internal_revenue_service department of the treasury number release date index no p o box ben franklin station washington dc re ein - person to contact telephone number refer reply to cc dom p si plr-105128-99 date legend trust trust trust a beneficiary trustee grandparent grandparent date date x y corporation charity a charity b charity c dear this is in response to your letter dated date in which you requested a ruling regarding the application of the generation-skipping_transfer gst tax provisions of chapter of the internal_revenue_code specifically you requested a ruling that the exempt status of trust a for gst tax purposes would not be affected by the following i the trustee’s consent to corporation’s s election on behalf of trust a ii the trustee’s execution of an electing_small_business_trust election on behalf of trust a and iii the trustee’s execution of the shareholder agreement on behalf of trust a according to your submission on date grandparent transferred x shares of corporation common_stock to trust an irrevocable_trust on the same date grandparent transferred y shares of corporation common_stock to trust an irrevocable_trust pursuant to the terms of both trust agreements from date plr-105128-99 until date the net_income from these trusts was distributed annually in equal amounts to charity a and charity b on date pursuant to the terms of article e of trust the trustee divided trust into equal shares one share for each grandchild of grandparent then living and one share for each deceased grandchild leaving one or more descendants then living twelve such shares were created and held as separate trusts in the names of the living and deceased grandchildren of grandparent trust a was established under the terms of article e for the benefit of beneficiary and his issue also on date pursuant to the terms of trust the trust estate of trust was transferred to the then acting trustee of trust added equally to the shares created under that agreement and held administered and disposed of in accordance with the provisions of trust governing such shares article g of trust provides that after date and during the lifetime of each living grandchild the trustee shall pay to or expend for the benefit of such grandchild so much or all of the net_income and principal of the share designated by the grandchild’s name as the trustee in its discretion deems to be for the grandchild’s best interests and welfare subject_to this provision in favor of each living grandchild so much or all of the net_income and principal of the share designated by the name of the grandchild shall be paid to or expended for the benefit of the descendants of the grandchild as shall be living from time to time at such times in such equal or unequal proportions among them and in such manner as the trustee in its discretion deems to be for the best interests and welfare of such descendants individually and as a group article h states that upon the death of a grandchild after division of the trust estate into shares or upon division of the trust estate into shares if a grandchild is then deceased the share designated by the name of such grandchild is to be held in trust or distributed to or in trust for the benefit of any one or more of such grandchild’s spouse and descendants and the spouses of such descendants in such amount and in such manner and upon such terms and conditions as such grandchild shall appoint by his or her last will specifically referring to the power_of_appointment conferred upon him or her in default of the exercise of the power_of_appointment by such grandchild and upon the death of such grandchild or upon division of the trust estate into shares as the case may be the grandchild’s share of the trust estate or the part not effectively appointed shall be distributed per stirpes to his or her then living descendants if any if there are no living descendants the trust estate or the part not effectively appointed shall be distributed equally to such of grandparent 1's other grandchildren who are then plr-105128-99 living per capita however the then living descendants of any other deceased grandchild shall take per stirpes the share which the deceased grandchild would have received if living each portion otherwise distributable to a grandchild or descendant of a grandchild for whom a share of the trust estate is then being held is to be added to such share and if at such time there is no other grandchild or descendant of a deceased grandchild then living the corpus is to be distributed to charity c article l of trust states that notwithstanding any provision in the trust agreement to the contrary the trusts created under the instrument or pursuant to the exercise of any power_of_appointment under the instrument are to terminate not later than twenty-one years after the death of the last survivor of grandparent 1’s descendants living on date if the trusts created have not sooner terminated the trustee is to pay over transfer and deliver the trust estate to the persons then entitled to receive the income therefrom in the same shares or portions in which such income is then being paid to them the primary asset of trust a is stock in corporation a c_corporation the corporation’s board_of directors proposes to elect to treat corporation as a small_business_corporation an s_corporation trustee proposes to consent to the s election in order to convert corporation to an s_corporation each of its shareholders must be eligible to hold s_corporation stock as of the first day of the year for which the election is to take effect trustee proposes to make an election under sec_1361 to treat trust a as an electing_small_business_trust so that it can qualify as an eligible s_corporation shareholder in an effort to ensure the continuing qualification of corporation as an s_corporation trustee intends to enter into a shareholder agreement with corporation and corporation’s other shareholders to protect the s election under the sec_3 of the proposed shareholder agreement no shareholder may transfer and no person may acquire the legal or beneficial_ownership of any share if such transfer or acquisition would cause the s status of the corporation to terminate specifically no transfer may be made to any person that is not eligible to be a shareholder of an s_corporation under the applicable provisions of the code as in effect at the time of the purported transfer in addition no shareholder may affirmatively transfer shares to a person if the transfer would cause the corporation to exceed the maximum number of persons who are allowable s_corporation shareholders sec_3 of the proposed shareholder agreement provides that no shareholder shall make any transfer of shares to any trust having multiple beneficiaries or amend any trust that owns plr-105128-99 shares to increase the number of beneficiaries unless all such beneficiaries are persons eligible to be transferees pursuant to sec_3 and immediately after such transfer or amendment the number of shareholders the corporation is deemed to have for purposes of sec_1361 would not exceed the maximum number of persons who are allowable s_corporation shareholders pursuant to that section notwithstanding any other provision of the shareholder agreement the shareholders and the corporation acknowledge and agree in sec_3 that none of the following shall be prohibited by the terms of this shareholder agreement i the addition of a_trust beneficiary due to the birth of an additional descendant of grandparent ii the exercise of a power_of_appointment granted to a beneficiary pursuant to the terms of any irrevocable_trust that is in existence on the date of the agreement and that owns shares iii the transfer of shares to any person in whose favor a power_of_appointment described in ii above is exercised or iv the distribution of shares to a a beneficiary of any irrevocable_trust that is in existence on the date of the agreement and that owns shares pursuant to the terms thereof or b to the beneficiary of any trust created pursuant to the exercise of a power_of_appointment described in ii above even if such addition exercise or distribution shall cause the termination of the corporation’s s election sec_3 provides that prior to any transfer or other_disposition of shares if the corporation in its discretion so requires an opinion of counsel to the corporation must first be received by the corporation the cost of which shall be borne by the shareholder whose shares are to be transferred or disposed of that the transferee is i eligible to be a shareholder of an s_corporation in accordance with the applicable_requirements of the code or ii that the transfer otherwise is allowable pursuant to the provisions of the shareholder agreement in addition to the other requirements of sec_3 of the shareholder agreement sec_3 provides that no transfer of shares including without limitation transfers pursuant to sec_3 shall be permitted and no purported transfer shall be effective until a permitted transferee has executed a supplemental signature page to the shareholder agreement all parties agree that upon execution and acceptance of a supplemental signature page the shareholder agreement shall be amended and the transferee shall have the rights and obligations of a shareholder under the agreement sec_3 of the shareholder agreement provides that shareholders possessing of the total voting power of all outstanding shares may at any time and from time to time agree in writing to authorize or ratify any transfer of shares which would plr-105128-99 otherwise not be permitted by this agreement in which event the transfer shall be deemed for all purposes to comply with this agreement notwithstanding any other provision of this agreement under sec_3 if a transfer of shares is required to be made pursuant to sec_3 iii or iv to a transferee who is not already a shareholder and who has not previously executed or currently refuses to execute a supplemental signature page to the shareholder agreement a non- consenting transferee certain procedures will apply the shareholders may allow the transfer of shares to the non- consenting transferee pursuant to the procedure set forth in sec_3 otherwise the shares that otherwise would be transferred to the non-consenting transferee shall instead be redeemed by the corporation for a price equal to the fair_market_value of the shares as of the valuation_date pursuant to sec_5 of the proposed shareholder agreement any purported transfer in violation of the shareholder agreement shall not affect the beneficial or legal ownership of shares section of the agreement states that subject_to any limitations on dividends or other distributions imposed by