t c memo united_states tax_court joseph a and carol delvecchio petitioners v commissioner of internal revenue respondent docket no filed date petitioner h was the sole_proprietor of a business a ps h and w filed original joint returns and subsequently amended tax returns for the tax years and r determined deficiencies and additions to tax against ps based on ps’ failure to report on the original returns all gross_income from a and all capital_gain from the sale of real_property held each of ps’ amended returns is an admission of a tax underpayment held further p-h is liable under sec_6653 b a i r c for and sec_6653 i r c for for the addition_to_tax for fraud on the portion of the underpayment attributable to the failure to report all gross_income from a held further to the extent we have determined there to be an underpayment_of_tax attributable to fraud the addition_to_tax under sec_6653 b b i r c shall apply for held further ps are liable for the addition_to_tax for substantial_understatement under sec_6661 i r c for and - - joseph a delvecchio and carol delvecchio pro_se leonard t provenzale for respondent memorandum findings_of_fact and opinion halpern judge by notice_of_deficiency dated date respondent determined deficiencies in and additions to petitioners’ and federal income taxes as follows joseph delvecchio additions to tax sec sec sec sec year deficiency b a b b b dollar_figure dollar_figure -- dollar_figure big_number --- dollar_figure --- big_number ‘50 of the interest payable under sec_6601 carol delvecchio additions to tax sec sec sec sec year deficiency a a a b a dollar_figure dollar_figure --- dollar_figure big_number --- --- dollar_figure big_number '50 of the interest payable under sec_6601 following the trial in this case respondent moved to amend the answer to conform the pleadings to the proof to take account of amended tax returns received into evidence which show items of income in excess of respondent’s previous adjustments we granted that motion and as amended the answer now avers deficiencies in and additions to petitioners’ federal income taxes for and as follows joseph delvecchio additions to tax sec sec sec sec year deficiency b a b b b dollar_figure dollar_figure --- t dollar_figure big_number --- dollar_figure -- big_number ‘50 of the interest payable under sec_6601 carol delvecchio additions to tax sec sec sec sec year deficiency a a a b a dollar_figure dollar_figure t --- dollar_figure big_number --- --- dollar_figure big_number ‘50 of the interest payable under sec_6601 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 the principal issues remaining for decision are petitioners’ claims that they are entitled to net_operating_loss deductions for the years in issue and the additions to tax findings_of_fact residence petitioners resided in stuart florida at the time the petition was filed monterey glass and mirror distributors petitioner joseph delvecchio joseph is a glazier during the years in issue joseph sold glass to both wholesale and retail customers joseph carried on his business as a q4e- proprietorship under the name monterey glass and mirror distributors monterey joseph monterey when referring to the business had a shop and employed two or three secretaries and two drivers joseph was familiar with all aspects of monterey’s business deliveries to customers were made from monterey’s shop and when monterey’s drivers returned to the shop joseph reviewed all sale documents and received any checks collected by the drivers joseph opened monterey’s mail and removed any checks he examined all invoices from vendors and the checks drawn to pay such invoices bookkeeping during the years in issue a central feature of monterey’s system of bookkeeping was a financial register referred to by the parties as the peg board ledger system the peg board the peg board consists of sheets of paper on one side of which is a check register the check register and on the other side of which are columns to keep a running bank balance showing checks drawn deposits made and the resulting balance the check register consists of numerous columns the first columns have preprinted headings as follows remarks paid to date check no and amount of check blank checks overlay the first columns and as the check is written carbon is deposited onto a line of the ledger and records the information - for column sec_2 through columns through have no preprinted headings the headings may be filled in or extended to identify information entered in the underlying column with respect to any check generally during the years in issue checks to pay monterey’s expenses were written by secretaries all checks were recorded in the check register joseph signed those checks as the checks were written entries were automatically made in column sec_2 through columns through and the headings of those columns of the original pegboard remained blank until at which time after the commencement of respondent’s examination of the years in question joseph filled in the headings to identify various categories of expenses eg insurance phone and truck repairs and made entries in the appropriate column based on the check information on each line at that time entries were made footing each column during the years in issue secretaries made entries on the reverse side of each sheet to show checks written deposits made and the resulting bank balance secretaries would collect checks received by monterey total them enter the total as a deposit in the peg board and deposit the checks in the bank joseph reviewed all invoices to customers and checks received monterey also kept vendor ledger cards files of sales invoices and bank statements - - joseph was familiar with the peg board and other aspects of monterey’s bookkeeping system sales and bank_deposits generally monterey received payments for glass by check information as to all receipts was entered on the peg board and the receipts were deposited into monterey’s account at first national bank and trust company the monterey account monterey deposited dollar_figure and dollar_figure into the monterey account during and respectively withdrawals monthly during and joseph examined statements showing the balance of the monterey bank account and withdrew funds in excess of the amount needed to operate the business he deposited such excess funds in the amounts of dollar_figure and dollar_figure during and respectively into interest bearing accounts in his own name original tax returns petitioners timely filed form sec_1040 u s individual_income_tax_return for and the form sec_1040 attached to the form sec_1040 were schedules c profit or loss from business or profession which relate to monterey the schedules c joseph prepared the form sec_1040 including the schedules c in preparing the schedules c as source documents joseph had available the peg board vendor ledger cards sales invoices and - monterey’s bank statements at least for joseph used an adding machine to prepare adding machine tapes the adding machine tapes totaling various periodic expenses such as expenses for repairs and telephone which were deducted on the schedule c for entries on the adding machine tapes correspond to the totals of such expenditures on pages of the peg board for example on the schedule c for there is a deduction for repairs in the amount of dollar_figure there is an adding machine tape headed repairs with items totaling dollar_figure column on the check register pages of the peg board is headed utilities the footed amounts for column match on an item by item basis all of the items on the adding machine tape examination and investigation in date respondent began an examination of the form sec_1040 in date that examination was terminated so that respondent could commence a criminal investigation of joseph the criminal investigation with respect to his income_tax_liability for and the criminal investigation resulted in charges and a trial at which on date joseph was acquitted of all charges administrative_summons on date in connection with the criminal investigation special_agent richard mclaughlin served an --- - administrative_summons the administrative_summons on petitioners’ accountant nancy crowder who in response thereto turned over various business and personal records of petitioners the records included bank statements invoices canceled checks and a cash disbursements ledger respondent has returned some if not all of the documents obtained pursuant to the administrative_summons amended returns on april and petitioners filed form sec_1040xx amended u s individual_income_tax_return for and respectively the form sec_1040x the form sec_1040xk were prepared by accountants retained by joseph on the form sec_1040x petitioners reported increases in schedule c net_income of dollar_figure and dollar_figure for and respectively a capital_gain of dollar_figure for net_operating_loss deductions of dollar_figure and dollar_figure for and respectively and decreases in interest_income of dollar_figure and dollar_figure for and respectively following is a comparison of various schedule c entries with respect to monterey from the schedules c attached to the form sec_1040 and form sec_1040x the amended schedules c form_1040 form 1040x income gross_receipts or sales dollar_figure dollar_figure less returns and allowances big_number -- less cost_of_goods_sold big_number balance gross_income big_number big_number deductions advertising bad_debts bank service charges car truck expenses depreciation insurance office expense repairs supplies taxes utilities and telephone wages trash pickup other expenses nonemployee compensation total deductions net profit income gross_receipts or sales less returns and allowances less cost_of_goods_sold balance gross_income deductions advertising bad_debts bank service charges car truck expenses depreciation insurance office expenses repairs supplies taxes utilities and telephone wages trash pickup other expenses nonemployee compensation total deductions net profit dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number dollar_figure form_1040 dollar_figure big_number dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number