t c memo united_states tax_court william n kellahan jr and alice h kellahan petitioners v commissioner of internal revenue respondent docket no filed date j richard cox for petitioners james eb gray for respondent memorandum findings_of_fact and opinion gale judge respondent determined the following deficiencies additions to tax and accuracy-related_penalties additions to tax and penalties year deficiency sec_6651 a sec_6662 h dollar_figure dollar_figure dollar_figure big_number big_number big_number unless otherwise noted all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure after concessions we must decide the following issues’ the value of real_property dollar_figure acres on which is located a manmade canal that petitioners donated to the south carolina public service authority as a charitable_contribution we hold that the value is no higher than the amount determined by respondent dollar_figure whether petitioners are liable for the addition_to_tax pursuant to sec_665l1 a for we hold that they are not whether petitioners are liable for accuracy-related_penalties in increased amounts pursuant to sec_6662 for and we hold that they are findings_of_fact some of the facts have been stipulated and are so found we incorporate by this reference the stipulation of facts and attached exhibits at the time of filing the petition petitioners resided in kingstree south carolina the real_property that is the subject of the dispute in this case was acquired by g h hardy in as part of a 15-acre ' at trial petitioners sought to amend their petition to aver that certain income reported in had been reported twice this matter will be disposed of separately tract of land in clarendon county south carolina near lake marion mr hardy’s tract abutted land owned by h f oliver mr oliver had dug a canal on his land the canal was connected to lake marion and thus provided access to the lake mr oliver who was a land surveyor had subdivided his property and sold lots around his canal the canal on mr oliver’s property terminated at mr hardy’s tract and mr oliver persuaded mr hardy to dig a canal and subdivide in similar fashion so mr hardy arranged to have a canal the canal dug on his tract starting from the point where mr oliver’s canal terminated and had mr oliver survey and subdivide his tract into lots surrounding the canal he commenced selling the lots in date and sold the last one in date the deeds conveying the lots recited the various land boundaries of each lot and further stated that each lot was bound by waters of lake marion ie the canal the property plat showing the subdivision of mr hardy’s tract which was referenced in the deeds conveying the lots as providing a more particular description of the lots indicated that the lots terminated at the high water mark of the canal the plat made no reference to a low water mark or to any land between high and low water mark when mr hardy offered the lots for sale it was his understanding that the lots extended to the center of the canal rather than terminating at the water’s edge and he represented this to the potential buyers mr hardy did not specify the language used in the deeds and did not read the deeds before signing them the clarendon county assessor took the position apparently based on the language of the deeds that mr hardy still held title to the land under the canal waters consequently sometime after mr hardy had sold all the lots he received a bill from the clarendon county tax collector for property taxes owed on the canal mr hardy did not pay the tax on the canal because he did not believe he owned the canal and because he did not think it had any value as a result of mr hardy’s delinquency in paying the taxes the canal was auctioned by the clarendon county tax collector mr hardy subsequently had the opportunity to reacquire title to the canal if he paid the delinquent taxes plus a redemption fee see below within_12_months he did not do so for the same reasons he did not initially pay the property taxes on the canal he did not believe he owned it and he did not think it had any value this position was later confirmed in date when in response to a request from the clarendon county tax collector the clarendon county assessor issued a letter stating that based on a review of the deeds the property owners abutting the canal own down to the water but no further and that the developer g h hardy still owned the land under the water mr hardy recollected that the amount billed by the clarendon county assessor was in the range of dollar_figure-big_number petitioner william n kellahan jr petitioner had been engaged in the purchase of properties at tax sales since the early 1980’s as a member of a partnership by the name of dak which consisted of w w dibble harry r askins jr and petitioner dak generated income by purchasing properties at tax sales and selling them back to the previous owners thereby collecting redemption fees if a property owner was delinquent in paying property taxes the county could seize the property and sell it the property would be sold at auction to the highest bidder whose bid would include the delinquent taxes and penalties the delinguent taxpayer would have months in which to reacquire or redeem the property by paying the delinquent taxes and penalties plus an additional fee equal to percent of the bid amount if property sold at auction was redeemed during the redemption_period the purchaser at auction would receive a refund of his bid price plus the 8-percent redemption fee if there was no redemption the auction purchaser would acquire title dak’s principal objective in engaging in the tax sale purchases was to collect the 8-percent redemption fees which were distributed to the partners approximately to percent of the properties purchased by dak were redeemed properties that were not redeemed would be distributed by dak to the individual partners who would attempt to sell them at a gain unredeemed properties would be equally divided among mr dibble mr askins and petitioner based on the properties’ bid prices the specific properties were divided randomly but ina manner ensuring that each partner got the same total value of properties based on their bid prices the partner to whom an unredeemed property was assigned would be deeded the property by the relevant county after the redemption_period had expired often after the properties had been deeded it was the practice of mr dibble mr askins and petitioner to exchange properties primarily for convenience because g a property was closer to a partner’s place of residence or to equalize the value of parcels being exchanged properties exchanged between the partners were valued based on the bid prices plus any additional taxes paid during the period the property had been held dak purchased the canal at a tax sale in october of for a bid price of dollar_figure the canal was not redeemed and was assigned to petitioner in date the canal was deeded from the clarendon county tax collector to colonial properties inc a corporation controlled by petitioners colonial properties deeded the property to mr askins in date for total consideration of dollar_figure mr askins subsequently exchanged the property with mr dibble and it was deeded to blue inc a this deed indicated that the taxes due for and totaled dollar_figure corporation owned by mr dibble for purposes of the foregoing transfer mr askins and mr dibble treated the property as having an exchange value of dollar_figure finally the canal was deeded from blue inc to petitioners on date for consideration of dollar_figure and the exchange of other_property four days later on date petitioners contributed the canal to the south carolina public service authority scpsa petitioners contributed the canal because the clarendon county tax assessor had advised petitioner that the owners of the lots surrounding the canal were very upset that the canal had been sold and had suggested that petitioner either attempt to work out some kind of agreement with the owners or give the property to the scpsa petitioners decided to contribute the property to the scpsa so they would not have to deal with the disgruntled owners at the time they contributed it petitioners had not visited the property and knew very little about it in fact petitioners did not visit the property until approximately month prior to the trial in this case however petitioner received a letter dated date the date of the contribution from harby moses jr a licensed contractor doing business as coastal the record does not indicate what property was exchanged or its value structures which stated that the cost of digging a canal of the approximate dimensions of the canal would be dollar_figure as of date the tax-assessed value of the canal was dollar_figure according to a ratio study completed by the state of south carolina in clarendon county during the average ratio of tax-assessed value to sales_price for nonresidential nonagricultural property wa sec_79 percent on date petitioners filed a form_4868 extension of time to file u s individual_income_tax_return seeking an automatic 4-month extension of time to file their federal_income_tax return the form_4868 signed by petitioners’ tax_return_preparer required the taxpayer to estimate the amount of tax owed and stated that if we later find that your estimate was not reasonable the extension will be null and void on the form_4868 petitioners estimated a total_tax liability of dollar_figure for on date petitioners filed a form_2688 application_for additional extension of time to file u s individual_income_tax_return seeking an additional extension of time to file their return until date petitioners hired an appraiser to value the canal the appraiser’s report dated date valued the canal at dollar_figure the appraisal used the cost method of valuation under which the appraiser’s estimated cost of constructing the canal dollar_figure was included in the value of the property on their return petitioners claimed a charitable_contribution_deduction with respect to the canal in the amount of dollar_figure they claimed the remainder--dollar_figure 642--on their federal_income_tax return as a charitable_contribution carryover from the canal was described on the return a sec_4 acres of land and improvements appraised at a fair_market_value of dollar_figure attached to the return was the letter from mr moses estimating a dollar_figure cost for digging a canal on dollar_figure acres of land in addition petitioners reported adjusted_gross_income of dollar_figure for claimed itemized_deductions of dollar_figure including the charitable_contribution_deduction with respect to the canal of dollar_figure and exemptions of dollar_figure and computed taxable_income of dollar_figure they reported a tax_liability of dollar_figure and previous withholdings of dollar_figure resulting in net tax due for of dollar_figure in the notice_of_deficiency respondent determined that the value of the canal was dollar_figure included in the notice was the appraiser’s report relied on by respondent in making the determination and offered by respondent at trial in preparation for trial in this case petitioners hired a second appraiser who valued the canal at dollar_figure and petitioners now concede that the canal’s value was no greater than dollar_figure opinion i value of the canal a background sec_170 provides there shall be allowed as a deduction any charitable_contribution payment of which is made within the taxable_year a charitable_contribution shall be allowable as a deduction only if verified under regulations prescribed by the secretary where the charitable_contribution consists of property other than cash the