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 fip b01 plr-125828-11 date date legend legend taxpayer date property event holding partnership property partnership signs l p events l p year year date date tenant date --------------------- ----------------------------- -------------------------- ---------------------------------------------------- --------------------------------------------------------------- --------------- -------------------------- ------------------------------------------------ ---------------------- ----------------------- ------- ------- -------------------------- -------------------------- ------------------------------------ --------------------------- plr-125828-11 date a b corporation dear ------------------ ------------------- ---- ---- --------------------------- this is in reply to a letter dated date in which taxpayer requests certain rulings in connection with its intent to elect to be taxed as a real_estate_investment_trust reit under of the internal_revenue_code_of_1986 as amended the code facts taxpayer is a limited_liability_company that intends to adopt the calendar_year as its tax_year and the accrual_method of accounting taxpayer intends to make an election to be treated as a reit pursuant to sec_856 effective for its initial taxable_year ending date taxpayer intends to invest primarily in office and retail real_estate properties either directly or through one or more entities that are treated as partnerships or disregarded entities for federal_income_tax purposes taxpayer will acquire an interest in the partnership that owns the land and building located at property property is at the center of event property generates income from three sources property leases interior space to traditional tenants property leases space on steel structures on the façade of the property to unrelated companies and property sells sponsorship and media rights in connection with the event taxpayer will acquire a partnership_interest in holding partnership holding partnership owns a percent limited_partnership_interest in three partnerships the property partnership signs l p and events l p property partnership owns the property holding partnership will have one limited_partner referred to as investor x investor x is unaffiliated with taxpayer taxpayer will form a subsidiary_corporation and taxpayer and subsidiary will jointly elect to treat the corporation as a taxable_reit_subsidiary under sec_856 trs trs and investor x will acquire all the limited_partnership interests in events l p from holding partnership property partnership and signs l p are parties to a license agreement dated as of date and an amendment to that license agreement dated date collectively the plr-125828-11 master license agreement pursuant to the master license agreement in exchange for specified fees the master license fees property partnership granted to signs l p among other things the exclusive right to use existing sign superstructures located on the façade and exterior of property the use rights the existing and any new sign superstructures are referred to herein as the sign superstructures property partnership owns the sign superstructures that were constructed prior to year and it has granted to signs l p the use rights with respect to those sign superstructures signs l p owns the sign superstructures that were constructed after year the sublicense agreements with advertisers pursuant to individual agreements referred to herein as sublicense agreements signs l p has granted various companies advertisers the right to place advertising signage signs on the sign superstructures in exchange for fees sublicense fees advertisers using electrically powered light-emitting diode led video screen signs also have the right under the sublicense agreements to use a small space inside the property to house computer and technical equipment which is owned and installed by advertisers at their expense events l p generates revenue by selling sponsorships media rights merchandise rights and other similar rights in connection with the event to various companies sponsors in exchange for fees sponsor fees because taxpayer does not believe sponsor fees qualify as gross_income described in sec_856 or sec_856 its partnership_interest in events l p will be held by trs the traditional leases to tenants property has two traditional office tenants pursuant to a lease between property partnership and tenant dated date lease in exchange for rent property partnership leases to tenant the interior space of property and grants tenant the right to place signs on certain sign superstructures tenant pays to property partnership a single fixed amount of rent for these rights accordingly tenant is also an advertiser and a portion of the rent it pays to property partnership is a sublicense fee the other tenant at property is events l p which pursuant to a lease dated date lease leases two floors floors events l p provides promotional efforts in promoting the event property partnership and events l p intend to renegotiate lease under the new terms of lease events l p will pay market rent property partnership will commence paying events l p a fee equal to the amount of the revised market rent that events l p will pay as compensation_for events l p promotional efforts in generating the sponsor fees plr-125828-11 in accordance with sec_856 taxpayer represents that at least of the leased space at property is leased to persons other than events l p and related parties described in sec_856 further the layout of the floors is unusual and unlike any other space at property taxpayer has no way to determine whether the space leased to events l p is comparable to any space located in the same geographic area as property as required by sec_856 therefore taxpayer represents that the rent to be paid under the revised lease will be approximately equal to the fair market rental value of the floors the signs and sign superstructures the sign superstructures consist of welded steel frames that are bolted to the façade of property each sign superstructure has been in place for at least ---- years no sign superstructure has been substantially_modified since it was constructed and taxpayer has no intention of doing so removal of a sign superstructure would be a costly and time consuming undertaking that would require the use of heavy construction equipment each sublicense agreement provides that signs l p is responsible for the maintenance of the sign superstructures the signs are attached to the sign superstructures and consist of either vinyl material or an led video screen the signs vary in size but each can be seen at a distance of several city blocks each of the led signs other than the top sign as described below is wholly owned by a particular advertiser the advertiser is solely responsible for the production installation and maintenance of its led signs neither taxpayer holding partnership property partnership signs l p nor events l p provides any services relating to the production installation or maintenance of the led signs each led sign is connected via power lines to an electrical box or outlet made available by signs l p the advertiser is responsible for the cost of the electricity each advertiser using an led sign also has the right under its sublicense agreement to use a small space inside property to house its computers which are used to program the led signs the computers fiber optic cables and power lines are owned and installed by the advertisers at their own expense each of the vinyl signs is wholly owned by a particular advertiser the vinyl signs are illuminated by spotlights attached to the sign superstructures signs l p supplies the electricity necessary to power the spotlights and replaces the lightbulbs through an independent_contractor taxpayer represents that the portion of the sublicense fee attributable to the spotlights is not more than percent of the total sublicense fee attributable to the sign superstructure and the spotlights signs l p retains independent contractors who produce and install the vinyl signs sign installation based on the advertisers’ specifications signs l p bills plr-125828-11 these costs together with a small spread to cover administrative costs to the advertisers in some cases however signs l p agrees to bear the cost_of_producing or installing a vinyl sign signs l p generally supervises and coordinates the production and installation process signs l p provides sign installation to ensure that the vinyl signs are properly produced and installed for safety purposes sign installation is also convenient for advertisers taxpayer represents that sign installation is customarily furnished rendered or arranged for by similar properties in the geographic market in which property is located neither taxpayer nor signs l p receives any income from the independent contractors that produce or install the vinyl signs in addition signs l p contracts with an independent_contractor to monitor the condition of the vinyl signs taxpayer represents that the independent contractors that produce or install the vinyl signs qualify as independent contractors under sec_856 the top sign the top sign is an led sign which measures a feet wide and b feet tall it is bolted to a sign superstructure and was constructed to remain in place on the sign superstructure indefinitely signs l p has no intention of removing the top sign and doing so would require substantial deconstruction computers housed