t c memo united_states tax_court patricia s windham petitioner v commissioner of internal revenue respondent docket no filed date james l chase for petitioner edwin b cleverdon for respondent memorandum findings_of_fact and opinion paris judge respondent determined a deficiency of dollar_figure in and an accuracy-related_penalty of dollar_figure in relation to petitioner’ sec_2010 federal_income_tax after concessions the issues remaining before the court are whether 1petitioner conceded that she is liable for unreported taxable interest_income of dollar_figure respondent conceded that petitioner is entitled to deduct the amount of continued petitioner was a qualifying taxpayer in a real_property_trade_or_business under sec_469 is entitled to a claimed deduction for unreimbursed employee business_expenses and is liable for a sec_6662 accuracy- related penalty findings_of_fact some of the facts are stipulated and are so found the first stipulation of facts the first supplemental stipulation of facts the second supplemental stipulation of facts the third supplemental stipulation of facts and the facts drawn from stipulated exhibits are incorporated herein by this reference petitioner resided in florida when she timely filed her petition i petitioner’s employment as a stock broker petitioner has been a stock broker for more than years she began her career with a national brokerage house in and in the year in issue she was employed by wells fargo in its brokerage department during the year in issue continued mortgage interest_expense she claimed on her return after trial respondent also conceded that petitioner is allowed all of the claimed deductions related to her rental_real_estate_activities there was no adjustment to petitioner’s reported rental income respondent’s only argument regarding the rental_real_estate_activities is that petitioner is not a qualifying taxpayer under sec_469 and therefore petitioner’s rental_real_estate_activities are passive unless otherwise indicated all section references are to the internal_revenue_code code for the year in issue and all rule references are to the tax_court rules_of_practice and procedure she managed a number of individual accounts with total assets of approximately dollar_figure million petitioner generally worked at her brokerage office from p m until the u s markets closed each weekday petitioner was compensated on the basis of her production for most of her client account portfolios petitioner was paid a commission up front and then received a trail on the investment--a small amount of money received quarterly a few of her clients preferred to actively trade common_stock that was the only aspect of her brokerage job that required her to be in her office regularly when the u s markets were trading the u s stock markets were closed for various holidays on january january february april may july september november and date those days in petitioner’s calendar are marked with an h petitioner did not work in her brokerage office on those days on the days she did work petitioner would often stay at the office after the u s markets closed pincitethe u s stock markets close pincite p m central standard time 3the court takes judicial_notice of those dates see fed r evid 4petitioner’s calendar entered into evidence started on monday date friday date is not marked with an h in petitioner’s calendar but the space for that day on the calendar contains a diagonal line drawn across it and the words good friday written and circled at the top p m for an hour and a half to do work for the various charities for which she volunteered petitioner had one administrative assistant who performed tasks associated with petitioner’s brokerage work petitioner frequently met with her brokerage clients during business lunches and dinners the parties entered into evidence receipts for and stipulated that petitioner paid meals and entertainment_expenses of dollar_figure most of the receipts include the name or names of the individual or individuals who were entertained the receipts do not however include the business_purpose for any of the meals and entertainment petitioner testified that the meals and entertainment_expenses also included meals associated with her rental_real_estate_activities and the various charities for which she volunteered there are duplicate receipts and many of the receipts are illegible wells fargo reimbursed petitioner dollar_figure annually for meals and entertainment_expenses related to her client accounts ii petitioner’s rental properties in addition to her employment as a stock broker petitioner owned rental properties and a interest in a vacant lot she had a home_office where she 5one of petitioner’s rental properties was an apartment attached to her personal_residence petitioner did not include the rental property attached to her personal_residence when she calculated the number of hours she performed services for real_property trades_or_businesses or to determine whether she continued completed administrative tasks associated with her rental properties understanding the time commitment that would be necessary to manage multiple rental properties petitioner set_aside the morning hours before going to her brokerage office to complete those tasks and to handle other issues concerning her rental real_estate although all of the properties were titled in petitioner’s name she conducted her rental_real_estate_activities under windham agency lc a limited_liability_company llc petitioner managed all aspects of her rental properties including vetting potential tenants collecting rent and evicting tenants when necessary she also negotiated with hired and oversaw contractors and repairmen working on the rental properties additionally petitioner acquired and maintained insurance on each