value of the contribution with exceptions not relevant here is the fair_market_value of the donated property at the time of contribution see sec_1_170a-1 income_tax regs see also 109_tc_258 affd 166_f3d_332 4th cir the regulations define fair_market_value as the price at which the property would change hands between a willing buyer and a willing seller neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts sec_1_170a-1 income_tax regs see also 85_tc_469 valuation is a guestion of fact see eg 94_tc_193 the parties agree that a deduction in the instant case is permitted and that the only issue is the fair_market_value of the contributed_property b expert reports both parties rely on expert appraisals of the canal respondent’s expert felecia coleman respondent’s expert considered the 75-acre canal to be solely land under water she used a comparable sales approach to value the canal under which she attempted to estimate the value of the canal based on the sales prices of similar properties since she could find no sales of manmade canals respondent’s expert used ponds as the best available comparables also because there were no sales of ponds in the vicinity close to the time of the contribution of the canal she estimated the value of the ponds of comparable size in the area using their assessed values for local property_tax purposes on the basis of her experience in real_estate she concluded that such assessed values were typically percent of fair_market_value and respondent introduced statistics supporting this ratio for nonresidential nonagricultural real_property in clarendon county since the tax-assessed value for similarly sized ponds in the area was dollar_figure per acre respondent’s expert used a figure of dollar_figure per acre as the estimated fair_market_value of the ponds on the basis of that figure she estimated the canal’s value at dollar_figure dollar_figure acres times dollar_figure which she rounded to dollar_figure petitioners’ expert theodore b gardner petitioners’ expert treated the 75-acre canal as comprising three components acres of land under water a 25-acre strip of land between the water’s edge at its normal levels and the high water mark and piers built from adjacent lots out into the water the 25-acre strip of land was usually above water but was nonetheless part of the canal parcel because the canal extended to the high water mark petitioners’ expert testified that the state maintained and operated a dam that among other things controlled the water level of lake marion and in general kept the water level below the high water mark with respect to the acres of land under water petitioners’ expert’s method of valuation was similar to respondent’s he too sought comparable properties and settled on ponds he examined sales of farms with ponds of acres or more the first of these sales took place in date more than years after the charitable_contribution in the instant case petitioners’ expert relied on buyers’ estimates of the per-acre value of the ponds and from this he estimated the value of the land under water in the canal to be dollar_figure per acre he thus valued the land under water at dollar_figure acres x dollar_figure with respect to the piers petitioners’ expert estimated that there were piers extending out into the canal he valued the piers at their estimated cost of dollar_figure each a figure he obtained from tax assessor records he included a total value for the piers in the amount of dollar_figure piers x dollar_figure with respect to the 25-acre strip of land above water petitioners’ expert estimated the size of the strip based ona visit to the canal and examination of tax assessor maps he valued the strip of land as follows he measured the total waterfront footage of all lots on the canal at big_number feet he then summed the total sales prices of all the lots between date and date which produced a figure of dollar_figure he then divided the latter by the former to establish an average cost per waterfront foot of dollar_figure he then discounted this number by percent producing a value of dollar_figure per waterfront foot or dollar_figure for the strip big_number feet x dollar_figure the value of the canal therefore under petitioners’ expert’s computations was the sum of the value of the piers dollar_figure the value of the land under water dollar_figure and the value of the strip of land above water dollar_figure for a total of dollar_figure which he rounded down to dollar_figure c court’s analysis valuing this parcel of property was no doubt a challenge for both experts in this case given its highly unusual if not unique characteristics nonetheless the court’s review of both experts’ theories reveals that they cannot hold water we start with the use of ponds as comparables although we appreciate the dilemma faced by the experts we do not accept the premise that a pond is comparable to the canal the owner of a pond may restrict access both petitioners’ and respondent’s experts agreed that the owner of the canal could not restrict access by the public via lake marion the experts’ position appears correct see eg hughes v nelson s ebe 2d s c ct app manmade canal opening into navigable water is itself navigable and hence open to public access petitioners have in any event failed to offer facts or law to refute it nevertheless while both experts conclude that the canal is open to public access they fail to take this factor into account in deciding that ponds are viable comparables to the canal for valuation purposes in our view given that he cannot control public access the canal owner’s property rights are substantially attenuated in comparison to the owner of a pond cf state v head s e 2d s c ct app conviction for fishing without permission overturned owner of land under navigable water could not prevent public access for this reason we doubt that ponds and publicly accessible canals petitioners attempt unsuccessfully in our view to refute this point on brief with the naked claim that the record states that the canal was dug and then opened into the waters of lake marion without public service authority permission in light of that the public service authority or other interested_party may well have been authorized to place a barrier between the canal and lake marion petitioners do not suggest who that other interested_party might be or provide any support for their contention nor do they explain how the canal’s being subject_to barricading by the public service authority might enhance its value -- - are comparable in any event the failure of either expert to address this issue renders their conclusions unreliable to the extent they involve pond comparables we believe there are additional substantial flaws in petitioners’ expert’s report first petitioners’ expert decided to include an estimated value of dollar_figure for several piers constructed by the lot owners and extending from their lots into the water of the canal an obvious premise underlying this position is that the canal owner owned the piers yet neither the expert nor petitioners on brief offer any support for that legal conclusion or indeed even discuss it in his report petitioners’ expert notes that he obtained the value he used for the piers from the tax assessor’s office which at least suggests that for local property_tax purposes the piers were not considered to be part of the canal parcel ’ there is certainly support for the contrary conclusion namely that the piers were the property of the lot owners see eg 828_fsupp_1241 d s c pier held to be an appurtenance to the real_property located above the mean high water mark in any event on this record petitioners have failed to show that ’ the tax-assessed value attributed to the canal by the clarendon county assessor in date was dollar_figure whereas the value placed on the piers was approximately dollar_figure each according to petitioners’ expert the value of the piers should be counted in determining a value for the canal second petitioners’ expert’s method of valuing the strip of land between the ordinary water level and the high water mark of the canal is flawed it appears that the figure used for the total sales prices of all lots dollar_figure included multiple sales of the same lots this would skew the average further petitioners’ expert provided no convincing rationale for his determination that the value of the strip of land could be determined by taking percent of the combined fair market values of the lots and allocating it to the amount of their waterfront footage thus his use of the 85-percent discount appears to be arbitrary we accordingly reject this portion of his analysis the most significant problem with the valuation of petitioners and their expert is the proposition that the strip of land between the water’s edge and high water mark of the canal had significant value at all petitioners’ expert valued the strip at dollar_figure however petitioners’ expert conceded that the strip which he estimated varied in width from to feet and for instance if each of the lots were sold twice then the total sales prices would have been with respect to twice the waterfront footage which would mean other things being equal that each waterfront foot was half as valuable as petitioners’ expert calculates was by definition occasionally submerged could not be used for residential or agricultural purposes petitioners’ expert also conceded that the strip was only accessible to its owner by water and further that the only conceivable market for the property would be the adjacent lot owners petitioners make clear in their arguments on brief that their theory of valuation is that the strip of land between the water’s edge and high water mark was valuable because it afforded its owner the opportunity to restrict the water access of the adjacent lot owners thus it was a nuisance that the lot owners would pay to eliminate respondent counters that under south carolina law the lot owners had an easement granting them access to the water citing mcallister v smiley s be 2d s c owner of lot bounded by road had easement over road since it appeared in original plat thus respondent argues the lot owners would pay nothing for water access or would certainly sue any owner of the strip who sought to restrict their water access we believe there is significant support for respondent’s position in addition to the case cited by respondent we note epps v freeman s e 2d s c which held that where waterfront property is subdivided such that a strip of land exists between the lots and the water the lot owners have a right to water access if it was the intention of the subdividers to give the lot owners access to the water and the plat amounted to a representation that the lot owners would have access to the water id pincite the record in this case demonstrates that the subdivider’s intent was to give water access and the plat or at least mr hardy’s representation to buyers appears to indicate water access further the record in this case amply documents that the lot owners were very disgruntled upon learning that the canal had been sold at auction for back taxes we need not and do not decide whether under south carolina law the adjacent lot owners had easements with respect to the canal parcel it is sufficient for our purposes to conclude that there was a significant risk that such was the case we believe it obvious that whatever property rights were conveyed with ownership of the canal parcel were subject_to significant litigation hazards we conclude that it was a virtual certainty that any attempt by the canal’s owner to restrict the adjacent lot owners’ water access would be met with a lawsuit ’ petitioners’ expert conceded at trial that he took no account of the possibility of litigation in arriving at his value estimate this fact alone might provide grounds for substantially discounting his conclusions when we consider the failure to indeed given the lot owners’ disgquietude evidenced in the record we believe merely holding title to the canal might result in entanglement in a suit to quiet title brought by the lot owners account for litigation hazards along with the shortcomings previously discussed we conclude that petitioners’ expert’s conclusions should be disregarded having largely rejected’ both expert reports we must ascertain the value of the canal based on the remaining evidence in the record with respect to the multiple transfers of the canal between the dak partners respondent's expert conceded that they were not at arm's length and for that reason we believe they should be disregarded likewise with respect to the tax sale for dollar_figure there is no evidence in the record that the auction was publicized or otherwise reached a wide market we therefore conclude that it was more akin to a forced sale and should be disregarded mr hardy abandoned the property rather than pay the accumulated tax_liability which he recalled was between dollar_figure and dollar_figure mr hardy was highly knowledgeable regarding the canal and we believe his actions have some probative value with respect to its worth in addition there is no evidence that the value of the canal changed significantly between the time of mr hardy's abandonment and the later we accept respondent’s expert’s contention in her report that the tax-assessed value of the subject property cannot be ignored as an indication of value ‘t the deed resulting from the tax sale indicated that the taxes due for through totaled only dollar_figure contribution by petitioners cf 88_tc_1197 there remains the assessed value for local property_tax purposes of dollar_figure the tax-assessed value of property is in general not necessarily a reliable criterion to be used in estimating its fair market value’ 98_tc_554 quoting estate of 27_bta_735 this is particularly true when there is nothing in the record indicating that the tax- assessed value was intended to represent fair_market_value see frazee v commissioner supra however in this case the record contains evidence that the tax-assessed value of property in this locality was approximately percent of fair_market_value the ratio study conducted by the state of south carolina found that in the average ratio of tax-assessed value to sales_price for nonresidential nonagricultural property in clarendon county wa sec_79 percent respondent’s expert also opined that the tax- assessed value of property in south carolina was approximately percent of fair_market_value moreover in appropriate circumstances tax-assessed values can be useful as a guideline or as corroboration of other evidence of fair_market_value see fannon v commissioner tcmemo_1986_572 modified and remanded without published opinion 842_f2d_1290 4th cir in the circumstances of this case we believe the tax- assessed value is entitled to some weight in valuing the canal mr hardy's abandonment and the tax-assessed value considered cumulatively both suggest that the value of the canal is much closer to respondent's estimate of dollar_figure than to petitioners' estimate of dollar_figure moreover a closer look at petitioners' theory of a nuisance value also provides support for respondent's position petitioners theorize that the canal had value because the adjacent lot owners would pay something to eliminate a potential obstacle to their water access as noted earlier the respective property rights of the adjacent lot owners and the canal owner were not clear and would likely require litigation to determine the parties to such a potential dispute might well pay to avoid it under petitioner's theory of value the lot owners would collectively pay dollar_figure or almost dollar_figure each to be rid of the nuisance the average purchase_price of the lots was approximately dollar_figure we do not believe given the speculative nature of the canal owner's rights to restrict their water access that the lot ‘2 as we pointed out in fannon v commissioner tcmemo_1989_136 the court_of_appeals for the fourth circuit also relied on assessed values in reaching its result this price is based on the sales data provided in petitioners’ expert’s report using only the most recent sale for lots that had been sold more than once owners would be likely to pay anywhere near this amount which represents approximately percent of the average purchase_price of the lots under respondent's value the lot owners would collectively pay dollar_figure or a little more than dollar_figure each this we believe represents a more realistic estimate of the nuisance value of the canal owner's speculative property rights the canal parcel only came into existence as a result of inadvertence any owner of the canal could not restrict public access to the canal waters from lake marion as to a canal owner's right to restrict the adjacent lot owners' water access from their lots the record amply demonstrates that any such nuisance value was speculative and subject_to a significant litigation hazard the canal's first owner abandoned it and petitioners gave it away rather than confront the litigation almost certainly entailed in any effort to realize value from the property rights conferred by canal ownership based on our review of all the evidence with respect to the canal we conclude that respondent's determination of a value of dollar_figure is better supported than petitioners’ and that petitioners have failed to prove that the value was any greater than the amount conceded by respondent accordingly we sustain respondent's determination of value ti addition_to_tax in the notice_of_deficiency respondent determined that petitioners were liable for additions to tax under sec_6651 for failure_to_file tax returns for both and respondent now concedes that petitioners are not liable for the addition_to_tax for respondent agrees that the requests for extension for filing the return were timely filed and that petitioners’ return was filed within the time as provided in the requests for extension however respondent argues that the form_4868 requesting an automatic_extension of time to file was invalid we disagree in order for a form_4868 to be valid the taxpayer must use available evidence of tax_liability and must attempt to locate evidence to make a proper estimate ' see 92_tc_899 the mere fact that the estimate is incorrect does not make the form_4868 invalid see id pincite however if a taxpayer in his form_4868 request for automatic_extension estimated his tax_liability to be zero even though he had at the time he submitted the request ample evidence discrediting the estimate the form_4868 would be invalid id pincite the form_4868 itself warns of this limitation it states if we later find that your estimate was not reasonable the extension will be null and void in this case petitioners did not have ample evidence discrediting the estimate of zero tax_liability and in fact had some evidence supporting it petitioner received a letter from a licensed contractor prior to filing the form_4868 which stated that the cost of constructing a canal similar to the canal would be dollar_figure given that a copy of this letter was ultimately attached to their tax_return as filed we believe petitioners estimated the value of their contribution of the canal using replacement cost petitioners thus made an effort to locate evidence which although incorrectly used was sufficient for purposes of their form_4868 estimate particularly in light of the fact that valuing this property involved complicated legal issues and posed a genuine challenge for both experts who testified in this case accordingly petitioners are not liable for the addition_to_tax under sec_665l1 a for iii accuracy-related_penalties in the notice_of_deficiency respondent determined that petitioners were liable for accuracy-related_penalties under sec_6662 for both and sec_6662 applies when there is a substantial_valuation_overstatement in which the value of any property claimed on a tax_return is percent or more of the value determined to be correct see sec_6662 h a e however no penalty is imposed unless the portion of the underpayment attributable to substantial_valuation_overstatement exceeds dollar_figure see sec_6662 if sec_6662 h applies the accuracy-related_penalty under sec_6662 is applied using a 40-percent rather than a 20-percent rate see sec_6662 in this case the value of the canal claimed on petitioners’ tax_return dollar_figure is percent or more of the value determined to be correct dollar_figure further the portion of the underpayment attributable to substantial_valuation_overstatement exceeds dollar_figure thus sec_6662 applies however petitioners might be relieved of the penalty under sec_6662 if sec_6664 the reasonable_cause exception applies sec_6664 provides in relevant part as follows in general --no penalty shall be imposed under this part 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 special rule for certain valuation overstatements --in the case of any underpayment attributable to a substantial or gross_valuation_overstatement under chapter with respect to charitable_deduction_property paragraph shall not apply unless--- a the claimed value of the property was based on a qualified_appraisal made by a qualified_appraiser and b in addition to obtaining such appraisal the taxpayer made a good_faith investigation of the value of the contributed_property - - by adding subparagraph b to sec_6664 congress obviously intended that the taxpayer take some further steps beyond merely obtaining an appraisal from a qualified_appraiser we believe that petitioners’ actions in this case fall short of what subparagraph b requires petitioner had experience in real_estate given his activity in purchasing property at tax sales and reselling it and successfully ran his own engineering and survey business thus he is chargeable with some sophistication in real_estate matters taking into account petitioner’s experience and the fact that he did not even visit the property until approximately month before trial we conclude that he failed to make a good_faith investigation of the value of the contributed_property within the meaning of sec_6664 b before claiming the value on the tax_return see sergeant v commissioner tcmemo_1998_265 therefore petitioners have failed to satisfy sec_6664 b and the reasonable_cause exception does not apply accordingly petitioners are liable for the accuracy-related_penalty under sec_6662 for and as determined by respondent an appropriate order will be issued