inside property transmit programming data to the top sign via fiber optic cables and an electrical box transmits electricity to the top sign via power lines signs l p owns the top sign but does not provide any services other than the provision of electricity with respect to the top sign signs l p entered into a sublicense agreement with corporation the top sign sublicense agreement the maintenance and operation of the top sign are performed by an independent_contractor hired by corporation corporation is responsible for the cost of the electricity signs l p owns the computers fiber optic cables and power cables collectively the top sign equipment signs l p leases the top sign equipment to corporation along with the top sign under the top sign sublicense agreement signs l p granted corporation the right to advertise on the top sign the top sign rights pursuant to the top sign sublicense agreement in addition signs l p granted corporation numerous top sign event rights in exchange for the top sign rights and the top sign event rights corporation pays signs l p a single fixed fee top sign sublicense fee each month in turn signs l p pay sec_1 of the top sign sublicense fee to events l p in exchange events l p assumes signs l p ’s obligation to provide the top sign event rights taxpayer will treat the top sign event rights as noncustomary services taxpayer represents that the of the top sign sublicense fee is at least percent of events l p ’s direct_cost in providing the top sign event rights taxpayer represents the following taxpayer does not own and will not own directly or indirectly in the case of an advertiser that is a corporation ten percent or plr-125828-11 more of the total combined voting power of all classes of stock entitled to vote of such advertiser or in the case of any advertiser that is not a corporation an interest of ten percent or more in the assets or net profits of such advertiser no portion of the sublicense fees or the top sign sublicense fee depends in whole or in part on the income or profits derived by any person from the signs or sign superstructures and the portion of the top sign sublicense fee attributable to the top sign equipment is not more than percent of the total top sign sublicense fee attributable to the top sign and the top sign equipment law sec_856 provides that at least percent of a reit's gross_income must be derived from among other sources rents_from_real_property sec_856 provides that at least percent of a reit's gross_income must be derived from among other sources rents_from_real_property sec_856 provides that at the close of each quarter of its tax_year at least percent of the value of a reit’s total assets must be represented by real_estate_assets cash and cash items including receivables and government securities sec_856 provides that the term real_estate_assets for purposes of sec_856 means real_property including interests_in_real_property and interests in mortgages on real_property and shares or transferable certificates of beneficial_interest in other reits that meet the requirements of sec_856 through sec_856 and sec_1_856-3 of the income_tax regulations provide that the term interests_in_real_property includes fee ownership and co-ownership of land or improvements thereon leaseholds of land or improvements thereon options to acquire land or improvements thereon and options to acquire leaseholds of land or improvements thereon but does not include mineral oil or gas royalty interests sec_856 provides that rents_from_real_property include subject_to exclusions provided in sec_856 a rents from interests_in_real_property b charges for services customarily furnished or rendered in connection with the rental of real_property whether or not such charges are separately_stated and c rent attributable to personal_property leased under or in connection with a lease of real_property but only if the rent attributable to the personal_property for the taxable_year does not exceed percent of the total rent for the tax_year attributable to both the real and personal_property leased under or in connection with the lease sec_856 excludes from the definition of rents_from_real_property any impermissible_tenant_service_income as defined in sec_856 sec_856 provides in relevant part that the term impermissible_tenant_service_income means plr-125828-11 with respect to any real or personal_property any amount received or accrued directly or indirectly by the real_estate_investment_trust for managing or operating such property sec_856 provides that de_minimis amounts of impermissible_tenant_service_income ie amounts less than one percent of all amounts received or accrued by the reit with respect to a particular property during the taxable_year will not cause otherwise qualifying amounts to not be treated as rents_from_real_property sec_856 excludes from the definition of impermissible_tenant_service_income amounts received for services furnished or rendered or management or operation provided through an independent_contractor from whom the trust itself does not derive or receive any income subparagraph a does not take into account any amount that would be excluded from unrelated_business_taxable_income ubti under sec_512 if received by an organization described in sec_511 sec_512 provides in relevant part that rents_from_real_property are excluded from the computation of ubti sec_1_512_b_-1 provides that payments for the use or occupancy of rooms or other quarters in hotels boarding houses or apartment houses furnishing hotel services or in tourist camps or tourist homes motor courts or motels or for the use or occupancy of space in parking lots warehouses or storage garages do not constitute rent from real_property generally services are considered rendered to the occupant if they are primarily for his convenience and are other than those usually or customarily rendered in connection with the rental of rooms or other space for occupancy only the supplying of maid service for example constitutes such service whereas the furnishing of heat and light the cleaning of public entrances exits stairways and lobbies and the collection of trash are not considered as services rendered to the occupant sec_856 provides that a reit can provide noncustomary services without tainting the rent that it receives so long as the noncustomary services are provided through a trs of the reit or through an independent_contractor from whom the reit does not derive or receive any income sec_856 provides that the amount treated as received for any service or management or operation must not be less than percent of the direct_cost of the reit in furnishing or rendering the service or providing the management or operation sec_1_856-3 provides in part that the term real_estate_assets means real_property sec_1_856-3 provides that real_property includes land or improvements thereon such as buildings or other inherently permanent structures thereon including items which are structural_components of such buildings or structures in addition the term real_property includes interests_in_real_property local law definitions will not be controlling for purposes of determining the meaning of real_property for purposes of sec_856 and the regulations thereunder under the plr-125828-11 regulations real_property includes for example the wiring in a building plumbing systems central heating or central air-conditioning machinery pipes or ducts elevators or escalators installed in a building or other items which are structural_components of a building or other permanent structure the term does not include assets accessory to the operation of a business such as machinery printing press transportation equipment which is not a structural_component of the building office equipment refrigerators individual air-conditioning units grocery counters furnishings of a motel hotel or office building etc even though such items may be termed fixtures under local law under sec_1_856-3 a reit that is a partner in a partnership is deemed to own its proportionate share of each of the assets of the partnership and to be entitled to the income of the partnership attributable to that share for purposes of sec_856 the interest of a partner in the partnership's assets is determined in accordance with the partner's capital interest in the partnership the character of the various assets in the hands of the partnership and items of gross_income of the partnership retain the same character in the hands of the partners for all purposes of sec_856 sec_1_856-4 provides that the term rents_from_real_property means generally the gross amounts received for_the_use_of or the right to use real_property of the real_estate_investment_trust sec_1_856-4 provides that services provided to tenants of a particular building will be considered customary if in the geographic market in which the building is located tenants in buildings which are of a similar class are customarily provided with the service such services include the furnishing of water heat light air conditioning and telephone answering services where it is customary in a particular geographic marketing area to furnish electricity or other utilities to tenants in buildings of a particular class the submetering of such utilities to tenants in such buildings will be considered a customary service to qualify as a service customarily furnished the service must be furnished or rendered to the tenants of the reit or primarily for the convenience or benefit of