dollar_figure dollar_figure form 1040x dollar_figure big_number dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number dollar_figure dollar_figure sales_tax deficiencies monterey was subject_to an examination by the state of florida department of revenue the department for sales_tax liabilities for and other years the department found that monterey had collected more sales_taxes than reported to the department for and monterey reported to the department gross_receipts of dollar_figure and dollar_figure respectively opinion i deficiencies in tax respondent determined deficiencies in petitioners’ income taxes for and principally on account of respondent’s determination that petitioners underreported their schedule c income from monterey by dollar_figure and dollar_figure for and respectively ’ on the form sec_1040x petitioners reported increased schedule c net_income for monterey of dollar_figure and dollar_figure for and respectively a capital_gain of dollar_figure for net_operating_loss deductions of dollar_figure and dollar_figure for and respectively and decreases in interest_income of dollar_figure and dollar_figure for and ' respondent also determined increased self-employment taxes under sec_1401 petitioners have not separately challenged those determinations which we assume are derivative of respondent’s principal adjustments we do not further discuss the self-employment_tax adjustments respectively respondent accepts the foregoing changes reported on the form sec_1040x except for the net_operating_loss deductions based on the form sec_1040x we find that petitioners underreported their schedule c net_income from monterey by dollar_figure and dollar_figure for and respectively and failed to report a capital_gain of dollar_figure for based on respondent’s acceptance of the decreases in interest_income shown on the form sec_1040x we find that petitioners over reported their interest_income in such amounts petitioners have failed to prove their entitlement to the net_operating_loss deductions claimed on the form sec_1040x and we allow no deductions therefor il additions to tax for fraud a introduction respondent has determined additions to tax for fraud against joseph for both and for sec_6653 b a imposes an addition_to_tax equal to percent of any underpayment in tax if any part of the underpayment is due to fraud sec_6653 b imposes a separate addition_to_tax egual to percent of the interest payable under sec_6601 determined on the portion of the underpayment attributable to fraud for sec_6653 imposes an addition_to_tax egqual to percent of any underpayment in tax if any part of the underpayment is due to fraud the time-sensitive interest addition previously found in sec_6653 b is eliminated for both years if the secretary establishes that any portion of an underpayment is attributable to fraud the entire underpayment is attributable to fraud except with respect to any portion of the underpayment that the taxpayer establishes is not attributable to fraud see sec_6653 respondent has the burden of proving fraud by clear_and_convincing evidence sec_7454 rule b to prove that a taxpayer fraudulently underpaid a dollar of tax respondent must prove both the fact of the underpayment and fraudulent intent with respect thereto see eg 91_tc_874 b existence of an underpayment the first inquiry is whether any underpayment exists as relevant to this case sec_6653 defines an underpayment for purposes of sec_6653 as a deficiency defined under sec_6211 petitioners filed amended returns for and the form sec_1040x showing additional taxes due bach of petitioners’ amended returns is an admission of a tax underpayment see 464_us_386 respondent has satisfied the first prong of the test c fraudulent intent introduction the second inquiry concerns the taxpayer’s state of mind the existence of a fraudulent state of mind is a question of fact to be determined from the entire record see recklitis v commissioner supra pincite 91_tc_273 respondent must show that petitioner intended to evade taxes known to be owing by conduct intended to conceal mislead or otherwise prevent the collection_of_taxes 398_f2d_1002 3d cir 94_tc_654 fraud will never be presumed 55_tc_85 but may however be proved by circumstantial evidence because direct proof of the taxpayer’s intent is rarely available recklitis v commissioner supra pincite meier v commissioner supra the taxpayer’s entire course of conduct may be examined to establish the requisite fraudulent intent recklitis v commissioner supra meier v commissioner supra having considered all of the evidence before us we conclude that respondent clearly and convincingly has shown fraud with respect to at least the underpayments in tax attributable to monterey for both and we do so based on the following factors which together convince us that joseph had fraudulent intent with respect to his underreporting of income from monterey consistent and substantial understatements of income on the form sec_1040x petitioners reported increased net profit from monterey of dollar_figure and dollar_figure for and respectively the amended schedules c show that originally petitioners underreported monterey’s gross_sales by dollar_figure and dollar_figure for and respectively those are large amounts compared to the amounts originally reported a consistent pattern of underreporting large amounts of income is evidence of fraud see 348_us_121 two years of substantial_understatement may support a finding of fraud see kelley v commissioner tcmemo_1991_ affd 988_f2d_1218 11th cir control of books_and_records joseph prepared the schedules c on which monterey’s income was understated monterey’s system of bookkeeping centered around the peg board in which was recorded all checks written with respect to monterey’s business and all deposits of moneys received with respect to that business together with the vendor ledger cards sales invoices and bank statements the peg board provided sufficient information to prepare accurately the schedules c entries on adding machine tapes used by joseph to prepare the schedule c for convince us that joseph did use the peg board to prepare the schedule c for also joseph testified that he looked at statements for monterey’s bank -- - account to determine bank charges deducted on the schedules c joseph had in his possession and used source documents that we assume accurately recorded monterey’s income and expenses the gross discrepancies between entries on the schedules c and the amended schedules c convince us that joseph did not make inadvertent mistakes in completing the schedules c we infer from the ready availability to joseph of accurate information which he failed to use a willful attempt by him to avoid his obligation correctly to state his net_income from monterey withdrawals of funds from monterey on the amended schedules c petitioners reported net profits from monterey of dollar_figure and dollar_figure for and respectively when the noncash expense of depreciation shown on the amended schedules c is added to such net profits the resulting amounts are dollar_figure and dollar_figure for and respectively those amounts coincide with the yearly totals of amounts withdrawn monthly by joseph from monterey’s bank account and deposited into interest bearing accounts in his own name we consider such transfers to be some evidence that joseph attempted to conceal monterey’s income albeit ineptly more importantly we consider such transfers evidence that joseph knew very well not only on a yearly but on a monthly basis what monterey’s profits were moreover on the schedules c joseph reported net profits from monterey of dollar_figure and dollar_figure for and -- - respectively joseph has failed to explain how he could deposit into his personal bank account each year substantially more money from monterey than he reported as monterey’s net profit and disregard that fact when figuring such net profit joseph’s lack of credibility joseph was not a credible witness some of joseph’s testimony was as follows he was not involved in the financial operations of his business and he had no idea how much money monterey earned in and he did not see the incoming checks but rather the drivers turned in all checks received from customers directly to the secretaries and the secretaries opened the mail and removed any checks before turning the mail over to joseph he had no knowledge as to the bookkeeping method the secretaries used to record the checks he signed the checks that were sent out to pay bills but he did not keep track of total expenditures shirley saunier ms saunier was employed as a secretary at monterey from approximately january or date until shortly before thanksgiving of ms saunier testified as follows joseph maintained strict control_over monterey’s finances joseph received all incoming checks from the drivers directly and opened all the mail and removed the incoming checks joseph scrutinized all outgoing checks and accompanying invoices and frequently questioned the secretaries regarding these transactions although the secretaries entered the deposits and disbursements onto the peg board joseph reviewed all the entries we found ms saunier’s testimony as to joseph’s extensive involvement with and awareness of monterey’s finances to be consistent and credible joseph testified that he never balanced or reviewed monterey’s bank statements except when preparing the schedules c and then only to determine the amount of bank charges and therefore was unaware of how much money had been deposited into the monterey account that testimony is contradicted by petitioners’ statements on brief mr delvecchio each month reviewed his bank statements and when balances in the business account exceeded the amounts needed to operate the business petitioner transferred some of the excess funds to his other account and although mr delvecchio was obviously aware that he was receiving more gross_receipts than previous years it is obvious with his lack of accounting experience that he operated primarily based on his bank balances each month when he received his bank statements joseph testified that he did not