t c memo united_states tax_court gary j kauffman petitioner v commissioner of internal revenue respondent docket no filed date gary j kauffman pro_se kimberly a daigle for respondent memorandum findings_of_fact and opinion vasquez judge respondent issued a notice_of_deficiency determining a dollar_figure deficiency in petitioner’s federal_income_tax and an accuracy- related penalty under sec_6662 of dollar_figure after concessions the remaining issues for decision are whether petitioner is entitled to a deduction for certain expenses paid from a disregarded_entity to a controlled_corporation is entitled to a mortgage interest_deduction in excess of the amount respondent allowed and is liable for a sec_6662 accuracy-related_penalty findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated by this reference at the time the petition was timely filed petitioner resided in montana during the year at issue petitioner was a realtor and cinematographer petitioner operated his business through several llcs and a solely owned c_corporation the llcs were reported on petitioner’s form_1040 u s individual_income_tax_return as disregarded entities and the c_corporation filed its own return unless otherwise indicated all section references are to the internal_revenue_code code in effect for the year at issue and all rule references are to the tax_court rules_of_practice and procedure respondent concedes that petitioner is entitled to deduct dollar_figure in costs of sales on his schedule c profit or loss from business for rocky mountain habitats llc other concessions are discussed in the body of this opinion consulting fees and commission expenses one of petitioner’s llcs rocky mountain habitats llc rmh reported paying rocky mountain habitats inc corporation dollar_figure in consulting fees and dollar_figure in commissions and fees these expenses were actually rental expenses--rmh allegedly rented and used a sophisticated camera that was owned by the corporation petitioner claimed a deduction for these expenses on his form_1040 schedule c for rmh and the corporation included the corresponding amounts in income on its form_1120 u s_corporation income_tax return respondent disallowed rmh’s claimed deduction for consulting fees and commissions in the notice_of_deficiency the record also shows that respondent made a corresponding adjustment to the corporation’s income reducing it by dollar_figure dollar_figure plus dollar_figure interest_expense petitioner owned two homes during the year at issue petitioner’s primary home was in west glacier montana and his second home was in san diego california petitioner deducted interest_expenses arising from loans secured_by both homes petitioner purchased the west glacier property in for dollar_figure financing the purchase with a single loan in date petitioner paid off the first loan with a dollar_figure loan from countrywide the balance on the first loan at the time it was refinanced was dollar_figure two months later petitioner received a home equity line of credit from wells fargo for dollar_figure both the countrywide loan and the wells fargo loan were secured_by the west glacier property petitioner purchased the san diego property in for dollar_figure financing the purchase with loans of dollar_figure and dollar_figure both loans were secured_by the san diego property in petitioner refinanced the two loans with a single loan from washington mutual now jp morgan chase which was also secured_by the san diego property the balances on the loans at the time they were refinanced were dollar_figure and dollar_figure petitioner deducted dollar_figure of interest_expenses related to the countrywide loan and the wells fargo loan the loans secured_by the west glacier property on his form_1040 schedule c for rmh respondent disallowed dollar_figure of the interest_expense_deduction on the schedule c but reallocated dollar_figure of that amount to petitioner’s schedule a itemized_deductions as deductible mortgage interest at trial respondent conceded that petitioner could deduct an additional dollar_figure on his schedule a as mortgage interest respondent maintains that the remaining dollar_figure dollar_figure minus dollar_figure and dollar_figure is nondeductible petitioner timely filed a petition with this court seeking redetermination i burden_of_proof opinion as a general_rule the commissioner’s determinations in a notice_of_deficiency are presumed correct and the taxpayer bears the burden of proving that those determinations are erroneous rule a 290_us_111 sec_7491 shifts the burden_of_proof to the commissioner as to any factual issue relevant to a taxpayer’s liability for tax if the taxpayer meets certain conditions 116_tc_438 petitioner has not shown that he satisfied the requirements of sec_7491 to shift the burden_of_proof to respondent accordingly petitioner bears the burden_of_proof see rule a petitioner also deducted interest_expenses attributable to the jp morgan chase loan related to the san diego property on his return but none of it was disallowed by respondent ii consulting fees and commission expenses petitioner argues he is entitled to deduct dollar_figure in consulting fees and commission expenses which should have been more appropriately labeled camera rental expenses because they were ordinary and necessary business_expenses of rmh respondent argues that petitioner failed to prove that the expenses were ordinary and necessary business_expenses we agree with respondent taxpayers are allowed a deduction for ordinary and necessary expenses paid_or_incurred in carrying_on_a_trade_or_business sec_162 whether an expenditure is ordinary and necessary is usually a question of fact 320_us_467 generally for an expenditure to be an ordinary and necessary business_expense the taxpayer must show a bona_fide business_purpose for the expenditure there must be a proximate relationship between the expenditure and the business_of_the_taxpayer 37_tc_650 36_tc_879 sec_1_162-1 income_tax regs to be necessary within the petitioner changed course at trial and argued that the reported expenses were actually intercompany loans deductible as bad_debt losses however petitioner abandoned this argument on brief and reiterated that the expenses were ordinary and necessary business_expenses meaning of sec_162 an expense needs to be appropriate and helpful to the taxpayer’s business welch v helvering u s pincite the requirement that an expense be ordinary connotes that the transaction which gives rise to it must be of common or frequent occurrence in the type of business involved 308_us_488 citing welch v helvering u s pincite even if an expense is ordinary and necessary it is deductible under sec_162 only to the extent it is reasonable in amount 380_f2d_786 9th cir gill v commissioner tcmemo_1994_92 aff’d without published opinion 76_f3d_378 6th cir brallier v commissioner tcmemo_1986_42 the element of reasonableness is inherent in the phrase ordinary and necessary in sec_162 haskel eng’g supply co f 2d pincite while petitioner explains on brief that the expenses were ordinary and necessary business_expenses he does not cite any credible testimony or other relevant evidence in the record supporting his assertion the only evidence petitioner provided was accounting_records and bank statements however these items merely reflect expenses allegedly incurred by rmh the accounting_records and bank statements do not show why the alleged expenses are ordinary and necessary we also note that petitioner did not testify or offer other evidence explaining how the expenses were calculated or whether the corporation charged third parties the same amounts for similar services therefore we are unable to determine whether the expenses were reasonable in amount consequently on the basis of the record before us we cannot find that the expenses were ordinary and necessary business_expenses we therefore sustain respondent’s determination on this issue iii interest_expenses we next address the extent to which petitioner is entitled to deductions for interest_expenses taxpayers are generally allowed to deduct all interest_paid or accrued within the taxable_year on indebtedness sec_163 but in the case of a taxpayer other than a corporation no deduction is allowed for personal_interest sec_163 personal_interest includes any interest allowable as a deduction other than any qualified_residence_interest sec_163 q ualified residence interest means any interest that is paid_or_accrued during the taxable_year on acquisition indebtedne sec_5 or home equity indebtedness6 with respect to any qualified_residence of the taxpayer sec_163 a taxpayer may have up to two qualified residences see sec_163 petitioner was liable in on three loans which were secured_by his two qualified residences respondent did not challenge the interest_deduction arising from the jp morgan chase loan securing the san diego property and does not assert that any portion of that loan is home_equity_indebtedness respondent does however challenge a portion of the interest_deduction attributable to the countrywide and wells fargo loans securing the west glacier property respondent argues that the dollar_figure countrywide loan consists of dollar_figure in a cquisition indebtedness means any indebtedness that is incurred in acquiring constructing or substantially improving any qualified_residence of the taxpayer and is secured_by the residence sec_163 acquisition_indebtedness also includes any indebtedness secured_by the residence resulting from the refinancing of acquisition_indebtedness but only to the extent the amount of the indebtedness resulting from the refinancing does not exceed the amount of the refinanced indebtedness id and the aggregate amount treated as acquisition_indebtedness for any period must not exceed dollar_figure million sec_163 h ome equity indebtedness means any indebtedness other than acquisition_indebtedness secured_by a qualified_residence to the extent the aggregate amount of the indebtedness does not exceed the fair_market_value of the qualified_residence reduced by the amount of acquisition_indebtedness with respect to the residence sec_163 and the aggregate amount treated as home_equity_indebtedness for any period must not exceed dollar_figure sec_163 qualified home acquisition_indebtedness and that the remaining dollar_figure balance of the loan is home_equity_indebtedness respondent also asserts that the entire dollar_figure wells fargo loan is home_equity_indebtedness under that premise respondent argues that the disallowed interest_deduction should be sustained because