internal_revenue_service number release date index number ------------------------ ---------------------------------- -------------------- -------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-123703-13 date date legend x ---------------------------------- ----------------------------------------------------------- a ------------------------ ------------------------------------------------------------ state date year ---------------- ------------------- ------- dear ------------------ this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x by its authorized representative requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_754 of the internal_revenue_code facts based on the materials submitted on behalf of x we understand the relevant facts to be as follows x was formed as a limited_partnership under the laws of state x is treated as a partnership for federal tax purposes a a partner of x died on date x inadvertently failed to timely make an election under sec_754 for the year of a’s death plr-123703-13 x represents that it has acted reasonably and in good_faith that granting relief will not prejudice the interests of the government and that it is not using hindsight in making the election x further represents that it has filed returns for year and all subsequent years consistent with the election law and analysis sec_754 provides that if a partnership files an election in accordance with regulations prescribed by the secretary the basis of partnership property shall be adjusted in the case of a transfer of a partnership_interest in the manner provided in sec_743 such an election shall apply with respect to all distributions of property by the partnership and to all transfers of interest in the partnership during the taxable_year with respect to which the election was filed and all subsequent tax years sec_1_754-1 of the income_tax regulations provides that an election under sec_754 to adjust the basis of partnership property under sec_734 and sec_743 with respect to a distribution_of_property to a partner or a transfer of an interest in a partnership shall be made in a written_statement filed with the partnership return for the taxable_year during which the distribution or transfer occurs for the election to be valid the return must be filed not later than the time prescribed by sec_1 e including extensions thereof for filing the return for that taxable_year under sec_301_9100-1 the commissioner may 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 code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose deadline is prescribed by a regulation published in the federal_register sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based solely upon the information submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied plr-123703-13 as a result x is granted an extension of time of days following the date of this letter to make an election under sec_754 effective for its year taxable_year and thereafter the election should be made in a written_statement filed with the appropriate service_center a copy of this letter should be attached to the sec_754 election a copy is enclosed for that purpose except as expressly set forth above no opinion is expressed or implied concerning the federal tax consequences of the facts discussed above under any other provision of the code specifically we express no opinion as to whether or not x is a partnership for federal tax purposes this ruling is directed only to the taxpayers requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely laura c fields laura c fields senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service number release date index number ----------------------------- ------------------------------------ --------------------------------------------------- --------------------- ---------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ----------------- telephone number ------------------- refer reply to cc psi b3 plr-136727-08 date date legend legend x a b --------------------------------------------------------------------------------------------------- ------------------------- --------------------------------------------------------------------------------------------------- ------------------------- --------------------------------------------------------------------------------------------------- ------------------------- state ------------- date --------------------------- date -------------------------- dear ------------------ this letter responds to a letter dated date and subsequent correspondence written on behalf of x requesting a ruling under sec_301_9100-3 of the procedure and administration regulations facts the information submitted provides that x was organized on date as a state law limited_liability_company x is wholly-owned by a and x and a are members of b’s affiliated_group x requests an extension of time to elect to be classified as a disregarded_entity effective date plr-136727-08 law and analysis sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides in part that except as provided in sec_301_7701-3 unless the entity elects otherwise a domestic eligible_entity is a a partnership if it has two or more members or b disregarded as an entity separate from its owner if it has a single member sec_301_7701-3 provides in part that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 or to change its classification by filing form_8832 entity classification election with the service_center designated on form_8832 sec_301_7701-3 provides that an election made under sec_301 c i will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed if an election specifies an effective date more than days prior to the date on which the election is filed it will be effective days prior to the date it was filed sec_301_9100-1 provides that the commissioner in exercising the commissioner’s discretion 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 not more than 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_9100-2 provides the standards the commissioner will use to determine whether to grant an automatic_extension of time for making certain elections sec_301_9100-3 provides the guidelines for granting extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301 a provides that requests for relief subject_to sec_301_9100-3 will be granted when the plr-136727-08 taxpayer provides evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based solely on the facts submitted and the representations made we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 as a result we grant x an extension of sixty days from the date of this letter to file a properly executed form_8832 with the appropriate service_center to elect to be classified as a disregarded_entity effective date a copy of this letter should be attached to the form_8832 except as specifically set forth above we express no opinion concerning the federal tax consequences of the above described facts under any other provision of the internal_revenue_code we are directing the ruling only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office we are sending a copy of this letter to x’s authorized representative sincerely s curtis g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


department of the treasury internal_revenue_service p o box irs cincinnati oh release number release date uil code date employer id number contact person id number contact telephone number form you must file tax years dear this letter is our final_determination that you don’t qualify for tax-exempt status under sec_501 of the internal_revenue_code the code recently we sent you a proposed adverse determination in response to your application the proposed adverse determination explained the facts law and basis for our conclusion and it gave you days to file a protest because we didn’t receive a protest within the required days the proposed determination is now final because you don’t qualify as a tax-exempt_organization under sec_501 of the code donors can’t deduct contributions to you under sec_170 of the code you must file federal_income_tax returns for the tax years listed at the top of this letter using the required form also listed at the top of this letter within days of this letter unless you request an extension of time to file we’ll make this final adverse determination_letter and the proposed adverse determination_letter available for public inspection as required under sec_6110 of the code after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions follow the instructions in the notice on how to notify us if you agree with our deletions you don’t need to take any further action we'll also notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed determination_letter under sec_6104 of the code you should contact your state officials if you have questions about how this determination will affect your state responsibilities and requirements letter rev catalog number 47632s if you have questions about this letter you can contact the person listed at the top of this letter if you have questions about your federal_income_tax status and responsibilities call our customer service number pincite-829-1040 tty for deaf or hard of hearing or customer service for businesses pincite-829-4933 sincerely director exempt_organizations enclosures notice redacted letter proposed adverse determination under sec_501 redacted letter final adverse determination under sec_501 - no protest letter rev catalog number 47632s department of the treasury internal_revenue_service cincinnati oh legend b individual c director trustee d director trustee o state q date dear date employer id number contact person id number contact telephone number contact fax number uil we considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code the code based on the