use the peg board to prepare the schedules c that testimony is false as shown by our analysis supra section ii c joseph’s lack of credibility is evidence of his fraudulent intent joseph’s defense joseph claims that he once possessed computer sheets that would demonstrate how he mistakenly understated both his gross_receipts and expenses he contends that such computer sheets are among the records obtained by respondent’s agent pursuant to the administrative_summons he further contends that he did not receive back from respondent many of those records including the computer sheets he needs to defend himself in fact such computer sheets are the only document joseph has identified as missing he does not contend that he needs the computer sheets to calculate his gross_income and deductions but rather that they would serve as proof that he had a reasonable albeit erroneous basis for the gross_receipts and cost_of_goods_sold he reported on the schedules c joseph did not offer any testimony as to the creation or maintenance of those computer sheets nor did he produce any witnesses to authenticate their existence indeed he did not explain what information the computer sheets would contain that differed from that appearing on the peg board the purpose for also running adding machine tapes against the peg board nor why he would have gone to the effort of maintaining two bookkeeping systems----a manual peg board system and an automated computer system we do not believe that the claimed computer sheets ever existed conclusion joseph methodically understated gross_receipts and cost_of_goods_sold in order to conceal the amount of net profit that monterey earned he did that years ina row according to his own testimony which in many respects was incredible he had kept what amounted to a second set of books the computer sheets which purportedly are missing joseph had no explanation for why he maintained two separate sets of books he moved funds from monterey’s bank account to his personal account that is the clear evidence that convinces us that joseph fraudulently intended to understate his income with respect to monterey for and d portion of underpayments attributable to fraud petitioners have failed to rebut the presumption that the entire underpayments in tax for and are due to fraud see sec_6653 we find accordingly be additions to tax for fraud we sustain respondent’s additions to tax for fraud against joseph under sec_6653 a and b for and under sec_6653 for tit addition_to_tax for negligence having found that the entire underpayments for and are attributable to fraud and that joseph is subject_to additions to tax on account thereof we need not address the - - addition_to_tax for negligence that respondent determined against petitioner carol delvecchio see sec_6653 iv substantial_understatement_of_income_tax liability for returns due before date sec_6661 provides for an addition_to_tax equal to percent of the amount of any underpayment attributable to a substantial_understatement an understatement is substantial when the understatement for the taxable_year exceeds the greater of percent of the tax required to be shown or dollar_figure the understatement is reduced to the extent that the taxpayer has adequately disclosed his or her position or has substantial_authority for the tax treatment of an item see sec_6661 sec_1 a income_tax regs petitioners’ understatements for and exceed percent of the tax required to be shown they are therefore substantial under sec_6661 petitioners have cited no authority for their failure to report the understatements of income for or nor did they disclose any facts pertaining to such income on their returns or in a statement attached to the returns therefore petitioners are liable for the sec_6661 addition_to_tax decision will be entered under rule


internal_revenue_service department of the treasury number release date index number 468a 468a washington dc person to contact telephone number refer reply to cc psi plr-115727-02 date date re request for a revised schedule of ruling amounts legend taxpayer old co co plant location commission a commission b commission c commission d commission e director fund dear this letter responds to the request of taxpayer dated and supplemental information as submitted by taxpayer for a revised schedule of ruling amounts in accordance with sec_1_468a-3 and sec_1_468a-6 of the income_tax regulations taxpayer was previously granted a revised schedule of ruling amounts on information for the schedule of ruling amounts was submitted on behalf of the taxpayer pursuant to sec_1_468a-3 taxpayer represents the facts and information relating to its request for a revised schedule of ruling amounts as follows taxpayer has a direct ownership_interest of percent in plant which is situated at location taxpayer is under the audit jurisdiction of the director plr-115727-02 on taxpayer’s predecessor old co and co entered into a merger agreement which resulted in the transfer of old co’s assets including its funds to taxpayer in a transaction qualifying for nonrecognition treatment pursuant to sec_351 of the code further as part of the merger as approved by the commissions taxpayer has accepted the rights and obligations of old co through the change in corporate structure without the regulatory agencies having to re-establish new rate structures or depreciation recovery associated with nuclear decommissioning in place before the merger taxpayer represents that this transaction qualifies for the treatment specified in sec_1_468a-6 and has for the year of transfer allocated the prior schedule of ruling amounts between old co and the taxpayer plant's operating license expires on taxpayer is subject_to the jurisdiction of commission a which covers percent of the taxpayer's total electric sales commission b which covers percent commission c which covers percent commission d which covers percent and commission e which covers percent for a total of percent these percentages may vary slightly from year to year the estimated base cost for decommissioning the plant is based on an independent study and is premised on the prompt removal immediate dismantling method commission a in docket no effective authorized nuclear decommissioning costs to be included in cost of service for ratemaking purposes for the plant in the amount of dollar_figure for dollars and estimated an after-tax rate of return on assets of percent the commission also determined the total estimated cost of decommissioning to be dollar_figure dollars this base cost escalated using an estimated inflation rate of percent results in an estimated future decommissioning cost of the commission a portion of the plant of dollar_figure dollars the tax and investment changes made to sec_468a of the internal_revenue_code made by section of the energy policy act of were taken into consideration in setting these rates commission b in docket nos effective authorized nuclear decommissioning costs to be included in the taxpayer's cost of service for ratemaking purposes for the plant in the amount of dollar_figure for dollars and estimated an after-tax rate of return on assets of percent the commission also determined the total estimated cost of decommissioning to be dollar_figure dollars this base cost escalated using an estimated inflation rate of percent results in an estimated future decommissioning cost of the commission b portion of the plant of dollar_figure dollars the tax and investment changes made to sec_468a of the internal_revenue_code made by section of the energy policy act of were not taken into consideration in setting these rates plr-115727-02 commission c in docket no effective authorized nuclear decommissioning costs to be included in the taxpayer's cost of service for ratemaking purposes for the plant in the amount of dollar_figure for dollars and estimated an after-tax rate of return on assets of percent the commission also determined the total estimated cost of decommissioning to be dollar_figure dollars this base cost escalated using an estimated inflation rate of percent results in an estimated future decommissioning cost of the commission c portion of the plant of dollar_figure dollars the tax and investment changes made to sec_468a of the internal_revenue_code made by section of the energy policy act of were not taken into consideration in setting these rates commission d in docket no effective authorized nuclear decommissioning costs to be included in the taxpayer's cost of service for ratemaking purposes for the plant in the amount of dollar_figure for dollars and estimated an after-tax rate of return on assets of percent the commission also determined the total estimated cost of decommissioning to be dollar_figure dollars this base cost escalated using an estimated inflation rate of percent results in an estimated future decommissioning cost of dollar_figure dollars the tax and investment changes made to sec_468a of the internal_revenue_code made by section of the energy policy act of were not taken into consideration in setting these rates commission e in docket no effective authorized nuclear decommissioning costs to be included in the taxpayer's cost of service for ratemaking purposes for the plant in the amount of dollar_figure dollars and estimated an after-tax rate of return on assets of percent the commission also determined the total estimated cost of decommissioning to be dollar_figure dollars this base cost escalated using an estimated inflation rate of percent results in an estimated future decommissioning cost of the commission e portion of the plant of dollar_figure dollars the tax and investment changes made to sec_468a of the internal_revenue_code made by section of the energy policy act of were not taken into consideration in setting these rates there are no proceedings pending before any of the commissions that may result in an increase or decrease in the amount of decommissioning costs for the plant to be included in taxpayer's cost of service for ratemaking purposes the funding_period and level_funding limitation period for the plant extends from through the estimated period for which the fund