petitioner’s total home_equity_indebtedness during the year at issue was dollar_figure which exceeds the dollar_figure home_equity_indebtedness limit in sec_163 petitioner argues that the entire amount of the countrywide loan consists of home acquisition_indebtedness petitioner maintains that he purchased the west glacier property with a dollar_figure loan and began financing over dollar_figure in improvements to the property by using credit cards the record shows that petitioner later refinanced the first loan which then had a balance of dollar_figure with a new loan of dollar_figure from countrywide the countrywide loan was clearly used to pay off the first loan but the record shows that the balance of the loan was distributed to petitioner in his individual capacity this is not fatal and in fact the remaining balance of the loan distributed to petitioner could be considered acquisition_indebtedness if he were able to prove that he did actually incur expenses to improve the qualified_residence during the months before the date the house was complete and that the countrywide loan was secured within days of the completion of construction see notice_88_74 example 1988_2_cb_385 petitioner however did not produce credible_evidence showing that expenses were incurred to improve the property petitioner’s only evidence offered in support of his argument is his uncorroborated accounting_records in the absence of the actual credit card statements bank records receipts or other documents showing that he incurred improvement expenditures we find petitioner’s uncorroborated accounting_records insufficient and we sustain respondent’s determination that petitioner is limited to dollar_figure in home acquisition_indebtedness on the countrywide loan we also find that the interest attributable to the home equity portion of the countrywide loan and the interest attributable to the wells fargo loan are subject_to the dollar_figure limit provided by sec_163 iv accuracy-related_penalty we next determine whether petitioner is liable for an accuracy-related_penalty pursuant to sec_6662 and b and a taxpayer may be liable for a penalty of on the portion of an underpayment_of_tax due to negligence or disregard of rules or regulations or a substantial_understatement_of_income_tax negligence is defined as any failure to make a reasonable attempt to comply with the provisions of the code this includes a failure to keep adequate books_and_records or to substantiate items properly sec_6662 sec_1_6662-3 income_tax regs negligence has also been defined as the failure to exercise due care or the failure to do what a reasonable person would do under the circumstances see 92_tc_1 aff’d 925_f2d_348 9th cir 85_tc_934 disregard means any careless reckless or intentional disregard sec_6662 understatement means the excess of the amount of the tax required to be shown on the return over the amount of the tax imposed which is shown on the return reduced by any rebate sec_6662 a substantial_understatement_of_income_tax is defined as an understatement_of_tax that exceeds the greater of of the tax required to be shown on the tax_return or dollar_figure sec_6662 the accuracy-related_penalty does not apply with respect to any portion of the underpayment for which the taxpayer shows that there was reasonable_cause and that he or she acted in good_faith see sec_6664 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 of the pertinent facts and circumstances see sec_1_6664-4 income_tax regs circumstances that may indicate reasonable_cause and good_faith include an honest misunderstanding of fact or law that is reasonable in light of all of the facts and circumstances including the experience knowledge and education of the taxpayer id reliance on a tax professional demonstrates reasonable_cause when a taxpayer selects a competent tax adviser supplies the adviser with all relevant information and relies in good_faith on the adviser’s professional judgment see 115_tc_43 aff’d 299_f3d_221 3d cir the commissioner bears the burden of production with respect to the taxpayer’s liability for the sec_6662 penalty and must produce sufficient evidence indicating that it is appropriate to impose the penalty see sec_7491 higbee v commissioner t c pincite once the commissioner meets his burden of production the taxpayer must come forward with persuasive evidence that the commissioner’s determination is incorrect or that the taxpayer had reasonable_cause or substantial_authority for the position see higbee v commissioner t c pincite respondent satisfied his burden of production in establishing the appropriateness of the penalty petitioner did not maintain sufficient records to substantiate most of the expenses underlying his deductions and the disallowed deductions in this case are directly attributable to petitioner’s failure to maintain adequate_records furthermore petitioner has not proven he had reasonable_cause for his return positions and his failure to maintain adequate business records although petitioner argues he relied on a return preparer there is no evidence in the record that his return preparer was provided all relevant information petitioner testified that he provided his return preparer with his accounting_records which we find unreliable but the record does not show that he provided his return preparer with the supporting evidence or that the supporting evidence ever existed it is also unclear from the record whether petitioner adequately explained the nature of the transactions his related business entities were purportedly engaged in ie that consulting fees and commissions and fees were actually camera rental expenses we therefore hold that petitioner is liable for a sec_6662 accuracy-related_penalty on the ground of negligence in reaching our holding we have considered all arguments made and to the extent not mentioned we consider them irrelevant moot or without merit in the event the rule_155_computations demonstrate that petitioner’s understatement of income_tax for the year at issue exceeds the greater of dollar_figure or of the amount of tax required to be shown on the return we conclude that the underpayment for the year will also be attributable to a substantial_understatement_of_income_tax for which petitioner has not shown reasonable_cause to reflect the foregoing decision will be entered under rule


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 ita b07 plr-124312-17 date february re request for extension of time to make the partial_disposition election legend taxpayer tenant1 tenant2 date1 date2 date3 a b c d ------------------------------------------------------------ -------------------------- -------------------------- --------------------------- --------------------------- ---------------------- ------- ------- ---------------- -------------- dear ------------------- this letter responds to a letter dated date and subsequent correspondence submitted by taxpayer requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make the partial_disposition election under sec_1_168_i_-8 of the income_tax regulations for the taxable_year ended on date1 the a taxable_year facts taxpayer represents that the facts are as follows taxpayer a calendar-year taxpayer is a limited_liability_company that is classified as a partnership for federal tax purposes taxpayer acquires and owns office buildings for lease to tenants plr-124312-17 taxpayer acquired and placed_in_service an office building on date2 and leased it to tenant1 tenant1 vacated the office building in the fall of b on date3 taxpayer leased the office building to tenant2 before tenant2 moved into the office building taxpayer undertook and completed a tenant build-out project for the office building in a in connection with the construction of the new tenant improvements for tenant2 taxpayer in a removed and disposed of the tenant improvements that taxpayer had placed_in_service on date2 for use by tenant1 the total cost of the disposed tenant improvements was c for which a total of d in depreciation had been claimed taxpayer engaged an accounting firm to prepare taxpayer’s form_1065 u s return of partnership income for the a taxable_year the accounting firm knew that tenant1 had vacated the office building and that taxpayer undertook the above tenant build-out project however the accounting firm did not make appropriate inquiries of taxpayer regarding the cost of the tenant improvements disposed of in connection with this build-out project as a result a partial_disposition election for such disposed tenant improvements was not made on taxpayer’s form_1065 for the a taxable_year ruling requested taxpayer requests an extension of time pursuant to sec_301_9100-1 and sec_301_9100-3 to make a partial_disposition election under sec_1_168_i_-8 on its form_1065 for the taxable_year ended on date1 for the tenant improvements that were placed_in_service by taxpayer on date2 for use by tenant1 and disposed of by taxpayer during the taxable_year ended on date1 law and analysis pursuant to sec_1_168_i_-8 sec_1_168_i_-8 provides rules applicable to dispositions of macrs_property as defined in sec_1_168_b_-1 and also applies to dispositions described in sec_1_168_i_-8 of a portion of such property except as provided in sec_1_168_i_-1 sec_1_168_i_-8 does not apply to dispositions of assets included in a general_asset_account sec_1_168_i_-8 provides that for purposes of sec_1_168_i_-8 disposition occurs when ownership of the asset is transferred or when the asset is permanently withdrawn from use either in the taxpayer's trade_or_business or in the production_of_income a disposition includes the sale exchange retirement physical abandonment or destruction of an asset a disposition also occurs when an asset is transferred to a supplies scrap or similar account or when a portion of an asset is disposed of as described in sec_1_168_i_-8 if a structural_component or a portion thereof of a building is disposed of in a disposition described in sec_1_168_i_-8 a disposition also includes the disposition of such structural_component or such portion thereof plr-124312-17 sec_1_168_i_-8 provides that the manner of disposition for example normal retirement abnormal_retirement ordinary_retirement or extraordinary_retirement is not taken into account in determining whether a disposition occurs or gain_or_loss is recognized sec_1_168_i_-8 provides that sec_1_168_i_-8 also applies to a lessor of leased property that made an improvement to that property for the lessee of the property has a depreciable basis in the improvement and disposes of the improvement