internal_revenue_service number release date index number ---------------------------------------- ------------------------------------------- ---------------------------------------- re ----------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------------- id no --------------- ----------------- telephone number ---------------------- refer reply to cc psi b04 plr-119902-16 date date legend decedent spouse date datae ----------------------------------------------------------- ----------------------- ------------------------ -------------------------- dear ----------------- this letter responds to your personal representative’s letter of date requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make the election under sec_2010 of the internal_revenue_code portability election to allow a decedent’s surviving_spouse to take into account that decedent’s deceased spousal unused exclusion dsue amount the facts and representations are as follows decedent died on date survived by spouse date is a date after the effective date of the amendment to sec_2010 which provides for portability of a dsue amount to a surviving_spouse to obtain the benefit of portability of decedent’s dsue amount to spouse decedent’s estate was required to file form_706 united_states estate and generation-skipping_transfer_tax return on or before the date that is nine months after decedent’s date of death or the last day of the period covered by an extension decedent’s form_706 was due on date but the estate did not file a form_706 to make the portability election the estate discovered its failure to elect portability after the due_date for making the election it is represented that the value of decedent’s gross_estate is less than the basic exclusion amount in the year of decedent’s death including any taxable_gifts made during his lifetime plr-119902-16 you request an extension of time pursuant to sec_301_9100-3 to elect portability of decedent’s dsue amount pursuant to sec_2010 law and analysis sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2010 provides that a credit of the applicable credit_amount shall be allowed to the estate of every decedent against the tax imposed by sec_2001 sec_2010 provides that the applicable credit_amount is the amount of the tentative_tax that would be determined under sec_2001 if the amount with respect to which such tentative_tax is to be computed were equal to the applicable_exclusion_amount on date congress amended sec_2010 effective for estates of decedents dying and gifts made after date to allow portability of a decedent’s unused applicable_exclusion_amount between spouses tax relief unemployment insurance reauthorization and job creation act of pub_l_no sec_303 124_stat_3296 sec_2010 provides that the applicable_exclusion_amount is the sum of the basic exclusion amount and in the case of a surviving_spouse the dsue amount sec_2010 generally provides that the basic exclusion amount is dollar_figure to be adjusted for inflation annually after calendar_year sec_2010 defines the dsue amount to mean the lesser_of a the basic exclusion amount or b the excess of -- i the applicable_exclusion_amount of the last deceased spouse of the surviving_spouse over ii the amount with respect to which the tentative_tax is determined under sec_2001 on the estate of such deceased spouse sec_2010 provides that a dsue amount may not be taken into account by a surviving_spouse under sec_2010 unless the executor of the estate of the deceased spouse files an estate_tax_return on which such amount is computed and makes an election on such return that such amount may be so taken into account the election once made shall be irrevocable no election may be made if such return is filed after the time prescribed by law including extensions for filing such return sec_2010 provides that the secretary shall prescribe regulations as may be necessary or appropriate to implement sec_2010 plr-119902-16 sec_20_2010-2t a of the estate_tax regulations as in effect on date provides that to allow a decedent’s surviving_spouse to take into account that decedent’s dsue amount the executor of the decedent’s estate must elect portability of the dsue amount on a timely-filed form_706 under sec_20_2010-2t a the due_date of an estate_tax_return required to elect portability is nine months after the decedent’s date of death or the last day of the period covered by an extension if an extension of time for filing has been granted under sec_20_2010-2t a the portability election is made by timely filing a complete and properly prepared estate_tax_return unless the executor satisfies the requirements for the election not to apply in sec_20_2010-2t a i sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 provides that the term statutory election means an election whose due_date is prescribed by statute the term regulatory election means an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute a request for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election the due_date for the portability election is prescribed by statute in the case of an estate required to file an estate_tax_return under sec_6018 see sec_2010 sec_6075 and sec_6018 in the case of an estate that is not required to file an estate_tax_return under sec_6018 the due_date is prescribed by regulation see sec_20_2010-2t a see also sec_20_2010-2 and revproc_2014_18 2014_7_irb_513 sec_2 accordingly in the latter case a taxpayer may seek an extension of time to elect portability under the provisions of sec_301_9100-3 plr-119902-16 sec_6018 requires the filing of an estate_tax_return in all cases where the gross_estate exceeds the basic exclusion amount in effect under sec_2010 for the calendar_year which includes the date of death for purposes of this determination under sec_6018 the basic exclusion amount is reduced but not below zero by the sum of -- a the amount of the adjusted_taxable_gifts within the meaning of sec_2001 made by the decedent after date plus b the aggregate amount allowed as a specific exemption under sec_2521 as in effect before its repeal by the tax reform act of with respect to gifts made by the decedent after date it is represented that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is not required to file an estate_tax_return under sec_6018 under these facts the commissioner has discretionary authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly we grant an extension of time of days from the date of this letter in which to elect portability under sec_2010 the election should be made by filing a complete and properly-prepared form_706 and a copy of this letter within days from the date of this letter to the cincinnati service_center at the following address internal_revenue_service cincinnati service_center stop cincinnati oh for purposes of electing portability a form_706 filed by decedent’s estate within days from the date of this letter will be considered to be timely filed the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination if it is later determined that based on the value of the gross_estate and taking into account any taxable_gifts decedent’s estate is required to file an estate_tax_return pursuant to sec_6018 the commissioner is without authority under sec_301_9100-3 to grant to decedent’s estate an extension of time to elect portability and the grant of the extension referred to in this letter is deemed null and void this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-119902-16 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 associate chief_counsel passthroughs special industries by lorraine e gardner lorraine e gardner senior counsel branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


t c memo united_states tax_court asa eugene pearson petitioner v commissioner of internal revenue respondent docket no filed date asa bugene pearson pro_se george eb gasper for respondent memorandum opinion goldberg special_trial_judge respondent determined a deficiency in petitioner’s federal_income_tax of dollar_figure for the taxable_year unless otherwise indicated 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 after a concession ’ the issue for determination is whether disability payments received by petitioner in are includable in gross_income some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference at the time of filing the petition petitioner resided in fort worth texas in petitioner began working for general motors corporation general motors at its arlington texas assembly plant as an employee petitioner was included in general motors’ long-term disability plan the disability plan which general motors funded through metropolitan life_insurance_company metlife general motors paid all the policy premiums and did not deduct the cost of the premiums from employee wages because of the repetitious nature of the work and other stressful situations at the plant petitioner began to suffer from severe depression which affected his ability to work by his condition worsened and petitioner was on sick leave for most of the year at trial petitioner failed to offer any evidence whatsoever contesting the commissioner’s determination in the notice_of_deficiency that he failed to report income from general motors of dollar_figure for the taxable_year accordingly petitioner is deemed to have conceded the issue see rule sec_149 sec_142 on january petitioner retired from general motors and began receiving monthly disability benefits petitioner received his retirement and his disability benefits in two separate monthly checks petitioner received one check from general motors and one check directly from metlife the payments petitioner received from metlife were payments made under the disability plan and were based on the number of years petitioner was employed by general motors though petitioner initially included his disability benefit payments received from metlife in gross_income on his federal_income_tax returns on advice of a tax preparer petitioner filed a form 1040x amended u s individual_income_tax_return for the taxable_year and reported the metlife payments as nontaxable disability_income pursuant to sec_105 c and sec_1_105-3 income_tax regs and requested a refund for excess income_tax_withholding the internal_revenue_service irs allowed the requested amounts as overpayments that it offset against outstanding income_tax liabilities petitioner continued to request a refund for excess income_tax_withholding for every taxable_year from up to and including the year in issue once petitioner’s income_tax liabilities were paid in full the irs refunded the balance of the claimed excess withholding for tax years up to and including petitioner testified that sometime after an irs representative told him to stop reporting the metlife payments on his federal_income_tax return because the payments constituted nontaxable income in accordance with the advice he purportedly received from the irs petitioner stopped reporting the payments from metlife in petitioner received a form_w-2 wage and tax statement from metlife reporting the amount he had received from metlife for the taxable_year petitioner did not report the payments from metlife and did not attach the form_w-2 he received from metlife to his return in the notice_of_deficiency respondent determined that petitioner failed to report dollar_figure of taxable wages from general motors in and further determined that petitioner should have included dollar_figure the entire amount of metlife’s payments to petitioner in gross_income under sec_105 for the taxable_year gross_income does not include amounts received through accident_or_health_insurance for personal injuries or sickness to the extent such amounts are attributable to contributions by the employer which were includable in the gross_income of the employee or paid for by the employee see sec_104 sec_105 provides however that amounts received by an employee through accident or health inssurance are includable in the gross_income of the employee to the extent such amounts are attributable to contributions by the employer which were not includable in the gross_income of the employee or paid_by the employer petitioner concedes that the disability insurance premiums were paid_by general motors and that he did not include those premiums in his gross_income but contends that the payments from metlife were disability payments pursuant to sec_105 and therefore excludable from gross_income sec_105 provides as follows sec_105 payments unrelated to absence from work -- gross_income does not include amounts referred