rental property maintained services and upkeep on vacant rental properties maintained records for each rental property and completed the necessary documents for her certified public account cpa to prepare her federal_income_tax returns petitioner was interested in selling some of her rental properties so continued materially participated in those trades_or_businesses 6petitioner’s llc is registered as a florida limited_liability_company with the florida department of state as windham agency l c and is a single- member llc petitioner testified that the rental properties were titled in her name and not her llc’s for mortgage interest rate and insurance purposes she showed certain rental properties to potential buyers the following table details petitioner’s approximate hours of participation for each rental property and the vacant lot in rental property address hours of participation culpepper north 9th ave via de luna road bayshore drive port royal st alban road1 brookside drive calle hermosa fort pickens road maldonado apartment attached to personal_residence lynn haven vacant lot total dollar_figure -0- dollar_figure 1this property is a duplex petitioner did not divide the hours between the two properties petitioner credibly testified about the hours she spent in regard to the maldonado property and the hours she spent in regard to the vacant lot in which she had a ownership_interest the parties entered into evidence summaries of the hours petitioner spent on the other properties listed in the table supra to which they agreed petitioner would have testified petitioner owned her rental properties during the tumultuous and hurricane seasons and during the recession of petitioner discussed with an attorney the option of foreclosure of mortgages on her rental properties after the downturn of the real_estate market but decided against it in petitioner withdrew dollar_figure from her retirement accounts to meet her rental real_estate business_expense requirements petitioner properly reported dollar_figure of her withdrawal as taxable_income for iii petitioner’ sec_2010 form_1040 petitioner timely filed her form_1040 u s individual_income_tax_return she reported wage income of dollar_figure from wells fargo along with the distributions from her retirement accounts of dollar_figure she attached a schedule c profit or loss from business to her form_1040 which reported a loss of dollar_figure from her rental properties petitioner reported gross_receipts or sales of dollar_figure which was the amount of income she received from all of her rental properties for that year on a document attached to petitioner’ sec_2010 form_1040 she listed the origins of her gross_receipts or sales some amounts had a property address next to them and other_amounts had an entity’s name next to them 7the document appears to be one petitioner’s cpa generated petitioner reported total expenses of dollar_figure on her schedule c petitioner did not attach an election to treat all of her rental properties as one activity to her form_1040 petitioner also claimed a deduction for unreimbursed employee_expenses of dollar_figure on a schedule a itemized_deductions attached to her return the deduction was for meals and entertainment_expenses vehicle expenses an employee bonus expense cell phone expenses and business_expenses petitioner paid a cpa to prepare her form_1040 iv notice_of_deficiency respondent issued to petitioner a notice_of_deficiency determining that her loss from her rental_real_estate_activities was passive and could not be used to offset her wells fargo wage income he moved petitioner’s rental real_estate income and expenses to schedule e supplemental income and loss from rental real_estate royalties partnerships s_corporations estates trusts remics etc but disallowed deductions for most of petitioner’s reported expenses see supra note respondent also disallowed deductions for all of petitioner’s 8the parties also entered into evidence petitioner’s form_1040 which also had a schedule c attached to it reporting petitioner’s income and expenses from her rental properties there was no election to treat petitioner’s rental properties as one activity attached to her form_1040 either 9the same cpa had prepared petitioner’s form_1040 see supra note unreimbursed employee business_expenses reported on schedule a and determined that petitioner was liable for an accuracy-related_penalty petitioner filed a petition with the court for a redetermination of that deficiency opinion generally the commissioner’s determination_of_a_deficiency is presumed correct and the taxpayer bears the burden of proving it incorrect see rule a 290_us_111 under certain circumstances the burden_of_proof as to factual matters may shift to the commissioner pursuant to sec_7491 petitioner argued for the first time on brief that the burden_of_proof under sec_7491 should be shifted to respondent the court need not decide which party bears the burden_of_proof as to factual matters because its decision rests on a preponderance_of_the_evidence see 110_tc_189 ndollar_figure i passive activities sec_162 and sec_212 generally permit a taxpayer to deduct ordinary and necessary expenses paid_or_incurred in carrying_on_a_trade_or_business or for the production_of_income in the case of an individual sec_469 generally disallows any current deduction for a passive_activity_loss sec_469 b a passive_activity_loss is equal to the aggregate losses from all passive activities for a taxable_year over the aggregate income from all passive activities for that year sec_469dollar_figure a passive_activity is any trade_or_business in which the taxpayer does not materially participate or any rental real_estate activity regardless of material_participation sec_469 c and if a taxpayer can prove that she is a