or disposes of a portion of the improvement under sec_1_168_i_-8 before or upon the termination of the lease with the lessee sec_1_168_i_-8 provides that for purposes of applying sec_1_168_i_-8 the facts and circumstances of each disposition are considered in determining what is the appropriate asset disposed of the asset for disposition purposes may not consist of items placed_in_service by the taxpayer on different dates without taking into account the applicable convention for purposes of determining what is the appropriate asset disposed of the unit_of_property determination under sec_1_263_a_-3 or in published guidance in the internal_revenue_bulletin under sec_263 does not apply in addition to the general rules in sec_1_168_i_-8 for purposes of applying sec_1_168_i_-8 sec_1_168_i_-4 provides that each building including its structural_components is the asset except as provided in sec_1_1250-1 or in sec_1 i - c ii b or d sec_1_168_i_-8 provides that if the taxpayer places in service an improvement or addition to an asset after the taxpayer placed the asset in service the improvement or addition and if applicable its structural_components are a separate asset sec_1_168_i_-8 provides that for purposes of applying sec_1_168_i_-8 a disposition includes a disposition of a portion of an asset as a result of a casualty event described in sec_165 a disposition of a portion of an asset for which gain determined without regard to sec_1245 or sec_1250 is not recognized in whole or in part under sec_1031 or sec_1033 a transfer of a portion of an asset in a transaction described in sec_168 or a sale of a portion of an asset even if the taxpayer does not make the election under paragraph sec_1_168_i_-8 for that disposed portion for other transactions a disposition includes a disposition of a portion of an asset only if the taxpayer makes the election under sec_1_168_i_-8 for that disposed portion sec_1_168_i_-8 provides that a taxpayer may make an election to apply sec_1_168_i_-8 to a disposition of a portion of an asset if the asset is properly included in one of the asset classes dollar_figure through of revproc_87_56 1987_2_cb_674 a taxpayer may make an election to apply sec_1_168_i_-8 to a disposition of a portion of such asset only if the taxpayer classifies the replacement portion of the asset under the same asset class as the disposed portion of the asset plr-124312-17 sec_1_168_i_-8 provides that except as provided in sec_1 i - d iii or iv a taxpayer must make the election specified in sec_1_168_i_-8 by the due_date including extensions of the original federal tax_return for the taxable_year in which the portion of an asset is disposed of by the taxpayer sec_1_168_i_-8 provides that except as provided in sec_1 i - d iii or iv a taxpayer must make the election specified in sec_1_168_i_-8 by applying the provisions of sec_1_168_i_-8 for the taxable_year in which the portion of an asset is disposed of by the taxpayer by reporting the gain loss or other deduction on the taxpayer's timely filed including extensions original federal tax_return for that taxable_year and if the asset is properly included in one of the asset classes dollar_figure through of revproc_87_56 by classifying the replacement portion of such asset under the same asset class as the disposed portion of the asset in the taxable_year in which the replacement portion is placed_in_service by the taxpayer except as provided in sec_1_168_i_-8 or iv b or except as otherwise expressly provided by other guidance published in the internal_revenue_bulletin the election specified in sec_1 i - d i may not be made through the filing of an application_for change in accounting_method sec_1_168_i_-8 provides that solely for purposes of sec_1_168_i_-8 the term asset is an asset within the scope of sec_1_168_i_-8 or the portion of such asset that is disposed of in a disposition described in sec_1_168_i_-8 disposition of a portion of an asset except as provided by sec_280b and sec_1_280b-1 the following rules apply when an asset is disposed of during a taxable_year if an asset is disposed of by sale exchange or involuntary_conversion gain_or_loss must be recognized under the applicable provisions of the internal_revenue_code if an asset is disposed of by physical abandonment_loss must be recognized in the amount of the adjusted depreciable basis as defined in sec_1_168_b_-1 of the asset at the time of the abandonment taking into account the applicable convention however if the abandoned asset is subject_to nonrecourse indebtedness sec_1 i - e applies to the asset instead of sec_1_168_i_-8 for a loss from physical abandonment to qualify for recognition under sec_1_168_i_-8 the taxpayer must intend to discard the asset irrevocably so that the taxpayer will neither use the asset again nor retrieve it for sale exchange or other_disposition if an asset is disposed of other than by sale exchange involuntary_conversion physical abandonment or conversion to personal_use as for example when the asset is transferred to a supplies or scrap account gain is not recognized loss must be recognized in the amount of the excess of the adjusted depreciable basis of the asset at the time of the disposition taking into account the applicable convention plr-124312-17 over the asset's fair_market_value at the time of the disposition taking into account the applicable convention sec_1_168_i_-8 applies only when a taxpayer disposes of a portion of an asset and sec_1_168_i_-8 applies to that disposition for computing gain_or_loss the adjusted_basis of the disposed portion of the asset is the adjusted depreciable basis of that disposed portion at the time of its disposition as determined under the applicable convention for the asset sec_1_168_i_-8 provides that except as provided in sec_1_168_i_-8 asset disposed of is in a multiple asset account or disposition of a portion of an asset a taxpayer must use the specific_identification_method of accounting to identify which asset is disposed of by the taxpayer under this method_of_accounting the taxpayer can determine the particular taxable_year in which the asset disposed of was placed_in_service by the taxpayer sec_1_168_i_-8 disposition of a portion of an asset applies only if it is impracticable from the taxpayer’s records to determine the particular taxable_year in which the asset that included the disposed portion was placed_in_service sec_1_168_i_-8 provides that depreciation ends for an asset at the time of the asset's disposition as determined under the applicable convention for the asset see sec_1_167_a_-10 if a taxpayer disposes of a portion of an asset and sec_1 i - d applies to that disposition depreciation ends for that disposed portion of the asset at the time of the disposition of the disposed portion as determined under the applicable convention for the asset sec_1_446-1 provides that generally the making of a late depreciation or amortization election or the revocation of a timely valid depreciation or amortization election is not a change in method_of_accounting except as otherwise expressly provided by the internal_revenue_code the regulations under the internal_revenue_code or other guidance published in the internal_revenue_bulletin a taxpayer may request consent to make a late election or revoke a timely valid election by submitting a request for a private_letter_ruling under sec_301_9100-1 the commissioner of internal revenue has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 plr-124312-17 sec_301_9100-3 provides that 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 the grant of relief will not prejudice the interests of the government conclusion based solely on the facts and representations submitted we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied accordingly taxpayer is granted calendar days from the date of this letter to make the partial_disposition election under sec_1_168_i_-8 for the tenant improvements that were placed_in_service by taxpayer on date2 for use by tenant1 and disposed of by taxpayer during the taxable_year ended on date1 this election must be made by taxpayer filing an amended form_1065 for the taxable_year ended on date1 and reporting the gain loss or other deduction from the disposition of such tenant improvements on that amended_return please attach a copy of this letter_ruling to the amended_return except as expressly set forth above we express or imply no opinion concerning the federal tax consequences of the facts described above under any other provision of the code including other subsections of sec_168 or regulations specifically no opinion is expressed or implied concerning whether the disposition of each tenant improvement that was placed_in_service by taxpayer on date2 for use by tenant1 and disposed of by taxpayer during the a taxable_year is eligible for the partial_disposition election taxpayer’s depreciation method recovery_period convention and placed- in-service date for any asset are correct the adjusted depreciable basis of the tenant improvements for which taxpayer is making the partial_disposition election is correct and taxpayer has a depreciable_interest in the tenant improvements for which taxpayer is making the partial_disposition election the ruling contained in this letter is based upon information and representations submitted by 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 this letter_ruling is directed only to taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent plr-124312-17 in accordance with the power_of_attorney we are sending a copy of this letter_ruling to taxpayer’s representative we also are sending a copy of this letter_ruling to the appropriate operating division director sincerely yours kathleen reed kathleen reed chief branch office of associate chief_counsel income_tax accounting enclosures copy of this letter copy for sec_6110 purposes