information provided we determined that you don’t qualify for exemption under sec_501 of the code this letter explains the basis for our conclusion please keep it for your records issues do you qualify for exemption under sec_501 of the code no for the reasons described below facts you were incorporated under the laws of the state of o on q per your initial articles of incorporation you were formed for the following purposes e this non-profit corporation is formed specifically for health and educational financial assistance for b all funds received will be used for his treatment education and therapies for his medical ailment condition of autism c and d are your only two directors trustees they are the parents of b you state there will be no compensation to any directors as they are the parents of the child needing non-profit assistance you state that a conflict of interest policy is not applicable in your case since the wellness of the child is in both of the parents’ interest letter rev catalog number 47630w b receives individual services paid for by you individual services that b receives funds for include in-home speech therapy sessions private behavioral institute and educational_services sometimes at home and other learning and assistive devices you receive funding through solicitations you mail and email solicitation letters describing you and the ailment condition of b you also make personal solicitations through verbal requests for funds for the ailment condition of b law sec_501 of the code provides in relevant part exemption from federal_income_tax for corporations and any community chest fund or foundation organized and operated exclusively for religious charitable scientific literary or educational_purposes no part of the net_earnings inure to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 of the regulations provides that an organization is organized exclusively for one or more exempt purposes only if its articles of organization a limit the purposes of such organization to one or more exempt purposes and b do not expressly empower the organization engage otherwise than as an insubstantial part of its activities in activities that in themselves are not in furtherance of one or more exempt purposes sec_1_501_c_3_-1 of the regulations explains that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 of regulations explains the prohibition against private_inurement as follows an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private individuals sec_1_501_c_3_-1 of the regulations states that an organization is not organized or operated exclusively for exempt purposes unless it serves a public rather than a private interest it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests revrul_67_367 1967_2_cb_188 states that a nonprofit organization whose sole activity is the operation of a scholarship plan for making payments to pre-selected specifically named individuals does not qualify for exemption from federal_income_tax under sec_501 of the internal_revenue_code of in 325_us_844 the court held that the presence of a single non-exempt purpose if substantial in nature will destroy a claim for exemption regardless of the number or importance of truly exempt_purpose in wendy l parker rehabilitation foundation inc petitioner v commissioner tcmemo_1986_348 the tax_court upheld the service’s position that a foundation formed to aid coma victims including a family_member of the founders was not entitled to recognition of exemption approximately of the organization’s net_income was expected to be distributed to aid the family coma victim the court found that the family coma victim was a substantial beneficiary of the foundation’s activities letter rev catalog number 47630w in easter house v united_states cl_ct citing sec_1_501_c_3_-1 of the regulations affd without opinion 846_f2d_78 fed cir that an organization is not operated exclusively for exempt purposes if it serves a private rather than a public interest application of law sec_501 of the code sets forth two main tests for qualification for exempt status an organization must be both organized and operated exclusively for purposes described in sec_501 the articles of incorporation you provided states you were formed for the benefit of b as a result you have not satisfied the organizational_test required by sections sec_1_501_c_3_-1 of the regulations in addition you do not meet the requirements of sec_1_501_c_3_-1 of the regulations which requires you to engage primarily in activities which accomplish one or more exempt purposes since you are operating for the substantial private benefit of b you are not operating exclusively for charitable purposes all financial records provided by you show that substantially_all your funds are paid out for the benefit of b you provide a substantial private benefit to b you are not operated exclusively for one or more exempt purposes as set forth in sec_1_501_c_3_-1 of the regulations because your net_earnings inure in whole or in part to the benefit of private individuals the facts show that your operations have and will continue to result in a substantial private benefit to b which precludes exemption under c you are not organized and operated for exempt purposes as set forth in sec_1_501_c_3_-1gi of the regulations the language in your articles of incorporation shows you were formed with the intent of providing benefits for a designated individual b your solicitations for funding states you are a fund for b to date funds have only been provided to b this shows that your formation and operations are primarily for the private benefit of b and your activities fulfill a substantial non-exempt purpose which precludes exemption you are similar to the organization in revrul_67_367 because your sole activity is making payments to a pre- selected specifically named individual you serve the private interests of b rather than public interests you are like the organization in 326_us_279 in that you are not operated exclusively for exempt purposes your purposes include substantially furthering the private interests of b like the organization in this court case and easter house supra this single nonexempt purpose destroys your claim for exemption under sec_501 of the code similar to wendy l parker rehabilitation foundation inc petitioner v commissioner of internal revenue a substantial amount of your funds will be expended for the benefit of b you were created by the family of b and your board consists of c and d who are the parents of b in addition b was pre-selected as the sole recipient of funds throughout your formation as evidenced by your name articles of incorporation and financial records these facts show that your operations result in a substantial private benefit b which precludes exemption under c conclusion based on the facts presented above you have failed both the operational_test and the organizational_test required of c organizations your organizational document shows you were created for the substantial private benefit of b your operations show that you have operated for b’s private benefit since formation rather than for public purposes therefore we are unable to determine that you qualify for exemption under sec_501 of the code letter rev catalog number 47630w if you don’t agree you have a right to file a protest if you don’t agree with our proposed adverse determination to do so you must send a statement to us within days of the date of this letter the statement must include e e e e e e your name address employer_identification_number ein and a daytime phone number acopy of this letter highlighting the findings you disagree with anexplanation of why you disagree including any supporting documents the law or authority if any you are relying on the signature of an officer director trustee or other official who is authorized to sign for the organization or your authorized representative one of the following declarations for an officer director trustee or other official who is authorized to sign for the organization under penalties of perjury i declare that i examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete for authorized representatives under penalties of perjury i declare that i prepared this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete your representative attorney certified_public_accountant or other individual enrolled to practice_before_the_irs must file a form_2848 power_of_attorney and declaration of representative with us if he or she hasn’t already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney we’ll review your protest statement and decide if you provided a basis for us to reconsider our determination if so we’ll continue to process your case considering the information you provided if you haven’t provided a basis for reconsideration we’ll forward your case to the office of appeals and notify you you can find more information about the role of the appeals_office in publication how to appeal an irs decision on tax-exempt status if you don’t file a protest within days you can’t seek a declaratory_judgment in court at a later date because the law requires that you use the irs administrative process first sec_7428 of the code where to send your protest please send your protest statement form_2848 if needed and any supporting documents to the applicable address letter rev catalog number 47630w u s mail street address for delivery service internal_revenue_service eo determinations quality assurance internal_revenue_service eo determinations quality assurance you can also fax your statement and supporting documents to the fax number listed at the top of this letter if you fax your statement please contact the person listed at the top of this letter to confirm that he or she received it if you agree if you agree with our proposed adverse determination you don’t need to do anything if we don’t hear from you within days we’ll issue a final adverse determination_letter that letter will provide information on your income_tax filing_requirements you can find all forms and publications mentioned in this letter on our website at www irs gov formspubs if you have questions you can contact the person listed at the top of this letter sincerely director exempt_organizations enclosure publication letter rev catalog number 47630w