the tenant to the guests customers or subtenants of the tenant the service must be furnished through an independent_contractor from whom the trust does not derive or receive any income sec_1_856-4 provides that trustees or directors of the reit are not required to delegate or contract out their fiduciary duty to manage the trust itself as distinguished from rendering or furnishing services to the tenants of its property or managing or operating the property thus the trustees or directors may do all those things necessary in their fiduciary capacities to manage and conduct the affairs of the trust itself including establishing rental terms choosing tenants entering into renewal of leases and dealing with taxes interest and insurance relating to the reit's property the trustees or directors may also make capital expenditures with respect to the reit's plr-125828-11 property and may make decisions as to repairs of the property the cost of which may be borne by the reit see also revrul_67_353 1967_2_cb_252 revrul_98_60 1998_2_cb_749 holds that the determination of whether impermissible_tenant_service_income received by a reit exceeds the one percent limitation is computed separately with respect to each property owned by the reit rather than with respect to any particular tenant revrul_75_424 1975_2_cb_269 concerns whether various components of a microwave transmission system are real_estate_assets for purposes of sec_856 the system consists of transmitting and receiving towers built upon pilings or foundations transmitting and receiving antennae affixed to the towers a building equipment within the building and waveguides the waveguides are transmission lines from the receivers or transmitters to the antennae and are metal pipes permanently bolted or welded to the tower and never removed or replaced unless blown off by weather the transmitting multiplex and receiving equipment is housed in the building prewired modular racks are installed in the building to support the equipment that is installed upon them the racks are completely wired in the factory and then bolted to the floor and ceiling they are self-supporting and do not depend upon the exterior walls for support the equipment provides for transmission of audio or video signals through the waveguides to the antennae also installed in the building is a permanent heating and air conditioning system the transmission site is surrounded by chain link fencing the revenue_ruling holds that the building the heating and air conditioning system the transmitting and receiving towers and the fence are real_estate_assets the ruling further holds that the antennae waveguides transmitting receiving and multiplex equipment and the prewired modular racks are assets accessory to the operation of a business and therefore not real_estate_assets revrul_73_425 1973_2_cb_222 considers whether a mortgage secured_by a shopping center and its total energy system is an obligation secured_by real_property a total energy system is a self-contained facility for the production of all the electricity steam or hot water and refrigeration needs of associated commercial or industrial buildings building complexes shopping centers apartment complexes and community developments the system may be permanently installed in the building attached to the building or it may be a separate structure nearby the principal components consist of electric generators powered by turbines or reciprocating engines waste heat boilers heat exchangers gas-fired boilers and cooling units in addition each facility includes fuel storage tanks control and sensor equipment electrical substations and air handling equipment for heat hot water and ventilation it also includes ducts pipes conduits wiring and other associated parts machinery and equipment the revenue_ruling holds in part that a mortgage secured_by the building and the system is a real_estate asset regardless of whether the system is housed in the building it serves or is housed in a separate structure apart from the building it serves this is because the interest in a structural_component is included with an interest held in a building or plr-125828-11 inherently_permanent_structure to which the structural_component is functionally related revrul_80_151 1980_1_cb_7 provides two examples that illustrate how the service will apply the criteria set forth in 65_tc_664 acq 1980_1_cb_1 in determining whether outdoor advertising displays are inherently permanent structures or tangible_personal_property that qualified for the now- repealed investment_tax_credit the criteria which are in the form of questions are is the property capable of being moved and has it in fact been moved is the property designed or constructed to remain permanently in place are there circumstances that tend to show the expected or intended length of fixation that is are there circumstances that show the property may or will have to be moved how substantial a job is removal of the property and how time-consuming is it how much damage will the property sustain upon its removal what is the manner of affixation of the property to the land analysis issue real_estate_assets the sign superstructures consist of large welded steel frames that are bolted to property they are designed and constructed to remain permanently in place there is no plan to remove any sign superstructure and removal of a sign superstructure would be a costly and time consuming undertaking in addition the top sign consists of an led video screen that measures a feet wide and b feet high it is bolted to a sign superstructure and was constructed to remain in place indefinitely there is no plan to remove the top sign and removing it would be a costly and time consuming undertaking that would require it to be dismantled piece-by-piece by outside engineers and other personnel similar to the properties or structural_components described in revrul_75_424 and revrul_73_425 that qualify as real_property for purposes of sec_856 the sign superstructures and top sign described above are inherently permanent structures the sign superstructures and top sign are structural_components of property themselves and therefore are not assets accessory to the operation of a business like the examples set forth in sec_1_856-3 accordingly based on the facts as represented by taxpayer we conclude that the sign superstructures and the top sign constitute real_property for purposes of sec_856 and sec_856 in addition because the sign superstructures and the top sign are real_property they constitute real_estate_assets for purposes of sec_856 and sec_856 issue use rights plr-125828-11 as ruled on above the sign superstructures qualify as real_estate_assets and therefore real_property under sec_1_856-3 based upon that the use rights which are granted under the master license agreement and permit signs l p to use the sign superstructures owned by property partnership constitute interests_in_real_property under sec_856 and sec_1_856-3 and therefore are real_estate_assets under sec_856 and sec_856 issue rents_from_real_property the sublicense fees and top sign sublicense fee received by signs l p are payments for the right to use space on the sign superstructures and on property the licenses grant to each licensee the right to use specified real_property in exchange for a fee the sublicense fees and top sign sublicense fee are similar to rent payments that would be required under a lease therefore the sublicense fees and top sign sublicense fee received pursuant to the sublicense agreements qualify as rents_from_real_property under sec_856 issue sign installation taxpayer has represented that sign installation is provided through independent contractors and is customarily furnished rendered or arranged by similar properties in the geographic market in which property is located taxpayer has also represented that sign installation is rendered for the convenience of the advertisers in addition as part of their fiduciary duties the directors of taxpayer have an obligation to ensure that the vinyl signs are properly produced and installed on the sign superstructures consequently sign installation by taxpayer and its independent contractors will not cause taxpayer’s allocable share of the sublicense fees or the top sign sublicense fee paid to signs l p to be treated as impermissible_tenant_service_income and excluded from rents_from_real_property pursuant to sec_856 issue sponsor fees the sponsorship media and merchandising rights provided to sponsors are not provided to advertisers in connection with the rental of real_property sponsorships are generally available to interested companies and events l p does not offer discounted sponsor fees to advertisers events l p operates a separate_line_of_business related to the event and it keeps separate books_and_records from the property partnership and signs l p taxpayer’s partnership_interest in events l p is held through trs which provides further evidence that this is a separate_line_of_business accordingly the provision of the sponsorship media merchandising and similar rights by events l p to the sponsors will not cause the sublicense fees or the top sign sublicense fee to be treated as other than rents_from_real_property under plr-125828-11 sec_856 because such rights are not services rendered by taxpayer to advertisers in connection with the rental of real_property issue top sign event rights the top sign event rights that are provided in exchange for a portion