t c memo united_states tax_court walter j virginia l ward et al petitioners v commissioner of internal revenue respondent docket nos filed date walter j and virginia l ward pro sese kay hill for respondent ' cases of the following petitioners are consolidated herewith alaska statewide investors co trust daniel a carvalho trustee docket no great northern development co trust daniel a carvalho trustee docket no worldwide travelers trust daniel a carvalho trustee docket no golden nugget investments co trust daniel a carvalho trustee docket no we use the words trust and trustee in our opinion for convenience only -- - memorandum opinion vasquez judge these consolidated cases are before the court on respondent’s motions to dismiss for lack of prosecution pursuant to rule b motion for partial summary_judgment and motion for damages under sec_6673 by separate notices of deficiency respondent determined the following deficiencies in and penalties on petitioners’ federal income taxes walter j ward mr ward and virginia l ward together the wards penalty year deficiency sec_6662 a dollar_figure dollar_figure big_number big_number alaska statewide investors co trust asi daniel a carvalho trustee penalty year deficiency sec_6662 a dollar_figure dollar_figure big_number big_number 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 dollar for convenience figures are rounded to the nearest great northern development co trust gnd daniel a carvalho trustee penalty year deficiency sec_6662 a dollar_figure dollar_figure big_number big_number worldwide travelers trust wt daniel a carvalho trustee penalty year deficiency sec_6662 a dollar_figure dollar_figure big_number big_number golden nugget investments co trust gni daniel a carvalho trustee penalty year deficiency sec_6662 a dollar_figure dollar_figure big_number big_number background in the wards’ notice_of_deficiency respondent determined the amount the wards could claim for their exemptions in and was reduced to zero because of the amount of their income the wards’ itemized_deductions for and were decreased by dollar_figure and dollar_figure respectively because they failed to establish that dollar_figure for and dollar_figure for were losses sustained by them and because their itemized_deductions were limited because of the amount of their adjusted_gross_income the wards’ schedule c profit or loss from q4e- business realty advertising and auto expenses for and were reduced to zero because they did not establish the expenses were paid during the taxable years and that they were ordinary and necessary to their business the wards’ schedule c video cost_of_goods_sold and supplies expenses for and were reduced to zero because they did not establish they were paid during the taxable years and that they were ordinary and necessary to their business the wards’ schedule c video depreciation expenses for and were reduced to zero because they did not establish the basis of the assets that the assets were depreciable and that they were ordinary and necessary to their business the wards’ schedule e supplemental income or loss income was increased by dollar_figure for and dollar_figure for because a the wards’ trust arrangements were shams or grantor trusts or alternatively due to assignment_of_income b of income from a partnership and c of failure to establish that dollar_figure for from video city shepard and dollar_figure for from arctic video city were losses the wards sustained self-employment_tax adjustments for and and accuracy-related_penalties for and due to negligence or substantial_understatement of tax in the notices of deficiency issued to asi gnd wt and gni collectively the trusts respondent took protective - - inconsistent positions and asserted tax on the corrected income of the trusts on date petitioners invoked the jurisdiction of this court by timely filing petitions at the time they filed the petitions the wards resided in anchorage alaska and the trusts’ mailing addresses were in anchorage alaska in the answers respondent denied petitioners’ assignments of error by notice dated date the court set these cases for trial at the court’s anchorage alaska session beginning date this notice specifically stated your failure to appear may result in dismissal of the case and entry of decision against you although our standing_pretrial_order required petitioners to submit trial memoranda they never did so on date respondent filed a motion to consolidate for trial briefing and opinion the wards’ case with the cases of the trusts on date the court granted this motion on date respondent filed respondent’s first request for admissions in each of the cases petitioners did not respond to the requests for admissions therefore each matter of which respondent requested admission is deemed admitted rule c some of these deemed admissions were the returns attached to the requests for admissions are -- - true and correct copies of petitioners’ and federal_income_tax returns before mr ward was a partner with jack ward in various partnerships that engaged in video and real_property rentals before the wards owned their residence at reef place the parkview rentals an interest in parkview partnership an interest in the video city partnership an interest in the arctic building commercial partnership an interest in the arctic video city partnership and an interest in an office building beginning in the wards formed various trusts and transferred their partnership and real_property interests to the trusts around the wards transferred their residence at reef place to gni around the wards transferred their interest in parkview rentals and the parkview partnership to gni gni paid nothing to acquire the wards’ residence their interest in parkview rentals and their interest in the parkview partnership around the wards transferred their interest in the video city partnership to asi ast paid nothing to acquire the wards’ interest in the video city partnership around the wards transferred their interest in the arctic building commercial partnership to gnd around the wards transferred their interest in the arctic video city partnership to gnd gnd paid nothing to acquire the wards’ interest in the arctic building commercial partnership and the arctic video city partnership around the wards transferred their interest in the office building to wt wt paid nothing to acquire the office building after the aforementioned transfers the wards’ relationship to the transferred partnership interests and properties did not change the wards and not the trusts are the correct taxpayers to report the income and expenses of the transferred partnership interests and properties petitioners did not produce documents summonsed by the revenue_agent auditing their and returns and although offered an opportunity to do so petitioners did not meet with respondent’s counsel for the purpose of preparing this matter for trial attached to the requests for admissions among other things are the wards’ and tax returns the notices of deficiency several letters from the wards to the --- - internal_revenue_service irs and amended returns from the wards for and in the letters to the irs the wards claimed that they did not have any remuneration paid to them that was includable in gross_income for and 1997--thus they did not have any gross_income for and 1997--and they made various tax_protester type arguments to support their claim in the amended returns the wards listed the correct amount of their adjusted_gross_income taxable_income and tax as zero on date the court received a motion to dismiss for mootness from the wards the wards claimed that due to a misunderstanding and misapplication of the law the returns that were filed were inaccurate and in error the source of the wards’ income is exempted excluded or eliminated from gross_income by law and that they had filed amended returns correcting the error on date the court denied this motion on date the court received a motion to dismiss for mootness from each of the trusts the trusts made similar claims as the wards ie that the form sec_1041 u s income_tax return for estates and trusts were filed in error and the trusts’ income was exempted excluded or eliminated from gross_income on date the court denied these motions on date petitioners filed a motion for continuance --- - and a motion for a protective_order on date the court denied these motions by notice dated date the court notified the parties of a change_of courtroom and address for trial at the court’s anchorage alaska session beginning date on date the wards filed a motion to dismiss claiming that the wards were settling out of court with the irs and that they were planning to pay all of the taxes they lawfully owed on date the court denied this motion on that same date respondent sent the wards a letter regarding settlement of the cases respondent attached a decision document and a closing_agreement to the letter respondent’s counsel provided the wards a telephone number to call regarding their decision to settle there is no evidence that the wards actually pursued settlement of their case even after respondent gave them an opportunity to do so on date these cases were called from the calendar for the trial session of the court at anchorage alaska petitioners failed to appear at the calendar call on date these cases were recalled from the calendar for the trial session of the court at anchorage alaska petitioners again failed to appear at this time respondent filed motions to dismiss for lack of prosecution in each case a - motion for partial summary_judgment in the wards’ case anda motion for damages under sec_6673 in the wards’ case discussion i rule b dismissal the court may dismiss a case and enter a decision against a taxpayer for his failure properly to prosecute or to comply with the rules of this court rule b the court may for similar reasons decide against any party any issue as to which the party has the burden_of_proof and the decision shall be treated as a dismissal id when these cases were called for trial and in respondent’s motions respondent represented that he has the burden of production regarding the penalty because the examination in these cases began after date but claimed that he does not bear the burden_of_proof on any issue in these cases sec_7491 c 116_tc_438 as a general_rule the taxpayer bears the burden of proving the commissioner's deficiency determinations incorrect rule a 290_us_111 sec_7491 however provides that if a taxpayer introduces credible_evidence and meets certain other prerequisites the commissioner shall bear the burden_of_proof with respect to factual issues rule b generally applies in situations where the taxpayer bears the burden_of_proof relating to the liability of the taxpayer for a tax imposed under subtitle a or b of the code petitioners failed to appear and did not introduce any evidence therefore we conclude that the burden_of_proof is not placed on respondent pursuant to sec_7491 accordingly we sustain respondent’s deficiency determination regarding the wards and we shall dismiss the case with regard to the deficiencies in docket no and enter a decision against the wards for those amounts rule sec_123 sec_142 welch v helvering supra pincite in the motions to dismiss in the trust cases respondent stated that he took protective