will be in effect is years through for commission a commission b and commission c and years through for commission d and commission e the estimated_useful_life of the plant is years through for commission a commission b and commission c and years through for commission d and commission plr-115727-02 e thus the taxpayer has calculated its qualifying percentage to be percent for commission a commission b and commission c and percent for commission d and commission e sec_468a of the internal_revenue_code provides that a taxpayer may elect to deduct the amount of payments made to a qualified nuclear decommissioning fund however sec_468a limits the amount_paid into the fund for any taxable_year to the lesser_of the amount of nuclear decommissioning costs allocable to the fund that is included in the taxpayer's cost of service for ratemaking purposes for the taxable_year or the ruling_amount applicable to that year sec_468a of the code provides that no deduction shall be allowed for any payment to the nuclear decommissioning fund unless the taxpayer requests and receives from the secretary a schedule of ruling amounts the ruling_amount for any taxable_year is defined under sec_468a as the amount which the secretary determines to be necessary to fund that portion of nuclear decommissioning costs which bears the same ratio to the nuclear power plant as the period for which the fund is in effect bears to the estimated_useful_life of the plant this term is further defined to include the amount necessary to prevent excessive funding of nuclear decommissioning costs or funding of these costs at a rate more rapid than level_funding taking into account such discount rates as the secretary deems appropriate sec_468a of the code provides that a taxpayer shall be deemed to have made a payment to the nuclear decommissioning fund on the last day of the taxable_year if the payment is made on account of the taxable_year within 2½ months after the close of the taxable_year sec_1_468a-1 of the regulations provides that an eligible_taxpayer may elect to deduct nuclear decommissioning costs under sec_468a of the code an eligible_taxpayer as defined under sec_1_468a-1 is a taxpayer that has a qualifying interest in a nuclear power plant as defined under sec_1_468a-1 a qualifying interest is among other things a direct ownership_interest including an interest held as a tenant in common or joint tenant sec_1_468a-2 of the regulations provides that the maximum amount of cash payments made or deemed made to a nuclear decommissioning fund during any taxable_year shall not exceed the lesser_of i the cost of service amount applicable to the nuclear decommissioning fund for such taxable_year or ii the ruling_amount applicable to the nuclear decommissioning fund for such taxable_year sec_1_468a-3 of the regulations provides that in general a schedule of ruling amounts for a nuclear decommissioning fund is a ruling specifying annual payments that over the taxable years remaining in the funding_period as of the date plr-115727-02 the schedule first applies will result in a projected balance of the nuclear decommissioning fund as of the last day of the funding_period equal to and in no event more than the amount of decommissioning costs allocable to the fund sec_1_468a-3 of the regulations provides that each schedule of ruling amounts shall be based on the reasonable assumptions and determinations used by the applicable public_utility commission s in establishing or approving the amount of decommissioning costs to be included in the cost of service for ratemaking purposes taking into account amounts that are otherwise required to be included in the taxpayer's income under sec_88 of the code and the regulations thereunder each schedule of ruling amounts shall be based on the public_utility commission's reasonable assumptions concerning i the after-tax rate of return to be earned by the amounts collected for decommissioning ii the total estimated cost of decommissioning the nuclear power plant and iii the frequency of contributions to the nuclear decommissioning fund for a taxable_year sec_1_468a-3 of the regulations permits the internal_revenue_service to provide a schedule of ruling amounts that is identical to the schedule proposed by the taxpayer but no such schedule shall be provided by the service unless the taxpayer's proposed schedule is consistent with the principles and provisions of this section sec_1_468a-3 of the regulations provides that the ruling_amount specified in a schedule of ruling amounts for any taxable_year in the level_funding limitation period shall not be less than the ruling_amount specified in such schedule for any earlier taxable_year under sec_1_468a-3 the level_funding limitation period begins on the first day of the first taxable_year for which a deductible payment is made to the nuclear decommissioning fund and ends on the last day of the taxable_year that includes the estimated date on which the nuclear power plant will no longer be included in the taxpayer's rate base for ratemaking purposes sec_1_468a-3 of the regulations provides that the funding_period for a nuclear decommissioning fund is the period that begins on the first day of the first taxable_year for which a deductible payment is made or deemed to be made to such nuclear decommissioning fund and ends the later of i the last day of the taxable_year that includes the estimated date on which decommissioning costs of the nuclear power plant to which the nuclear decommissioning fund relates will no longer be included in the taxpayer's cost of service for ratemaking purposes or ii the last day of the taxable_year that includes the estimated date on which the nuclear power plant to which the nuclear decommissioning fund relates will no longer be included in the taxpayer's rate base for ratemaking purposes plr-115727-02 sec_1_468a-3 of the regulations provides that the amount of decommissioning costs allocable to a nuclear decommissioning fund is the taxpayer's share of the total estimated cost of decommissioning the nuclear power plant multiplied by the qualifying percentage sec_1_468a-3 of the regulations provides that in general the total estimated cost of decommissioning a nuclear power plant is the reasonably estimated cost of decommissioning used by the applicable public_utility commission in establishing or approving the amount of these costs to be included in cost of service for ratemaking purposes sec_1_468a-3 of the regulations provides that a taxpayer's share of the total estimated cost of decommissioning a nuclear power plant equals the total estimated cost of decommissioning the plant multiplied by the taxpayer's qualifying interest in the plant sec_1_468a-3 of the regulations provides that the qualifying percentage for any nuclear decommissioning fund is equal to the fraction the numerator of which is the number of taxable years in the estimated period for which the nuclear decommissioning fund is to be in effect and the denominator of which is the number of taxable years in the estimated_useful_life of the applicable nuclear power plant sec_1_468a-3 of the regulations provides that the estimated period for which a nuclear decommissioning fund is to be in effect begins on the later of the first day of the first taxable_year for which a deductible payment is made to the nuclear decommissioning fund or deemed made or the first day of the taxable_year that includes the date that the nuclear power plant begins commercial operations as determined by the applicable public_utility commission at the time the plant was first included in the taxpayer's rate base and ends on the last day of the taxable_year that includes the estimated date on which the nuclear power plant will no longer be included in the taxpayer's rate base for ratemaking purposes according to sec_1_468a-3 the estimated date on which the nuclear power plant will no longer be included in the taxpayer's rate base for ratemaking purposes is determined under the ratemaking assumptions used by the applicable public_utility commission in establishing or approving rates during the first ratemaking proceeding in which the nuclear power plant was included in the taxpayer's rate base sec_1_468a-3 of the regulations provides that the estimated_useful_life of a nuclear power plant begins on the first day of the taxable_year that includes the date that the plant begins commercial operations as determined by the applicable public_utility commission at the time the plant was first included in the taxpayer's rate base and ends on the last day of the taxable_year that includes the estimated date on plr-115727-02 which the nuclear power plant will no longer be included in the taxpayer's rate base for ratemaking purposes according to sec_1_468a-3 the estimated date on which the nuclear power plant will no longer be included in the taxpayer's rate base for ratemaking purposes is determined under the ratemaking assumptions used by the applicable public_utility commission in establishing or approving rates during the first ratemaking proceeding in which the nuclear power plant was included in the taxpayer's rate base sec_1_468a-3 of the regulations provides that if two or more public_utility commissions establish or approve rates for electric energy generated by a single nuclear power plant then the schedule of ruling amounts shall be separately determined pursuant to the rules of sec_1_468a-3 through e for each public_utility commission that has determined the amount of decommissioning costs to be included in the cost of service for ratemaking purposes for this plant under sec_1_468a-3 this separate determination shall be based on the reasonable assumptions and determinations used by the relevant public_utility commission and shall take into account only that portion of the total estimated cost of decommissioning that is properly allocable to the ratepayer whose rates are established or approved by the public_utility commission according to sec_1_468a-3 the ruling amounts for any taxable_year is the sum of the ruling amounts for such taxable_year determined under the separate schedules of ruling amounts sec_1_468a-3 