to in subsection a to the extent such amounts-- constitute payment for the permanent loss or loss of use of a member or function of the body or the permanent disfigurement of the taxpayer x and are computed with reference to the nature of the injury without regard to the period the employee is absent from work in order to qualify for the sec_105 exception the payments to petitioner must satisfy both paragraphs and of sec_105 sec_105 itself has two parts that must be satisfied the payments to the taxpayer must be computed with reference to the nature of the injury and the payments must be computed without regard to the period the taxpayer is absent from work with respect to the first part of sec_105 829_f2d_506 4th cir states as follows a review of the cases indicates that for payments to be excludible from income under sec_105 the instrument or agreement under which the amounts are paid must itself provide specificity as to the permanent loss or injury suffered and the corresponding amount of payments to be provided exclusion is permitted only under plans which vary benefits to reflect the particular loss of bodily function petitioner has been unable to establish that the disability plan payments he received from metlife comport with the requirements of sec_105 indeed petitioner concedes that the monthly payments from metlife are computed based on the number of years of credited service petitioner had at general motors and not with regard to any injury as required by sec_105 on the basis of the record we find that the disability plan payments petitioner received from metlife are not excludable from gross_income pursuant to sec_105 since we find that on the basis of the record the disability payments fail to satisfy sec_105 we need not decide whether they satisfy sec_105 in the alternative petitioner contends that even if we find that the disability payments are not excludable from gross_income pursuant to sec_105 the disability plan payments are part of a wage_continuation_plan and are therefore nontaxable pursuant to sec_105 pursuant to sec_105 during years for which it was in effect payments made under wage continuation plans could be excluded from gross_income under certain conditions sec_105 however was repealed effective for taxable years after by the social_security act amendments of publaw_98_21 97_stat_85 finally petitioner contends that the irs refunded his taxes for prior years after he filed an amended_return in and that by such action the irs implicitly recognized that the metlife payments were nontaxable we do not agree petitioner has failed to establish the reason for refunds he received in prior years however it is well established that even if petitioner had presented proof that respondent may have overlooked or accepted the tax treatment of certain items in previous years respondent is not precluded from correcting that error in subsequent years with respect to the same taxpayer see 55_tc_28 at the conclusion of the trial the court instructed respondent to contact metlife in order to get an accurate accounting of disability benefits paid to petitioner during the taxable_year in an apparent answer to respondent’s query metlife sent petitioner a form w-2c statement of corrected income and tax amounts for the taxable_year which reported that petitioner had received only dollar_figure in disability payments and not dollar_figure as stated on the previously issued form_w-2 accordingly we find that petitioner received dollar_figure from metlife and hold that such amount is taxable_income pursuant to sec_105 to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index number ----------------------------------------------------- ------------------------------ --------------------- ----------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------- id no ------------ telephone number -------------------- refer reply to cc fip plr-145877-05 date date legend taxpayer dear -------------------- ------------------------------ this is in reply to a letter dated date and subsequent correspondence requesting rulings that certain classes of pass-through certificates to be issued by a fixed_investment_trust qualify as stripped coupons or stripped bonds within the meaning of sec_1286 of the internal_revenue_code and the trust will be classified as a fixed_investment_trust under sec_301_7701-4 of the income_tax regulations facts taxpayer is seeking to market fixed or variable rate pass-through certificates by using a vehicle that qualifies as a fixed_investment_trust and holds all or a portion of a single class of pass-through certificates issued by an investment_trust that represent an undivided_interest in real_estate mortgages grantor_trust certificates or holds all or a portion of a single class of remic regular interests remic regular interests and together with the grantor_trust certificates contributed assets taxpayer intends to sponsor a newly-formed trust trust by contributing the contributed assets to the trust in exchange for multiple classes of pass-through certificates certificates the contributed assets which taxpayer represents are indebtedness or ownership interests in indebtedness for federal_income_tax purposes may pay interest at a fixed or variable rate the certificates will represent rights to different portions of the principal and interest payments on the underlying contributed assets the trust will be a passive trust there will be no power under the trust agreement to vary the investment of certificate holders the trust will hold the plr-145877-05 contributed assets collect cash payments thereon and pass the payments through to certificate holders on monthly payment dates except that a portion of the payments will be used to pay arm’s-length fees for servicing and trust administration and possibly fees for guarantees of payments on the certificates or other credit support administrative costs the trust will have the power to pursue remedies and enforce rights with respect to its assets in the event of a default the certificates will represent collectively a percent beneficial_ownership interest in the trust they will be issued in multiple classes that will be separately assignable each class will provide for monthly distributions of interest calculated by applying a pass-through rate to the certificate principal balance each certificate within a class will be entitled to a pro_rata portion of payments allocated to the class the certificates will pay interest at a fixed or variable rate the certificate classes will be fixed rate classes floating rate classes or inverse floating rate classes interest payable on all of the classes will equal in the aggregate interest on the contributed assets less administrative costs floating rate classes will have a pass- through rate that varies directly with an interest rate index or a multiple of an interest rate index inverse floating rate classes will have a pass-through rate that varies inversely with an interest rate index or a multiple of an interest rate index pass- through rates may be adjusted by adding or subtracting a fixed number of basis points and may be subject_to caps or floors the principal_amount of a class may be actual or notional an actual principal_amount represents a right to receive principal payments a notional_principal_amount does not create a right to principal payments but is used in computing interest distributions a class of certificates may have a pass-through rate of zero each class with a positive pass-through rate will be entitled to a share of the interest payable on the contributed assets such share would constitute a specified portion of such interest payments if covered by the specified portion_rules of sec_1_860g-1 the specified portion will not vary over the life of the class ie until payments are no longer made on the class or the class is exchanged for contributed assets or a different class under the exchange feature of the trust the trust will have an exchange feature allowing certificate classes to be exchanged over time there will be three types of permitted exchanges a redemption by the trust of certificates through delivery of the underlying contributed assets an exchange of certificates for certificates with different terms representing interests in the same contributed assets and plr-145877-05 a deposit of additional contributed assets in the trust identical to those already held in exchange for new certificates representing an interest in those contributed assets and in the contributed assets already held by the trust each exchange will be for matching amounts in that the actual principal_amount of certificates or contributed assets given up will equal the actual principal_amount of certificates or contributed assets received and the aggregate pass- through rate on certificates given up will equal the aggregate pass-through rate on certificates received or the rate of interest less administrative costs on contributed assets received taxpayer represents that the exchanges will not be taxable events under sec_1001 and that they involve no change in economic interests in underlying assets taxpayer represents that the exchanges will not cause exchanging certificate holders or non-exchanging certificate holders to be entitled to a differing stream of aggregate payments from differing obligors the exchange feature permits exchanging certificate holders to take advantage of market opportunities that arise from differences in pricing of the whole certificate or separate pieces thereof the exchanges will have no effect on the rights to principal or interest of any certificate holder not participating in the exchange the trust may charge an administrative fee for an exchange law and analysis sec_1286 provides rules governing the tax treatment of stripped bonds and stripped coupons sec_1286 treats a stripped_bond or stripped_coupon in the hands of a purchaser as if it were a newly issued debt_instrument issued at a price equal to the purchase_price sec_1286 provides rules governing the person stripping a bond including rules for allocating basis between stripped bonds or coupons that are sold and disposed of sec_1286 defines a stripped_coupon as any coupon relating to a stripped_bond a stripped_bond is defined in sec_1286 as a bond issued at any time with interest_coupons where there is a separation in ownership between the bond and any coupon which has not yet become payable a bond is defined in sec_1286 to include any evidence_of_indebtedness sec_1286 defines a coupon as any right to receive interest on a bond whether or not evidenced by a coupon sec_860b provides that in determining the tax under this chapter of any holder of a regular_interest in a remic such interest if not otherwise a debt_instrument shall be treated as a debt_instrument plr-145877-05 revenue rulings 1984_1_cb_155 1977_2_cb_20 and 1974_1_cb_147 provide that the holders of a single class of certificates in a mortgage pass-through trust are treated as holding undivided interests in the pool of mortgages held by the trust revrul_91_46 1991_2_cb_358 provides that a mortgage is a bond for purposes of sec_1286 sec_301_7701-4 provides that an investment_trust with multiple classes of ownership interests ordinarily will be classified as a business_entity under sec_301_7701-2 however an investment_trust with multiple classes of ownership interests in which there is no power to vary the investment of the certificate holders will be classified as a_trust if the trust is formed to facilitate direct investment in the assets of the trust and the existence of multiple classes of ownership interests is incidental to that purpose sec_301_7701-4 example applies this