number release date u i l control no tam-101460-00 cc ita b5 internal_revenue_service national_office technical_advice_memorandum director taxpayer’s name date taxpayer’s address taxpayer’s ein year involved taxpayer product x state product y product z agency agency plant plant agreement dollar_figure dollar_figuredollar_figure dollar_figuredollar_figuredollar_figure date date date date date date date date date date date date date date date date year issues was taxpayer eligible for sec_1033 involuntary_conversion treatment of the settlement proceeds what were the beginning and ending dates for the initial replacement_period for the converted property under sec_1033 what is an appropriate extension of the replacement_period under sec_1033 conclusion sec_1 taxpayer is eligible for sec_1033 involuntary_conversion treatment of the settlement proceeds the beginning of the replacement_period was date and the ending date was two years after the close of taxpayer’s fiscal_year ending on date under the extremely unusual circumstances in this case it is appropriate to grant taxpayer sufficient additional time as may be necessary to purchase product z for consumption in the normal course of its manufacturing operations facts taxpayer is a manufacturer of product x and has manufacturing plants located in state_agency contacted taxpayer and encouraged taxpayer to use product y in its manufacturing process instead of using product z prior to year taxpayer used product z in its manufacturing process taxpayer had on occasion purchased product z from agency taxpayer was interested in using product y as it had a longer life than product z as a result of agency 1’s offer taxpayer expended dollar_figureto convert plant so it could utilize product y in its manufacturing process on date taxpayer executed a lease with agency for product y to be used at plant the lease was for a 10-year period with taxpayer having the option to renew for two additional 10-year periods taxpayer received product y from agency on date and commenced operations with product y on date on date taxpayer applied to agency for renewal of its existing license to possess and use product y and product z on date agency notified taxpayer in writing that depending on the outcome of agency 2’s investigation of the causes of an accident involving product y at another location agency may require taxpayer to return product y to agency agency also suggested that taxpayer consider contingency plans for the removal and replacement of product y on date agency sent a letter to taxpayer indicating that based on information provided by agency and its contractors agency lacked confidence that product y could be safely used in commercial facilities and requested to meet with the taxpayer on date representatives from agency and taxpayer met to discuss the use of product y at taxpayer’s plant at the meeting representatives from agency indicated they had concluded that product y could not be suitably used at taxpayer’s plant in addition the representatives from agency indicated that other companies that were using product y also would have to return it agency stated it wanted all of product y returned by the end of the following year on date agency offered to take back at its expense all of product y from taxpayer on date agency withdrew its approval of the commercial use of product y and mandated the removal of all of taxpayer’s product y on date taxpayer submitted a revised license renewal application to agency to possess and use product y and product z at its state facility taxpayer also requested permission to use product y and product z in a new facility being built at plant agency denied taxpayer’s request to renew its license at taxpayer’s existing plant but allowed taxpayer to continue operating under its old license pending agency 1's removal of product y on date agency granted taxpayer’s license application_for its new facility but only authorized use of product z on date taxpayer filed an administrative claim for breach of contract with agency based on the recall of product y agency 1's decision regarding the claim recited the agency’s position that there had been no breach of taxpayer’s lease and that taxpayer was entitled to recover no more than dollar_figuredollar_figureeven if a breach had taken place as a result of the actions taken by both agencies taxpayer was required to convert plant so that it could use product z and redesign plant which was under construction product y has a much longer useful_life than product z on date in a telephone conference representatives from the taxpayer and agency discussed taxpayer’s failure to allow removal of product y taxpayer indicated it had filed a claim against agency and taxpayer had been unable to arrive at a settlement with agency a representative from agency indicated it would have to consider its options to have product y returned including denying taxpayer’s license renewal and issuing a binding order to return product y finally taxpayer and agency entered into an agreement on date whereby taxpayer agreed to accept dollar_figuredollar_figuredollar_figurein settlement of the claim based on the taking of taxpayer’s property by agency the dollar_figuredollar_figuredollar_figureamount was based on the estimated present_value of the cost of replacing product y with product z purchased periodically over the 20-year term remaining on taxpayer’s lease the physical removal of product y from taxpayer’s facility was delayed until date taxpayer elected to defer the recognition of the gain realized under the agreement as an involuntary_conversion under sec_1033 on its form_1120 for the fiscal_year presently under consideration law sec_1033 of the internal_revenue_code provides that if property as a result of its destruction in whole or in part theft seizure or requisition or condemnation or threat or imminence thereof is compulsorily or involuntarily converted into money and the taxpayer purchases other_property similar_or_related_in_service_or_use to the property converted during the period specified in sec_1033 then the taxpayer may elect to have the gain from the conversion recognized only to the extent that the amount_realized exceeds the cost of the replacement_property sec_1033 states that the replacement_period begins with the date of the disposition_of_the_converted_property or the earliest date of the threat or imminence of requisition or condemnation of the converted property whichever is earlier and ends i years after the close of the first taxable_year in which any part of the gain upon the conversion is realized or ii subject_to such terms and conditions as may be specified by the secretary at the close of such later date as the secretary may designate on application by the taxpayer revrul_63_221 1969_2_cb_332 states that for purposes of sec_1033 of the code a threat_or_imminence_of_condemnation is generally considered to exist when a property owner is informed either orally or in writing by a representative of a governmental body or by a public official authorized to acquire property for public use that such body or official has decided to acquire the property and the property owner has reasonable grounds to believe from the information conveyed to him by such representative or official that the necessary steps to condemn the property will be instituted if a voluntary sale is not arranged revrul_69_303 1969_1_cb_201 holds that a sale of property to a non-profit organization for resale to a u s agency following notification of the agency’s decision to acquire it by condemnation if necessary when funds became available constitutes an involuntary_conversion as a result of threat_or_imminence_of_condemnation revrul_71_567 1971_2_cb_309 holds that the enactment of a public law authorizing acquisition of a property was a sufficient threat_or_imminence_of_condemnation to qualify for treatment under sec_1033 of the code notwithstanding the absence of an actual appropriation of funds necessary to acquire the property revrul_82_147 1982_2_cb_190 involved federal legislation that prohibited the use on a particular lake of motorboats with motors of greater than horsepower this effectively denied the taxpayer the economic use of resort property owned by the taxpayer adjacent to the lake while the taxpayer could have retained possession of its property the service concluded that the property was no longer suitable for commercial use because of the restrictions and thus no longer useful or available to the taxpayer for the property’s originally intended purpose the legislation which gave the taxpayer the choice to keep or to sell the property to the government pursuant to the legislation effectively constituted a taking of the property and the sale of the resort constituted an involuntary_conversion within the meaning of sec_1033 of the code revrul_83_70 1983_1_cb_189 holds that a timely acquired fee simple property interest qualifies under sec_1033 of the code as replacement_property similar_or_related_in_service_or_use to an involuntarily converted 15-year leasehold because the fee property is to be used in the same business and for the identical purposes as the condemned leasehold analysis issue taxpayer argues it should be entitled to defer the recognition of gain under sec_1033 because either