of the top sign sublicense fee generate impermissible_tenant_service_income under sec_856 as noted above signs l p pays a portion of the top sign sublicense fee to events l p in exchange events l p assumes the obligation to satisfy the top sign event rights the top sign event rights that events l p provides to corporation are deemed provided by trs and investor x as partners of events l p signs l p compensates trs and investor x for the top sign event rights they are deemed to provide by paying events l p of the top sign sublicense fee taxpayer represents that the of the top sign sublicense fee is approximately equal to the fair_market_value of the top sign event rights and is at least percent of events l p ’s direct_cost in providing the top sign event rights the portion of the top sign event rights deemed provided by trs do not generate impermissible_tenant_service_income because they are being provided by a trs as permitted by sec_856 the portion of the top sign event rights deemed provided by investor x do represent impermissible_tenant_service_income property generates income by leasing interior space to tenant and events l p by leasing spaces on the sign superstructures to various advertisers and by leasing the top sign to corporation consistent with revrul_98_60 the entire property constitutes the property for purposes of sec_856 including the sign superstructures the top sign and the interior space leased to tenant and events l p accordingly taxpayer represents that the value of the top sign event rights that are deemed to be provided by investor x falls within the de_minimis one percent basket for noncustomary services provided in sec_856 based on this representation the provision of the top sign event rights will not cause otherwise qualifying_income received or accrued by the taxpayer with respect to property to not be treated as rents_from_real_property issue master license fees taxpayer will acquire a partnership_interest in holding partnership which owns all of the limited_partnership interests in property partnership and signs l p pursuant to sec_1_856-3 taxpayer through holding partnership will be allocated a percentage of the gross_income derived by signs l p from the sublicense fees paid_by the advertisers taxpayer through holding partnership will be allocated the same percentage of the gross_income derived by property partnership from the master license fees paid_by signs l p further taxpayer through holding partnership will be allocated the same percentage of the deduction attributable to signs l p ’s payment plr-125828-11 of the master license fees thus taxpayer would be treated as earning the same gross_income twice accordingly for purposes of determining taxpayer’s gross_income under sec_856 and c taxpayer’s allocable share of the master license fees paid from signs l p to property partnership will be disregarded as an item_of_gross_income to the extent that those amounts do not exceed taxpayer’s allocable share of signs l p ’s deductions attributable to the master license fees paid to property partnership except as specifically ruled upon above no opinion is expressed concerning any federal_income_tax consequences relating to the facts herein under any other provision of the code specifically we do not rule whether taxpayer otherwise qualifies as a reit under part ii of subchapter_m of chapter of the code this ruling is directed only to the taxpayer requesting it taxpayer should attach a copy of this ruling to each tax_return to which it applies sec_6110 provides that this ruling 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 diana imholtz diana imholtz branch chief branch office of associate chief_counsel financial institutions and products enclosures copy of this letter copy for sec_6110 purposes


department of the treasury int ernal revenue service washington d c date o f f i c e o f c h i e f c o u n s e l number release date cc corp tl-n-5970-00 uilc internal_revenue_service national_office field_service_advice memorandum for special litigation assistant cc lm rfp tl-n-5970-00 from jasper l cummings jr associate chief_counsel corporate cc corp subject agent for the group this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent legend a b c d e date k date l year year year year tl-n-5970-00 year year year year year year year year a b issues are the forms 1120x for taxable_year sec_1 through and including filed by b on behalf of a the amended returns valid for the purpose of filing a timely claim_for_refund by a who is the proper party to receive any overpayment or notice_of_deficiency that results from the final_determination of the examiners concerning the amended returns who is the proper party to execute the form sec_872 consent to extend time to assess tax for the b consolidated group’s taxable years and the waivers what language should be used to identify the taxpayer on the waivers conclusion sec_1 the amended returns filed by b on behalf of a are valid for the purpose of filing a timely claim_for_refund by a a is the proper party to receive any overpayment or notice_of_deficiency that results from the final_determination of the examiners concerning the amended returns tl-n-5970-00 e is the proper party to execute the waivers the proper language to use on the waivers is e e i n xx-xxxxxxx as successor by merger to b e i n xx-xxxxxxx and as agent for the former b and subsidiary companies consolidated_group put an asterisk immediately thereafter as shown at the bottom of page of form_872 the following language should be added including the asterisk with respect to the consolidated_tax_liability of b and subsidiary companies for the tax periods ending on date k and date l facts prior to year a was the common parent of and filed consolidated_returns for the group a consolidated_group for taxable_year sec_1 through and including year a also executed form sec_872 for year sec_1 through and including in year the a group reorganized pursuant to this reorganization a formed a wholly owned subsidiary b which in turn formed a wholly owned subsidiary c c merged with and into a with a surviving causing a to become a wholly owned subsidiary of b in a private_letter_ruling the service held that the a group would continue with b as the new common parent hereafter the b consolidated_group b filed consolidated forms for the b consolidated_group for each of the taxable years through and including and form sec_872 for years through and including b also filed the amended returns on behalf of a seeking refunds for taxable_year sec_1 through and including in year b entered into a stock exchange and merger agreement with d and e a subsidiary of d pursuant to this agreement d and e effected a common_stock exchange pursuant to which d became a wholly owned subsidiary of e in a transaction intended to constitute a sec_351 exchange b then merged with and into e with e surviving in a transaction intended to qualify as a sec_368 reorganization as a result of this corporate restructuring a became a wholly owned subsidiary of e following this restructuring e was a more than owned by the former shareholders of d and b owned by the former shareholders of b exam proposes to secure the waivers to extend the statute_of_limitations for the assessment of tax for the b group’s taxable years and law and analysis sec_6402 provides that the overpayment_of_tax will be credited and the excess of such credit will be refunded only to the person who made the overpayment under sec_7422 a claim_for_refund must be duly filed before a tl-n-5970-00 refund action may be maintained in any court to be duly filed within the meaning of sec_7422 a claim must comply with the requirements of sec_6511 wall industries inc v united_states cl_ct sec_6511 requires that a claim_for_refund for overpayment_of_tax be filed by the taxpayer within a specified period sec_7701 defines the taxpayer as any person subject_to any internal revenue tax sec_1501 grants members of an affiliated_group the privilege of filing a consolidated_return upon the condition that they consent to be bound by all of the consolidated_return_regulations in joining in the filing of a consolidated_return each corporation consents to the designation of an agent to act for members of the affiliated_group sec_1_1502-77 under sec_1_1502-77 the common parent of the consolidated_group is the agent for the group and it alone has authority to file consolidated_returns enter into closing agreements file waivers receive notices of deficiency and file refund claims among other things with regard to consolidated_return years the regulations provide for a few exceptions not applicable here where the common parent is not the agent of the consolidated tax_return group for the year in question see sec_1_1502-77 sec_1_1502-75 solely with respect to notices of deficiency and waivers of the statutes of limitations for taxable years for which the due_date without extensions of the consolidated_return is after date sec_1_1502-77t provides for alternative agents for the group in cases where a corporation that is the common parent of the group ceases to be the common parent whether or not the group remains in existence in such cases acceptable alternative agents for the consolidated_group include a successor to the former common parent in a transaction to which sec_381 applies courts have held that after a restructuring pursuant to which the old common parent ceases to be the common parent but remains a member of the group and the