rule to a_trust that holds bonds and issues certificates evidencing interests in the bonds it provides corporation n purchases a portfolio of bonds and transfers the bonds to a bank under a_trust agreement at the same time the trustee delivers to n certificates evidencing interests in the bonds these certificates are sold to public investors each certificate represents the right to receive a particular payment with respect to a specific bond under sec_1286 stripped coupons and stripped bonds are treated as separate bonds for federal_income_tax purposes although the interest of each certificate holder is different from that of each other certificate holder and the trust thus has multiple classes of ownership the multiple classes simply provide each certificate holder with a direct interest in what is treated under sec_1286 as a separate bond given the similarity of the interests acquired by the certificate holders to the interests that could be acquired by direct investment the multiple classes of trust interests merely facilitate direct investment in the assets held by the trust accordingly the trust is classified as a_trust a power to contribute assets to a_trust that are identical to existing assets in exchange for new certificates identical to those already outstanding is not a power to vary because it does not change the economic position of existing certificate holders 122_f2d_540 2nd cir an investment_trust holding stocks was not an association where the depositor could make up additional units of the same number and type of stock as originally deposited revrul_90_7 1990_1_cb_153 provides that the redemption of pass- through certificates issued by a fixed_investment_trust for a pro_rata share of trust assets is not a realization event for the certificate holder who goes from being a co-owner of all plr-145877-05 of the trust’s assets to a sole owner of a proportionate share of the trust’s assets because the redemption effects no material_change in his position conclusion based on the information submitted and representations made we conclude that with the qualification stated in the following sentence the classes of certificates to be issued by the trust holding all or a portion of a single class of pass-through certificates issued by an investment_trust or a single class of remic regular interests qualify as stripped coupons or stripped bonds within the meaning of sec_1286 and the trust if operated in accordance with the above representations will be classified as a fixed_investment_trust under sec_301_7701-4 no conclusion is expressed with respect to certificates that represent rights to the same portions of the principal and interest payments on the underlying contributed assets this ruling letter is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to taxpayer’s authorized representative sincerely patrick e white patrick e white senior counsel branch office of associate chief_counsel financial institutions and products


internal_revenue_service department of the treasury index number number release date washington dc person to contact telephone number refer reply to cc dom p si 3-plr-107939-99 date date legend a x y z sec_1 sec_2 sec_3 exchange date a b p1 p2 dear plr-107939-99 this letter responds to your letter dated date submitted on behalf of a requesting rulings under sec_1362 and sec_1375 of the internal_revenue_code facts a is an s_corporation with subchapter_c accumulated_earnings_and_profits that is in the business of constructing developing maintaining servicing and operating a self- created commercial retail marketplace a directly owns two strip centers p1 and p2 a performs a number of services with respect to p1 and p2 either through direct on-site personnel through sec_1 sec_2 or sec_3 or through other outside independent contracting firms services provided by a include but are not limited to the following common area maintenance tenant in-line maintenance food court maintenance cooling and heating systems service and maintenance daily inspection of premises energy management on-call 24-hour staff processing tenant requests and concerns refuse management remodeling safety inspections security personnel sprinkler system maintenance for fire prevention janitorial services plumbing and electrical services tenant amenities both seasonal and daily staffing and personnel services to tenants structural maintenance water and sewage services and other related leasing management and administrative services a incurs various costs in its leasing businesses for the taxable_year ending date a collected approximately dollar_figurea in gross revenue and incurred approximately dollar_figureb in relevant operating_expenses in the rental business from time to time a has invested or will invest either directly or indirectly through a general_partnership or limited_liability_company in certain publicly traded limited_partnerships ptps primarily engaged in the exploration and or production of oil_and_gas also from time to time a has invested or will invest either directly or indirectly through a general_partnership or limited_liability_company in other ptps primarily involved in processing various minerals and chemicals these investments are made to provide for liquidity and also to diversify investment risk presently a has identified three specific ptps listed on exchange that it has or will invest in x y and z x is engaged in the purchasing gathering transporting trading storage and resale of crude_oil and refined petroleum products and related activities y is engaged in the purchasing gathering transporting aggregating and resale of crude_oil z is engaged in the operation of various chemical plants a represents that x and y meet the qualifying_income exception under sec_7704 and are taxed as partnerships for federal tax purposes a further represents that z is an electing_1987_partnership under sec_7704 and is taxed as a partnership for federal tax purposes in addition a represents that x y and z are not electing large partnerships under sec_771 and that the normal flow-through provisions of subchapter_k apply to their partners plr-107939-99 a has requested the following rulings a’s distributive_share of partnership gross_receipts attributable to the interests it has or will acquire either directly or indirectly through a general_partnership or limited_liability_company in x y or z will be included in a’s gross_receipts for the purpose of applying the passive_investment_income limitations of sec_1362 and sec_1375 a’s distributive_share of partnership gross_receipts attributable to the interests it has or will acquire in x y or z will not constitute passive_investment_income for purposes of sec_1362 and sec_1375 to the extent the gross_receipts are derived from the exploration or production of oil_and_gas or the processing of various minerals and chemicals and a’s rental income from the leasing of strip centers will not constitute passive_investment_income under sec_1362 and sec_1375 analysis sec_702 of the code requires each partner to take into account separately its distributive_share of the partnership’s items of income gain loss deduction and credit to the extent provided by regulations sec_1_702-1 of the income_tax regulations requires each partner to take into account separately any partnership_item that would result in an income_tax_liability for that partner different from that which would result if that partner did not take the item into account separately under sec_702 the character of any item_of_income gain loss deduction or credit included in a partner’s distributive_share under sec_702 through shall be determined as if the item were realized directly from the source from which realized by the partnership or incurred in the same manner as incurred by the partnership sec_1362 allows a small_business_corporation as defined in sec_1361 to elect to be an s_corporation this election however terminates under the provisions of sec_1362 if the corporation has accumulated_earnings_and_profits at the close of each of three consecutive taxable years and has gross_receipts for each of such taxable years more than percent of which are passive_investment_income sec_1362 provides in general that the term passive_investment_income means gross_receipts derived from royalties rents dividends interest annuities and sales and exchanges of stock_or_securities gross_receipts from such sales or exchanges being taken into account for purposes of this paragraph only to the extent of gains therefrom plr-107939-99 sec_1_1362-2 ii b provides that rents means amounts received for_the_use_of or the right to use property whether real or personal of the corporation sec_1_1362-2 provides that rents does not include rents derived in the active trade_or_business of renting property rents received by a corporation are derived in an active trade_or_business of renting property only if based on all the facts and circumstances the corporation provides significant services or incurs substantial costs in the rental business generally significant services are not rendered and substantial costs are not incurred in connection with net leases whether significant services are performed or substantial costs are incurred in the rental business is determined based upon all the facts and circumstances including but not limited to the number of persons employed to provide the services and the types and amounts of costs and expenses_incurred other than depreciation sec_1375 imposes a tax on the excess_net_passive_income of an s_corporation in any year in which the corporation has accumulated_earnings_and_profits at the close of the taxable_year and has gross_receipts more than percent of which are passive_investment_income sec_7704 requires that except as provided in sec_7704 a publicly_traded_partnership shall be treated as a corporation for federal_income_tax purposes sec_7704 defines the term publicly_traded_partnership as any partnership if interests in such partnership are traded on an established_securities_market or are readily_tradable on a secondary market or the substantial equivalent thereof under sec_7704 sec_7704 does not apply to any ptp for any taxable_year if the partnership met the gross_income requirements of sec_7704 for the taxable_year and each preceding_taxable_year beginning after date during which the partnership or any predecessor was in existence sec_7704 provides that the gross_income requirement is met for any taxable_year if at least percent of the partnership’s gross_income for the taxable_year consists of qualifying_income sec_7704 provides that income and gains derived from the exploration development mining or production processing refining transportation including pipelines transporting gas oil or products thereof or the marketing of any mineral_or_natural_resource including fertilizer geothermal_energy and timber is qualifying_income for purposes of this section mineral_or_natural_resource means any product of a character with respect to which a deduction for depletion is allowable under sec_611 but is not a product described in sec_613 or b under sec_7704 sec_7704 does not apply to an electing_1987_partnership sec_7704 defines an electing_1987_partnership as any ptp if a the ptp is an existing partnership as defined in section c of the revenue plr-107939-99 reconciliation act of generally a ptp on or before date b sec_7704 has not applied and without regard to sec_7704 would not have applied to such partnership for all prior taxable years beginning after date and before date and c such partnership elects the application of sec_7704 and consents to the application of the tax under sec_7704 for its first taxable_year