agency 1's cancellation of the lease and repossession of product y was a requisition or condemnation of property or the cancellation and repossession was a destruction of the property taxpayer argues that its case is similar to revrul_89_2 1989_1_cb_260 wherein a taxpayer owned property that it used in a trade_or_business and through no fault of the taxpayer dangerous chemicals were released into the property a governmental agency subsequently determined that the property was unsafe for habitation and that the businesses and residents in the area should relocate the service concluded the chemical contamination constituted a destruction within the meaning of sec_1033 because it was a result of an outside force beyond the taxpayer’s control and the property was rendered useless for its intended purpose the courts have interpreted the term requisition or condemnation to mean the taking of property by a governmental authority that has the power to do so against the will of the owner and for_the_use_of the taker a sec_1033 requisition or condemnation is a taking which requires the payment of just compensation under the fifth_amendment 196_fsupp_129 d mass 279_f2d_220 ct_cl a seizure occurs when a governmental authority enters into physical possession of property without authority of a court order with compensation to be determined later this is different from a requisition or condemnation under which the government pays judicially determined compensation before it takes property or it takes property under court order before the amount of compensation had been determined 357_us_17 the word requisition is more often used in reference to the taking of personal_property and the word condemnation to the taking of real_estate 266_f_911 e d s c in taxpayer’s case representatives from agency on date specifically told taxpayer that product y was no longer suitable for use and wanted all of product y returned to agency by the following year since the materials were not returned agency again met with taxpayer taxpayer indicated it had an unsettled claim filed against agency because of the possibility of the taking of product y agency stated it had no interest in the settlement but would have to consider denying taxpayer’s license renewal and issuing a binding order requiring the return of product y the action taken by agency resulted in the property leased by taxpayer under the lease agreement with agency being no longer suitable for commercial use and taxpayer was required to return the property this created a situation similar to that presented in revrul_82_147 product y was no longer suitable for its intended use because agency withdrew its approval for commercial use of the product since taxpayer’s leasehold interest was rendered useless it filed a claim against agency for the loss of its rights under the contract compare 964_f2d_361 5th cir affg tcmemo_1991_15 court denied sec_1033 non-recognition of gain for fire insurance proceeds received for destruction of improvements to leased property to the extent proceeds were reinvested in replacement_property for the leasehold interest leasehold interest itself was not involuntarily converted because it remained available for its intended use by repairing damage to the improvements agency entered into the agreement with taxpayer which eventually terminated taxpayer’s rights under the original lease agreement in considering all the facts in this case and the actions taken by agency and agency we conclude that taxpayer’s leasehold interest under the agreement with agency was requisitioned and involuntarily converted under sec_1033 of the code issue what were the beginning and ending dates for the initial replacement_period for the converted property under sec_1033 taxpayer argues that although it received the settlement proceeds on date the last day of its fiscal_year product y was not removed until date taxpayer views this as the date of disposition of product y and argues that the replacement_period did not begin until that date it is clear under the statute that the replacement_period begins at the earlier of the date of disposition_of_the_converted_property or the earliest date of the threat_or_imminence_of_condemnation or requisition of the property thus we believe that the replacement_period began on date when taxpayer was advised by agency that product y was no longer suitable for commercial use under sec_1033 the replacement_period end sec_2 years after the close of the first taxable_year in which any part of the gain upon the conversion is realized as an accrual_method taxpayer taxpayer’s right to the dollar_figuredollar_figuredollar_figurepayment from agency became fixed on date the date on which the agreement was entered into accordingly the initial replacement_period ended years after the close of taxpayer’s fiscal_year ending on date what is an appropriate extension of the replacement_period under sec_1033 before the end of the initial replacement_period taxpayer requested an extension of the period pursuant to sec_1_1033_a_-2 that section provides that extensions shall be granted only if a taxpayer can show reasonable_cause for not being able to replace the converted property within the required period of time taxpayer’s facilities have been converted and or designed for use of product z in its manufacturing operations agency has approved taxpayer’s use of product z because of its useful_life product z cannot be purchased in advance of the period in which it must be consumed or it becomes useless at any given point in time the cost of the quantity of product z required by taxpayer in the normal course of its manufacturing operations is significantly less than the dollar_figuredollar_figuredollar_figurerealized under the agreement under these extremely unusual circumstances we believe that taxpayer has demonstrated reasonable_cause for not being able to replace the converted property within the required period of time accordingly we believe it is appropriate in this case to grant taxpayer sufficient additional time as may be necessary to purchase product z1 for consumption in the normal course of its manufacturing operations we agree with taxpayer’s proposal to use a detailed schedule of projected future purchases of product z and periodically review those purchases in connection with the approval of consecutive extensions the length of any particular extension can be determined by mutual agreement between taxpayer and the appropriate field official although not addressed in the request for technical_advice we note that the purchase of product z as replacement_property for taxpayer’s leasehold interest in product y appears to be the purchase of qualifying replacement_property under the rationale of revrul_83_70 1983_1_cb_189 which holds that a fee simple property interest qualifies as replacement_property similar_or_related_in_service_or_use to an involuntarily converted 15-year leasehold interest when the fee property is used by the taxpayer in the same business and for identical purposes as the converted leasehold caveat a copy of this technical_advice_memorandum is to be given to taxpayer sec_6110 provides that it may not be used or cited as precedent george wright


internal_revenue_service department of the treasury washington dc so22e2 o a uiccs contact person telephone number in reference to tepra t3 1d may _ legend taxpayer a taxpayer b taxpayer c taxpayer d date date date date date date date date trust x ira y company z subtrust a eee state b dear ms this is in response to the representative on your behalf in which you request a series of letter rulings under sec_401 of the internal_revenue_code the following facts and representations support your ruling requests letter submitted by your authorized taxpayer a maintained ira y an individual_retirement_arrangement which your authorized representative asserts was qualified within the meaning of code sec_408 with company z taxpayer a’s date of birth was date thus he attained age on date asa result his code sec_401 required_beginning_date was date taxpayer a was married to taxpayer b however taxpayer b died on date on date taxpayer a created trust x on or about date taxpayer a named trust x as the beneficiary of his ira y taxpayer a did not change his ira y beneficiary designation prior to his death on or about date taxpayer a named trust x as the beneficiary of his ira y taxpayer a did not change his ira y beneficiary designation prior to his death taxpayer a died on date which was after his code sec_401 required_beginning_date at the time of his death taxpayer a was receiving required distributions from his ira y over his recalculated single life expectancy your authorized representative asserts on your behalf that within two weeks of the date of taxpayer a’s death the trustee of trust x served a copy of the trust x document on company z taxpayer a was survived by his two children taxpayers c and d taxpayer c’s date of birth was date and taxpayer d’s date of birth was date thus taxpayer d is older than taxpayer c the primary beneficiary of taxpayer a’s trust x was taxpayer b however as noted above taxpayer b predeceased taxpayer a furthermore taxpayer b died prior to taxpayer a’s code sec_401 required_beginning_date according to the terms of trust x in the event that taxpayer b did not survive taxpayer a the assets of trust x are payable in equal shares to the children of taxpayer a who are living at the time of taxpayer a’s death page paragraph second f of trust x provides in relevant part that if the settlor’s spouse does not survive the settlor the balance of the trust estate described in paragraph second c shall be transferred to subtrust a of trust x and held administered and disposed of in accordance with the provisions of paragraph fourth of trust x pursuant