statute the corporation shall make pro_rata dividend distributions of money based on ownership of shares to pay the federal state and local income_tax on the income and gain of the corporation net of any_tax benefits produced for the shareholders by the corporation’s losses deductions and credits for the current_year and for each prior year during which the corporation’s s election was in effect that passes through to the shareholders under the applicable provisions of the code in respect of each taxable_year or portion thereof of the corporation for which its s election is in effect section of the proposed shareholder agreement provides that the corporation shall a not issue more than one class of shares b use its best efforts to avoid a termination of its s election and c in the event of a termination of the s election use its best efforts to distribute to each shareholder such shareholder’s net share of the corporation’s undistributed_taxable_income for all taxable years for which the s election was in effect to the extent permitted by law and consistent with the obligations of the corporation to creditors agreements to which the corporation is a party and other business considerations within the period when such a distribution will be considered a non-dividend distribution under sec_1371 section of the proposed shareholder agreement states that if the corporation’s status as an s_corporation is terminated inadvertently and the corporation wishes to obtain a ruling under sec_1362 each shareholder agrees to make any adjustments plr-105128-99 required pursuant to sec_1362 and approved by the corporation’s board_of directors a shareholder’s obligation to make such adjustments shall continue after the shareholder has ceased to own shares in the corporation and after this agreement has terminated except as directed by the shareholder agreement the existing trustee will continue to serve in the same manner as it previously served in addition trust a will continue to be administered in accordance with the terms and conditions set forth in trust sec_2601 imposes a tax on every generation-skipping_transfer sec_26_2601-1 of the generation-skipping_transfer_tax regulations provides that the gst tax applies to any generation-skipping_transfer made after date sec_26_2601-1 provides an exception to this rule for any distributions from a_trust that was irrevocable on date however this exception does not apply to a pro_rata portion of any generation-skipping_transfer under an irrevocable_trust where additions were made to the trust after date in addition a modification to a_trust that results in a change in the quality value or timing of any beneficial_interest provided for under the trust instrument will cause the trust to lose its exempt status sec_26_2601-1 provides that except as provided under sec_26_2601-1 where any portion of a_trust remains in the trust after the post-date release exercise or lapse of a power_of_appointment over that portion of the trust and the release exercise or lapse is treated to any extent as a taxable transfer under chapter or chapter the value of the entire portion of the trust subject_to the power that was released exercised or lapsed is treated as if that portion had been withdrawn and immediately retransferred to the trust at the time of the release exercise or lapse sec_26_2601-1 provides a special rule for certain powers of appointment this section provides that the release exercise or lapse of a power_of_appointment other than a general_power_of_appointment as defined in sec_2041 will not be treated as an addition to a_trust if- such power_of_appointment was created in an irrevocable_trust that is not subject_to chapter under sec_26_2601-1 and in the case of an exercise such power_of_appointment is not exercised in a manner that may postpone or suspend the vesting absolute ownership or power of alienation of an interest in property for a period measured from the date of creation of the trust plr-105128-99 extending beyond any life in being at the date of creation of the trust plus a period of years sec_2041 provides that the term general_power_of_appointment means a power that is exercisable in favor of the individual possessing the power his estate his creditors or the creditors of his estate in the present case it has been represented that trust a was irrevocable on date and that there have been no additions constructive or otherwise to trust a after that date based on the representations made and the facts submitted we conclude that there is no change in the quality value or timing of any beneficial_interest in trust a resulting from the following i the trustee’s consent to corporation’s proposed s election ii the trustee’s election to treat trust a as an electing_small_business_trust and iii the trustee’s execution of the proposed shareholder agreement therefore items i - iii above will not cause trust a to lose its exempt status with respect to the gst tax provided that there are no additions constructive or otherwise to trust a after date distributions from trust a to skip persons will not be subject_to the gst tax except as specifically ruled herein we express no opinion as to the consequences of this transaction under the cited provisions of the code or under any other provisions of the code specifically we express no opinion on whether trust a will qualify as an electing_small_business_trust within the meaning of sec_1361 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 assistant chief_counsel passthroughs and special industries by george masnik chief branch


t c memo united_states tax_court william w halle iv and janice c halle petitioners v commissioner of internal revenue respondent docket no filed date william w halle iv pro_se sara j barkley for respondent memorandum opinion dawson judge respondent determined a deficiency of dollar_figure in petitioners' federal_income_tax for a sec_6651 addition_to_tax of dollar_figure and a sec_6662 accuracy-related_penalty of dollar_figure prior to or at trial respondent made several concessions resulting in a substantial reduction of the determined deficiency and the elimination of the sec_6651 addition_to_tax because of petitioner2 william halle's contention that the notice_of_deficiency was arbitrary and that the burden_of_proof shifted to respondent the concessions made by respondent are fully set forth below on petitioners' schedule c attached to their federal_income_tax return they claimed schedule c business_expenses in the total amount of dollar_figure during the examination of their return respondent allowed in full the amounts claimed for repairs travel meals and entertainment which totaled dollar_figure for all the remaining categories of expenses claimed on the return respondent determined in the notice_of_deficiency that petitioners were entitled to schedule c expenses in the amount of dollar_figure and disallowed dollar_figure during the preparation of this case for trial respondent increased the amount of schedule c expenses to which petitioners were entitled by dollar_figure and unless otherwise indicated all section references are to the internal_revenue_code in effect for the taxable_year and all rule references are to the tax_court rules_of_practice and procedure are to william w halle iv subsequent references herein to petitioner individually disallowed only dollar_figure thus at trial respondent agreed that petitioners are entitled to dollar_figure in schedule c expenses instead of the dollar_figure allowed by respondent in the notice_of_deficiency which amount is in addition to expenses of dollar_figure allowed by respondent for repairs travel meals and entertainment in the notice_of_deficiency respondent determined that petitioners had an unreported capital_gain of dollar_figure from the sale of their new jersey personal_residence in the stipulation of facts respondent conceded that petitioners did not have a dollar_figure capital_gain from the sale of their personal_residence during because it was not sold until date on form_4797 attached to their federal_income_tax return for petitioners reported the sale of business property and reported a gain of dollar_figure this reported gain was from the sale of the portion of petitioners' new jersey residence used for business because their personal_residence was not sold during this gain of dollar_figure should not have been reported by them in that year in exhibit al respondent proposed that no gain_or_loss should be recognized by petitioners on the trade-in of a chevrolet cavalier because they did not follow the rules under sec_1031 for like_kind_exchanges when they traded in the chevrolet cavalier on the lease of a chevrolet van respondent's position was based on the fact that petitioners had advised respondent that they had treated the lease of the van as a purchase and not as a lease at trial however petitioner testified that in subsequent years the lease was treated as a lease and not as a purchase and that petitioners were not entitled to depreciation on the van consequently respondent concedes part of the loss claimed on petitioners' federal_income_tax return for the trade-in of the chevrolet cavalier for the van in the notice_of_deficiency respondent determined that petitioners were liable for an addition_to_tax under sec_6651 in the amount of dollar_figure however in the stipulation of facts respondent conceded that petitioners timely filed their federal_income_tax return and consequently are not liable for that addition_to_tax in the notice_of_deficiency there is an adjustment to petitioners' self-employment_tax which was increased by respondent there is no dispute as to whether petitioner's net_earnings from his locksmith burglar alarm business are subject_to self-employment_tax that adjustment is computational in addition respondent adjusted petitioners' medical_expenses deduction there is no dispute as to whether petitioners incurred the medical_expenses claimed on the return that adjustment is also computational petitioner in his answering brief has raised two preliminary issues namely whether respondent should bear the burden_of_proof because the deficiency_notice was allegedly arbitrary and excessive and whether the testimony of respondent's witness alan hull should be rejected as unreliable the two substantive issues remaining for decision are whether petitioners are entitled to schedule c business_expense deductions in excess of the amounts allowed by respondent and whether petitioners are liable for the sec_6662 accuracy-related_penalty for negligence or disregard of rules or regulations for convenience we are combining our findings_of_fact and opinion in this case some of the facts have