qualifying taxpayer in a real_property_trade_or_business ie a real_estate_professional her rental_real_estate_activities will not be considered per se passive activities sec_469 thus the activities are treated as nonpassive and the sec_469 disallowance does not apply to that portion of the claimed losses see shiekh v commissioner tcmemo_2010_16 wl at a taxpayer qualifies as a real_estate_professional if she owns at least one interest in rental real_estate and meets both of the requirements of sec_469 i more than one-half of the personal services performed in trades_or_businesses by the taxpayer during such taxable_year are performed in real_property trades_or_businesses in which the taxpayer materially participates and 10the effect of the passive_activity_loss disallowance rule is that deductions related to passive activities are allowed against income from passive activities and the excess ie the amount by which the deductions related to the passive activities exceed the income from passive activities cannot be deducted from income from activities other than passive activities see 279_f3d_547 7th cir aff’g 114_tc_366 ii such taxpayer performs more than hours of services during the taxable_year in real_property trades_or_businesses in which the taxpayer materially participates because both of the conditions to qualify as a real_estate_professional require material_participation in the trade_or_business the court must first decide whether petitioner materially participated in her rental_real_estate_activities see hailstock v commissioner tcmemo_2016_146 at a material_participation election for the court to decide whether petitioner materially participated in her rental_real_estate_activities each interest in rental real_estate will be treated as a separate activity unless she elected to treat all her rental_real_estate_activities as one activity see sec_469 sec_1_469-9 income_tax regs a taxpayer must clearly notify the commissioner of the taxpayer’s intent to make an election see 743_f2d_781 11th cir to make an election the taxpayer must exhibit in some manner his unequivocal agreement to accept both the benefits and burdens of the tax treatment afforded by the governing statute 83_tc_831 aff’d 783_f2d_1201 5th cir to elect to group several rental_real_estate_activities as one activity a taxpayer’s election must contain a declaration that the taxpayer is a qualifying taxpayer and is making the election pursuant to sec_469 and it must be filed with the taxpayer’s original income_tax return for the taxable_year sec_1_469-9 income_tax regs a taxpayer has not made an election if it is not clear from the return that an election has been made see young v commissioner f 2d pincite the court has held that aggregating losses from rental real_estate on a tax_return is not an election to treat the separate rental properties as one activity shiekh v commissioner wl at citing kosonen v commissioner t c memo petitioner admitted that she did not include an election to treat her rental_real_estate_activities as one activity she argued that she was not required to do so under revproc_2010_13 sec_4 2010_4_irb_329 which states a taxpayer is not required to file a written_statement reporting the grouping of the trade_or_business activities and rental activities that have been made prior to the effective date of this revenue_procedure until the taxpayer makes a change to the grouping as described in sections dollar_figure and dollar_figure of this revenue_procedure revproc_2010_13 supra is effective for tax years beginning on or after date id sec_5 petitioner’s tax_year in issue i sec_2010 which began on date therefore revproc_2010_13 supra does not apply and petitioner was required to file an election as prescribed under the code petitioner admitted that she made no such election therefore her rental_real_estate_activities must be treated as separate in determining whether she materially participated in them for petitioner’s participation in her rental_real_estate_activities involvement in an activity that is regular continuous and substantial will qualify as material_participation sec_469 the regulations set forth seven tests that a taxpayer can satisfy to prove that she materially participated in an activity sec_1_469-5t temporary income_tax regs fed reg date three of those tests are applicable here the individual’s participation in the activity for the taxable_year constitutes substantially_all of the participation in such activity of all individuals including individuals who are not owners of interests in the activity for such year the individual participates in the activity for more than hours during the taxable_year and such individual’s participation in the activity for the taxable_year is not less than the participation in the activity of any other individual including individuals who are not owners of interests in the activity for such year or based on all the facts and circumstances taking into account the rules in paragraph b of this section the individual participates in the activity on a regular continuous and substantial basis during such year id if the individual participates in an activity for hours or less during the taxable_year she shall not be treated as materially participating in the activity under sec_1_469-5t temporary income_tax regs fed reg date see sec_1_469-5t temporary income_tax regs fed reg date a via de luna road bayshore drive and port royal properties petitioner had three rental_real_estate_activities in which she had over hours of participation each in 2010--via de luna road bayshore drive and port royal see supra pp the court found credible petitioner’s testimony about how she managed her rental_real_estate_activities the court also found credible the number of hours petitioner listed in exhibit 21-j as the