to the above the proceeds of ira y payable to trust x were transferred to subtrust a paragraph fourth c of trust x provides in pertinent part that upon the death of the settlor and the settlor’s spouse subtrust a shall terminate and the trustee of trust x shall divide the remaining principal and income of subtrust a into equal shares one share for each child of the settlor then surviving each such share shall forthwith be paid over to such child free and discharged from the trusts hereof paragraph ninth of trust x provides in pertinent part that taxpayer a had the sole power_to_revoke trust x at the time of his death taxpayer a was a resident of state b state b consolidated laws section provides in pertinent part that an individual_retirement_account or individual_retirement_annuity defined in sec_408 or sec_408 of the internal_revenue_code_of_1986 and the payments or distributions from such account or annuity shall be exempt from levy and sale under any execution your authorized representative has asserted that pursuant to this section of the state b statutes iras are exempt from creditors based on the above facts and representations you through your authorized representative request the following letter rulings that taxpayer a timely designated taxpayer d as a beneficiary of his ira y that taxpayer a timely designated taxpayer c as a beneficiary of his ira y _ that with respect to ira y in determining code sec_401 minimum required distributions commencing in the calendar_year following the calendar_year of taxpayer a’s death taxpayer d may use the remaining term-certain life expectancy of taxpayer d since she is the elder of taxpayers c and d reduced by one for each calendar_year thereafter _ that with respect to ira y taxpayer a’s use of his single life expectancy recalculated to determine minimum required distributions during his od2 page lifetime does not preclude the use of the remaining term-certain life expectancy of taxpayer d the older of taxpayers c and d reduced by one for each calendar_year for purposes of computing minimum required distributions for calendar years commencing with calendar_year _ that taxpayer d as a beneficiary of trust x the beneficiary of ira y may direct that her portion of the trust x assets which consists of her interest in ira y be transferred by means of a trustee-to-trustee transfer into another ira set up and maintained in the name of taxpayer a for the benefit of taxpayer d beneficiary thereof that trust x’s being the named beneficiary of taxpayer a’s ira y at the death of taxpayer a does not preclude the service’s issuing favorable responses to letter_ruling requests through above and _ that trust x’s being the named beneficiary of taxpayer a’s ira y at the death of taxpayer a does not preclude minimum required distributions from ira y or a transferee ira thereof set up in the name of taxpayer a for the benefit of taxpayer d being made directly to taxpayer d after trust x is terminated over taxpayer d’s life expectancy with respect to your ruling requests sec_408 of the code provides that under regulations prescribed by the secretary rules similar to the rules of sec_401 a and the incidental death_benefit requirements of sec_401 shall apply to the distribution of the entire_interest of an individual for whose benefit the ira trust is maintained code sec_401 provides in general that a_trust will not be considered qualified unless the plan provides that the entire_interest of each employee- i will be distributed to such employee not later than the required_beginning_date or ii will be distributed beginning not later than the required_beginning_date over the life of such employee or over the lives of such employee and a designated_beneficiary or over a period not extending beyond the life expectancy of such employee and a designated_beneficiary sec_401 of the code provides in relevant part that for purposes of this paragraph the term required_beginning_date means april of the calendar_year following the calendar_year in which the employee ira holder attains age lee page code sec_401 provides that where distributions have begun over life expectancy cies in accordance with subparagraph a ii a_trust shall not constitute a qualified_trust under this section unless the plan provides that if the employee dies before his entire_interest has been distributed to him the remaining portion of such interest will be distributed at least as rapidly as under the method of distribution being used under subparagraph a ii as of the date of death sec_401 -1 of the proposed income_tax regulations question and answer d-3 provided that for purposes of calculating the distribution period for distributions that begin prior to death the designated_beneficiary will be determined as of the plan participant’s ira holder’s required_beginning_date sec_401 -1 of the proposed_regulations q a e-5 a provided in general that if more than one individual is designated as a beneficiary with respect to an employee ira holder as of the applicable_date for determining the designated_beneficiary the designated_beneficiary with the shortest life expectancy will be the designated_beneficiary for purposes of determining the code sec_401 distribution period sec_401 -1 of the proposed_regulations q a f-1 a provided that where an employee’s benefit is in the form of an individual_account and is to be distributed over a period not extending beyond the life expectancy of the employee or the joint life and last survivor expectancy of the employee and his designated_beneficiary the amount required to be distributed for each calendar_year beginning with the first calendar_year for which distributions are required and for each succeeding calendar_year must be at least equal to the quotient obtained by dividing the employee’s benefit by the applicable life expectancy sec_1_401_a_9_-1 of the proposed_regulations q a f-1 d provided that the term applicable life expectancy means the life expectancy or the joint and last survivor expectancy determined in accordance with e-1 through e-5 of the proposed_regulations reduced by one for each calendar_year which has elapsed since the date on which the life expectancy or joint and last survivor expectancy was calculated however pursuant to e-6 through e-8 life expectancy is recalculated the applicable life expectancy will be the life expectancy so recalculated sec_1_401_a_9_-1 of the proposed_regulations q a e-6 provided in general that the life expectancy of a designated_beneficiary may be recalculated if the desi ignated beneficiary is the ira holder’s spouse sec_1_401_a_9_-1 of the proposed_regulations q a f-3a provided generally that with respect to individual_account_plans from which distributions have ee’ commenced prior to the employee’s death post death distributions will comply with the at least as rapidly as under the method of distribution being used under sec_401gi rule if said distributions are made in accordance with q a f-1 sec_1_401_a_9_-1 of the proposed_regulations q a e-8 provided in ‘ pertinent part that the life expectancy of a non-spouse beneficiary may not be recalculated q a e-8 also provides in pertinent part that if the life expectancy of either a plan participant ira holder or his beneficiary is being recalculated the recalculated life expectancy is reduced to at the end of the calendar_year following the calendar_year of the ira holder’s or beneficiary’s death sec_1_401_a_9_-1 of the proposed_regulations q a d-2a provided that only individuals may be designated beneficiaries for purposes of sec_401 a person who is not an individual such as the employee's estate may not be a designated_beneficiary however q a d-5 of sec_1_401_a_9_-1 provided that beneficiaries of a_trust with respect to the trust's interest in an employee's benefit may be treated as designated beneficiaries if the following requirements are met the trust is valid under state law or would be but for the fact that there is no corpus the trust is irrevocable or the trust contains language to the effect it becomes irrevocable upon the death of the employee the beneficiaries of the trust who are beneficiaries with tespect to the trust's interest in the employee's benefit are identifiable from the trust instrument the documentation described in d-7 of this section has been provided to the plan_administrator sec_1_401_a_9_-1 of the proposed_regulations q a d-6 provided that in the case in which a_trust is named as the beneficiary of an employee all beneficiaries of the trust with respect to the trust's interest in the employee's benefit are treated as desi ignated beneficiaries of the employee under the plan for purposes of determining the distribution period under sec_401 and iv if the requirements in paragraph a of d-5 above are satisfied as of the date of the employee's death or in the case of the documentation described in d-7 of this section by the end of the ninth month beginning after the employee's death sec_1_401_a_9_-1 of the proposed_regulations q a d-7 provided in general that the plan_administrator be provided with either a list of all trust beneficiaries as of the date of death or with a copy of the trust document for the trust which is named as beneficiary of the plan as of the employee's date of death in general with respect to ded page required distributions which commence after death the necessary documentation must be furnished no later than the end of the ninth month beginning after the death of the employee ira holder with respect to your first and second ruling requests in this case taxpayer a prior to his code sec_401 required_beginning_date named his trust x as the beneficiary of his ira ira y as noted above taxpayer a did not change his beneficiary designations prior to his death the facts of this case summarized above indicate that