been stipulated and are so found the stipulation of facts and the exhibits attached thereto are incorporated herein by this reference petitioners william w halle iv and janice c halle resided in cheyenne wyoming at the time their petition was filed they timely filed their joint federal_income_tax return for prior to and during petitioner operated a locksmith and burglar alarm business the locksmith business as a schedule c business he used the accrual_method of accounting in that business his personal_residence and locksmith business were located in new jersey until late date petitioner used percent of the new jersey personal_residence for the locksmith business he also leased additional space in a separate location from date to date the lease agreement called for payments in the amount of dollar_figure per month in date petitioner moved his family personal_residence and locksmith business to his current location in cheyenne wyoming he continued to operate his locksmith business in wyoming and used a portion of his wyoming residence for his locksmith shop in date petitioners signed an agreement with north american van lines to transport their belongings from new jersey to wyoming actual delivery was made by north park transportation co on date although petitioners contracted to sell their new jersey personal_residence in date the sale did not occur until date in petitioner used two vehicles in his locksmith business a chevrolet cavalier and a chevrolet van petitioner owned the cavalier having acquired it in at a cost of dollar_figure until the cavalier was used percent for personal purposes on date petitioner converted the cavalier to percent business use on date petitioner traded in the cavalier as a downpayment on a year lease for a chevrolet van the amount credited to petitioner for the cavalier trade-in was dollar_figure the van was used percent for petitioner's locksmith business his lease payments for the van were dollar_figure per month in as in previous years petitioner maintained the financial records for his locksmith business and prepared the schedule c for the business as well as the rest of petitioners' joint federal_income_tax return petitioner did not hire an accountant return preparer or anyone else to help him maintain his business or financial records or prepare the tax_return during petitioner used two different computer accounting systems to maintain his financial records he personally made all entries into both systems petitioner first used computer accounting system software called managing your money mym from date until approximately date petitioner entered expense items into the mym system on his computer after using mym for a time petitioner discovered that it did not perform tasks he felt were necessary for his business to remedy this situation a second computer accounting software dac easy dac was installed on petitioner's computer prior to date petitioner was then able to use either mym or dac from approximately date to date petitioner entered his business_expenses into dac and he no longer made entries into mym thus at the end of petitioner essentially had two separate expense records one on mym and the other on dac neither the mym nor the dac expense records were complete mym covered only approximately the first months of and dac covered only approximately the last months of recognizing this problem petitioner set out to consolidate the mym and dac expense records by transferring the mym expenses into the dac system to accomplish this petitioner created a summary of the mym expenses mym summary the mym summary is dated date on the same date petitioner transferred each expense from the mym summary into the dac system this transfer is recorded on the dac general ledger listing report dac ledger dated date pincite a m on date pincite p m petitioner created his dac accounting summary this summary lists total dac system expenses by account number under the column heading balance ytd therefore when petitioner completed the entries on date he had successfully accomplished his goal of consolidating the locksmith business_expenses for the entire year into one system the dac system petitioner prepared the joint federal_income_tax return on date more than months after he had consolidated his expenses in the dac system to prepare the tax_return he created a series of numbered tally sheets called scratch pads on his computer the purpose of the scratch pads was to give petitioner the dollar amount for total business_expense items by category for the tax_year the scratch pad categories are identical to the expense categories listed on schedule c of petitioners' tax_return petitioner personally created all the scratch pads to create each scratch pad petitioner retrieved an expense item for a schedule c category from the mym system he then listed the mym expense on a numbered scratch pad petitioner also retrieved the dac expense for the same category and then listed it on the same numbered scratch pad the computer added the mym items to the dac items to produce a scratch pad dollar amount total for each schedule c category finally the computer recorded the dollar amount total from a scratch pad onto the appropriate line of petitioner's schedule c i preliminary issues a burden_of_proof respondent initially determined a deficiency in the amount of dollar_figure after concessions the deficiency was substantially reduced petitioner argues that respondent's determination was arbitrary and thus the burden_of_proof shifted to respondent a statutory_notice_of_deficiency is presumed correct rule a 290_us_111 petitioner ha sec_3 identical to the amounts listed on the mym summary the mym amounts listed on each scratch pad are accounting summary under the column balance ytd the dac amounts are identical to the amounts on the dac the burden of proving that the determination was arbitrary 80_tc_34 affd on this issue 756_f2d_1430 9th cir if the taxpayer shows that the deficiency_notice is arbitrary or without foundation the burden of going forward with the evidence shifts to the commissioner 83_tc_269 generally this court will not look behind the notice_of_deficiency to review the information used or respondent's motives or procedure involved in making the determination 62_tc_324 our decision with respect to the tax_liability is based on the evidence submitted at the trial of the case and not on any record previously developed at the administrative level id petitioner made three arguments in support of this contention first he argues that respondent's concessions before and at trial rendered the deficiency_notice arbitrary as to the remaining issues petitioner is incorrect respondent's concession of an issue or issues prior to or at trial does not destroy the presumptive correctness of the deficiency_notice as to the remaining issues 44_tc_323 and cases cited therein second petitioner contends that the deficiency_notice is arbitrary because his canceled checks and other records were not used to determine the deficiency he testified that he delivered these documents to the internal_revenue_service irs office in cheyenne wyoming at the auditor's request he did not keep copies of the documents or obtain a receipt from anyone he testified that he put the documents on a receptionist's desk because no one was in the office he failed to return to the office or telephone to verify that the receptionist auditor or any other irs employee actually received the documents the auditor notified petitioner by letter dated date that the documents could not be located and requested that he resubmit them in response petitioner submitted his mym summary dac ledger dac trial balance dac accounts_payable listing and other documents detailing his business_expenses these records were stamped received by the irs on date the same records were later returned to petitioner he then submitted them to respondent at her request prior to the issuance of the deficiency_notice moreover all of petitioner's scratch pads used to calculate the total expense claimed for each schedule c category were attached to the joint federal_income_tax return although the inability to produce a record that has been unintentionally lost whether by petitioner respondent or a third party alters the type of evidence that may be offered to establish a fact the burden_of_proof is not affected fed r evid 81_tc_699 71_tc_1120 thus notwithstanding the purported unavailability of petitioner's original canceled checks and other documents petitioner provided ample detailed records of his claimed business_expenses prior to the issuance of the deficiency_notice on date petitioner testified at trial that he made these records very detailed so that he gave a complete audit_trail consequently we think petitioner cannot now complain that respondent lacked his business records and thus arbitrarily determined the deficiency third petitioner contends that the deficiency_notice did not state that the adjustments were made because he claimed certain business_expenses twice ie duplicated deductions instead the notice_of_deficiency states that it has not been established that any amount in excess of the corrected amount was for an ordinary and necessary business_expense or was expended for the purpose designated a list of adjustments by category and dollar amount followed although petitioner correctly notes that the deficiency_notice does not use the word duplication the lack of specificity preferred by petitioner does not prove that the notice is arbitrary a notice_of_deficiency must describe the basis for and identify the amounts of tax due any additional_amounts additions to tax and assessable_penalties sec_7522 and b an inadequate description does not invalidate the notice id the notice must fairly advise the taxpayer that the commissioner has determined a deficiency and specify the year and amount 84_tc_1308 affd sub nom 800_f2d_987 10th cir also affd by six additional circuits 47_tc_340 the notice_of_deficiency adequately described the basis for respondent's determination as excessive ordinary and necessary business_expense deductions it fairly advised petitioner that a deficiency was determined it specified the year as and it contained a comprehensive list of amounts by category in all that are identical to petitioner's schedule c categories see hustead v commissioner tcmemo_1994_374 affd without published opinion 61_f3d_895 3d cir notice_of_deficiency clearly served to advise the taxpayers which of their claimed deductions had been disallowed burnside v commissioner tcmemo_1994_308 notice_of_deficiency which specified the years amount of deficiencies and additions to tax complied with sec_7522 and b petitioner attempts to shift