time she spent working on each of those three rental properties furthermore the court notes that petitioner took significant distributions from her retirement accounts-- approximately of which was taxable and on which she properly paid income_tax in 2010--to keep her rental_real_estate_activities afloat those funds were used to maintain all of her rental properties petitioner spent a considerable amount of time and money to keep her rental_real_estate_activities viable petitioner satisfies the facts_and_circumstances_test in sec_1_469-5t temporary income_tax regs supra in relation to the via de luna road bayshore drive and port royal properties therefore petitioner materially participated in those activities for dollar_figure b petitioner’s other rental properties according to petitioner’s testimony for the maldonado property and the hours listed in exhibit 21-j for the culpepper north 9th avenue st alban road brookside drive calle hermosa and fort pickens road properties petitioner participated less than hours in a rental real_estate activity for each of those properties in dollar_figure because she participated less than hours in each of those activities the material_participation tests under sec_1_469-5t and temporary income_tax regs supra are not applicable the only material_participation test available for those activities is whether petitioner’s participation for each constituted substantially_all of the participation in the separate activitie sec_11the court notes that petitioner would also meet the material_participation test under sec_1_469-5t temporary income_tax regs fed reg date for these properties 12the fact that petitioner did not separate her hours for the duplex’s two properties is of no consequence because the hours for both properties is less than of all individuals including individuals who are not owners of interests in the property for see sec_1_469-5t temporary income_tax regs supra petitioner ran her rental_real_estate_activities by herself she handled all aspects of the business from collecting rent to overseeing the work of repairmen she also met prospective buyers and handled problems with utility and service companies while petitioner did not physically perform all of the repairs that were necessary at each of those rental properties she hired multiple contractors and repairmen to handle those repairs with the repairs made and the number of different individuals involved in those repairs no one individual participated in the rental_real_estate_activities to the extent petitioner did the court is satisfied by petitioner’s testimony and other evidence that her participation in each of those activities constituted substantially_all of the participation in each petitioner meets the material_participation test requirements in sec_1_469-5t temporary income_tax regs supra in relation to the maldonado culpepper north 9th avenue st alban road brookside drive calle hermosa and fort pickens road properties therefore petitioner materially participated in those activities for the lynn haven property was a vacant lot in which petitioner had a ownership_interest she spent approximately hours meeting with an attorney and the other owner of the vacant lot discussing whether to develop or sell the vacant lot there is nothing in the record about the participation hours of the other owner of the vacant lot petitioner has failed to prove that her participation constituted substantially_all of the participation in the activity therefore petitioner did not materially participate in the activity for the vacant lot for dollar_figure b real_estate_professional now that the court has found that petitioner did indeed materially participate in her rental_real_estate_activities the question of whether petitioner was a real_estate_professional can be addressed the court can easily dispense with the requirement under sec_469 petitioner performed dollar_figure hours of services in her rental real_estate trade_or_business in which she materially participated because she performed more than hours_of_service that requirement was met petitioner must also meet the requirement of sec_469 i --more than one-half of her personal service hours must be in a real_property trade or 13petitioner would be entitled to deduct her half of the property taxes for the vacant lot on schedule a business her other trade_or_business was that of a stock brokerdollar_figure she testified that she went into her brokerage office for hours a day five days a week and took no vacations in that would be a total of hours while the court finds credible petitioner’s testimony that she took no vacations in the court notes that u s stock markets were closed on nine days in see supra p and finds that petitioner did not work in her brokerage office those days that would reduce her number of hours working as a stock broker to petitioner’s stock broker hours added to her real_property hours equals dollar_figure hours respondent argued that petitioner did not meet the requirement under clause i because she did not include the hours she spent meeting with her brokerage clients at lunches and dinners exhibit 17-j comprises receipts from petitioner’s business lunches and dinners she credibly testified that some were for her brokerage work while others were connected with her rental_real_estate_activities and charities for which she volunteered even if all of the meals were for dinners 14although petitioner did volunteer a considerable amount of her time to various charities as a volunteer she was not holding herself out to others as engaged in the selling of goods or services 416_us_500 therefore her volunteering did not have the requisite profit_motive to be a trade_or_business see goldstein v commissioner tcmemo_1981_96 wl at citing 23_tc_90 aff’d 227_f2d_779 6th cir