of the regulations provides that the internal_revenue_service shall not provide a taxpayer with a schedule of ruling amounts for any nuclear decommissioning fund unless the public_utility commission that establishes or approves the rates for electric energy generated by the plant to which the nuclear decommissioning fund relates has determined the amount of decommissioning costs to be included in the taxpayer's cost of service for ratemaking purposes and has disclosed the after-tax rate of return and any other assumptions and determinations used in establishing or approving the amount sec_1_468a-3 of the regulations enumerates the information required to be contained in a request for a schedule of ruling amounts filed by a taxpayer in order to receive a ruling_amount for any taxable_year sec_1_468a-3 of the regulations provides that a taxpayer is required to request a revised schedule of ruling amounts for a nuclear decommissioning fund if a any public_utility commission that establishes or approves rates for the furnishing or sale of electric energy generated by a nuclear power plant to which the nuclear decommissioning fund relates increases the proposed period over which decommissioning costs of the nuclear power plant will be included in cost of service for ratemaking purposes adjusts the estimated date on which the nuclear power plant will no longer be included in the taxpayer's rate base for ratemaking purposes or reduces the amount of decommissioning costs to be included in cost of service for any plr-115727-02 taxable_year and b the taxpayer's most recent request for a schedule of ruling amounts did not provide notice to the service of such action by the public_utility commission sec_1_468a-3 of the regulations provides that any taxpayer that has previously obtained a schedule of ruling amounts can request a revised schedule of ruling amounts such a request must be made in accordance with the rules of sec_1_468a-3 the internal_revenue_service shall not provide a revised schedule of ruling amounts applicable to a taxable_year in response to a request for a schedule of ruling amounts that is filed after the deemed payment deadline date for such taxable_year sec_1_468a-6 generally provides rules for the transfer of an interest in a nuclear power plant and transfer of the qualified_fund where after the transfer the transferee is an eligible_taxpayer sec_1_468a-6 of the regulations provides that a transferee of a qualifying interest in a nuclear power plant must file a request for a revised schedule of ruling amounts with respect to that interest on or before the deemed payment deadline for the first taxable_year of the transferee beginning after the disposition see sec_1_468a-2 if the transferee does not timely file such a request the transferee’s ruling_amount with respect to that interest for the affected year or years will be zero unless the internal_revenue_service waives the application of sec_1_468a-6 upon a showing of good cause for the delay sec_1_468a-7 of the regulations provides in general that an eligible_taxpayer is allowed a deduction for the taxable_year in which the taxpayer makes a cash payment or is deemed to make a cash payment to a nuclear decommissioning fund only if the taxpayer elects the application of sec_468a a separate election is required for each nuclear decommissioning fund and for each taxable_year with respect to which payments are to be deducted under sec_468a in the case of an affiliated_group_of_corporations that join in filing a consolidated_return for a taxable_year the common parent must make a separate election on behalf of each member whose payments to a nuclear decommissioning fund during such taxable_year are to be deducted under sec_468a the election under sec_468a for any taxable_year is irrevocable and must be made by attaching a statement election statement and a copy of the schedule of ruling amounts provided pursuant to the rules of sec_1_468a-3 to the taxpayer's federal_income_tax return or in the case of an affiliated_group_of_corporations that join in filing a consolidated_return the consolidated_return for such taxable_year the return to which the election statement and a copy of the schedule of ruling amounts is attached must be filed on or before the time prescribed by law including extensions for filing the return for the taxable_year with respect to which payments are to be deducted under sec_468a plr-115727-02 section a and c of the energy act eliminated for taxable years beginning after date the investment restrictions contained in sec_468a of the code section b and c of the energy act revised sec_468a by lowering the tax_rate applicable to a nuclear decommissioning fund for taxable years beginning after date we have examined the representations and information submitted by the taxpayer in relation to the requirements set forth in the sec_468a of the code and the regulations thereunder based solely on these representations of the facts we reach the following conclusions taxpayer has a qualifying interest in the plant and is therefore an eligible_taxpayer under sec_1_468a-1 of the regulations commissions a b c d and e have determined the amount of decommissioning costs to be included in the taxpayer's cost of service for ratemaking purposes as required by sec_1_468a-3 of the regulations taxpayer as owner of the plant has calculated its share of the total decommissioning costs under sec_1_468a-3 of the regulations taxpayer has determined that pursuant to sec_1_468a-3 of the regulations the qualifying percentage is percent for commission a commission b and commission c and percent for commissions d and e taxpayer has proposed a schedule of ruling amounts which meets the requirements of sec_1_468a-3 and of the regulations the annual payments specified in the proposed schedule of ruling amounts are based on the reasonable assumptions and determinations used by commissions a b c d and e and will result in a projected fund balance at the end of the funding_period equal to or less than the amount of decommissioning costs allocable to the fund the maximum amount of cash payments made or deemed made to the fund during any taxable_year is restricted to the lesser amount of the decommissioning costs applicable to the fund or the ruling_amount applicable to the fund as set forth under sec_1_468a-2 of the regulations taxpayer subject_to the jurisdiction of public_utility commissions for ratemaking purposes has calculated its share of the total decommissioning costs allocable to commissions a b c d and e as plr-115727-02 required by sec_1_468a-3 of the regulations based on the above determinations we conclude that the taxpayer's proposed schedule of ruling amounts satisfies the requirements of sec_468a of the code approved schedule of ruling amounts taxable years through commissions a b c d and e year comm a comm b comm c comm d comm e total with agreement of the taxpayer this revised schedule of ruling amounts is limited to a 5-year period for the portion of the schedule of ruling amounts for commission c commission d and commission e because these commissions have not taken into account the statutory changes made to sec_468a of the code by the energy act the elimination of the investment restrictions and the reduction of the tax_rate applicable to income earned by the fund may result in a greater after-tax of return than was estimated prior to the enactment of the energy act by these commissions this increased after-tax rate of return could over the life of the fund result in a balance in the fund on the last day of the funding_period that could exceed the amount of decommissioning costs allocable to the fund thus in order to prevent the excess accumulation in the fund this schedule of ruling amounts is being limited to a 5-year period except the amounts for commission a and commission b which took into account the amendments made by the energy act to sec_468a of the code approval of a revised schedule of ruling amounts may be granted after a determination by commission c commission d and commission e of an after-tax rate of return that accounts for the reduced_tax_rate and unrestricted investments plr-115727-02 approval of the schedule of ruling amounts is contingent on there being no change in the facts and circumstances known or assumed at the time this ruling is issued if any of the events described in sec_1_468a-3 of the regulations occur in future years the taxpayer must request a review and revision of the schedule of ruling amounts generally the taxpayer is required to file such a request on or before the deemed payment deadline date for the first taxable_year in which the rates reflecting such action became effective when no such event occurs the taxpayer must file a request for a revised schedule of ruling amounts on or before the deemed payment deadline of the tenth taxable_year following the close of the tax_year in which the most recent schedule of ruling amounts was received the approved schedule of ruling amounts is relevant only to those payments made to the fund payments allocable to any funds other than the fund cannot qualify for purposes of the deduction under the provisions of sec_468a of the code as stated above payments made to the fund can qualify only to the extent that they do not exceed the lesser_of the decommissioning costs applicable to the fund or the ruling amounts applicable to the fund in the taxable_year this letter_ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that this ruling may not be used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to your authorized legal_representative a copy of this letter_ruling also is being sent to the director pursuant to sec_1_468a-7 of the regulations a copy of this letter must be attached with the required election statement to the taxpayer's federal_income_tax return for each taxable_year in which the taxpayer claims a deduction for payments made to the fund sincerely yours peter c friedman senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries


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 b01 plr-124012-06 date date - legend x state date1 dear -------------- --------------------------- ------------------------ ------------------ -------------------------- this letter responds to the letter dated date and subsequent correspondence submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code facts the information submitted states that x was incorporated on date1 under the laws of state the shareholder of x intended that x be treated as an s_corporation effective date1 but the election to be treated as an s_corporation was not timely filed sec_1362 provides that a small_business_corporation may elect to be an s law and analysis corporation sec_1362 provides the rule on when an s election will be effective if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made if the election is made after the first two and one-half months of a corporation's plr-124012-06 taxable_year then the corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if no election is made pursuant to sec_1362 or if made the election is made after the date prescribed for making such an election and the secretary determines there was reasonable_cause for the failure to timely make the election then the secretary may treat such an election as timely made for such taxable_year and effective as of the first day of that tax_year x did not file a timely election to be treated as an s_corporation under sec_1362 effective date1 x has however established reasonable_cause for not making a timely election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and representations made and provided that x otherwise qualifies as a subchapter_s_corporation we conclude that x will be recognized as an s_corporation effective date1 within days from the date of this letter x should submit a properly completed form_2553 with a copy of this letter attached to the relevant service_center further x and its shareholder should file amended returns in connection with the s election as necessary 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 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 a copy of this letter is being mailed to your authorized representative sincerely dianna k miosi chief branch passthroughs special industries enclosures copy of this letter copy for sec_6110 purpose


internal_revenue_service department of the treasury number release date index numbers washington dc person to contact telephone number refer reply to cc ita 5-plr-104652-00 date date legend taxpayers owner owner seller lessee parcel parcel parcel state city city river contractor contractor contractor contractor contractor consultant consultant consultant terrain method a b c d e f g h plr-104652-00 i j year year year year year year year year year year year year year year year year dear this letter_ruling is in response to taxpayers’ ruling_request dated date under revproc_98_17 1998_1_cb_405 the facts are as follows facts in year owner and owner purchased property from seller know as parcels and a commercial building was built on parcel in which the upper floor was used for laundry and shower facilities in mid-decade a dry cleaning machine was installed in the same upper floor area which used a chemical known as perchloroethylene pce to clean clothes in year owner and owner acquired another parcel of property known as parcel which was adjacent to parcels and parcel was not usable at the time of purchase since the land was too low and consisted of terrain however in mid-year fill material was spread along parcel making it usable for equipment parking and storage of oil used for dust control and empty pce tanks in the winter of years an employee of owner sec_1 and attempted to distill some quantity of pce which proved unsuccessful because the chemical was scorched and therefore unusable also while doing this process the employee learned that when pce was allowed to remain out of doors water and contaminates would rise to the top and freeze upon learning this the employee removed the frozen mass from plr-104652-00 the top of the stored pce and put it on the ground the taxpayers were unaware of the employee’s attempt to distill the pce prior to their purchase of the property taxpayers purchased parcel in year at that time the property contained mobile home spaces rv spaces with no utilities a laundry and a drycleaners taxpayers purchased additional properties in year and opened a mobile home and rv sales operation in year the taxpayers replaced the dry cleaning machine with a new machine that did not require changing the pce rather it only required adding more chemical when the level dropped according to use in the same year the taxpayers contracted to dispose_of the old machine and all barrels in the storage area except those containing used motor oil in year the drycleaning facility was closed and the existing machine was moved to an equipment storage shed that had been constructed by the taxpayers behind the laundry and drycleaning building the machine could not be drained and the tank containing the chemical remained sealed in june year the state department of environmental conservation dec investigated a complaint concerning the barrel storage area an investigation by personnel from the dec revealed that one barrel had a small hole on its rim but it appeared as though nothing had leaked since the barrel was full all other barrels were found to be secure and the taxpayers contracted to remove the defective barrel also in june year a fire destroyed the equipment storage shed and damaged the drycleaning machine wiring no chemicals were released from the sealed chemical tank of the drycleaning machine the dec ordered the taxpayers to dispose_of the drycleaning machine and its contents taxpayers hired contractor to remove the pce from the machine and to make the machine acceptable for disposal in year the dec ordered the taxpayers to test the soil on parcel the taxpayers hired tester who tested soil samples from test holes on parcel on location tested parts per million of pce the dec then required taxpayers to address remediation of soil contamination which taxpayers did by hiring contractor it was determined that method was the most effective and cost efficient method to remediate the soil and the taxpayers purchased an air blower and remediation by the method commenced in april year in may year while installing water and sewer lines across parcel the dec required the taxpayers to test the soil from excavated ditches high concentrations of pce were detected and the dec declared the taxpayers to be under epa - rcra laws and regulations the taxpayers subsequently contacted the epa and the epa determined that the taxpayers did not fall under rcra because the taxpayers were not generators of hazardous waste this ruling allowed the taxpayers to remediate the soil on site plr-104652-00 the taxpayers began land farming the soil using hydrosol and a rototiller while some of the soils excavated in the water and sewer ditches were placed in lined storage cells approved by the dec project manager was hired as the project manager to oversee the remediation the dec required the taxpayers to do a site assessment and the taxpayers hired consultant to perform such assessment the site assessment plan prepared by consultant was approved by dec in december year in november year the taxpayers hired project manager as the project manager consultant informed project manager that the site assessment plan written by consultant and approved by the dec was only the start and more assessment would be required by dec the taxpayers contracted with contractor and contractor to develop a comprehensive site assessment plan to satisfy the dec the taxpayers hoped to avoid costly multiple plans and efforts in the field work of soil assessment while the comprehensive site assessment plan was being developed the dec informed the taxpayers that the taxpayers had to implement the consultant plan by december year otherwise the dec would take over the cleanup and all costs would be charged to the taxpayers in order to avoid the takeover project manager and a representative from contractor flew to city on january year to meet with dec director of contaminated sites the parties reached an agreement whereby the taxpayers would submit for dec approval a site assessment plan that would be at a minimum equal or more comprehensive than the previous consultant plan and the taxpayers would enter into a consent decree with the dec specifying certain work and time lines a site assessment plan developed by contractor was finally approved on february year project manager had begun to implement such plan at the site on february this site assessment was completed in march year that same month the dec withdrew from their agreement made in city on december year refused to enter into a consent decree and filed a lawsuit against the taxpayers for being owners of a contaminated property and owing costs for oversight to the dec the dec also made the taxpayers perform a river bank sediment study to determine the contamination in the river and the possible effects on aquatic life in april year the dec insisted upon four ground monitoring wells when the dec used one of their own contractors to perform a river bank sediment assessment in may of the same year the sample showed a very small trace amount of pce also in may year consultant submitted a ground water assessment plan on behalf of the taxpayers the dec informed the taxpayers in june year that this plan was not approved and that the dec would overtake this phase and charge plr-104652-00 the costs to the taxpayers the taxpayers attorney project manager and contractor met with the dec that same month in city to discuss the ground water conditions at the cleanup site no agreement was reached after two subsequent meetings an agreement was reached in june year whereby the dec took control of all environmental assessment and cleanup work with the costs being charged to the taxpayers the dec took charge of the site in june year the dec and its contractor contractor conducted a sampling of water in the storm sewer manholes on the opposite side of the highway bordering parcel a very small detectable trace of pce was found in the last manhole nearest the river and