beginning after date sec_7704 imposes for each taxable_year on the income of each electing_1987_partnership a tax equal to percent of such partnership’s gross_income for the taxable_year from the active_conduct of trades and businesses by the partnership revrul_71_455 1971_2_cb_318 holds that for purposes of the passive_investment_income limitations an electing small_business_corporation should include its distributive_share of gross_receipts from a joint_venture rather than its distributive_share of ordinary_loss from the joint_venture because items of income maintain their character upon distribution to the partners under sec_702 the character of the gross_receipts of the joint_venture were not converted into passive_investment_income upon the distribution to the small_business company described in the revenue_ruling a's distributive_share of gross_receipts from x y or z if separately taken into account may affect a's federal_income_tax liability under sec_1362 the status of a as an s_corporation could depend upon the character of a's distributive_share of gross_receipts from x y or z thus pursuant to sec_1_702-1 a must separately take into account its distributive_share of the gross_receipts from x y and z the character of the partnership receipts for a will be the same as the character of the partnership receipts for x y and z based solely on the facts as represented we rule as follows a's distributive_share of gross_receipts from x y and z will be included in a's gross_receipts for the purpose of applying the passive_investment_income limitations of sec_1362 and sec_1375 a's distributive_share of gross_receipts attributable to x’s crude_oil and petroleum businesses y’s crude_oil businesses and z’s chemical businesses will not constitute passive_investment_income under sec_1362 and sec_1375 a's rental income from p1 and p2 is not passive_investment_income under sec_1362 and sec_1375 except as specifically set forth above no opinion is expressed as to the federal tax consequences of the above-described facts specifically we express no opinion on whether a's distributive_share determined in accordance with the partnership agreements of x y or z will be respected under sec_704 or whether x y or z meet the requirements of sec_7704 or g in addition we express no opinion plr-107939-99 regarding a’s status as an s_corporation under sec_1362 nor do we comment on the amount of gross revenue that constitutes rental income for purposes of sec_1362 and sec_1375 further the passive_investment_income rules of sec_1362 are completely independent of the passive_activity rules of sec_469 unless an exception under sec_469 applies the rental_activity and the crude_oil petroleum and chemical activities of x y and z remain passive with respect to a for purposes of sec_469 this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this ruling is being sent to a sincerely donna m young senior technician reviewer branch office of the assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number ------------------- --------------------------- --------------------------------- ---------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------------- --- id no ------------------ telephone number ---------------------- refer reply to cc corp plr-112300-19 date date legend llc ------------------------------------------------------------ ------------------------------------------------------------- s_corporation -------------------------- ------------------------ purchaser ------------------------------------------------------------ --------------------------------------------------- state a state b ------------- ------- shareholder ------------------------------------------- ------------------------------------------------------------ --------------------------------------------------------------------------------- date date date ---------------------- ---------------------- -------------------- company officials ---------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- ------------------- plr-112300-19 -------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- ---------------------- tax professionals ------------------------------------------------------ -------------------------------------------------- ------------------------------------ ------------------------------------------------- -------------------------------------------------- ---------------------------------- dear -------------- this letter responds to a letter dated date submitted on behalf of llc as successor of s_corporation and joined by purchaser and shareholder collectively the parties requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to make an election additional information was submitted subsequently the parties are requesting an extension of time to file an election statement under sec_1_336-2 the election statement with respect to shareholder’s disposition of all of the outstanding_stock of s_corporation on date the material information submitted is summarized below on date purchaser a state a limited_liability_company that is taxed as a partnership for federal_income_tax purposes acquired all of the stock of s_corporation a state b corporation that elected to be treated as an s_corporation for federal_income_tax purposes from shareholder the disposition it has been represented that the disposition qualified as a qualified_stock_disposition as defined in sec_1_336-1 on date s_corporation converted to a state b limited_liability_company llc for federal_income_tax purposes llc is disregarded as an entity separate from its owner purchaser prior to date the due_date for s corporation's tax_return for the taxable_year that included date s_corporation purchaser and shareholder entered into a written binding agreement providing that a sec_336 election would be made with respect to the disposition however for various reasons the election statement was not timely filed subsequently a request was submitted under sec_301_9100-3 of the procedure and administration regulations for an extension of time to file the election statement it has been represented that none of the parties is seeking to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 plr-112300-19 regulations promulgated under sec_336 permit certain_sales exchanges or distributions of stock of a corporation to be treated as asset dispositions if i the disposition is a qualified_stock_disposition as defined in sec_1_336-1 and ii a sec_336 election is made sec_1_336-2 provides that a sec_336 election for an s_corporation target is made by completing the following requirements i all of the s_corporation shareholders including those who do not dispose_of any stock in the qualified_stock_disposition and the s_corporation target must enter into a written binding agreement on or before the due_date including extensions of the federal_income_tax return of the s_corporation target for the taxable_year that includes the disposition date to make a sec_336 election ii the s_corporation target must retain a copy of the written_agreement and iii the s_corporation target must attach the sec_336 election statement described in sec_1_336-2 and to its timely filed including extensions federal_income_tax return for the taxable_year that includes the disposition date under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 the time for filing the election statement is fixed by the regulations sec_1_336-2 therefore the commissioner has discretionary authority under sec_301_9100-3 to grant an extension of time to file the election statement provided the parties acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief would not prejudice the interests of the government information affidavits and representations submitted by the parties company officials and tax professionals explain the circumstances that resulted in the failure to timely file the election statement the information establishes that the request for relief was filed before the failure_to_file the election statement was discovered by the internal_revenue_service see sec_301_9100-3 based on the facts and information submitted including the representations made we conclude that the parties have acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the plr-112300-19 interests of the government accordingly an extension of time is granted under sec_301_9100-3 until days from the date on this letter to file the election statement within days of the date on this letter llc as successor of s_corporation must file the election statement in accordance with sec_1_336-2 the election statement must be attached to s corporation’s tax_return for the taxable_year including date in addition a copy of this letter must be attached to s corporation’s return alternatively if s_corporation files its return electronically it may satisfy the requirement of attaching a copy of this letter to the return by attaching a statement to its return that provides the date on this letter and control number plr-112300-19 of this letter_ruling within days of the date on this letter all relevant parties must file or amend as applicable all returns and amended returns if any necessary to report the transaction consistently with the making of a sec_336 election for the taxable_year in which the transaction was consummated and for any other affected_taxable_year the above extension of time is conditioned on all relevant parties’ tax_liabilities if any being not lower in the aggregate for all years to which the sec_336 election applies than it would have been if the election statement had been timely filed taking into account the time_value_of_money no opinion is expressed as to the relevant parties’ tax_liabilities for the years involved a determination thereof will be made by the applicable director’s office upon audit of the federal_income_tax returns involved we express no opinion as to whether the disposition qualifies as a qualified_stock_disposition or any other tax consequences arising from the sec_336 election in addition we express no opinion as to the tax consequences of filing the return or election statement late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or resulting from filing the election statement late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-3 we have relied on certain statements and representations made by the parties company officials and tax professionals however the director should verify all essential facts in addition notwithstanding that an extension is granted under sec_301_9100-3 to file the election statement penalties and interest that would otherwise be applicable if any continue to apply this letter_ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent plr-112300-19 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 t ian russell chief branch office of associate chief_counsel corporate cc