the burden_of_proof to respondent under rule a by arguing that respondent first raised the duplication grounds at trial that is not so respondent's counsel stated that she made several attempts prior to trial to communicate precisely this point to petitioner furthermore respondent's trial memorandum filed date explained that certain expenses were duplicated petitioner had ample notice of respondent's duplication grounds mayerson v commissioner t c pincite accordingly we conclude that the notice_of_deficiency was not arbitrary and that the burden_of_proof with respect to the disputed issues remained with petitioner b testimony of alan hull in his answering brief petitioner contends that the testimony of respondent's witness alan hull should be rejected by the court while petitioner did not object to mr hull's testimony at trial he argues that mr hull lacked the necessary foundation to testify because he was not involved in the audit or the issuance of the deficiency_notice we disagree mr hull is a technical advisor to the irs district_counsel he has been an irs employee for years and is a certified_public_accountant in colorado mr hull who had reviewed petitioner's records the irs administrative file and the stipulation of facts with attached exhibits was called as respondent's witness to explain which of petitioner's expenses were duplicated or otherwise disallowed he was a qualified competent and thorough witness who gave reliable and detailed testimony tax_court trials are conducted according to the rules of evidence applicable in trials without a jury in the united_states district_court for the district of columbia sec_7453 rule a these rules include the federal rules of evidence 99_tc_370 affd 39_f3d_658 6th cir departing from these rules would remove the certainty of what this court may consider in finding the facts 93_tc_529 fed r evid requires that the witness have personal knowledge of the matter to which he testifies mr hull testified that petitioner duplicated certain business_expense deductions he based his conclusions on his analysis of detailed computer records of the locksmith business_expenses supplied by petitioner--records that petitioner acknowledged were so comprehensive as to create an audit_trail thus mr hull had personal knowledge of the matters about which he testified he need not have been involved in the audit or the issuance of the deficiency_notice in order to have first-hand knowledge fed r evid a the controlling rule for objections requires that a timely objection or motion to strike appear of record an objection that is not timely made generally is waived 549_f2d_1263 9th cir petitioner's objection to mr hull's testimony was first made in his answering brief and not at the trial it is untimely and therefore treated as waived moreover it lacks merit ii disallowance of claimed schedule c business_expense deductions as previously indicated petitioners claimed total schedule c business_expense deductions of dollar_figure on their federal_income_tax return of that total amount respondent allowed dollar_figure for repairs travel meals and entertainment and dollar_figure with respect to the other claimed expenses respondent disallowed dollar_figure ie dollar_figure of duplicated expenses and the remainder attributable to nondeductible personal expenses incorrect depreciation a moving expense or the incorrect basis used to compute a loss on an automobile a duplicated expenses in addition to the expenses claimed for repairs travel meals and entertainment petitioner claimed the following expenses on schedule c relating to his locksmith business_expense amount claimed advertising car and truck depreciation insurance interest legal and prof moving office expense other expense rent supplies taxes utilities total dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number dollar_figure petitioner is allowed a deduction for the ordinary and necessary expenses paid_or_incurred in carrying on his trade_or_business sec_162 it is clear that a business_expense incurred only once cannot be claimed twice deductions are a matter of legislative grace 292_us_435 and petitioner has the burden of proving that he is entitled to any deductions claimed rule a 290_us_111 petitioner acknowledged at trial that some of the expenses he claimed were duplicated he indicated that when he hastily prepared the federal_income_tax return on or about date he may have forgotten that he had transferred the mym expense items into the dac system in date the evidence shows that petitioner deducted various expenses included in the mym system twice once as deductions based on the mym system and a second time when the same expenses were transferred to the dac system and included as deductions claimed based on the dac system the duplicated expenses included on petitioner's schedule c for are as follows expense amount duplicated advertising car and truck insurance legal and prof moving office expense other expense rent supplies dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure taxes utilities dollar_figure dollar_figure total dollar_figure accordingly we sustain respondent's disallowance of the duplicated expenses b personal allocation of expenses utilities during petitioners utilized percent of their residence located in new jersey for personal_use and allocated percent of the use to petitioner's schedule c locksmith business on the schedule c for the business dollar_figure was deducted for utilities of that amount dollar_figure claimed for utilities was duplicated of the remaining amount of utilities deducted dollar_figure was attributable to utilities for petitioners' personal_residence because petitioner used the residence percent for his business only dollar_figure is deductible on schedule c the other dollar_figure is a nondeductible personal_expenditure sec_262 petitioners presented no evidence that respondent's calculation of the portion of the utilities attributable to personal_use was incorrect therefore respondent is sustained as to this adjustment insurance according to petitioners' federal_income_tax return petitioner used a van percent for business use and a vehicle percent for business use on schedule c the amount of dollar_figure was deducted for insurance of that amount dollar_figure was duplicated the remaining amount of insurance after subtracting the duplication was attributable to insurance on petitioners' two vehicles one being used exclusively for the schedule c business and the other one being used percent for business use the portion of the insurance attributable to the personal_use of one of petitioners' vehicles is not deductible because it is a nondeductible personal_expenditure respondent determined that the portion of the insurance expense attributable to personal_use was dollar_figure petitioners presented no evidence that respondent's calculation was incorrect therefore respondent is sustained as to this adjustment car and truck expense on schedule c petitioners deducted car and truck expenses in the amount of dollar_figure of which dollar_figure was duplicated and dollar_figure was a payment for the lease of a chevrolet van the remaining expenses of dollar_figure deducted on schedule c were not allocated by petitioners between business and personal_use even though one of the vehicles was used percent for personal_use petitioners should have allocated the expenses between business and personal_use consequently they are not entitled to deduct expenses of dollar_figure the amount allocated by respondent to personal_use of one of the vehicles taxes petitioners deducted dollar_figure for taxes on schedule c for the business of that amount dollar_figure was duplicated of the remaining amount of taxes deducted dollar_figure was attributable to sales_taxes paid_by petitioner in his schedule c business which are deductible in full on schedule c and dollar_figure was attributable to real_property_taxes paid_by petitioners on their personal_residence on their schedule a petitioners deducted real_estate_taxes paid on their personal_residence in the amount of dollar_figure since petitioners used the residence percent for business dollar_figure is deductible on schedule c and the remaining dollar_figure is deductible on schedule a instead of the dollar_figure claimed by petitioners on schedule a interest on schedule c for the business petitioner deducted dollar_figure for interest interest of dollar_figure paid to midatlantic bank was attributable to the mortgage on petitioners' personal_residence because the residence was used percent for business only dollar_figure is deductible on schedule c the remaining dollar_figure is deductible on schedule a as an itemized_deduction c depreciation petitioners claimed depreciation_deductions in the total amount of dollar_figure for this amount included depreciation for a chevrolet van a chevrolet cavalier and the wyoming locksmith shop the amount of dollar_figure was correctly disallowed thus the correct allowable_depreciation is dollar_figure instead of dollar_figure allowed by respondent sec_167 allows as a depreciation deduction a reasonable_allowance_for_exhaustion_wear_and_tear including a reasonable allowance for obsolescence -- of property_used_in_the_trade_or_business or of property_held_for_the_production_of_income the burden of proving the claimed depreciation_deductions rests with petitioners rule a 290_us_111 see 25_tc_878 in order to meet their burden they must affirmatively establish the cost or other basis of the assets their age condition remaining useful_life and the portion of their cost or other basis which has been recovered in prior years o bee inc v commissioner tcmemo_1959_ moore v commissioner a memorandum opinion of this court dated date see 31_tc_1 chevrolet van petitioner leased a chevrolet van and placed it in service in his locksmith business on date depreciation was claimed on schedule c for the van in the amount of dollar_figure petitioner also claimed a deduction for lease payments in the amount of dollar_figure on the federal_income_tax return for the lease of the van petitioner testified that he did not treat the lease as a purchase but as a lease and admitted that he was not entitled to depreciate it therefore petitioners are allowed to deduct their lease payments of dollar_figure for however they are not allowed a depreciation deduction chevrolet cavalier petitioner claimed a sec_179 deduction of dollar_figure for the cavalier respondent disallowed this deduction and instead allowed_depreciation of dollar_figure to claim a sec_179 deduction petitioner must have acquired the property by purchase for use in the active_conduct of his trade_or_business sec_179 campana v