also at the storm sewer outfall on the river bank the taxpayers and the dec disagree as to the source of this pce since other sources nearby are known to exist also in june year the dec filed criminal charges against lessee for releasing hazardous waste on parcel while he leased the property from the taxpayers in july year the dec and contractor obtained a court order through a local magistrate to install monitoring wells for ground water on parcel and an area where the state department of transportation owned a right of way a small trace of pce was found in several of the wells a dispute still exists between the dec and the taxpayers as to whether this small trace amount of pce is in ground water by regulatory definition or surface water moving through fill material soil in august year the epa and the taxpayers signed an administrative order of consent which allowed the taxpayers to excavate and remediate rcra class soil contamination on site in september year the epa approved the taxpayers’ soil extraction plan developed by consultant the plan provided that the contaminated soil would be removed and sorted through the winter in lined cells treatment of the soil would begin in spring of year the taxpayers implemented this plan in september year and all soil containing 1ppm or more of pce was removed by october year the taxpayers incurred costs for consultants testing supplies and equipment labor and legal fees the taxpayers originally expensed the costs on their tax returns for the year sec_12 through and including the environmental costs that were expensed on original income_tax returns are as follows year year year dollar_figurea dollar_figureb dollar_figurec costs incurred for year but not yet expensed total dollar_figured and costs incurred but not yet paid total dollar_figuree for years and subsequent the taxpayers estimate costs as being between dollar_figuref and g plr-104652-00 at the start of year no insurance recovery was anticipated and the extent of the problem had not been anticipated consequently taxpayers elected to expense the costs as paid the first insurance recovery in the amount of dollar_figureh was not received until year with an additional negotiated insurance settlement in the amount of dollar_figurei received in year the settlement was received in satisfaction of the taxpayers’ claims that they were entitled to insurance coverage under specified insurance policies for defense costs expenses supplemental payments and damages incurred in connection with environmental claims arising in connection with the site see page of the settlement agreement sec_1 of the settlement agreement defines environmental claims as a ny and all claims against the taxpayers whether based on the taxpayers’ alleged acts or omissions or status as a generator user disposer owner operator or transporter arising out of or as a consequence of actual alleged threatened or potential pollution contamination or any other injurious environmental condition and or the release discharge dispersal escape leaching or exposure to any actual or alleged injurious toxic or noxious substance including without limitation any hazardous_substance as defined in state statutes and in u s c sec_9601 smoke vapors soot fumes acids alkalis toxic chemicals petroleum substances and derivates liquids or gases waste materials or other irritants contaminants or pollutants of whatsoever nature and shall include any such claims involving actual alleged threatened or potential property damage including alleged damage or injury to groundwater and other natural_resources bodily injury personal injury advertising liability and claims to recover cleanup or remediation costs including costs incurred and sums expended for attorneys’ fees and defense costs investigation removal distribution remediation treatment or containment whether incurred by the taxpayers or others this definition includes claims arising out of any materials sold by the taxpayers for salvage scrap recycling or disposal rulings requested whether the costs incurred by the taxpayers to clean up land and treat contaminated groundwater are capitalizable under sec_263 the settlement agreement defines the site as the property on which the parcel is located including all structures on the property all surface and subsurface soils on the property and any all groundwaters and or aquifers below and in the proximity of the property and the adjacent river plr-104652-00 whether insurance proceeds received by the taxpayers are treated as a reduction of basis and taxable only if their basis in the land is reduced below zero ruling one -- law and analysis sec_162 allows a deduction for all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business sec_1_162-4 of the income_tax regulations allows a deduction for the cost of incidental repairs which neither materially add to the value of the property nor appreciably prolong its useful_life but keep it in an ordinarily efficient operating condition sec_263 provides that no deduction is allowed for any amount_paid out for permanent improvements or betterments made to increase the value of any property or for any amount expended in restoring property or for making good the exhaustion thereof for which an allowance is or has been made sec_1_263_a_-1 of the regulations provides that capital expenditures include amounts paid_or_incurred to add value or substantially prolong the useful_life of property owned by the taxpayer or adapt the property to a new or different use sec_1_263_a_-2 of the regulations provides that capital expenditures include the costs of acquisition construction or erection of buildings machinery and equipment furniture and fixtures and similar_property having a useful_life substantially beyond the taxable_year during the course of the cleanup the taxpayers incurred costs for consultants testing supplies and equipment labor and associated legal fees although the taxpayers previously expensed some environmental costs on their federal tax returns for prior years now the taxpayers wish to capitalize all costs incurred for the cleanup including those costs previously expensed based on the facts provided to us the taxpayers must capitalize costs incurred with the cleanup including those costs previously expensed in this context the appropriate test for determining whether expenditures increase the value of the property is to compare the status of the asset after the expenditure with the status of that asset before the condition arose that necessitated the expenditure see revrul_94_38 1994_1_cb_35 citing 39_tc_333 nonacq on other grounds 1964_2_cb_8 in revrul_94_38 the taxpayer had purchased uncontaminated property upon which it built a manufacturing_facility which discharged hazardous waste this waste was buried on the taxpayer’s property after years of manufacturing the taxpayer undertook to clean up the property in order to comply with federal state and local plr-104652-00 environmental requirements the cleanup involved soil remediation and groundwater treatment including the installation of groundwater treatment facilities the effects of the cleanup were to restore the land essentially to the same physical condition that existed prior to the contamination the revenue_ruling held that the costs to remediate the soil and groundwater contamination were deductible as ordinary and necessary business_expenses while the costs of constructing the groundwater treatment facilities were capitalizable the groundwater treatment facilities were capitalizable because they had a value that extended substantially beyond the taxable_year in which they were constructed however the other costs to remediate the soil and groundwater were deductible because the taxpayer did not increase the value of the land but merely restored the land to the condition it was in before the taxpayer’s operations contaminated it this situation is different from the situation in revrul_94_38 where the taxpayers were allowed a deduction for some of the cleanup expenditures in the present case the taxpayers represent that they acquired the property in a contaminated state therefore the expenditures_for the remediation operations increased the value of the land by improving the land from a contaminated state to a remediated state thus taxpayers must capitalize the costs incurred to clean up their land and treat contaminated groundwater ruling two - law and analysis the taxpayers also request a ruling that the insurance proceeds they receive reduce their basis in the property and result in gross_income only to the extent those proceeds exceed their basis in the property sec_61 provides that except as otherwise provided in subtitle a of the code a taxpayer must include in gross_income all income from whatever source derived in determining whether damages received in a settlement agreement are includible in gross_income the proper inquiry is in lieu of what were the damages awarded 144_f2d_110 1st cir aff'g 1_tc_952 cert_denied 323_us_779 all facts including the allegations contained in the taxpayer's complaint the evidence presented and the arguments made in the court_proceeding and the intent of the payor must be considered in determining in lieu of what were the damages awarded the taxpayers do not request a ruling concerning and we do not address the tax consequences to them if any of the state’s expenditure of up to dollar_figurej for environmental cleanup costs of the property plr-104652-00 as in other types of tort damage suits recoveries that represent a reimbursement for lost profits are income the reasoning is that because the profits would be taxable_income the proceeds of litigation which are their substitute are taxable in like manner raytheon pincite see also 32_tc_904 amount received in settlement of a claim for damages to a cotton crop caused by the use of an insecticide is taxable revrul_73_161 1973_1_cb_366 lump sum compensation_for damages of every kind caused by construction of a pipeline easement across taxpayer’s farmland is includible in income because the payment was for expected loss of future rental income in contrast if the suit is not to recover lost profits