group is treated as remaining in existence under sec_1_1502-75 both the new common parent and the old common parent are agents for the affiliated_group with respect to taxable years preceding such restructuring see 101_tc_130 under sec_1_1502-77 a remains the agent for the members of the a consolidated_group for the group’s taxable_year sec_1 through and including thus a is the proper entity to extend the statute_of_limitations on behalf of the a consolidated_group for the group’s consolidated taxable_year sec_1 through under the rationale of union oil supra either a or b could have filed a claim_for_refund on behalf of the a consolidated_group with respect to such years thus the amended returns filed by b on behalf of a are valid for the purpose of filing a timely claim_for_refund by a under these facts as the sole remaining agent for the a consolidated tl-n-5970-00 group’s taxable_year sec_1 through and including a is the proper party to receive any overpayment or notice_of_deficiency that results from the final_determination of the examiners concerning the amended returns under sec_1_1502-77t a ii e as the successor by merger to b in a transaction to which sec_381 applies is an alternative agent for b and the b consolidated_group with respect to notices of deficiency and waivers of the statutes of limitations accordingly e is the proper party to execute the waivers the proper language to use on the waivers is e e i n xx-xxxxxxx as successor by merger to b e i n xx-xxxxxxx and as agent for the former b and subsidiary companies consolidated_group put an asterisk immediately thereafter as shown at the bottom of page of form_872 the following language should be added including the asterisk with respect to the consolidated_tax_liability of b and subsidiary companies for the tax periods ending on date k and date l this writing may contain privileged information any unauthorized disclosure of this writing may have an adverse effect on privileges such as the attorney client privilege if disclosure becomes necessary please contact this office for our views please call lisa a fuller at if you have any further questions jasper l cummings jr associate chief_counsel corporate by michael j wilder senior technical reviewer


internal_revenue_service number release date index number ----------------------------------------- ------------------------------------------ ------------------------ --------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-151676-07 date date x -------- state date ----------------------------------------- legend --------------------------------------------------------------------- dear ----------- requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to elect to treat x as an association_taxable_as_a_corporation under sec_301_7701-3 of the internal_revenue_code this letter responds to your letter on behalf of x dated date ------------------ facts based on the materials submitted and representations contained within we understand the relevant facts to be as follows x was formed as a limited_liability_company in accordance with the laws of state on date x intended to elect to be treated as an association taxable as corporation with the election effective on date however form_8832 entity classification election was not timely filed law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes a business_entity is an plr-151676-07 entity recognized for federal tax purposes that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the code section a an eligible_entity with at least two members can elect to either be classified as an association and thus a corporation under sec_301_7701-2 or as a partnership otherwise the entity is a partnership if it has two or more members to elect to be classified other than as provided in sec_301_7701-3 an eligible_entity must file form_8832 with the designated service_center section c i an election will be effective on the date specified on the form_8832 or on the date filed if no such date is specified the effective date specified on form_8832 cannot be more than days prior to the date the election is filed nor later than twelve months after the filing_date section c iii sec_301_7701-3 provides that unless a domestic eligible_entity elects sec_301_9100-1 through provide the standards the sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-3 to make a regulatory election sec_301_9100-1 defines a regulatory election as an election with a due_date prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that the grant of relief will not prejudice the interests of the government sec_301_9100-3 requests for relief under sec_301_9100-3 will be granted when the taxpayer sec_301_9100-2 provides automatic extensions of time for making certain conclusion based on the facts submitted and representations contained within we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 as a result x is granted an extension of time of days following the date of this letter for making the election to be treated as an association_taxable_as_a_corporation for federal tax purposes effective date a copy of this letter should be attached to the original election form_8832 plr-151676-07 except for the specific ruling above we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the code provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer requesting it sec_6110 in accordance with the power_of_attorney on file with the office a copy of this letter will be sent to the taxpayer’s representative sincerely william p o'shea associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes


t c summary opinion united_states tax_court nasser and shahpar golshani petitioners v commissioner of internal revenue respondent docket no 11286-03s filed date michael d daniels for petitioners valeri l makarewicz for respondent panuthos chief special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure respondent determined that petitioners are liable for a deficiency in their federal_income_tax of dollar_figure an addition_to_tax under sec_6651 of dollar_figure and a penalty pursuant to sec_6662 of dollar_figure the issues for decision are whether petitioners are entitled to deduct a net_operating_loss_carryover attributable to losses from the expropriation of four parcels of property by the iranian government whether petitioners are liable for the delinquency addition_to_tax under sec_6651 and whether petitioners are liable for the accuracy-related_penalty under sec_6662 background some of the facts have been stipulated and they are so found the stipulation of facts and attached exhibits are incorporated herein by this reference at the time the petition was filed petitioners resided in los angeles california petitioners were citizens and residents of iran prior to petitioner nasser golshani hereinafter petitioner worked as a civilian engineer in iran prior to in the early 1970s petitioner formed fabris construction co fabris with two other individuals fabris did business with the government of iran from approximately through while the record is not entirely clear the parties appear to assume that fabris was a joint_venture in which petitioner had a one-third interest petitioner and his associates purchased four business properties in iran for development petitioner invested substantial sums of money for purchase of the properties and for improvements and equipment while the cost of the properties and improvements is not entirely clear petitioner asserts that the fair_market_value of his one-third investment_interest in the properties exceeded one million dollars in in the shah of iran was deposed in a revolution the ayatollah khomeini was installed as the new leader of iran the iran-iraq war commenced in and ended in approximately about that time petitioners and their children escaped from iran and gained political asylum in the united_states there were dramatic changes in petitioner’s business after the revolution and during the iran-iraq war as a person of jewish faith he was excluded from business opportunities with any governmental units additionally revolutionaries occupied some of the land and improvements and also appropriated equipment with respect to one of the parcels of property in mobarak abad tehran persons began building homes on the land in approximately and petitioner and his associates were unable to prevent the occupation or remove persons from the a detailed account of the events in iran is set forth in 94_tc_165 93_tc_758 affd 946_f2d_395 5th cir and moshrefzadeh-sani v commissioner tcmemo_1992_592 property one of the other parcels of property next to a railroad station was taken over by the government and a deed was changed in to reflect new ownership petitioner was also investigated by the revolutionary government for a few years after during the period after through the early 1990s petitioner through his business associates continued attempts to obtain access to the properties the attempts included among other things payments of large amounts of cash to persons having some power in the revolutionary government petitioner continued to stay in contact with his former business partners even after he came to the united_states in in the hope of reclaiming the expropriated properties or receiving some compensation petitioner knew of some property owners who were successful in having their property returned after the revolution petitioner and his business associates were unsuccessful in their attempts to reclaim the properties