trust x is a valid trust which became irrevocable at the death of taxpayer a furthermore taxpayers c and d were referenced in trust x as the beneficiaries thereof to take if taxpayer b did not survive taxpayer a taxpayer b who died prior to taxpayer a’s code sec_401 required_beginning_date did not survive taxpayer a finally a copy of trust x has been given to company z the custodian of taxpayer a’s ira y based on the above the service has concluded that trust x is a see-through trust described in sec_1_401_a_9_-1 of the proposed_regulations qs as d-5 and d-6 above as a result with respect to your first two ruling requests the service concludes as follows that taxpayer a timely designated taxpayer d as a beneficiary of his ira y and that taxpayer a timely designated taxpayer c as a beneficiary of his tray with respect to your third ruling_request as noted above taxpayer d is older than taxpayer c furthermore taxpayers c and d are the children of taxpayer a thus the life expectancy of taxpayer d may not be recalculated for purposes of determining the code sec_401 distribution period after the death of taxpayer a thus with respect to your third ruling_request the service concludes as follows _ that with respect to ira y in determining code sec_401 minimum required distributions commencing in the calendar_year following the calendar_year of taxpayer a’s death taxpayer d may use the remaining term-certain life expectancy of taxpayer d since she is the elder of taxpayers c and d reduced by one for each calendar_year thereafter with respect to your fourth ruling_request the issue presented is whether post death distributions from taxpayer a’s ira y may be made over taxpayer d’s life expectancy although distributions from ira y during taxpayer a’s life were made over ao ods page taxpayer a’s recalculated single life expectancy and not over taxpayer a’s and taxpayer d’s joint life expectancy without violating the at least as rapidly rule_of code sec_401 as described in sec_1_401_a_9_-1 of the proposed_regulations q a f-3a in this case as noted above taxpayer a timely designated taxpayer d as his beneficiary for purposes of code sec_401 thus taxpayer a could have received distributions from ira y over his and taxpayer d’s joint life expectancy subject_to the minimum distribution incidental benefit requirement such distributions would have complied with the minimum_required_distribution rules instead taxpayer a chose to receive distributions over his recalculated single life expectancy in effect taxpayer a received distributions in amounts greater than the required minimums or in other words chose to accelerate receipt of lifetime distributions taxpayer a’s election to accelerate distributions does not affect the determination above that taxpayer a’s timely designating taxpayer d as his beneficiary resulted in code sec_401 required distributions being those computed using taxpayer a’s and taxpayer d’s joint and survivor life expectancy thus although taxpayer d’s life expectancy was not used in computing lifetime distributions to taxpayer a it may be used to determine post-death required distributions to taxpayer a’s beneficiaries in short the at least as rapidly rule will not be violated if post-death distributions are calculated using the life expectancy of taxpayer a’s designated_beneficiary taxpayer d since taxpayer a could have used taxpayer d’s life expectancy to determine the amount of his required lifetime distributions in this case as noted above taxpayer a’s life expectancy was being recalculated thus as of the end of the calendar_year following the calendar_year of his death taxpayer a’s life expectancy will be reduced to therefore required distributions to taxpayer a’s beneficiaries will be those computed using the life expectancy of taxpayer d his designated_beneficiary thus with respect to your fourth ruling_request the service concludes as follows that with respect to ira y taxpayer a’s use of his single life expectancy recalculated to determine minimum required distributions during his lifetime does not preclude the use of the remaining term-certain life expectancy of taxpayer d the older of taxpayers c and d reduced by one for each calendar_year for purposes of computing minimum required distributions for calendar years commencing with calendar_year with respect to your fifth ruling_request revrul_78_406 1978_2_cb_157 provides that the direct transfer of funds from one ira trustee to another ira trustee does not result in such funds being treated as paid or distributed to the participant cab page and such transfer is not a rollover_contribution the revenue_ruling states that this conclusion would apply whether the bank trustee initiates or the ira participant directs the transfer of funds revrul_78_406 is applicable if the trustee to trustee transfer is directed by the beneficiary of an ira after the death of the ira owner as long as the transferee ira is set up and maintained in the name of the deceased ira owner for the benefit of the beneficiary with specific reference to your seventh ruling_request as noted above taxpayer a named trust x as the beneficiary of his ira y and as noted above taxpayers c and d are the named beneficiaries of trust x and not of ira y although taxpayer d as the older of taxpayers c and d is the code sec_401 designated_beneficiary of tray the facts summarized above indicate that after the deaths of taxpayers a and b_trust x is to be terminated and payments of assets otherwise payable to trust x will be made directly to the beneficiaries of trust x taxpayers c and d this trust x termination language is found in the provisions of trust x and reflects taxpayer a’s intent the provision of trust x which provides for its termination does not change either the identity of the individuals who will receive the ira y proceeds or the identity of the designated_beneficiary of ira y who remains taxpayer d furthermore the trust x termination language which results in distributions from ira y being made directly to taxpayers c and d instead of initially to trust x and then to taxpayers c and d was language in trust x approved by taxpayer a during his lifetime which reflects taxpayer a’s intent to pay his children directly instead of through trust x thus it does not give rise to a change in beneficiaries prohibited by sec_1 a - of the proposed_regulations q a e-5 f thus with respect to your fifth through seventh ruling requests the service concludes as follows that taxpayer d as a beneficiary of trust x the beneficiary of ira y may direct that her portion of the trust x assets which consists of her interest in ira y be transferred by means of a trustee-to-trustee transfer into another ira set up and maintained in the name of taxpayer a taxpayer d beneficiary thereof for the benefit of that trust x’s being the named beneficiary of taxpayer a’s ira y at the death of taxpayer a does not preclude the service’s issuing favorable responses to letter_ruling requests through above and of page that trust x’s being the named beneficiary of taxpayer a’s ira y at the death of taxpayer a does not preclude minimum required distributions from ira y or a transferee ira thereof set up in the name of taxpayer a for the benefit of taxpayer d being made directly to taxpayer d after trust x is terminated over taxpayer d’s life expectancy this ruling letter assumes that ira y either is has or will meet the requirements of code sec_408 at all times relevant thereto it also assumes that the transferee ira which will be set up and maintained in the name of taxpayer a for the benefit of taxpayer c will also meet the requirements of code sec_408 finally it assumes that trust x is valid under the laws of state b as asserted this ruling is directed solely to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited by others as precedent pursuant to a power of attomey on file in this office the original of this letter tuling is being sent to your authorized representative sincerely yours pret bom frances v sloan manager employee_plans technical group tax_exempt_and_government_entities_division enclosures deleted copy of letter_ruling form_437


third party communication date of communication month dd yyyy cca_2014102110431801 id uilc number release date from sent tuesday date am to cc bcc subject re snod on affected_item to a c b year the carryback can be directly assessed to the extent it is purely computational based on the amount of the partnership losses in ------and ------ without regard to whether it is passive or not nol carryovers are computational adjustments that generally may be directly assessed thus they are generally not subject_to affected_item deficiency procedures at least three courts have so held the cases are cummings v commissioner tcmemo_1996_282 849_fsupp_500 wd tex 172_f3d_1311 a f t r 2d ustc p big_number fed cir feb affirming 37_fedclaims_727 a f t r 2d ustc p big_number fed cl apr to the extent the computational adjustment allows some of the nol to survive and the passive_loss_rules are then applied to eliminate the remaining amount affected_item deficiency procedures apply to disallow this remaining amount specifically the notice_of_deficiency would determine that the partner did not materially participate and any other limitation on passive losses i r c a a i