inconsistent positions against the trusts and the wards respondent concedes that if we find the wards liable for the deficiencies in their case then there are no deficiencies in the trust cases accordingly we shall enter appropriate orders and decisions based on respondent’s concession il summary_judgment respondent moved for partial summary_judgment in the wards’ case on the issue of whether he met his burden of production with respect to the imposition of the accuracy-related_penalty rule a provides that either party may move for summary_judgment upon all or any part of the legal issues in controversy full or partial summary_judgment may be granted only if it is demonstrated that no genuine issue exists as to any material fact and a decision may be rendered as a matter of law rule b 98_tc_518 affd 17_f3d_965 7th cir we conclude that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law pursuant to sec_6662 a taxpayer may be liable for a penalty of percent on the portion of an underpayment_of_tax due to negligence or disregard of rules or regulations or a substantial_understatement_of_income_tax sec_6662 an understatement is the difference between the amount of tax required to be shown on the return and the amount of tax actually shown on the return sec_6662 a a substantial_understatement exists if the understatement exceeds the greater of percent of the tax reguired to be shown on the return for a taxable_year or dollar_figure sec_6662 the understatement is reduced to the extent that the taxpayer has adequately disclosed facts affecting the tax treatment of an item and there is a reasonable basis for such treatment or has substantial_authority for the tax treatment of an item sec_6662 d b sec_6664 provides that no accuracy-related_penalty shall be imposed with respect to any portion of an underpayment - - if it is shown that there was reasonable_cause for such portion and that the taxpayer acted in good_faith with respect to such portion the decision as to whether the taxpayer acted with reasonable_cause and in good_faith depends upon all the pertinent facts and circumstances sec_1_6664-4 income_tax regs sec_7491 provides that the commissioner shall bear the burden of production with respect to the liability of any individual for penalties the commissioner’s burden of production under sec_7491 is to produce evidence that it is appropriate to impose the relevant penalty swain v commissioner t c slip op pincite see also higbee v commissioner supra pincite if a taxpayer files a petition alleging some error in the determination of the penalty the taxpayer’s challenge generally will succeed unless the commissioner produces evidence that the penalty 1s appropriate swain v commissioner supra at slip op pincite the commissioner however does not have the obligation to introduce evidence regarding reasonable_cause or substantial_authority higbee v commissioner supra pincite the wards are deemed to have admitted certain facts--- including the fact that the wards and not the trusts are the correct taxpayers to report the income and expenses of the we do not decide herein whether respondent would have met his burden of production if he had not produced any evidence when the taxpayer failed to appear for trial -- transferred partnership interests and properties the wards were reguired to show dollar_figure and dollar_figure of tax on their and returns respectively however they reported dollar_figure and dollar_figure of tax for and respectively thus the wards’ understatements of dollar_figure and dollar_figure for and respectively exceed both percent of the tax required to be shown on their return--dollar_figure for and dollar_figure for 1997--and dollar_figure therefore on the basis of the evidence we conclude that the wards had a substantial_understatement_of_income_tax they did not present any evidence indicating reasonable_cause or substantial_authority id accordingly on this issue we sustain respondent’s determination and shall grant respondent’s motion for partial summary_judgment tii sec_6673 sec_6673 authorizes this court to penalize up to dollar_figure a taxpayer who institutes or maintains a proceeding primarily for delay or pursues a position in this court which is frivolous or groundless the wards’ conduct in these cases has convinced us that they maintained these proceedings primarily for delay their actions have resulted in a waste of limited judicial and administrative resources that could have been devoted to resolving bona_fide claims of other taxpayers 806_f2d_948 9th cir their insistence on making frivolous protester type arguments indicates an -- - unwillingness to respect the tax laws of the united_states accordingly we shall grant respondent’s motion for sanctions and require the wards to pay a penalty to the united_states pursuant to sec_6673 in the amount of dollar_figure to reflect the foregoing appropriate orders and decisions will be entered


t c memo united_states tax_court debra susan dickerson petitioner v commissioner of internal revenue respondent docket no filed date debra susan dickerson pro_se charles pillitteri for respondent memorandum findings_of_fact and opinion armen special_trial_judge respondent determined a deficiency in petitioner's federal_income_tax for the taxable_year in the amount of dollar_figure - - after concessions by the parties ’ the issues remaining for decision are as follows whether petitioner may exclude from gross_income under sec_104 proceeds from the settlement of a lawsuit that she received in the year in issue we hold that she may not whether petitioner is entitled to an earned_income_credit for amanda roland we hold that she is not findings_of_fact virtually all of the facts have been stipulated and they are so found petitioner resided in mobile alabama at the time that her petition was filed with the court a receipt of settlement proceeds from the lawsuit prior to the year in issue petitioner purchased various insurance policies from liberty national life_insurance co and torchmark corp collectively liberty life petitioner purchased these policies in order to provide comprehensive health care coverage the policies included individual medical expense policies hospital accident policies hospital confinement and ' at trial petitioner conceded that she failed to report wages in the amount of dollar_figure and interest_income in the amount of dollar_figure and respondent conceded inter alia that petitioner is entitled to a dependency_exemption for amanda roland see infra note regarding respondent’s additional concession unless otherwise indicated all section references are to the internal_revenue_code in effect for the taxable_year in issue and all rule references are to the tax_court rules_of_practice and procedure surgical policies hospital intensive care policies and accident policies petitioner ultimately determined that the insurance policies that she had purchased did not provide the coverage that had been represented accordingly petitioner decided to seek legal redress in date petitioner retained the law firm of olen mcglothren p c the olen law firm to represent her in prosecuting her claims against liberty life pursuant to the retainer agreement petitioner agreed to pay attorney’s fees equal to percent of whatever money was eventually recovered whether by trial or settlement petitioner also agreed to pay court costs and related legal expenses from such money thereafter in the olen law firm filed a complaint on petitioner’s behalf in the circuit_court of mobile county alabama against liberty life later in date an amended complaint was filed the amended complaint focused on the various insurance policies that petitioner had purchased from liberty life the amended complaint alleged that these insurance policies contained restrictive payment provisions limiting the amount of petitioner’s recovery to benefits available under only one of the policies such that the other policies were duplicative and worthless q4e- the amended complaint included causes of action the first cause of action alleged that the representations made by liberty life with respect to the insurance policies were made intentionally recklessly or negligently with the intent that petitioner would rely on such representations the first cause of action also alleged that these representations were part of a pattern and practice encouraged and sanctioned by liberty life finally the first cause of action alleged summarily that petitioner had suffered mental anguish under the first cause of action petitioner sought recovery_of an unspecified sum for actual damages general damages punitive_damages and such other damages as authorized by alabama law petitioner did not allege how such damages should be allocated among either the types of damages sought or the claims made in the first cause of action the second cause of action alleged that liberty life wrongfully concealed and suppressed from petitioner the true nature of the insurance policies in that liberty life never revealed to petitioner the fact that coverage for payment of benefits was limited to only one policy of inssurance the second cause of action further alleged that liberty life wrongfully concealed and suppressed from petitioner the true nature of the pattern and practice in which liberty life was engaged - - under the second cause of action petitioner sought recovery_of an unspecified sum for actual damages general damages punitive_damages and such other damages as authorized by alabama law petitioner did not allege how such damages should be allocated among the types of damages sought the third cause of action alleged that liberty life was guilty of conversion by taking various premium payments that were made by petitioner as a result of the representations or concealment and suppression practiced by liberty life under this cause of action petitioner sought recovery_of an unspecified sum for actual damages general damages punitive_damages and such other damages as authorized by alabama law petitioner did not allege how such damages should be allocated among the types of damages sought the fourth cause of action alleged that liberty life was guilty of a breach of fiduciary duty to petitioner by virtue of committing the acts described in the amended complaint under this cause of action petitioner sought recovery_of an unspecified sum for actual damages general damages punitive_damages and such other damages as authorized by alabama law petitioner did not allege how such damages should be allocated among the types of damages sought in date petitioner settled her action