unrelated to petitioner’s rental real_estate activities--with an average time of two hours-- more than half of her personal service hours would still be in a real_property_trade_or_business the court finds that petitioner satisfies the requirements of sec_469 therefore petitioner satisfies both requirements of sec_469 and is a real_estate_professional thus her schedule e losses for are not subject_to the sec_469 passive loss limitationsdollar_figure ii unreimbursed employee business_expenses sec_162 permits a deduction for ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business the expenditure must be directly connected with or pertaining to the taxpayer’s trade_or_business sec_1_162-1 income_tax regs the term trade_or_business includes performing services as an employee 54_tc_374 an employee’s expenses however are not ordinary and necessary if she is entitled to reimbursement from her employer see 24_tc_21 noz v commissioner t c memo 15one of the deductions respondent disallowed in the notice_of_deficiency was a net_operating_loss nol carryforward from respondent’s only reason for disallowing the nol carryforward was that petitioner did not meet the requirements of sec_469 sec_6001 requires the taxpayer to maintain records sufficient to establish the amount of each deduction see also sec_1_6001-1 income_tax regs no deduction is allowed for personal living or family_expenses sec_262 if a taxpayer cannot substantiate the amount of a deduction the court may still allow the deduction or a portion of the deduction if there is an evidentiary basis for doing so 39_f2d_540 2d cir 85_tc_731 in those instances the court may estimate the allowable expense bearing heavily if appropriate against the taxpayer whose inexactitude is of her own making cohan v commissioner f 2d pincite the cohan_rule does not apply however to deductions that are subject_to the strict substantiation requirements of sec_274 sec_1_274-5t temporary income_tax regs supra sec_274 applies to any traveling expense including meals_and_lodging away from home entertainment amusement and recreational expenses any expense for gifts or the use of listed_property as defined in sec_280f including passenger automobiles to deduct such expenses the taxpayer must substantiate by adequate_records or evidence sufficient to corroborate the taxpayer’s own testimony the amount of the expenditure or use which includes mileage in the case of automobiles the time and place of the travel entertainment or use its business_purpose and in the case of entertainment the business relationship to the taxpayer of each expenditure or use sec_274 flush language petitioner claimed a deduction for unreimbursed employee business_expenses of dollar_figure on the schedule a attached to her return respondent disallowed all of petitioner’s claimed deduction the parties stipulated that petitioner paid but did not stipulate that she substantiated unreimbursed employee business_expenses of dollar_figure for which comprises meals and entertainment_expenses of dollar_figure vehicle expenses of dollar_figure a bonus paid to an employee of dollar_figure cell phone expenses of dollar_figure and business_expenses of dollar_figure although respondent stipulated that petitioner paid those amounts in he argued that she did not substantiate any of themdollar_figure a meals and entertainment and vehicle expenses petitioner’s meals and entertainment and vehicle expenses are both subject_to strict substantiation under sec_274 over receipts for meals and 16petitioner did not offer any evidence to substantiate the dollar_figure difference between her claimed deduction and the amount of expenses the parties stipulated she paid petitioner is deemed to have conceded that amount see 87_tc_56 entertainment were submitted into evidence some of the receipts are duplicates and some are illegible the ones that are legible include the name of the individual or individuals with whom petitioner dined the receipts do not however include the business_purpose for the meal petitioner testified that she paid for meals that related to her brokerage work her rental_real_estate_activities and the charities for which she volunteered petitioner did not testify about any meals specifically and the court has no way to determine whether each of the meals for which the parties submitted receipts were for business--or whether the meal was for petitioner’s brokerage work or her rental real_estate activities--or whether the meal was related to petitioner’s volunteering therefore respondent’s determination to disallow any deduction for all of petitioner’s meal and entertainment_expenses is sustained petitioner also claimed a deduction for vehicle expenses of dollar_figure for big_number miles she reported as having driven for her brokerage work petitioner provided no mileage log to corroborate her reported mileage therefore respondent’s determination to disallow a deduction for all of petitioner’s vehicle expenses reported on schedule a is sustained b employee bonus petitioner had one administrative assistant that worked for her at wells fargo petitioner credibly testified that she paid to her assistant bonuses totaling dollar_figure in twelve checks drawn on beach community bank were made out to petitioner’s assistant and signed by petitioner the amounts of the twelve checks varied from dollar_figure to dollar_figure and totaled dollar_figure the name imprinted in the top left corner of each check is windham agency llc there is nothing written on the memo line of any of the checks the court finds that petitioner did pay her assistant a bonus of dollar_figure for brokerage-related work in dollar_figure c cell phone expenses the parties stipulated that petitioner paid dollar_figure in cell phone expenses for and entered into evidence petitioner’s