t c summary opinion united_states tax_court leonard b simpson and jennifer a simpson petitioners v commissioner of internal revenue respondent docket no 4122-12s filed date d douglas titus for petitioners patsy a clarke for respondent summary opinion dean special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the years at issue and rule references are to the tax_court rules_of_practice and procedure respondent issued a statutory_notice_of_deficiency to petitioners determining deficiencies in income_tax of dollar_figure for and dollar_figure for respondent also determined accuracy-related_penalties under sec_6662 of dollar_figure for and dollar_figure for petitioners have conceded that they received a premature_distribution from an individual_retirement_account ira in they have also conceded various items related to leonard b simpson’s mr simpson activity reported on schedules c profit or loss from business and petitioners’ activities reported on schedules e supplemental income and loss that will be discussed below the issues remaining for decision are whether petitioners are entitled to deduct for points paid in connection with acquiring real_estate expenses reported on schedules c for both years and expenses reported on schedules e for both years and whether petitioners are liable for the accuracy-related_penalty under sec_6662 for both years the amounts of petitioners’ student_loan_interest_deduction self- employment_tax and self-employment_tax deduction for each year are computational and will be resolved by the decision of the court on the other issues some of the facts have been stipulated and are so found the stipulation of facts and the exhibits received in evidence are incorporated herein by reference petitioners resided in the state of washington when the petition was filed background mr simpson was employed full time as a security guard in and and he reported wages from inter-con security and guardsmark llc for each of the years at issue jennifer simpson worked for part of and then became unemployed she listed her occupation on their income_tax return for as unemployed and reported wages from mds inc as an internet marketing manager on date mrs simpson filed for bankruptcy under chapter of the bankruptcy code and was discharged from bankruptcy on date in mrs simpson remained unemployed and withdrew dollar_figure from an ira points at trial petitioners produced a copy of two pages of a three-page settlement statement form hud-1 concerning mrs simpson’s purchase of a residential property in newcastle washington newcastle property the see u s c secs so-called liquidating bankruptcy there is no explanation in the record for the apparent discrepancy between mrs simpson’s testimony that she withdrew dollar_figure from her ira and respondent’s dollar_figure adjustment to her income settlement document reflects a first mortgage of dollar_figure and a second mortgage of dollar_figure with leave of the court petitioners provided a form_1098 mortgage interest statement for sent to mrs simpson at an address in seattle washington reflecting a loan discount or points of dollar_figure paid with respect to the purchase of a principle sic residence petitioners then introduced as evidence for a form 1040x amended u s individual_income_tax_return version showing an increase in itemized_deductions or standard deductions of dollar_figure to reflect the deduction of unamortized points or prepaid_interest that petitioners assert was paid with respect to their home sports unlimited in mr simpson began an activity he called sports unlimited international sports petitioners reported net losses on schedules c for sports for and petitioners filed with their federal_income_tax returns schedules c for sports reporting net losses of dollar_figure for and dollar_figure for although petitioners reported gross_income of dollar_figure on schedule c for the parties agree that petitioners did not earn any schedule c gross_income in during mr simpson’s testimony petitioners introduced into evidence a form 1040x for version along with a revised schedule c for that reflects changes to the original schedule c for sports the version form 1040x reflects the deletion of dollar_figure of gross_income and the deletion of both a deduction for advertising expenses of dollar_figure and a deduction for meals and entertainment_expenses of dollar_figure all of which were reported on the original schedule c filed with respondent although petitioners reported schedule c gross_income of dollar_figure for the parties agree that petitioners earned zero schedule c gross_income in during mr simpson’s testimony petitioners introduced into evidence a form 1040x for along with a revised schedule c that reflects changes to his original schedule c for sports for that year the form 1040x for reflects the deletion of gross_income of dollar_figure and the deletion of a deduction for an advertising expense of dollar_figure reported on the original form_1040 filed with respondent schedule e petitioners listed on their schedule e for eight real_estate properties in however they began having difficulty securing lines of credit and refinancing on the properties they were then pretty much underwater on most of the properties most of the properties were in mrs simpson’s name by petitioners owned only property on woodland avenue in kansas city woodland avenue petitioners offered no information explaining the circumstances of their disposal of any of the other properties petitioners filed schedules e reporting losses of dollar_figure for and dollar_figure for petitioners introduced at trial a copy of a schedule e for with corrections a deduction for mortgage interest_paid to banks of dollar_figure was eliminated and the depreciation expense deduction was increased from dollar_figure to dollar_figure petitioners also introduced at trial a revised schedule e for the revised schedule e for deleted dollar_figure that had been reported as a deduction for repairs to woodland avenue the change was made because petitioners are no longer deducting dollar_figure in one year but depreciating and taking the deduction each year for ½ years petitioners increased their depreciation expense deduction on the schedule e from dollar_figure to dollar_figure petitioners allege that the form sec_1040x for and incorporate the changes reported on the revised schedules c and e although mrs simpson went through a bankruptcy proceeding in the court was not provided with any details about that process there was nothing in the record documenting a bankruptcy proceeding concerning mr simpson discussion generally the commissioner’s determinations in a notice_of_deficiency are presumed correct and the taxpayer has the burden of proving that those determinations are erroneous see rule a 290_us_111 in some cases the burden_of_proof with respect to relevant factual issues may shift to the commissioner under sec_7491 the court finds that petitioners have not argued or shown that they have met the requirements of sec_7491 and the burden_of_proof does not shift to respondent points deduction for interest is compensation_for the use or forbearance of money 308_us_488 points paid for the use or forbearance of money may be deductible as prepaid_interest cao v commissioner tcmemo_1994_ aff’d without published opinion 78_f3d_594 9th cir petitioners contend that they are entitled to deduct for prepaid_interest paid in connection with the acquisition of their home because the home was subject_to foreclosure proceedings in as petitioners did not report for any gain_or_loss from the disposition of property in the court infers that the foreclosure may have taken place as part of mrs simpson’s bankruptcy proceedings if the foreclosure took place during the bankruptcy proceedings the bankruptcy_estate bore the tax consequences of the foreclosure including the deduction of accrued interest and points absent an abandonment of the property by the estate see catalano v commissioner tcmemo_2000_82 rev’d on other grounds 279_f3d_682 9th cir bergman v commissioner tcmemo_1985_256 as noted earlier no details about mrs simpson’s bankruptcy proceedings were provided to the court and no information about any foreclosure proceedings on petitioners’ home was provided petitioners did provide two pages of a three-page settlement statement form hud-1 concerning the purchase by mrs simpson of the newcastle property showing that the loan discount paid to american home equity corp was dollar_figure the address of the property is stated as se 82nd court newcastle washington notably none of the tax forms in evidence for the taxable years at issue as well as for and lists this address--not as a mailing address for petitioners not as an address on any of forms w-2 wage and tax statement forms or forms miscellaneous income and not as a rental property on any of the schedules e nothing in the record suggests let alone establishes that the property for which petitioners may have paid these points was owned by either of them at any point beyond its acquisition in without more information concerning the home’s ownership its status as either a residence or investment_property or its sale_or_other_disposition the court is unable to permit petitioners the deduction they now seek schedule c and e expenses respondent contends that petitioners have not shown for the years at issue that the sports activity and the rental_activity if any were actually conducted for profit or as businesses but if they were so conducted respondent contends that petitioners have adequately substantiated neither the amounts of the expenses deducted as a result of the activities nor whether the expenses were ordinary and necessary deductions are allowed under sec_162 for the ordinary and necessary expenses of carrying on an activity that constitutes the taxpayer’s trade_or_business deductions are allowed under sec_212 and for expenses paid in connection with an activity engaged in for the production_or_collection_of_income or for the management_conservation_or_maintenance_of_property_held_for_the_production_of_income generally no deduction is allowed for personal living or family_expenses see sec_262 the taxpayer must show that any claimed business_expenses were paid primarily for business rather than personal living or