against liberty life for dollar_figure the settlement was memorialized by a release which petitioner signed the release did not allocate the dollar_figure recovery among the four causes of action nor did it allocate such recovery between compensatory and punitive_damages however in the release petitioner acknowledged that the payment represented settlement of her claims for both compensatory and punitive_damages further the release indicated that a primary motivation and consideration on the part of liberty life in agreeing to settle the case was to eliminate the claims made by petitioner for punitive_damages pursuant to the terms of the retainer agreement with the olen law firm petitioner received dollar_figure from the settlement of her lawsuit ie dollar_figure less attorney’s fees of dollar_figure and court costs and related legal expenses of dollar_figure petitioner did not include in income on her income_tax return form 1040a any portion of the dollar_figure recovery received from liberty life nor did she deduct thereon any portion of the attorney’s fees and court costs and related legal expenses that were paid from such recovery in the notice_of_deficiency respondent determined that petitioner was not entitled to exclude from gross_income under sec_104 any portion of the dollar_figure recovery received from liberty life respondent also determined that petitioner must include the entire recovery in income and then deduct the portion used to satisfy attorney’s fees and court costs and related legal expenses b earned_income_credit in petitioner lived with jeffery s roland mr roland although petitioner and mr roland were not married they lived together as common-law husband and wife mr roland’s younger sister amanda roland amanda lived with petitioner and mr roland for a portion of the year at the time amanda was years old petitioner filed a joint_return for with mr roland on that return petitioner and mr roland claimed both a dependency_exemption for and an earned_income_credit with respect to amanda who was described as their foster_child at trial respondent conceded that the portion of the dollar_figure recovery that was used to pay attorney’s fees and court costs and related legal expenses does not constitute gross_income see 210_f3d_1346 cir affg per curiam tcmemo_1998_248 in davis the court_of_appeals for the eleventh circuit followed the court_of_appeals for the fifth circuit and held that under alabama law amounts paid to an attorney subject_to a contingency fee arrangement are excludable from gross_income see 263_f2d_119 cir affg in part and revg in part 28_tc_947 although we do not share this view see 114_tc_399 under the so-called golsen_rule we follow the law of the circuit to which a case is appealable see 54_tc_742 affd 445_f2d_985 cir consistent with respondent’s concession petitioner is not entitled to deduct the portion of the recovery that was used to pay attorney’s fees and court costs and related legal expenses - - opinion it inclusion v exclusion of petitioner’s settlement proceeds except as otherwise provided gross_income includes income derived from all sources see sec_61 348_us_426 sec_61 is to be broadly construed in contrast statutory exclusions from income are narrowly construed see 515_us_323 504_us_229 100_tc_124 affd per curiam without published opinion 25_f3d_1048 cir one statutory exclusion appears in sec_104 under sec_104 gross_income does not include the amount of any damages received whether by suit or agreement and whether as lump sums or as periodic_payments on account of personal injuries or sickness the relevant regulation sec_1 l c income_tax regs provides in pertinent part as follows the small_business job protection act of publaw_104_188 sec a 110_stat_1755 amended sec_104 to narrow the exclusion for personal injury damages received pursuant to a judgment or a settlement after date for taxable years ending after such date as such under the amendment personal_injury_or_sickness must be physical in nature moreover the amendment explicitly excepts punitive_damages from the exclusion provided by sec_104 the amendment however does not apply to the year before us and therefore has no bearing on the instant case --- - c damages received on account of personal injuries or sickness the term damages received whether by suit or agreement means an amount received through prosecution of a legal suit or action based upon tort or tort type rights or through a settlement agreement entered into in lieu of such prosecution thus damages may be excluded from gross_income if a two- prong test is satisfied the taxpayer must show the underlying cause of action giving rise to the recovery is based on tort or tort type rights and damages were received on account of personal_injury_or_sickness see commissioner v schleier supra pincite 48_f3d_894 cir 105_tc_396 affd 121_f3d_393 cir these two independent requirements must both be satisfied in order for the exclusion under sec_104 to apply furthermore the schleier test has been divided into its disparate elements by some courts thus the taxpayer must show there was an underlying claim sounding in tort the claim in 515_us_323 the supreme court distinguished the recovery that a taxpayer receives as a result of an automobile accident from the recovery that a taxpayer receives as a result of age discrimination under the age discrimination in employment act of adea publaw_90_202 81_stat_602 whereas both individuals may suffer emotional harm as a result of a defendant's wrongdoing only the accident victim's recovery can be considered as received on account of personal injury because the adea does not provide recovery for personal injury therefore the recovery received by the adea claimant is not on account of personal injury -- - existed at the time of settlement the claim encompassed personal injuries and the agreement was executed in lieu of the prosecution of the tort claim and on account of the personal injury rendering it a settlement rather than a mere severance agreement see 207_f3d_322 cir if a settlement is attributable to claims based on tort or tort type rights as well as other rights the taxpayer must establish which portion of the settlement is attributable to damages received based on tort or tort type rights similarly if the settlement may be attributable to damages received for personal injuries or sickness as well as other harm the taxpayer must establish which portion of the settlement is attributable to damages received for personal injuries or sickness see whitehead v commissioner tcmemo_1980_508 when damages are received pursuant to a settlement agreement the nature of the claim that was the actual basis for settlement controls whether such damages are excludable under sec_104 see united_states v burke supra 866_f2d_709 cir affg 89_tc_632 102_tc_116 affd in part revd in part on another issue 70_f3d_34 cir determination of the nature of the claim is factual see bagley v commissioner supra 98_tc_1 t he critical guestion is in lieu of what was the settlement amount_paid bagley v commissioner supra pincite if the settlement agreement does not expressly state the purpose for which payment was made the most important factor is the intent of the payor see 349_f2d_610 cir affg tcmemo_1964_33 robinson v commissioner supra stocks v commissioner supra pincite laguaite v commissioner tcmemo_2000_103 a the amended complaint the crucial question is whether the net amount ie the dollar_figure settlement payment was received on account of personal_injury_or_sickness when a payment is received pursuant to a settlement agreement from which we cannot clearly discern why the payment was made the underlying complaint is normally examined as an indicator of the payor’s intent see robinson v commissioner supra logic dictates that defendants will ordinarily determine their liability by taking into account the allegations made in the complaint see 87_tc_1294 affd 848_f2d_81 cir 80_tc_1104 accordingly the payor’s intent may be discerned from the allegations made in the complaint petitioner’s settlement agreement with liberty life does not state what the dollar_figure amount was paid to settle as the settlement agreement does not specifically state why the settlement proceeds were paid we must look at surrounding facts including the underlying amended complaint to decide the intent of liberty life in entering into the settlement a careful examination of the amended complaint demonstrates that the relief requested was not solely for personal_injury_or_sickness thus the amended complaint included four counts which asserted claims for detrimental reliance concealment and suppression conversion and beach of fiduciary duty the damages sought for each cause of action were identical in that petitioner sought recovery_of an unspecified sum for actual damages general damages punitive_damages and such other damages as authorized by alabama law the amended complaint contained no particularized allegations regarding personal_injury_or_sickness arising from liberty life’s conduct in fact the only allegation of any type of personal injury is found in the first cause of action regarding detrimental reliance and that allegation which is both conclusory and fleeting reads in its entirety as follows further the plaintiff has suffered mental anguish and will so suffer in the future we observe at this point that the mere mention of emotional harm in a complaint does not by itself serve to exclude the recovery from gross_income under sec_104 clearly - - such an approach would improperly expand the scope of sec_104 because language regarding emotional harm could easily be included in every complaint as standard boilerplate see kightlinger v commissioner tcmemo_1998_357 what is more the mere fact that a taxpayer suffers personal injury from a defendant's conduct is insufficient to satisfy the on account of personal_injury_or_sickness test commissioner v schleier supra pincite only recovery that is attributable to such personal injury is excludable from gross_income furthermore the relief requested by petitioner in the amended complaint included a claim for punitive_damages in the seminal case of 519_us_79 it was settled that punitive_damages generally are not intended to compensate on account of personal_injury_or_sickness rather punitive_damages are intended solely to levy private fines to punish reprehensible conduct and deter its future occurrence see o’gilvie v united_states supra pincite thus based on the amended complaint we cannot find that liberty life intended to pay petitioner on account of personal injury