t c memo united_states tax_court paul b dietsche petitioner v commissioner of internal revenue respondent docket no filed date larry d harvey for petitioner randall l preheim for respondent memorandum opinion vasquez judge this case is before the court on respondent’s motion for summary_judgment pursuant to rule unless otherwise indicated all rule references are to the tax_court rules_of_practice and procedure and all section references are to the internal_revenue_code in effect for the year in issue after a concession the sole issue for decision is whether petitioner can exclude from income wages earned during from working in antarctica background at the time he filed the petition petitioner resided in lena wisconsin during petitioner performed services at mcmurdo station in ross island antarctica on hi sec_2002 federal_income_tax return petitioner excluded wage income earned and received during for services performed in antarctica i summary_judgment discussion rule a provides that either party may move for summary_judgment upon all or any part of the legal issues in controversy full or partial summary_judgment may be granted only if it is demonstrated that no genuine issue exists as to any material fact and that the legal issues presented by the motion may be decided as a matter of law see rule b 98_tc_518 affd 17_f3d_965 7th cir we conclude that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law respondent concedes that no penalty pursuant to sec_6662 is due from petitioner for ii in general sec_61 provides that gross_income means all income from whatever source derived accordingly citizens of the united_states generally are taxed on income earned outside the geographical boundaries of the united_states unless the income is specifically excluded from gross_income 117_tc_95 affd sub nom 68_fedappx_44 9th cir affd sub nom 357_f3d_1108 10th cir exclusions from income are construed narrowly and taxpayers must bring themselves within the clear scope of the exclusion id iii sec_911 in 126_tc_89 473_f3d_790 7th cir arnett ii we addressed the arguments made by the parties herein regarding sec_911 the u s court_of_appeals for the seventh circuit to which an appeal of the case herein apparently lies agreed with our analysis of sec_911 and affirmed our conclusion that antarctica is not a foreign_country pursuant to sec_911 and the regulations thereunder arnett v commissioner f 3d pincite we shall not repeat our analysis from arnett i herein we follow our analysis and holding in arnett i and the analysis and holding of the court_of_appeals in arnett ii to which an appeal of the case herein apparently lies iv conclusion accordingly for the reasons stated in arnett i arnett ii and herein we conclude that petitioner cannot exclude from gross_income wages earned during and from working in antarctica to reflect the foregoing an appropriate order and decision will be entered


department of the treasury internal_revenue_service washington d c date sep employer_identification_number contact person id number telephone number sin sdollar_figure-o3 by dear applicant this is in response to your representative's letter of date requesting two rulings with respect to the sale of a painting by the club the club is a social and recreational club exempt from federal_income_tax pursuant to sec_501 of the internal_revenue_code its facilities consist of a furnished brick building with dining facilities and sleeping quarters situated on a lot with small lawn and an adjacent building housing squash courts and exercise equipment among the assets of the club is a painting received as a bequest in since that date the painting has been prominently displayed in the club's smail dining room the club contends that the painting is an important part of its exempt_function because it enhances a room where exempt_activities take place the club is not in the business of selling art nor is it an investor in art the club has never sold any other artwork in the club received an offer from an unrelated third party to purchase the painting which had substantially appreciated in value at that time the club aly was advised by its insurance carrier to increase the coverage of the painting to the appraised value of the painting due to concerns about the adequacy of the security protection at the club the insurance carrier also recommended that the painting be removed to a more secure location and membership determined that the club could not afford the expense of adequate security and removing the painting to a safer location would mean removing it from the club premises and putting it in storage in light of these factors the club determined to seil the painting and use the proceeds in furtherance of the club's exempt_purpose the painting was sold to an unrelated third party the club's board_of directors the club has requested the following rulings the painting is property used directly in the performance of the club's exempt_function such that the gain on the sale is excluded from tax by sec_512 of the code provided that the sales proceeds are spent entirely on property to be used in the performance of the club’s exempt_function within the period beginning one year before the date of the sale and ending three years after such date the sale of the painting will not adversely affect the club's exemption from tax as an organization described in sec_501 of the code sec_511 of the code imposes a tax on the unrelated_business_income of an organization described in sec_501 of the code sec_512 of the code provides that in the case of an organization described in sec_501 the term unrelated_business_taxable_income means the gross_income excluding any exempt_function_income less the deductions allowed by this chapter which are directly connected with the production of the gross_income excluding exempt_function_income both computed with the modifications provided in paragraphs of subsection b and sec_512 of the code provides that if property used directly in the performance of the exempt_function of an organization described in sec_501 is sold by such an organization and within a period beginning one year before the date of such sale and ending three years after such date other_property is purchased and used by such organization directly in the performance of its exempt_function gain if any from such sale shall be recognized only to the extent that such organization’s sales_price of the old property exceeds the organization's cost of purchasing the other_property the painting in question hung for many years in the club's main dining room which was named for it performance of the club's exempt_function the club received the painting as a its use in this way constitutes use directly in the ol bequest for the use and enjoyment of its members and not as an investment there is no evidence that the club is in the business of buying or selling works_of_art the gain on the sale of the painting therefore qualifies for exclusion under sec_512 of the code assuming that the proceeds are used to purchaseother property used by the ciub directly in the performance of its exempt_function within the specified time period sec_501 of the code provides for the exemption from federal_income_tax of clubs organized and operated for pleasure recreation and other nonprofitable purposes substantially_all of the activities of which are for such purposes and no part of the net_earnings of which inures to the benefit of any private shareholder sec_501 was amended by public law to provide that sec_501 organizations could receive some outside income without losing their exempt status senate report no 2d session 1976_2_cb_597 at page explains that a social_club is permitted to receive up to percent of its gross_receipts including investment_income from sources outside its membership without losing its tax-exempt status however where a club receives unusual amount of income such as from the sale of its clubhouse or similar facility that income is not to be included in the formula that is such unusual income is not to be included in the gross_receipts of the club for purposes of the permitted percent allowance the senate report quoted above states that unusual amounts of income are to be excluded from both the numerator and the denominator for purposes of determining whether the limit has been exceeded the only example given is income from the sale of a clubhouse or similar facility as noted before the club is not in the business of buying and selling art it has never sold another painting and does not expect to sell any in the future furthermore since as discussed before the painting was used directly in the performance of the club's exempt_function its sale is similar to the sale of the clubhouse or similar facility referred to in the legislative_history the proceeds of the sale are therefore excluded from both the numerator and denominator for purposes of determining whether the limit has been exceeded the sale will therefore not adversely affect the club's exemption from tax based on the application of the above principles to the facts presented in your ruling_request we rule as follows the painting is property used directly in the performance of the club's exempt_function therefore the gain on the sale is excluded from tax by sec_512 of the code provided that the sales proceeds are spent entirely on property to be used in the club's exempt_function within the period beginning one year before the date of the sale and ending three years after such date ove the sale of the painting will not adversely affect the club’s exemption from tax as an organization described in sec_501 of the code these rulings are based on the understanding that there will be no material changes in the facts upon which they are based any changes that may have bearing on your tax status should be reported to the service we are sending a copy of this ruling to the te eg key district_office because this letter could help resolve any questions about your exempt status you should keep it with your permanent records if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter this ruling is directed only to the organization that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent sincerely yours gerald v sack manager exempt_organizations technical group dod


o f f i c e o f t h e c h i e f c o u n s e l department of the treasury i n t e r n a l r e v e n u e s e r v i c e w a s h i n g t o n d c date ------------------------------------- number info release date conex-135309-09 uil the honorable todd platts member u s house of representative sec_2209 east market street york pa attention ------------------ dear congressman platts this letter responds to your enquiry dated date submitted on behalf of a constituent who requested information about the first-time_homebuyer credit specifically your constituent asked if he can take the first-time_homebuyer credit for the purchase of a two-dwelling unit home duplex we understand that the constituent intends to live in one dwelling_unit and rent out the other dwelling_unit generally sec_36 of the internal_revenue_code provides for a refundable_credit to first-time homebuyers for the purchase of a principal_residence for residences purchased in the amount of the credit is ten percent of the purchase_price of the residence up to a maximum credit of dollar_figure for purposes of sec_36 the term principal_residence has the same meaning as in sec_121 a principal_residence may be a house a houseboat a house trailer a mobile home a cooperative apartment or a condominium if a taxpayer owns property and uses part of the property as his principal_residence and uses a separate part to produce rental income the taxpayer must allocate the purchase_price of the property between the residential part and the rental part for example if a taxpayer owns a duplex and lives in one dwelling_unit and rents out the other separate dwelling_unit the taxpayer must allocate the purchase_price of the property between the dwelling units see page sec_3 and of publication selling your home enclosed accordingly a taxpayer can take the first-time_homebuyer credit only for the portion of the purchase_price of the property allocable to the taxpayer’s dwelling_unit and not for the entire purchase_price of the property conex-135309-09 i hope this information is helpful if you have any questions on the first-time_homebuyer credit please contact -----------------------------at --------------------- sincerely george j blaine associate chief_counsel income_tax and accounting enclosure