family reasons see rule a 72_tc_433 to show that the expense was not for personal reasons the taxpayer must show that the expense was paid primarily to benefit his business and there must have been a proximate relationship between the claimed expense and the business see walliser v commissioner t c pincite with respect to either sec_162 or sec_212 the taxpayer must demonstrate a profit objective for the activity in order to deduct associated expenses see 66_tc_312 sec_1_183-2 income_tax regs the profit standards applicable for sec_212 are the same as those used for sec_162 see 934_f2d_573 5th cir aff’g tcmemo_1989_687 893_f2d_656 4th cir aff’g 91_tc_686 72_tc_28 34_tc_1146 sec_1_183-2 income_tax regs sets forth nine nonexclusive factors that should be considered in determining whether a taxpayer is engaged in a venture with a profit objective a taxpayer in order to show that he was engaged in a trade_or_business must show not only that his primary purpose for engaging in the activity was for income or profit but also that he engaged in the activity with continuity and regularity 480_us_23 where a taxpayer has established that he has paid a trade_or_business expense failure to prove the exact amount of the otherwise deductible item may not always be fatal generally unless prevented by sec_274 the court may estimate the amount of such an expense and allow the deduction to that extent see 255_f2d_128 10th cir aff’g 27_tc_413 39_f2d_540 2d cir in order for the court to estimate the amount of an expense however there must be some basis upon which an estimate may be made 85_tc_731 without such a basis an allowance would amount to unguided largesse 245_f2d_559 5th cir before examining the issues of whether petitioners have adequately substantiated the amounts of the expenses deducted on their schedules c and e or whether the expenses were ordinary and necessary it is appropriate that the court consider petitioners’ evidence of their carrying_on_a_trade_or_business and holding property for the production_of_income sports petitioners admit that they did not receive any income from the sports activity in the years at issue even though they initially reported that they did mr simpson described his activity as a sports agent business mr simpson testified that he lived in a neighborhood where he was surrounded by athletes who played for the seahawks and supersonics he testified that he attempted to sign athletes to professional contracts and arrange marketing and advertisement and endorsement deals petitioner testified that in order to recruit young male athletes he was required to incur expenses to go to bars casinos clubs and parties and to take limousine rides and buy jewelry and airline tickets petitioners submitted as evidence of mr simpson’s sports activity business licenses from the city of seattle in the name of sports for the years through and for two international basketball association player contracts from said to be representative of the type of contracts he helped secure along with other materials from an invoice issued in the name of sports dated date along with miscellaneous correspondence dated in miscellaneous correspondence dated in and and the only item contemporaneous with a year at issue a date proposal by platinum to perform for sports a marketing and advertising campaign that was attached to a player list from mr simpson testified that he did not sign any player contracts in or in fact petitioners offered no evidence other than their own testimony that mr simpson was conducting any sports agent activity in and the court is not required to accept their self-serving testimony particularly in the absence of corroborating evidence see 440_f2d_688 9th cir aff’g per curiam tcmemo_1969_159 294_f2d_328 4th cir aff’g 34_tc_845 because of the inconsistencies and eccentricities in the record the court declines to accept their testimony since the court concludes that sports was conducted neither as a profit- seeking activity nor as a going concern in the years at issue it is not necessary to consider whether the deducted expenses were ordinary and necessary business_expenses because petitioners have not shown for what purpose the claimed expenses might otherwise be deductible the court sustains respondent’s determination on this issue as petitioners earned no gross_income from sports in the years at issue they are not entitled to any deductions for an activity_not_engaged_in_for_profit continued rental_activity respondent disallowed petitioners’ deduction on schedule e of expenses for depreciation mortgage interest cleaning and maintenance auto and travel and repairs related to woodland avenue mr simpson testified that petitioners rented woodland avenue to his uncle david simpson in and during which time mr simpson stated he also had a major renovation performed on woodland avenue according to mr simpson there was no written lease agreement and no rent receipts were provided to his uncle for rental payments made there were also few receipts if any detailing petitioners’ expenses petitioners having claimed a mortgage interest_expense_deduction of dollar_figure on schedule e for presented at trial a revised schedule e deleting the interest_deduction without explanation petitioners deducted dollar_figure of repairs expenses that were changed on the revised schedule e to painting and other contracted maintenance_expenses of dollar_figure petitioners’ evidence that they paid expenses for auto and travel was mr simpson’s testimony that he had paid the expenses in cash likewise mr simpson testified that the expenses for cleaning continued see sec_183 petitioners did not deduct any sec_183 items on schedule c and maintenance were all paid in cash to his father leonard senior a general contractor as evidence of the repairs expenses for petitioners offered a series of copies of documents titled proposal and invoice the documents are stated to be from james peterson remodeling to len can builders inc the company owned by mr simpson’s father mr simpson testified that the proposals and invoices were passed from mr simpson’s father to mr simpson and his father oversaw the work mr simpson testified that he paid the invoices in cash by delivering it physically to workers petitioners offered no evidence on these issues other than their testimony the court concludes that petitioners have not shown that woodland avenue was held for rental in and and if it was they have not substantiated the disallowed expenses deducted on schedule e respondent’s determination on these issues is sustained the court notes that petitioners resided in the state of washington at the time the petition was filed and that the notice_of_deficiency upon which this case is based was sent to them in seattle washington the income_tax returns filed for the years at issue reflect petitioners’ residence to be in seattle washington woodland avenue is in kansas city missouri accuracy-related_penalty sec_7491 imposes on the commissioner the burden of production in any court_proceeding with respect to the liability of any individual for penalties and additions to tax 116_tc_438 trowbridge v commissioner tcmemo_2003_164 aff’d 378_f3d_432 5th cir in order to meet the burden of production under sec_7491 the commissioner need only make a prima facie case that imposition of the penalty or addition_to_tax is appropriate higbee v commissioner t c pincite respondent determined that for and petitioners underpaid a portion of their income_tax because of negligence or intentional_disregard_of_rules_and_regulations and that there is a substantial_understatement_of_income_tax sec_6662 and b and imposes a penalty equal to of the portion of the underpayment attributable to negligence or disregard of rules or regulations or a substantial_understatement_of_income_tax negligence is defined as any failure to make a reasonable attempt to comply with the provisions of the internal_revenue_code and the term disregard includes any careless reckless or intentional disregard see sec_6662 negligence also includes any failure by the taxpayer to keep adequate books_and_records or to substantiate items properly sec_1_6662-3 income_tax regs a substantial_understatement includes an understatement_of_tax that exceeds the greater of of the tax required to be shown on the return or dollar_figure see sec_6662 sec_1_6662-4 income_tax regs the tax shown on petitioners’ joint_return for was dollar_figure and the tax_shown_on_the_return for was dollar_figure petitioners’ correct_tax liability for is dollar_figure and for it is dollar_figure petitioners have a substantial_understatement of tax for each of and since the understatement amount for each year will exceed both of the tax required to be shown on the return for that year and dollar_figure the court concludes that respondent has produced sufficient evidence to show that the accuracy-related_penalty under sec_6662 is appropriate for and the accuracy-related_penalty will apply unless a taxpayer demonstrates that there was reasonable_cause for the underpayment and that he or she acted in good_faith with respect to the underpayment see sec_6664 sec_1_6664-4 income_tax regs specifically provides circumstances that may indicate reasonable_cause and good_faith include an honest misunderstanding of fact or law that is reasonable in light of the experience knowledge and education of the taxpayer the most important factor is the extent of the taxpayer’s effort to assess his proper tax_liability for the year id petitioners did not show that there was reasonable_cause for and that they acted in good_faith with respect to the underpayments of tax for and therefore respondent’s determination of the accuracy-related_penalty under sec_6662 for and is sustained to reflect the foregoing decision will be entered under rule