petitioner has not received any compensation relating to his interest in the four parcels of property expropriated by the iranian government petitioner did not institute any court action in an attempt to regain the expropriated properties on date petitioners filed their federal_income_tax return petitioners received an automatic 4-month extension of the required_filing_date until date but did not request any further extensions on their return petitioners deducted a net_operating_loss nol_carryover in the amount of dollar_figure an nol worksheet attached to the return reported that the nol in the amount of dollar_figure had been carried forward from tax_year and that portions of the nol had been previously used in tax years and although not specifically stated in either their or returns there is no dispute that the nol was attributable to losses claimed from the expropriation of their properties in iran on date respondent issued to petitioner a notice_of_deficiency for respondent disallowed the nol_carryover and determined a deficiency of dollar_figure respondent further determined that petitioners were liable for the delinquency addition_to_tax and the negligence_penalty at trial petitioners asserted that they initially claimed the expropriation losses in instead of petitioners filed a motion to dismiss for lack of jurisdiction motion arguing that the notice_of_deficiency for was invalid because it incorrectly determined that the nol_carryover on their return originated in rather than in the court denied petitioners’ motion petitioners’ return was not made part of the record in this case and their assertion that the losses originated in was unsubstantiated and contradicted by statements in their return e g statement attached to their return provided the taxpayer hereby elects to relinquish the entire carryback period with respect to the net_operating_loss incurred in the taxable_year ending date in any event even if petitioners did initially claim the losses on the return the notice_of_deficiency was sufficient to give petitioners notice that respondent was disallowing the nol that petitioners carried forward to their return discussion the issue for decision is whether petitioners sustained losses in from the expropriation of four parcels of property sec_165 provides for the deduction of losses sustained during the taxable_year for which no compensation is received in the case of individuals sec_165 limits the deduction to losses_incurred in a trade_or_business or in any transaction entered into for profit in order to be deductible a loss must be evidenced by a closed and completed transaction fixed by identifiable events and actually sustained during the taxable_year 326_us_287 sec_1_165-1 income_tax regs a loss is only deductible for the taxable_year in which such loss is sustained sec_1_165-1 income_tax regs the determination of whether a loss occurred during a particular taxable_year is purely one of fact 524_f2d_888 9th cir affg tcmemo_1973_258 a critical inquiry is to focus on the year that the taxpayer loses control_over and possession of the property at issue 274_us_398 in general a taxpayer bears the burden_of_proof see rule a 290_us_111 the burden expropriation losses are not casualty or theft losses for purposes of sec_165 36_tc_1191 as to a factual issue relevant to the liability for tax may shift to the commissioner if the taxpayer introduces credible_evidence and satisfies the requirements under sec_7491 to substantiate items maintain required records and fully cooperate with respondent’s reasonable requests sec_7491 in the present case the burden_of_proof remains on petitioners because they have not established that they have complied with the requirements of sec_7491 in any event the disposition of this case does not depend upon the burden_of_proof petitioners assert that the iranian revolutionary government expropriated the properties in petitioners remained in iran until they came to the united_states in petitioners assert that as a result of their continuing efforts to reclaim the properties the losses actually occurred at a later date we have no doubt that petitioners sustained losses upon the expropriation of the properties and the question arises as to the amount of the losses and the year or years of the losses sec_1_165-1 income_tax regs provides that if a casualty or other event occurs which may result in a loss and while the record does not establish the exact amount of petitioners’ losses petitioner presented copies of deeds and credible testimony as to the cost of the properties involved however as a result of our conclusion that the losses occurred prior to the year in which they were claimed and are therefore not deductible we need not reach any conclusion as to the amount of the loss there exists a claim for reimbursement with respect to which there is a reasonable_prospect_of_recovery no portion of the loss is sustained under sec_165 until it can be ascertained with reasonable certainty whether such reimbursement will be received whether a reasonable_prospect_of_recovery exists is a question of fact see 93_tc_758 affd 946_f2d_395 5th cir 48_tc_711 sec_1_165-1 income_tax regs the prospect of recovery must be based upon a legal right to claim reimbursement from a third party in the year the loss occurs halliburton co v commissioner supra pincite colish v commissioner supra pincite sec_1_165-1 income_tax regs in this connection we note that we concluded in halliburton co v commissioner supra pincite as follows as of date iranian political power was in a state of disarray and the united_states had been unable even to commence negotiations with iran to resolve the crisis even though a principal stumbling block had been removed ie the shah had left the united_states for panama not until the fall of after a series of events occurred in including the iranian clerical faction’s assumption of power the outbreak of the iran-iraq war increased united_states economic sanctions against iran the failed american rescue mission the death of the shah and the impending change in the u s administration did iran make overtures to settle the crisis if anything these critical events are so clearly independent of the factual circumstances that existed as of date as to reinforce the conclusion that the elements of a reasonable_prospect_of_recovery were absent rather than present as of that date equally clearly the fact that the algiers accords came into being in is not in and of itself an indication that such a prospect of recovery existed colish v commissioner supra pincite estate of fuchs v commissioner supra pincite whether petitioners claimed the losses in as argued in the motion to dismiss or in as it appears in this record we conclude that the losses occurred at a date well before that time respondent’s determination is sustained as to the deficiency addition_to_tax for failure_to_file timely under sec_6651 the commissioner has the burden of production in any court_proceeding with respect to the liability of any individual for any addition_to_tax under sec_6651 sec_7491 to meet this burden the commissioner must come forward with sufficient evidence indicating that it is appropriate to impose the relevant penalty or addition_to_tax 116_tc_438 once the commissioner meets his burden of production the taxpayer must come forward with evidence sufficient to persuade a court that the commissioner’s determination is incorrect id pincite the taxpayer also bears the burden_of_proof with regard to issues of reasonable_cause substantial_authority or similar provisions id pincite in the present case respondent has satisfied his burden of production under sec_7491 by establishing that petitioners’ income_tax return was not timely filed in this connection petitioners do not assert nor did they present any evidence that the return was received or mailed before the due_date as extended sec_6651 imposes an addition_to_tax of percent per month of the amount of tax required to be shown on the return not to exceed percent for failure to timely file a return the addition_to_tax under sec_6651 is imposed unless the taxpayer establishes that the failure was due to reasonable_cause and not willful neglect the record is clear that the return was not timely filed and there is no evidence that would establish that the failure to timely file was due to reasonable_cause and not willful neglect respondent is sustained on this issue accuracy-related_penalty under sec_6662 the commissioner also has the burden of production in any court_proceeding with respect to the liability of any individual for any penalty under sec_6662 sec_7491 higbee v commissioner supra pincite once the commissioner meets his burden of production the taxpayer has the responsibility to come forward with evidence sufficient to persuade the court that the commissioner’s determination is incorrect higbee v commissioner supra pincite sec_6662 provides that a taxpayer may be liable for a penalty of percent of the portion of an underpayment_of_tax attributable to negligence or disregard of rules or regulations sec_6662 b and negligence is any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws see sec_6662 sec_1_6662-3 income_tax regs moreover negligence is the failure to exercise due care or the failure to do what a reasonable and prudent person would do under the circumstances 85_tc_934 disregard includes any careless reckless or intentional disregard of rules or regulations see sec_6662 sec_1_6662-3 income_tax