but is for injury to good will or other assets the recovery represents a return_of_capital raytheon pincite generally an amount received for injury to good will is included in gross_income only to the extent that it exceeds the taxpayer’s basis in the good will see collins v commissioner tcmemo_1959_174 amounts received by a partnership for anticipated damage to leases on oyster beds from the laying of pipelines across such beds were allocated between anticipated damage to oyster beds and anticipated destruction of oysters payments for the former represented a recovery_of_capital and payments for the latter represented a recovery_of lost profits in revrul_81_277 1981_2_cb_14 m agreed to construct a nuclear power plant for p at a set price of 250x dollars m agreed to provide at no additional cost to p any items later determined to be necessary to deliver a plant that met all safety requirements stricter environmental requirements were imposed during the construction_period and a dispute arose as to m’s obligations m paid p 40x dollars the estimated cost to complete the plant and was released from its construction obligations the revenue_ruling holds that the 40x dollar payment to p was a return_of_capital reducing p’s basis in the plant in this case the insurance proceeds including those received under the settlement agreement that the taxpayers received are a return_of_capital as in revrul_81_277 the amount of proceeds the taxpayers received in excess of their basis in parcel if any is in includible in their gross_income under the analysis provided in raytheon in raytheon the court found that the taxpayer received damages in an antitrust suit that represented compensation_for the destruction of good will in holding that compensation_for the loss of good will in excess of raytheon’s basis is gross_income the court explained but to say that the recovery represents a return_of_capital in that it takes the place of the business good will is not to conclude that it may not contain a taxable benefit although the injured party may not be deriving a profit as a result of the damage suit itself any conversion thereby of his plr-104652-00 property into cash is a realization of any gain made over the cost or other basis of the good will prior to the illegal interference thus a buys blackacre for dollar_figure it appreciates in value to dollar_figure b tortiously destroys it by fire a sues and recovers dollar_figure tort damages from b although no gain was derived by a from the suit his prior gain due to the appreciation in value in blackacre is realized when it is turned into cash by the money damages raytheon pincite therefore the taxpayers should reduce their basis in the parcel by dollar_figureh in year and dollar_figurei in year reflecting the amount of insurance proceeds they received in those years if the amount of the insurance proceeds they received in year or year exceeded their basis in the parcel in those years they must include such excess amounts in gross_income in the years such amounts were received the taxpayers’ have represented that that by the end of the year year the costs will have exceeded the insurance recovery if the insurance proceeds the taxpayers received in year exceeds their basis in the parcel they would still be required to include such amounts in income in year even if those proceeds are used in year to pay for additional cleanup costs accordingly we rule as follows the costs incurred by the taxpayers to clean up land and treat contaminated groundwater are capitalizable under sec_263 insurance proceeds received by the taxpayers are treated as a reduction of basis and taxable only if their basis in the land is reduced below zero this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely yours associate chief_counsel income_tax accounting by kelly e alton senior technician reviewer cc ita


internal_revenue_service number release date index number ---------------------------- ------------------------------ ------------------------- department of the treasury washington dc person to contact ------------------- id no ------------- telephone number --------------------- refer reply to cc psi b04 - plr-133418-09 date date re ------------------------------------------------------------------- re ------------------------------------------------------------------- legend decedent ------------------------ a b c date date date date date court ---------------------------- -------------------- ------------------------- ------------------- ------------------- ------------------- ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- -------------- a b c d town state -------- -------- ----------- ----------- -------------- ---------------------- -------- dear ---------------------- this responds to a letter dated date submitted by your authorized representative requesting a ruling under sec_2055 of the internal_revenue_code decedent died testate on date under articles second and third of the will decedent bequeathed his truck to a and his car to b respectively article fourth provides that if a and b are living at decedent’s death then the co-trustees shall set apart out of the estate and shall allocate to a and b each dollar_figurea per month for life article fifth provides that all the rest residue and remainder of decedent’s property be transferred to a and c as co-trustees in trust trust plr-133418-09 under the terms of trust decedent directed the co-trustees to build several buildings for town with the balance of the funds to be used for the upkeep of said buildings and to benefit several listed charities and any other charitable_organization as determined by the co-trustees if town declines the gift of the buildings then trust is to benefit the listed charities and any other charitable_organization as determined by the co-trustees it is represented that two of the listed charities are qualified exempt_organizations under sec_501 and that the third listed charity is a political_subdivision of state on date decedent’s executor filed proceedings with court asking court to resolve an ambiguity as to how it would be possible to set apart out of decedent’s estate the lifetime payments to a and b while also establishing in a timely manner trust with all the rest residue and remainder of the estate court entered an order on date in the order court concluded that decedent intended to establish a charitable_trust from the residuary_estate that decedent’s will contained an ambiguity regarding the establishment of trust and the general legacies to a and b and that decedent intended trust to qualify for the estate_tax charitable deduction under sec_2055 and that decedent intended to provide that an actuarial amount using the sec_7520 interest rate for date be set apart and distributed to a and b in full settlement of the general legacies in order to carry out decedent’s intent court ordered that a be paid b and b be paid c in full satisfaction of the general legacies and that the executor fund trust with the remainder of the estate in addition court added article eleventh to the will which clarifies the definition of charitable_organization to mean an organization as defined under sec_2055 and sec_501 on date the executor filed decedent’s form_706 united_states estate and generation-skipping_transfer_tax return on form_706 the executor reported each bequest to a and b in the amounts determined in the order on schedule o of form_706 the executor reported that the amount transferred to trust is d which equals the remainder of decedent’s estate you have requested that an estate_tax charitable deduction under sec_2055 is allowed for the value of trust sec_2055 provides that the value of the taxable_estate shall be determined by deducting from the value of the gross_estate the amount of all bequests legacies devises and transfers to or for a corporation or certain other organizations organized and operated exclusively for religious charitable scientific literary or educational_purposes in revrul_89_31 1989_1_cb_277 the decedent died testate under his will plr-133418-09 the decedent bequeathed the residue of the estate to a_trust the terms of which provided that income was to be paid to a an individual for a’s life and the remainder was to be paid to a charitable_organization described in sec_170 and sec_2055 in good_faith a challenged the validity of the will and as a result of a settlement the estate made an immediate payment to a and distributed the balance of the trust to the charitable_organization the revenue_ruling holds that the amount_paid to the charitable_organization qualifies for the estate_tax charitable deduction under sec_2055 in the present case trust was established under decedent’s will for the benefit of various charitable organizations and a political_subdivision of state the will contained an ambiguity regarding the payment of general legacies to a and b and the establishment of trust the executor initiated a proceeding in court to resolve the ambiguity court concluded that decedent intended to create a charitable_trust intended to qualify for a charitable deduction under sec_2055 and ordered that the general legacies be determined and distributed to a and b and the remainder of the estate to be held in trust for the charities court further ordered that the will be clarified to indicate that decedent intended charitable_organization to mean an organization described in sec_170 and sec_2055 court’s order will be effective upon the issuance of a favorable letter_ruling from the internal_revenue_service based upon the facts submitted and representations made and assuming that other requirements of sec_2055 are satisfied we conclude that trust will qualify for the estate_tax charitable deduction under sec_2055 the rulings contained in this letter are 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 rulings it is subject_to verification on examination except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code plr-133418-09 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely lorraine e gardner senior counsel branch passthroughs and special industries enclosure copy for sec_6110 purposes cc