to any discernible extent b the release where as here the settlement agreement does not expressly state the purpose for which the payment was made the most important factor is the payor’s intent see knuckles v commissioner supra pincite the evidence does not demonstrate that liberty life specifically intended to compensate petitioner on account of personal_injury_or_sickness for instance the record is silent as to whether the negotiations leading to the settlement agreement involved any discussion regarding personal injuries that petitioner may have suffered indeed there is nothing in the record to suggest that liberty life was aware of any personal injury that petitioner may have suffered in this regard and as previously stated the amended complaint makes no mention of personal injuries or sickness other than the tangential reference to mental anguish in the first cause of action the settlement agreement is embodied in the form of a standardized release of which a primary motivation and consideration on the part of liberty life in payment of the settlement amount is to eliminate the punitive damage claims a standardized release may be indicative that the payment was not made on account of personal injuries see laguaite v commissioner supra gajda v commissioner tcmemo_1997_345 affd 158_f3d_802 cir moreover as previously stated punitive_damages ordinarily are not received on account of personal injuries or sickness and are therefore includable in gross_income see o’gilvie v commissioner supra when a settlement resolves a number of claims and does not -- - allocate proceeds to specific claims and there is no evidence that a specific claim was meant to be singled out we consider the entire amount taxable see morabito v commissioner tcmemo_1997_315 in 515_us_323 the supreme court cautioned that there must be a direct link between the personal injury and the recovery_of damages for the exclusion in sec_104 to apply in the present case petitioner has not shown that her claim for mental anguish prompted to any discernible extent the settlement proceeds that she received in agreeing to settle petitioner’s civil_action liberty life appears to have been highly motivated by the possibility of an award of punitive_damages significantly the release did not specifically allocate any amount as compensation_for personal_injury_or_sickness further petitioner has not adduced any facts upon which she would rely to prove such an allocation under these circumstances we are unable to find that a specific_portion of the settlement was intended to satisfy any potential claim for mental anguish that petitioner might have had see eg 224_f3d_30 cir as a result the entire payment is presumptively includable in gross_income see tagqgi v united_states 35_f3d_93 2d cir in conclusion petitioner’s amended complaint and the -- - release do not demonstrate that any discernible portion of the settlement proceeds was paid on account of personal_injury_or_sickness petitioner has therefore failed to satisfy the second prong of the schleier test as a result no portion of the settlement proceeds may be excluded from gross_income under sec_104 because the record does not show that any discernible portion of petitioner’s recovery was attributable to personal_injury_or_sickness we need not decide whether the underlying civil lawsuit was based on tort or tort type rights il barned income credit for the year in issue petitioner claimed an earned_income_credit based on amanda qualifying as a foster_child sec_32 defines a qualifying_child in terms of a number of tests that must be satisfied among these tests is the so-called relationship_test see sec_32 a i b as relevant herein an individual satisfies the relationship_test if he or she is an eligible_foster_child of the taxpayer see sec_32 c b iii in turn sec_32 b i111 defines eligible_foster_child to mean an individual who the taxpayer cares for as the taxpayer's own child and who has the same principal_place_of_abode as the taxpayer for the taxpayer's entire taxable_year in the present case we need not decide whether petitioner cared for amanda as her own child because the record is clear that amanda did not have the same principal_place_of_abode as petitioner for petitioner's entire taxable_year petitioner is therefore not entitled to an earned_income_credit we therefore hold for respondent on this issue conclusion in order to give effect to our disposition of the disputed issues as well as the parties’ concessions see supra note sec_1 and decision will be entered under rule


id office uilc cca_2009092412165654 -------------- number release date from -------------------------- sent thursday date pm to ---------------------- cc ------------------------------------------ subject re the service cannot net the difference the service may consider reasons why the years to which the loss is carried forward are open under either sec_6501 or eg under section e the taxpayer was not identified on the key case entity partnership return regarding form_2259 which sec_1312 circumstance is applicable


internal_revenue_service number release date index number ----------------------------- ------------------- ---------------------- re ----------------------- ------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- telephone number --------------------- refer reply to cc psi b04 plr-137309-10 date date legend donor donor trust date date date date date date date child a child b child c a dear ----------------- ----------------------- -------------------------- -------------------------------------------- ---------------------- ----------------------- ----------------- ---------------------- ------------------------- ------------------------- ------------------------- ----------------------- ------------------- ------------------------ -------------------------- this letter responds to the submission dated date and subsequent correspondence requesting an extension of time pursuant to sec_2642 of the internal_revenue_code and sec_301_9100-3 of the procedure and administration regulations to elect out of the generation-skipping_transfer gst tax exemption automatic allocation rules donor and donor are spouses on date prior to date donor and donor created trust an irrevocable_trust under article first of trust until both donor and donor have died one-third of the trust property is to be held for child a another third is to be held for child b and the last third is to be held for child c each child’s share has substantially identical terms income is to be paid to the child in annual or more frequent installments on the first anniversary of the death of the survivor of donor and donor one-fourth of a child’s share will be paid to that child on the third anniversary of the death of the survivor of donor and donor one-third of a child’s share will be paid to that child on the fifth anniversary of the death of the survivor of plr-137309-10 donor and donor one-half of a child’s share will be paid to that child on the seventh anniversary of the death of the survivor of donor and donor the remaining balance of a child’s share is to be paid to that child if a child dies before his share is fully paid to him and a sibling of the child is living the net_income of the child’s share is to be paid to the child’s children portions of the principal are to be paid to the grandchild upon the grandchild’s attaining certain ages if a child dies before his share is fully paid to him and no sibling of the child is living the child’s share is to be paid to the child’s living descendants in equal shares under article sixteenth of trust with respect to any inter_vivos transfer made by donor sec_1 and during any calendar_year each of the persons living on the date such transfer is made who is a person i to whom income of the trust may be currently distributed or ii who is a presumptive taker of the next succeeding income_interest or the remainder_interest is authorized no later than thirty days after the giving of notice to withdraw certain amounts trust was drafted by a who did not inform donor sec_1 and of the application of the deemed_allocation rules of sec_2632 to transfers made after date donor and donor made transfers to trust on date date date date date and date all after date on the gift_tax returns filed for the transfers donor and donor treated the gifts as made one-half by each under sec_2513 recently donor and donor learned that under the deemed_allocation rules of sec_2632 gst_exemption was allocated to their transfers to trust after date and that to avoid the allocation of gst_exemption to a gst_trust a taxpayer must affirmatively elect out donor and donor now seek a ruling granting an extension of time to elect out of the automatic allocation rules with respect to the date through date transfers to trust sec_2601 imposes a tax on every generation-skipping_transfer a generation-skipping_transfer is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2602 provides that the amount of the tax imposed by sec_2601 is the taxable_amount multiplied by the applicable_rate sec_2641 defines the applicable_rate as the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer under sec_2642 the inclusion_ratio with respect to any property transferred in a generation-skipping_transfer is the excess if any of over the applicable_fraction the applicable_fraction as defined in sec_2642 is a fraction the under sec_2513 if both spouses have signified their consent a gift made by one spouse to any person other than his spouse shall be considered as made one-half by him and one-half by his spouse plr-137309-10 numerator of which is the amount of the gst_exemption under sec_2631 allocated to the trust or to property transferred in a direct_skip and the denominator of which is the value of the property transferred to the trust or involved in the direct_skip sec_2631 as effective in the year at issue provided that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure adjusted for inflation under sec_2631 which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable sec_2632 provides that if any individual makes an indirect_skip during such individual's lifetime any unused portion of such individual's gst_exemption shall be allocated to the property transferred to the extent necessary to make the inclusion_ratio for such property zero if the amount of the indirect_skip exceeds such unused portion the entire unused portion shall be allocated to the property transferred sec_2632 provides that the term indirect_skip means any transfer of property other than a direct_skip subject_to the tax imposed