regs notwithstanding sec_6662 no penalty will be imposed with respect to any portion of an underpayment if it is shown that there was a reasonable_cause for such portion and that the taxpayer acted in good_faith with respect to such portion sec_6664 respondent determined that petitioners are liable for an accuracy-related_penalty attributable to negligence or disregard of rules and regulations on the basis of the record we conclude that petitioners made a reasonable attempt to comply with the internal revenue other types of underpayments that may give rise to the imposition of an accuracy-related_penalty under sec_6662 and b do not apply in this case respondent did not present evidence that there was either a substantial or gross_valuation_misstatement under sec_6662 e and h and we did not make any conclusions as to the value of the expropriated properties see supra note code and that the underpayment_of_tax was not attributable to negligence petitioners claimed an nol loss carryover in the amount of dollar_figure on the return we have concluded that petitioners incurred a loss from the expropriation of four parcels of property by the iranian revolutionary government sometime in the late 1970s or early 1980s the issue in this case is one of timing having reviewed the documentary_evidence in this case and considered the testimony of petitioner we are satisfied that he reasonably believed that there was some hope in recovering some of the expropriated properties or of receiving some compensation_for same while we have concluded that there was not a reasonable_prospect_of_recovery in that conclusion is based on an analysis of legal precedent relating to the revolution in iran we do not believe petitioners acted recklessly or intentionally disregarded the tax laws in a manner sufficient to apply the accuracy-related_penalty accordingly we hold for petitioners on the sec_6662 penalty reviewed and adopted as the report of the small_tax_case division to reflect the foregoing decision will be entered for respondent as to the deficiency and addition_to_tax under sec_6651 and for petitioners as to the penalty under sec_6662


t c summary opinion united_states tax_court hector bawak besong petitioner v commissioner of internal revenue respondent docket no 30447-13s filed date hector bawak besong pro_se brian pfeifer for respondent summary opinion carluzzo special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not unless otherwise indicated section references are to the internal revenue continued reviewable by any other court and this opinion shall not be treated as precedent for any other case in a notice_of_deficiency dated date notice respondent determined deficiencies in and penalties with respect to petitioner’s federal_income_tax for and as follows penalty year deficiency sec_6662 dollar_figure dollar_figure big_number dollar_figure after concessions the issues for decision are whether petitioner has accurately reported the cost_of_goods_sold on a schedule c profit or loss from business included with his federal_income_tax return is entitled to certain deductions claimed on schedules c filed with his and federal_income_tax returns is entitled to a dependency_exemption deduction for his mother for and is liable for a sec_6662 accuracy-related_penalty for either year in issue continued code of as amended in effect for the years in issue rule references are to the tax_court rules_of_practice and procedure background some of the facts have been stipulated and are so found petitioner a native of the republic of cameroon cameroon resided in germany when the petition was filed while on vacation petitioner learned of a brazilian company named lorenzetti that manufactures an electric shower head that allows for a hot shower without the need for a water heater the water is heated in the shower head itself in petitioner acquired the rights to market the shower head in cameroon initially petitioner contracted with a third-party company to manage and or assist in the distribution of the shower heads in cameroon later petitioner replaced that company with groupe hamaya international groupe hamaya at various times during petitioner purchased with the intent to resell in cameroon shower heads from lorenzetti the purchases are evidenced by petitioner’s bank records that show wire transfers of funds from his account at wells fargo to lorenzetti’s bank account apparently petitioner’s arrangements with groupe hamaya obligated him to pay that company for the expenses it incurred in distributing the shower heads for resale including the costs of transporting the shower heads to a warehouse or warehouses where the inventory was stored and from a warehouse or warehouses to distributors or retailers petitioner’s arrangements with groupe hamaya also obligated him to pay that company commissions on sales that it generated payments made to groupe hamaya under the terms of petitioner’s contract with that company were usually made in cash during petitioner lived in a rented townhouse in philadelphia with his daughter his mother and the mother of his daughter as of the close of petitioner was not married petitioner’s mother moved from cameroon to the united_states in during that year she received a pension from her prior employment as a teacher in cameroon she was not employed during that year petitioner prepared his and federal_income_tax returns using a commercially available return preparation software program his self-prepared timely filed and returns each include a schedule c the schedules c show the name of the business a sec_3b international llc international and show petitioner as the sole_proprietor the items reported on the schedules c shown in the following table relate to the distribution of the shower heads international is a limited_liability_company organized by petitioner under the laws of delaware at all times relevant it was treated as a sole_proprietorship for federal_income_tax purposes income gross_receipts or sales dollar_figure dollar_figure cost_of_goods_sold big_number -0- expenses rent or lease of other business property big_number big_number interest other big_number big_number contract labor big_number commissions and fees big_number big_number car and truck big_number big_number utilities big_number big_number travel meals and entertainment big_number big_number also as relevant on hi sec_2010 return petitioner claimed a dependency_exemption deduction for his mother in the notice respondent determined that petitioner had failed to include interest of dollar_figure in income for increased petitioner’s income by dollar_figure for a state tax_refund disallowed the cost_of_goods_sold as well as deductions claimed on the schedule c for rent or lease of other business property interest other contract labor commissions and fees car and truck expenses utilities and travel for disallowed deductions claimed on the schedule c for rent or lease of other business property interest other commissions and fees car and truck expenses utilities and travel for disallowed the dependency_exemption deduction petitioner claimed for his mother for and imposed a sec_6662 accuracy-related_penalty on various grounds for each year other adjustments made in the notice are computational and need not be addressed discussion as we have observed in countless opinions deductions are a matter of legislative grace and the taxpayer bears the burden_of_proof to establish entitlement to any claimed deduction rule a 503_us_79 292_us_435 this burden requires the taxpayer to substantiate expenses respondent concedes that petitioner was not required to report a pennsylvania state tax_refund of dollar_figure on his federal_income_tax return petitioner concedes that he failed to report interest_income of dollar_figure from ing direct for petitioner also concedes that he is not entitled to the following deductions claimed on his schedules c for tax years and expense rent or lease of other business property dollar_figure dollar_figure interest other big_number big_number utilities big_number big_number petitioner does not claim and the record does not otherwise demonstrate that the provisions of sec_7491 are applicable here and we proceed as though they are not for deductions claimed by keeping and producing adequate_records that enable the commissioner to determine the taxpayer’s correct_tax liability sec_6001 65_tc_87 aff’d per curiam 540_f2d_821 5th cir 43_tc_824 a taxpayer claiming a deduction on a federal_income_tax return must demonstrate that the deduction is allowable pursuant to some statutory provision and must further substantiate that the expense to which the deduction relates has been paid_or_incurred see sec_6001 hradesky v commissioner t c pincite sec_1_6001-1 income_tax regs i schedule c deductions taxpayers may deduct ordinary and necessary expenses paid_or_incurred in connection with operating a trade_or_business sec_162 122_tc_305 as a general_rule if a taxpayer provides sufficient evidence that the taxpayer has incurred an expense contemplated by sec_162 but the taxpayer is unable to adequately substantiate the amount of the expense then the court may estimate the amount of the expense and allow the sec_162 deduction to that extent 39_f2d_540 2d cir however in order for the court to estimate the amount of an expense there must be some basis upon which an estimate may be made 85_tc_731 otherwise any allowance would amount to unguided largesse 245_f2d_559 5th cir petitioner claimed