commissioner tcmemo_1990_395 car purchased as family car and later also used in taxpayer's trade_or_business does not qualify for sec_179 deduction petitioner did not purchase the cavalier for use in his locksmith business he purchased it for personal_use on date and subsequently converted it to percent business use nearly years later thus petitioner is not entitled to a sec_179 deduction for the cavalier we agree with respondent's allowance of depreciation in the amount of dollar_figure for petitioner's business use of the cavalier respondent accepted petitioner' sec_56 percent business use respondent arrived at her depreciation figure by reducing petitioner's basis in the cavalier from dollar_figure cost to dollar_figure fair_market_value and by allocating percent of the reduced basis to business use petitioner offered no evidence as to the cavalier's fair_market_value respondent relied on the national automobile dealers association nada used car guide for the fair_market_value the basis_of_property which has not been used_in_the_trade_or_business and which is thereafter converted to such use is the lesser_of fair_market_value on the date of conversion or the adjusted_basis on the date of conversion sec_1_167_g_-1 income_tax regs because petitioner converted the cavalier to business use the appropriate basis for depreciation is fair_market_value petitioner provided no evidence as to the cavalier's fair_market_value on date the date of conversion consequently respondent's valuation is sustained see lillis v commissioner tcmemo_1983_142 affd without published opinion 740_f2d_974 9th cir taxpayers failed to carry their burden_of_proof as to amount claimed for depreciation where no evidence was introduced to establish basis or other component of their depreciation formula see also boggs v commissioner tcmemo_1981_224 the commissioner's estimate of salvage_value based on the nada guide was sustained where the taxpayer failed to introduce evidence to refute it wyoming locksmith shop petitioner claimed depreciation of dollar_figure for the wyoming locksmith shop respondent does not challenge petitioner's entitlement to depreciation rather the parties disagree as to the amount of depreciation to be allowed petitioner placed the locksmith shop in service on date he calculated the dollar_figure amount of depreciation using the percent declining balance method a 15-year recovery_period and half year convention respondent allowed petitioner month's depreciation in the amount of dollar_figure based on a determination that the locksmith shop is nonresidential_real_property hence in effect respondent argues that the straight_line method year recovery_period and mid-month_convention apply section controls the computation of allowable_depreciation depreciation is to be computed by using the applicable_depreciation_method the applicable_recovery_period and the applicable convention sec_168 petitioner offered no testimony or other evidence to support his selection of depreciation method recovery_period or convention for reporting the locksmith shop depreciation he thus failed to carry his burden_of_proof to refute respondent's depreciation adjustment see stafford v commissioner tcmemo_1992_637 where taxpayer failed to introduce any evidence to establish that respondent's depreciation calculations based on a shorter recovery_period were incorrect taxpayer did not overcome the presumption of correctness of those adjustments barron v commissioner tcmemo_1992_598 where the record sec_168 as amended by the tax_reform_act_of_1986 publaw_99_514 sec 100_stat_2085 for property placed_in_service after date and in taxable years ending thereafter contained no evidence that a shorter recovery_period was more appropriate taxpayers failed to carry their burden_of_proof therefore we sustain respondent as to the dollar_figure of allowed_depreciation d moving_expenses on his schedule c petitioner claimed moving_expenses in the amount of dollar_figure attributable to his locksmith business_assets respondent disallowed the entire amount on the ground that the expense was a contingent_liability in on date petitioners paid north park transportation co dollar_figure for shipment of the locksmith business_assets from new jersey to wyoming the bill of lading dated date issued by north american van lines shows that payment in the amount of dollar_figure was to be c o d two consignee memos dated date in the total amount of dollar_figure were issued by north park transportation co both were presented to petitioners on date stamped driver collect on delivery both bear the handwritten notation paid and petitioners' check number petitioner elected the accrual_method of accounting for the business sec_446 under this method an expense is deductible when all events have occurred to establish the fact of liability the amount can be determined with reasonable accuracy and economic_performance has occurred sec_461 481_us_239 accrual_method taxpayer may not deduct a contingent_liability 321_us_281 amount must be definite 281_us_11 liability must be unconditional levert v commissioner tcmemo_1989_333 taxpayer's contractual liability was contingent because it depended on completion of the promised services sec_1_461-1 income_tax regs economic_performance occurred on date when petitioner's goods were delivered to wyoming furthermore petitioner's liability to pay the moving_expenses was contingent under both parts of the all_events_test until date the obligation to pay the carrier for shipment was contingent on delivery of petitioner's goods to cheyenne wyoming had delivery not occurred petitioner would not have been obligated to pay the carrier delivery occurred on date moreover the amount of the liability was not reasonably certain or definite until the consignee memos were presented to him for payment on date the anticipated freight cost according to the bill of lading was dollar_figure the actual cost shown on the consignee memos was dollar_figure which includes a percent discount not reflected on the bill of lading hence the amount of petitioner's liability to the carrier was not reasonably certain until the consignee memos were presented to petitioner on date accordingly we sustain respondent's disallowance of the claimed moving_expenses e loss on disposition of chevrolet cavalier petitioner claimed a loss in the amount of dollar_figure when the cavalier was traded in for the leased van he calculated the loss by using a cost_basis of dollar_figure respondent reduced the amount of this loss to dollar_figure respondent arrived at this figure by reducing petitioner's basis in the cavalier from the dollar_figure cost_basis to the dollar_figure fair_market_value based on the nada used car guide respondent accepted petitioner' sec_56 percent business use of the cavalier and allocated dollar_figure of the fair_market_value basis to business use the basis for determining a loss on the disposition of property used in a trade_or_business is the cost except as otherwise provided in this subchapter sec_165 b and c however losses on personal_property are not deductible sec_262 the depreciable basis for property converted from personal to business use is the lesser_of cost or fair_market_value at the time of conversion sec_1_167_g_-1 income_tax regs thus the basis for determining a loss under sec_165 for an automobile converted from personal to business use is the lesser_of cost or fair_market_value gross v commissioner tcmemo_1972_221 to conclude otherwise would allow petitioner through conversion to recognize a loss which was realized during the period of personal_use id therefore we sustain respondent's position as to the amount allowed for the loss on the cavalier iii sec_6662 accuracy-related_penalty respondent determined that petitioners are liable for the accuracy-related_penalty sec_6662 and b provide that an amount equal to 20-percent of that portion of the underpayment that is attributable to negligence or disregard of rules or regulations shall be added to the tax negligence is the failure to exercise due care or to do what a reasonable and ordinarily prudent person would do under the circumstances 85_tc_934 negligence includes failure to make a reasonable attempt to comply with provisions of the internal_revenue_code sec_6662 petitioner has the burden of proving that respondent's determination is in error rule a 58_tc_757 taxpayers have a duty to keep accurate records and to carefully prepare their returns see sec_6001 sec_6011 sec_1_6001-1 sec_1_6011-1 income_tax regs petitioner overstated out of items listed on his schedule c primarily by duplication most of the duplication errors occurred when he prepared the scratch pads which he then used to compute total deductible expenses as petitioner listed expenses on the scratch pads he forgot that the dac system included the mym expenses he transferred the mym expenses into the dac system on date as a result of his forgetfulness petitioner listed both the mym expenses and the dac expenses on the scratch pads added them together and caused the computer to copy the inflated figure onto his schedule c there is no evidence that petitioner attempted to verify whether the mym expenses were already included in the dac totals as in fact they were on the contrary petitioner testified that i knew i had to get this return done it was april and i had to get those figures in there and i just kind of -- just jumped into it and started keypunching petitioner personally created the dac ledger dac accounting summary dac accounts_payable listing and dac trial balance on his computer prior to date no one else made entries for petitioner if copies of those records were unavailable on date petitioner had only to cause the computer to generate another copy petitioner should have reviewed his own computer records as both this court and respondent have done to see that the mym expenses should not have been listed on the scratch pads in addition to the dac expenses there is no explanation in the record as to why petitioner did not do so other than his own testimony that his duplication errors were the result of haste petitioner's contention that his records were complete and carefully prepared is self-serving and not supported by the evidence the scratch pads were a key component of his tax preparation because the totals were merely copied onto the matching lines of the schedule c the scratch pads were carelessly prepared in petitioner's admitted haste to complete his tax_return petitioner's carelessness also caused him to fail to properly allocate the personal_use portion of expenses for utilities home mortgage interest vehicle insurance car and truck expenses and property taxes furthermore petitioner's carelessness caused him to claim both depreciation and the rental expenses for the leased van in our judgment petitioner's conduct was neither reasonable nor prudent his numerous errors are due to his failure to keep accurate records and to verify the correct amount of his business_expenses therefore we conclude that respondent's imposition of the sec_6662 penalty for negligence was justified to reflect the concessions made by respondent and our conclusions with respect to the disputed issues decision will be entered under rule