by chapter made to a gst_trust as defined in sec_2632 under sec_2632 and ii an individual may elect to have the automatic allocation rule in sec_2632 not apply to an indirect_skip or to any or all transfers made by such individual to a particular trust sec_2632 provides that an election under sec_2632 may be made on a timely filed gift_tax_return for the calendar_year for which the election is to become effective sec_26_2632-1 of the generation-skipping_transfer_tax regulations provides in relevant part that to elect out the transferor must attach a statement election out statement to a form_709 filed within the time period provided in sec_26 b iii c whether or not any transfer was made in the calendar_year for which the form_709 was filed and whether or not a form_709 otherwise would be required to be filed for that year the election out statement must identify the trust except for an election out under sec_26_2632-1 and specifically must provide that the transferor is electing out of the automatic allocation of gst_exemption with respect to the described transfer or transfers further unless the election out is made for all transfers made to the trust in the current_year the current-year transfers to which the election out is to apply must be specifically described or otherwise identified in the election out statement sec_26_2632-1 provides in relevant part that to elect out the form_709 with the attached election out statement must be filed on or before the due_date for timely filing within the meaning of sec_26_2632-1 of the form_709 for the calendar_year in which the first transfer to be covered by the election out was made plr-137309-10 sec_2642 provides generally that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 or and an election under sec_2632 or c such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of this paragraph sec_2642 provides that in determining whether to grant relief under sec_2642 the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief the time for making the allocation or election shall be treated as if not expressly prescribed by statute sec_2652 provides in relevant part that if under sec_2513 one-half of a gift is treated as made by an individual and one-half of such gift is treated as made by the spouse of such individual such gift shall be so treated for gst tax purposes notice_2001_50 2001_2_cb_189 provides that under sec_2642 the time for allocating the gst_exemption to lifetime transfers and transfers at death the time for electing out of the automatic allocation rules and the time for electing to treat any trust as a generation-skipping_transfer_trust are to be treated as if not expressly prescribed by statute the notice further provides that taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 sec_301_9100-1 through provide the standards 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 an automatic_extension of time for making certain elections sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose date is prescribed by a regulation and not expressly provided by statute in accordance with sec_2642 and notice_2001_50 taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 sec_301_9100-3 provides in part that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government plr-137309-10 sec_301_9100-3 provides in part except as provided in sec_301 b i through iii that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly donor and donor are granted an extension of time of days from the date of this letter to make an election under sec_2632 that the automatic allocation rules do not apply to the transfers to trust after date the election out will be effective as of the dates the respective returns were filed the elections should be made on form sec_709 and filed with the internal_revenue_service center cincinnati ohio a copy of this letter should be attached to each form_709 two copies are enclosed for that purpose 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 sent to your authorized representative sincerely leslie h finlow senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosures copy for sec_6110 purposes


department of the treasury internal_revenue_service washington d c date cc intl b01 ----------- genin-129463-03 office_of_chief_counsel number info release date uil ----------------------------------- ------------------------------------------- ------------------------------------- ----------------------------- -------------------------------- attention --------------------------- dear ----------------- federal excise_taxes the september rule reference this responds to your letter to the commissioner of the internal_revenue_service dated date regarding the timing of certain excise_tax payments that your company is required to make in response your inquiry we are providing the following general information this information_letter is advisory only and has no binding effect on the internal_revenue_service you have requested an explanation for the requirement that three excise_tax deposits as you are probably aware information concerning the payment of excise_taxes for are required in the month of september while only two payments are required in each of the other eleven months of the year you have asked why the requirement should be different in september than during the other months including a description of the so-called september rule can be found on the internet at http www irs gov pub irs-pdf p510 pdf as you correctly describe in your letter excise_tax deposits determined under the regular_method are due on a semimonthly basis generally by the 29th day of the month for the first semimonthly period ie deposit for april is due by april and by the 14th day of the following month for the second semimonthly period ie april is due by may but in september the deposits corresponding to both the period september and the period september are due by september and there is in fact a third monthly period september the deposit for which is due by october we hope the following information will be helpful in explaining to you the origin statutory basis and rationale of the september rule the excise_tax on reinsurance premiums which you refer to specifically in your genin-129463-03 letter is an excise_tax imposed under subtitle d of the internal_revenue_code code code sec_6302 entitled time for deposit of certain excise_taxes provides in pertinent part except as otherwise provided in this subsection and subsection e if any person is required under regulations to make deposits of taxes under subtitle d with respect to semimonthly periods such person shall make deposits of such taxes for the period beginning on september and ending on september not later than september sec_40_6302_c_-2 describes in greater detail the special rules for september and provides more specific information about how to determine the amount of the deposit for the special september period code sec_6302 was enacted on date as section a of p l commonly known as the uruguay round agreements act act according to the house report accompanying the act this section was included as one of several financing provisions enacted to offset the projected cost of implementing the uruguay round legislation the purpose of the special september period is to accelerate to september the due_date for the related deposit prior to the act the due_date had been in october which is in the subsequent fiscal_year because the federal government’s fiscal_year ends on september the house report describes the reason for this change as follow sec_1 requiring excise_taxes that must be deposited on a semi-monthly basis to be deposited during the fiscal_year to which the taxes relate would provide substantial additional revenue without imposing significant burdens on taxpayers we hope this explanation of the origin and rationale of the september rule will be helpful to you if you should have any further questions in this matter please contact ---------- ------------ at sincerely w edward williams senior technical reviewer branch h_r rep no 103rd cong 2nd sess pt pincite genin-129463-03 office of associate chief_counsel international


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom corp 1-plr-121801-98 date date legend acquirer target sellers state a state b date y dear we respond to your letter dated date requesting a ruling concerning the federal_income_tax consequences of a proposed transaction additional information was submitted in letters dated date date date and date the information submitted is summarized as follows acquirer is a non-profit trust under the laws of state a that is exempt from federal_income_tax under sec_501 and is a private_foundation under sec_509 target is a taxable for-profit sub-chapter c_corporation incorporated under the laws of state b sellers are individual shareholders who own all of the stock of target the parties have completed or propose to complete the following steps the transaction on date a date prior to the effective date of the final_regulation under sec_1_337_d_-4 acquirer entered into a stock purchase agreement with sellers the agreement to purchase all of target’s stock for dollar_figurey and convert target from a taxable for-profit corporation to a tax exempt non-profit corporation the conversion upon a favorable irs ruling acquirer will cause target to amend its articles of incorporation target will then apply to the irs for tax exempt status as a charitable_organization described in sec_501 the agreement is binding upon the occurrence of several conditions one of which is a favorable tax ruling from the irs stating that the transaction will not be taxable under sec_336 or sec_337 acquirer has represented that its promise under the agreement to effect the conversion is legally binding under applicable law based solely on the information submitted we rule as follows the transaction will not result in the recognition of gain_or_loss under sec_336 or sec_337 no opinion is expressed about the tax treatment of the transaction under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the transaction that are not specifically covered by the above ruling in particular no opinion is expressed as to whether acquirer’s promise under the agreement to effect the conversion is legally binding under applicable law this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter should be attached to the federal_income_tax returns of the taxpayers involved for the taxable_year in which the transaction is consummated sincerely assistant chief_counsel corporate by mark s jennings senior technician reviewer branch