various deductions on the schedules c for international for and all of which relate to petitioner’s trade_or_business as the sole_proprietor of international some of the deductions have been allowed and some disallowed we address only the deductions that remain in dispute a cost_of_goods_sold petitioner reported cost_of_goods_sold of dollar_figure on the schedule c according to petitioner that amount represents international’s ending inventory that was used during for promotional materials provided to prospective buyers according to respondent petitioner has failed to substantiate the amount as claimed at trial petitioner acknowledged that he probably should have claimed the amount as some type of advertising expense deduction rather than cost_of_goods_sold as none of the items to which the amount relates were actually sold for convenience references to deductions will include cost_of_goods_sold even though technically cost_of_goods_sold is taken into account in the determination of a taxpayer’s gross_income see 69_tc_477 aff’d 630_f2d_670 9th cir accounting technicalities aside we could ignore petitioner’s mischaracterization of the amount in dispute if petitioner had established the cost of the items used for promotional purposes but he did not his uncorroborated generalized testimony regarding inventory purchased in does not include sufficient detail to allow for a finding on the point accordingly respondent’s disallowance of the amount shown for cost_of_goods_sold on the schedule c included with petitioner’s return is sustained b contract labor petitioner claimed a dollar_figure deduction for contract labor on international’s schedule c according to petitioner the deduction relates to the monthly fee approximately big_number central african cfa francs he was required to pay groupe hamaya for their business development and distribution services according to respondent petitioner has failed to substantiate this deduction with respect to the contract labor expense petitioner provided receipts from groupe hamaya substantiating payments totaling big_number central african cfa respondent does not challenge the conversion rate petitioner apparently used to convert central african cfa francs to u s dollars as reflected on his and returns we assume without finding that the proper conversion rate was used francs for accordingly petitioner is entitled to a deduction for contract labor expenses as shown on the schedule c for c commissions and fees petitioner claimed deductions of dollar_figure and dollar_figure for commissions and fees on the schedules c for and respectively petitioner contends that the commissions and fees expenses relate to the contract with groupe hamaya specifically petitioner explained that the expenses relate to sales commissions which were in addition to the base fee that groupe hamaya charged according to respondent petitioner has failed to substantiate the expenses underlying this deduction with respect to the commissions and fees expenses petitioner provided receipts from groupe hamaya substantiating payments totaling big_number and big_number central african cfa francs for and respectively accordingly petitioner is entitled to deductions for commissions and fees expenses as shown on the schedules c for and d car and truck petitioner claimed deductions of dollar_figure and dollar_figure for car and truck expenses on the schedules c for and respectively according to petitioner the car and truck expenses also relate to the contract with groupe hamaya more specifically petitioner explained that the car and truck expenses were fees he paid to groupe hamaya to move product from the warehouse to one of the different distributors according to respondent petitioner has failed to meet the strict substantiation requirements of sec_274 although petitioner described these deductions on his schedule c as car and truck expenses they are in fact not related to the use of vehicles owned by him instead the expenses related to petitioner’s obligations under his contract with groupe hamaya accordingly petitioner is not required to satisfy the strict substantiation requirements of sec_274 with respect to these expenses otherwise petitioner provided receipts from groupe hamaya substantiating payments totaling big_number and big_number central african cfa francs for and respectively accordingly petitioner is entitled to deductions for car and truck expenses as shown on the schedules c for and e travel meals and entertainment petitioner claimed deductions of dollar_figure and dollar_figure for travel meals and entertainment_expenses on the schedules c for and respectively according to petitioner the travel meals and entertainment_expenses also relate to the contract with groupe hamaya more specifically petitioner explained that the expenses were in addition to the other specific fees he was obligated to pay under that contract according to respondent petitioner has failed to meet the strict substantiation requirements of sec_274 with respect to these deductions as with the deductions for car and truck expenses the deductions described as travel meals and entertainment relate not to expenses that petitioner incurred for such purposes but rather to reimbursements to groupe hamaya for such expenses that he was obligated to make consequently the strict substantiation requirements set forth in sec_274 do not apply nevertheless petitioner did not provide adequate_records or other_sufficient_evidence corroborating his testimony to substantiate the deduction for nor are we able to estimate the expense see vanicek v commissioner t c pincite he did provide a receipt from groupe hamaya substantiating a payment of big_number central african cfa francs for accordingly petitioner is not entitled to a deduction for travel meals and entertainment_expenses for but is entitled to a deduction for travel meals and entertainment_expenses as shown on the schedule c for ii dependency_exemption deduction petitioner claimed a dependency_exemption deduction for his mother for respondent disallowed the deduction in general a taxpayer is entitled to an additional exemption deduction for each of the taxpayer’s dependents sec_151 c as applicable here the term dependent includes a taxpayer’s qualifying_relative see sec_152 in addition to other requirements an individual fits within the definition of a taxpayer’s qualifying_relative for any given year only if the taxpayer provides over one-half of the individual’s support during that year sec_152 in order to support a finding that he provided more than one-half of his mother’s total support during petitioner must establish the total amount of support his mother received from all sources during and of that amount the amount he provided the evidence petitioner offered on these points is insufficient to establish either petitioner has failed to establish that his mother was his qualifying_relative for it follows that he is not entitled to a dependency_exemption deduction for his mother for that year respondent’s disallowance of that deduction is sustained iii sec_6662 accuracy-related_penalties as relevant here sec_6662 imposes a penalty of of the portion of an underpayment_of_tax attributable to the taxpayer’s negligence or disregard of rules or regulations or substantial_understatement_of_income_tax sec_6662 and b and negligence includes any failure to make a reasonable attempt to comply with the provisions of the code including any failure to keep adequate books_and_records or to substantiate items properly see sec_6662 sec_1_6662-3 income_tax regs a substantial_understatement_of_income_tax includes an understatement of income_tax that exceeds the greater of of the tax required to be shown on the return or dollar_figure see sec_6662 sec_1_6662-4 income_tax regs respondent bears the burden of production with respect to the imposition of the sec_6662 accuracy-related_penalty see sec_7491 116_tc_438 petitioner failed to maintain adequate substantiating records for some of the expenses underlying the deductions claimed on his return according to respondent that failure justifies the imposition of a sec_6662 accuracy-related_penalty upon the ground of negligence for that year we agree furthermore to the extent that rule_155_computations establish a substantial_understatement_of_income_tax for either year in issue respondent has met his burden with respect to that year the accuracy-related_penalty does not apply to any part of an underpayment_of_tax if it is shown that the taxpayer acted with reasonable_cause and in good_faith with respect to that portion sec_6664 the determination of whether a taxpayer acted in good_faith is made on a case-by-case basis taking into account all the pertinent facts and circumstances sec_1_6664-4 income_tax regs petitioner bears the burden of proving that he had reasonable_cause and acted in good_faith with respect to the underpayments see higbee v commissioner t c pincite this he has failed to do he has offered no explanation for the items he has conceded and has otherwise failed to show that he had reasonable_cause and acted in good_faith with respect the underpayments of tax attributable to the issues decided against him in this opinion it follows that he is liable for a sec_6662 penalty for and if the rule_155_computations establish that petitioner has a substantial_understatement_of_income_tax for he is liable for the sec_6662 penalty for that year as well to reflect the foregoing decision will be entered under rule