department of the treasury internal_revenue_service p o box irs cincinnati oh release number release date uil code date date employer id number contact person id number contact telephone number form you must file tax years dear this letter is our final_determination that you don’t qualify for tax-exempt status under sec_501 of the internal_revenue_code the code recently we sent you a proposed adverse determination in response to your application the proposed adverse determination explained the facts law and basis for our conclusion and it gave you days to file a protest because we didn’t receive a protest within the required days the proposed determination is now final because you don’t qualify as a tax-exempt_organization under sec_501 of the code donors can’t deduct contributions to you under sec_170 of the code you must file federal_income_tax returns for the tax years listed at the top of this letter using the required form also listed at the top of this letter within days of this letter unless you request an extension of time to file we’ll make this final adverse determination_letter and the proposed adverse determination_letter available for public inspection as required under sec_6110 of the code after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions follow the instructions in the notice on how to notify us if you agree with our deletions you don’t need to take any further action we'll also notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed determination_letter under sec_6104 of the code you should contact your state officials if you have questions about how this determination will affect your state responsibilities and requirements letter rev catalog number 47632s if you have questions about this letter you can contact the person listed at the top of this letter if you have questions about your federal_income_tax status and responsibilities call our customer service number pincite-829-1040 tty for deaf or hard of hearing or customer service for businesses pincite-829-4933 sincerely stephen a martin director exempt_organizations rulings and agreements enclosures notice redacted letter proposed adverse determination under sec_501 redacted letter final adverse determination under sec_501 - no protest catalog number 47632s letter rev department of the treasury internal_revenue_service rs p o box i cincinnati oh legend x state y date dear date date employer id number contact person id number contact telephone number contact fax number uil we considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code the code based on the information provided we determined that you don’t qualify for exemption under sec_501 of the code this letter explains the basis for our conclusion please keep it for your records issues do you qualify for exemption under sec_501 of the code no for the reasons stated below facts you incorporated in x on y you submitted a certificate of incorporation from x but did not provide a copy of your articles of incorporation a letter was issued requesting you to attest that your articles of incorporation contained the necessary provisions of sec_501 relating to the organizational_test you didn’t respond to this request so another letter was sent to you requesting the same information you didn’t respond to either requests in addition to the organizational_test requests in the letters you were also asked to provide a narrative of your activities since it wasn’t provided with the attachments to the form_1023 again you did not respond to either request law sec_501 of the code provides for the recognition of exemption of organizations that are organized and operated exclusively for religious charitable or other purposes as specified in the statute no part of the net_earnings may inure to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 states that in order to be exempt as an organization described in sec_501 of the code an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt sec_1_501_c_3_-1 provides that an organization is organized exclusively for one or more exempt purposes only if its articles of organization a limit the purposes of such organization to one or more exempt purposes and b do not expressly empower the organization engage otherwise than as an insubstantial part of its activities in activities that in themselves are not in furtherance of one or more exempt purposes sec_1_501_c_3_-1 holds that an organization is not organized exclusively for one or more exempt purposes unless its assets are dedicated to an exempt_purpose an organization’s assets will be considered dedicated to an exempt_purpose for example if upon dissolution such assets would by reason of a provision in the organization’s articles or operation of law be distributed for one or more exempt purposes sec_1_501_c_3_-1 provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 of the code an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose in 372_fsupp_770 e d cal the court concluded that one seeking a tax exemption has the burden of establishing his right to a tax-exempt status pius xi academy v commissioner tcmemo_1982_97 provides that an organization must establish through the administrative record that it operates as an exempt_organization denial of exemption may be based solely upon failure to provide information describing in adequate detail how the operational_test will be met in 82_tc_215 the administrative record did not demonstrate that the organization would operate exclusively in furtherance of an exempt_purpose therefore denial of organization’s request for tax-exempt status was reasonable 70_fedclaims_782 was an action for declaratory_judgment that the petitioner brought to challenge the denial of his application_for exempt status the court in finding that the actual purposes displayed in the administrative record supported the service’s denial stated it is well- accepted that in initial qualification cases such as this gaps in the administrative record are resolved against the applicant the court noted that if the petitioner had evidence that contradicted these findings it should have submitted it as part of the administrative process the court also highlighted the principle that exemptions from income_tax are matters of legislative grace application of law ohio disability association v commissioner t c memo states denial is justified because responses to requests for additional information failed to supplement the initial application or clarify purposes and activities and generalizations did not provide sufficient detail to determine that the organization would be operated exclusively for exempt purposes letter rev catalog number 47630w a ruling on exempt status is based solely on facts and representations in the administrative file you have not provided supporting documentation to establish you meet the requirements of sec_501 of the code sec_501 sets forth two main tests for qualification for exempt status as stated in sec_1_501_c_3_-1 an organization must be both organized and operated exclusively for purposes described in sec_501 you did not provide an organizing document or attest that organizing document meets the requirements of sec_501 of the code asa result you have not satisfied the organizational_test described in sec_1_501_c_3_-1 and sec_1_501_c_3_-1 you do not meet the operational_test under sec_501 of the code because you are not operating exclusively for one or more exempt purposes specified in sec_501 of the code as required under sec_1_501_c_3_-1 you have not provided a narrative of activities to demonstrate you are operating exclusively for one or more exempt purposes specified in sec_501 of the code you have not submitted sufficient information establishing you are operated exclusively for c purposes see universal life church pius xii academy la verdad new dynamics foundation and ohio disability association you have not provided a narrative of activities to demonstrate you are operating exclusively for one or more exempt purposes specified in sec_501 of the code therefore there is not sufficient documentation to establish that you are exempt from taxation as required by sec_501 of the code and revproc_2017_5 as in universal you have the burden of establishing that you qualify for tax exemption in pius la verdad and new dynamics it was established that an organization must establish through its administrative record that it meets the requirements for exemption because you failed to provide sufficient details in your initial application and the additional documentation you provided did not meet the statutory and regulatory requirements for exemption you have not established that you meet the requirements for exemption under sec_501 of the code as provided in new dynamics any gaps in the administrative record will be resolved against the applicant similarly in ohio disability association the court found that even when additional information was provided but it contained generalizations and failed to clarify purposes denial is justified you did not provide supplemental information therefore we are unable to determine that you qualify for exemption conclusion based on the information submitted you have failed to establish that you are organized and operated exclusively for exempt purposes within the meaning of sec_501 of the code and the related_income tax regulations therefore based on the administrative record you fail to qualify for exemption under sec_501 e your name address employer_identification_number ein and a daytime phone number if you don’t agree you have a right to file a protest if you don’t agree with our proposed adverse determination to do so you must send a statement to us within days of the date of this letter the statement must include letter rev catalog number 47630w e e e e e acopy of this letter highlighting the findings you disagree with anexplanation of why you disagree including any supporting documents the law or authority if any you are relying on the signature of an officer director trustee or other official who is authorized to sign for the organization or your authorized representative one of the following declarations for an officer director trustee or other official who is authorized to sign for the organization under penalties of perjury i declare that i examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete for authorized representatives under penalties of perjury i declare that i prepared this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete your representative attorney certified_public_accountant or other individual enrolled to practice_before_the_irs must file a form_2848 power_of_attorney and declaration of representative with us if he or she hasn’t already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney we'll review your protest statement and decide if you provided a basis for us to reconsider our determination if so we’ll continue to process your case considering the information you provided if you haven’t provided a basis for reconsideration we’ll forward your case to the office of appeals and notify you you can find more information about the role of the appeals_office in publication how to appeal an irs decision on tax- exempt status if you don’t file a protest within days you can’t seek a declaratory_judgment in court at a later date because the law requires that you use the irs administrative process first sec_7428 of the code where to send your protest please send your protest statement form_2848 if needed and any supporting documents to the applicable address letter rev catalog number 47630w pe u s mail street address for delivery service internal_revenue_service eo determinations quality assurance room p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street room cincinnati oh you can also fax your statement and supporting documents to the fax number listed at the top of this letter if you fax your statement please contact the person listed at the top of this letter to confirm that he or she received it if you agree if you agree with our proposed adverse determination you don’t need to do anything if we don’t hear from you within days we’ll issue a final adverse determination_letter that letter will provide information on your income_tax filing_requirements you can find all forms and publications mentioned in this letter on our website at www irs gov formspubs if you have questions you can contact the person listed at the top of this letter sincerely stephen a martin director exempt_organizations rulings and agreements enclosure publication letter rev catalog number 47630w


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 b05 - plr-121313-04 date jul legend - taxpayer consolidated_group a consolidated_group b examination office ----------------------------------------- ----------------------- ---------------------------------- ------------------------------ -------------------------------------------------- ---------------- ----------------------------------- subsidiary --------------------------- subsidiary -------------------------------------------- subsidiary ------------------------------------------- subsidiary ------------------------------------ ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- subsidiary -------------------------------------------------------- subsidiary ------------------------------------------------------------ year year date partnership partnership partnership year a date b c ------- ------- ---------------------- ----------------------------------------------- ---------------------------------------------------------------- ---------------------------------------------------------------- ------- ------------- -------------------------- --------------- --------------- year ------- d e f -------------- ------------- ------------- date --------------------- g h i j k --------------- --------------- -------------- ----------- --------------- l m n --------------- -------------- --------- year ------- o ------------- partnership p ----------------------------------------------------------------- -------------- q --------- dear -------------------------- this letter responds to your letter dated date and subsequent submissions made on behalf of taxpayer requesting a ruling that certain transfers of interests in partnerships owning low-income_housing tax_credit property will not result in recapture under sec_42 of the internal_revenue_code the internal_revenue_service office that will have examination jurisdiction over taxpayer and consolidated_group a is the examination office the relevant facts as represented in these submissions are set forth below facts taxpayer is mutual holding_company and the parent of consolidated_group a a life-nonlife consolidated_group under sec_1504 of the code subsidiary a non-life holding_company is a wholly owned subsidiary of taxpayer subsidiary is a wholly owned subsidiary of subsidiary subsidiary is the only life_insurance_company within consolidated_group a and is taxed under sec_801 of the code subsidiary is a wholly owned non-life subsidiary of subsidiary subsidiary is a wholly owned non-life subsidiary of subsidiary subsidiary and subsidiary are holding_companies subsidiary subsidiary subsidiary and subsidiary are all members of consolidated_group a consolidated_group b consists of subsidiary and its wholly owned subsidiary subsidiary subsidiary is a wholly owned subsidiary of subsidiary in year subsidiary purchased a two-thirds interest in the predecessor_corporation of subsidiary in year subsidiary purchased the remaining one-third interest in subsidiary subsidiary joined consolidated_group a immediately however due to waiting requirements of sec_1504 subsidiary and subsidiary are unable to join consolidated_group a until date subsidiary is in the business of insuring life_insurance annuity and other related risks and is taxed as a life_insurance_company under sec_801 of the code subsidiary is a wholly owned subsidiary of subsidiary subsidiary is in the business of insuring life_insurance annuity and other related risks and is taxed as a life_insurance_company under sec_801 through a series of sec_351 transactions subsidiary proposes to transfer it’s limited_partner interest in three investment partnerships that invest in qualified low- income housing_credit partnerships the three investment partnerships are partnership partnership and partnership to the best of taxpayer’s knowledge none of the partnerships qualify as a sec_42 partnership beginning in year ----------------invested dollar_figurea in partnership based on the most recent financial statements and independent auditor’s report as of date partnership had total assets of dollar_figureb and total equity of dollar_figurec on its year k-1 subsidiary 2’s end of year capital_account was dollar_figured and subsidiary was allocated e percent of the profit sharing loss sharing and ownership of capital beginning in year subsidiary invested dollar_figuref in partnership based on the most recent financial statements and independent auditor’s report as of date partnership had total assets of dollar_figureg and total equity of dollar_figureh on its year k-1 subsidiary 2’s end of year capital_account was dollar_figurei and subsidiary was allocated j percent of profit sharing loss sharing and ownership of capital beginning in year subsidiary invested dollar_figurea in partnership based on the most recent financial statements and independent auditor’s report as of date partnership had total assets of dollar_figurek and partners equity of dollar_figurel on the partnership’s year k-1 subsidiary 2’s capital_account was dollar_figurem and subsidiary was allocated n percent of the profit sharing loss sharing and ownership of capital subsidiary is also a partner in a separate low_income_housing partnership beginning in year subsidiary invested dollar_figureo in partnership on partnership 4’s year k-1 subsidiary 6’s capital_account was dollar_figurep and subsidiary was allocated q percent of the partnership’s profit sharing loss sharing and ownership of capital proposed transaction subsidiary will through the chain of wholly owned corporations make sec_351 capital contributions of its interest in partnership sec_1 and to subsidiary in each case the interest transferred from subsidiary to subsidiary will be less than of the profits and capital interests of the investment_partnership further there will not have been and it is expected that there will not be a transfer of greater than of such interest by subsidiary in combination with any other partner in any twelve month period containing the date of transfer taxpayer specifically represents that the transfers of subsidiary 2’s interests in partnership sec_1 and through the chain of wholly owned corporations to subsidiary will qualify under sec_351 as tax-free transfers of assets by each transferor_corporation in exchange or constructive exchange for additional stock of the transferee corporations taxpayer further represents that immediately after these exchanges subsidiary 6’s basis in its partnership interests in partnership sec_1 and will equal the basis of these partnership interests in the hands of subsidiary immediately prior to the proposed transaction taxpayer requests the service to rule that the transfer of subsidiary 2’s interests in partnership sec_1 and through it’s chain of wholly owned corporations to subsidiary will not result in recapture under sec_42 ruling requested law and analysis sec_38 provides for a general_business_credit against tax that includes the amount of the current_year_business_credit sec_38 provides that the amount of the current_year_business_credit includes the low-income_housing_credit determined under ' a sec_42 provides that for purposes of sec_38 the amount of the low- income housing_credit determined under ' for any taxable_year in a 10-year credit_period shall be an amount equal to the applicable_percentage of the qualified_basis of each qualified_low-income_building in the case of any qualified_low-income_building placed_in_service by the taxpayer after ' b provides in part that the term applicable_percentage means the appropriate percentage prescribed by the secretary for the month applicable under ' b a i or ii sec_42 provides that the percentages prescribed by the secretary for any month shall be percentages that will yield over a 10-year period amounts of credit that have a present_value equal to i percent of the qualified_basis of new buildings that are not federally_subsidized for the taxable_year and ii percent of the qualified_basis of existing buildings and of new buildings that are federally_subsidized for the taxable_year sec_42 provides that the qualified_basis of any qualified_low-income_building for any taxable_year is an amount equal to the applicable_fraction defined in ' c b of the eligible_basis of such building in general under ' d the eligible_basis of a new_building is its adjusted_basis as of the close of the first taxable_year of the credit_period under ' j if at the close of any taxable_year in the compliance_period the amount of the qualified_basis of any building with respect to the taxpayer is less than the amount of such basis as of the close of the preceding_taxable_year the taxpayer's tax for the taxable_year will be increased by the credit recapture_amount the credit recapture_amount is determined under ' j and ' j generally under ' j any disposition by a taxpayer of a building or an interest therein upon which credits were claimed during the compliance_period is a recapture_event under ' j however no recapture will be imposed on a disposition of a low-income building or an interest therein if the taxpayer furnishes to the secretary a bond and it is reasonably expected that the building will continue to be operated as a qualified_low-income_building through the end of the compliance_period little guidance is available to illustrate when under ' j a reduction in qualified_basis of a building with respect to the taxpayer has occurred or when there has been a disposition that requires the taxpayer to post a bond to avoid recapture however analogous provisions concerning recapture of investment_tax_credit itc property provide relevant guidance for determining recapture under ' j sec_50 provides generally for recapture if during any taxable_year itc property is disposed of or otherwise ceases to be itc property with respect to the taxpayer before the close of the recapture_period currently there are no regulations under ' however for property placed_in_service before date former ' a and the regulations thereunder contained a similar itc recapture rule the regulations under former ' which are still effective mirror the general recapture rule_of former ' that a disposition or cessation of itc property before the close of the estimated_useful_life of the property that was taken into account in computing the taxpayer's qualified_investment will result in itc recapture however there are some exceptions to the general_rule concerning the recapture of itc property for example ' a of the income_tax regulations provides a de miminis rule that permits a partner to dispose_of up to percent of its proportionate interest in the general profits of a partnership or in a particular item of sec_38 property before itc recapture applies in determining the partner’s proportionate interest in the general profits of a partnership for purposes of applying this de_minimis_rule sec_1_47-6 provides an ‘identity of interest’ rule whereby the partner is considered to own any interest in the partnership that it owns directly or indirectly through ownership in other plr-121313-04 entities provided the other entities’ bases in the interest are determined in whole or in part by reference to the basis of the interest in the hands of the partner for example if a whose proportionate interest in the general profits of partnership x is percent transfers all of this interest to corporation y in exchange for all of the stock of y in a sec_351 transaction then a shall be considered to own a percent interest in partnership x revrul_90_60 1990_2_cb_6 adopts a similar de_minimis_rule for purposes of ' j whereby no bond is required to avoid or defer recapture for any disposition s by a partner of its interest in a low-income building held through certain partnerships ie partnerships with less than partners or partnerships to which ' j does not apply until the partner has disposed of more than percent of its greatest total interest in the building held through the partnership sec_351 provides that no gain_or_loss will be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately_after_the_exchange the person or persons are in control as defined in sec_368 of the corporation under sec_368 the term control means the ownership of stock possessing at least percent of the total combined voting power of all classes of stock entitled to vote and at least percent of the total number of shares of all other classes of stock of a corporation sec_362 provides that if property is acquired by a corporation in connection with a transaction to which sec_351 applies the basis of the property is the same as it was in the hands of the transferor increased by the amount of any gain recognized by the transferor on the transfer revrul_64_155 1964_1_cb_138 provides in part that a contribution of property by a corporation to a wholly owned subsidiary although not resulting in the issuance of additional stock to the contributing corporation is an exchange of property for stock under sec_351 of the code sec_708 provides that a partnership shall be considered as continuing if it is not terminated sec_708 provides that for purposes of ' a a partnership shall be considered terminated if within a 12-month_period there is a sale_or_exchange of percent or more of the total interest in partnership capital and profits if sec_42 does not apply to a partnership a sec_42 recapture_event can occur at the partnership level and also at the partner level a recapture_event can occur at the partnership level for example if a partnership disposes of a building upon which a sec_42 credit has been allowed recapture liability if any would be the responsibility of the partners in the partnership at the time of the disposition a recapture_event can also apply at the partner level for example if a partner disposes of more than percent of its greatest total interest in any sec_42 buildings held through the partnership in the present case subsidiary intends to transfer through a series of sec_351 capital contributions to wholly-owned subsidiaries its entire limited_partner interest in plr-121313-04 each of partnership sec_1 and to subsidiary taxpayer represents that to the best of its knowledge sec_42 does not apply to partnership sec_1 and accordingly a recapture_event can occur at both the partnership and partner level taxpayer also represents that in each case the sec_351 capital contributions of subsidiary 2’s limited_partner interests in partnership sec_1 and through its wholly owned subsidiaries to subsidiary will be less than of the profits and capital interests of these partnerships further taxpayer represents that there will not have been and it is expected that there will not be a transfer of or more of such interest by subsidiary and its wholly owned subsidiaries in combination with any other partner in any twelve month period containing the date of these transfers in other words to the best of the taxpayer’s knowledge there will be no sec_708 technical_termination of partnership sec_1 or during any 12-month_period containing the date of the transfers of subsidiary 2’s interests in partnership sec_1 and through the chain of wholly owned subsidiaries to subsidiary accordingly there is no recapture_event at the partnership level as respects partnership sec_1 and as a result of these transfers however subsidiary will be disposing its entire_interest in partnership sec_1 and this will result in a transfer of subsidiary 2’s entire interests in any underlying assets including any sec_42 property owned directly by any lower_tier_partnership s e g operating partnership s in which partnership sec_1 and are limited partners any dispositions of ownership interests in sec_42 property direct or indirect are treated as transfers or a change in ownership for purposes of recapture and any change in ownership is a recapture_event thus subsidiary 2’s proposed transfer of its total interest in each of partnership sec_1 and will absent an exception be a disposition and therefore a recapture_event at the partner level under the facts of this transaction such an exception is available the percent de_minimis_rule of revrul_90_60 is intended to reflect the percent de_minimis_rule of sec_1_47-6 therefore any rule s clarifying how the percent de_minimis_rule of sec_1_47-6 is determined should also apply for purposes of sec_42 this includes the identity of interest rule_of sec_1_42-6 which provides that in determining a partner’s proportionate interest in the general profits of a partnership the partner shall be considered to own any interest in the partnership that it owns directly or indirectly through ownership in other entities provide the other entities’ bases in the interest are determined in whole or in part by reference to the basis of the interest in the hands of the partners here subsidiary 2’s proportionate interest in the sec_42 property will not after applying the rule_of sec_1_47-6 have decreased by more than percent in fact in applying the rule_of sec_1_47-6 subsidiary 2’s proportionate interest in the sec_42 property will be deemed not to have changed at all because the sec_351 capital contributions of subsidiary 2’s interest in partnership sec_1 and will be to its wholly-owned subsidiaries and subsidiary will hold the same percentage interest in partnership sec_1 and and thus the same percentage interest in the underlying sec_42 property that subsidiary will hold immediately prior to the capital contributions accordingly under these circumstances subsidiary may rely on the percent de_minimis exception provided in revrul_90_60 to avoid the partner level recapture plr-121313-04 liability that would otherwise result from the sec_351 capital contributions of its entire_interest in partnership sec_1 and to its wholly owned subsidiaries accordingly based solely on the taxpayer s representations of fact and relevant law as set forth above we conclude that the transfer of subsidiary 2’s interest in partnership sec_1 and through its wholly owned subsidiaries to subsidiary will not in and of itself result in recapture under sec_42 we express no opinion on whether any other requirement of ' has been met or whether recapture under sec_42 would otherwise apply to any of the subsidiaries named in this ruling_request as a result for example of a recapture_event occurring from a sale_or_other_disposition of the underlying sec_42 property or interest therein by the lower tier operating partnership in accordance with the power_of_attorney we are sending a copy of this letter_ruling to the company's authorized representatives this ruling is directed only to the taxpayer which requested it sec_6110 provides that it may not be used or cited as precedent a copy of this letter should be filed with the federal_income_tax return for taxpayer and its partners for the first taxable_year in which the low-income_housing_credit for building is claimed sincerely yours enclosure copy cc- s susan reaman susan reaman chief branch office of associate chief_counsel passthroughs and special industries