cell phone bills for dollar_figure while 17respondent conceded that petitioner was entitled to deduct contract labor expenses of dollar_figure for her rental_real_estate_activities if the checks drawn on petitioner’s real_estate business account totaling dollar_figure were included in the dollar_figure that amount shall be reduced by dollar_figure and the dollar_figure will be allowed as an unreimbursed employee_business_expense and properly reported on petitioner’s schedule a when the parties calculate their rule_155_computations if the dollar_figure was not included in the contract labor expenses of dollar_figure petitioner shall be entitled to contract labor expenses of dollar_figure on schedule e and the bonus payments totaling dollar_figure on schedule a 18cell phones were no longer listed_property under sec_280f for therefore petitioner was not required to meet the strict substantiation requirements continued petitioner testified that she used her cell phone for her brokerage work for her rental_real_estate_activities and for the charities for which she volunteered she offered no testimony or other evidence delineating how many cell phone minutes were used for business calls charity calls or personal calls petitioner has provided no evidentiary basis for applying the cohan_rule to her cell phone expenses see vanicek v commissioner t c pincite citing 245_f2d_559 5th cir therefore respondent’s determination to disallow all of petitioner’s deduction for cell phone expenses is sustained d business_expenses the parties stipulated that petitioner paid business_expenses of dollar_figure for and entered into evidence receipts totaling that amount included with the receipts is a handwritten page entitled business_expenses that groups the receipts into various categories the court will use those categories to group and discuss petitioner’s expenses continued of sec_274 she must however still substantiate that she used her cell phone for business and provide credible_evidence as to the amount of business use of her cell phone windham agency lc incorporation fee and toll expenses the fee petitioner paid to the state of florida to incorporate her real_estate business is an allowable expense but should properly be reported with her other rental real_estate business_expenses if that amount was not included in the conceded amount of petitioner’s rental real_estate business_expenses it shall be included in the parties’ rule_155_computations petitioner credibly testified that she had to pay tolls when traveling to and from some of her rental properties and produced toll receipts no testimony or other evidence was provided that petitioner had to pay tolls for her brokerage work therefore petitioner is not allowed a deduction for the toll expenses included as a business_expense on her schedule a the tolls petitioner incurred to travel to her rental properties however if they were not included in the conceded amount of petitioner’s rental real_estate business_expenses shall be included in the parties’ rule_155_computations ads insurance license and wells fargo state registration fees expenses petitioner included receipts for advertisements and sponsorships in her business_expenses she testified to taking out those ads and to sponsoring events to increase her name recognition for her brokerage work petitioner is entitled to a deduction for ads and sponsorships of dollar_figure for petitioner also included a receipt for payment of an insurance licensing fee of dollar_figure for a nonresident producer for the state of georgia she also included receipts from wells fargo for chargebacks of state registration fees from wisconsin louisiana ohio and mississippi for dollar_figure dollar_figure dollar_figure and dollar_figure respectively petitioner is entitled to a deduction of dollar_figure for those fees for dues books aaa flowers blackberry and cpa expenses petitioner included receipts for dues of dollar_figure books of dollar_figure aaa of dollar_figure flowers of dollar_figure a blackberry of dollar_figure subscriptions of dollar_figure gifts of dollar_figure and travel of dollar_figure there was no testimony or other evidence presented concerning the dues petitioner deducted one receipt entered into evidence has irish palitian club handwritten on it at the bottom of the receipt are logos for four restaurants no deduction is allowed for dues incurred for membership in any club organized for business pleasure recreation or other social purpose sec_274 there was no testimony or additional evidence provided for the relation of the books aaa flowers and blackberry expenses to petitioner’s brokerage business therefore her deductions for those expenses are not allowed and respondent’s determination is sustained the parties entered into evidence one receipt for tax preparation fees of dollar_figure from petitioner’s cpa petitioner is entitled to a deduction for tax preparation expenses under sec_212 but the expense is not an unreimbursed employee_business_expense the expense is a miscellaneous deduction and is subject_to the floor for itemized_deductions see sec_67 subscriptions gifts and travel_expenses petitioner testified that she gave gifts of subscriptions or wine to her brokerage clients and occasionally to a prospective tenant there were two receipts entered into evidence with either the word gift or gifts handwritten on them one has dollar_figure handwritten on it the other has an illegible handwritten amount on it two other receipts were entered into evidence that were for subscriptions one receipt has the name of the recipient of the subscription typed on it and dollar_figure pd handwritten on it the second has two subscription recipients’ names typed on it and dollar_figure pd on it although petitioner’s handwritten document entitled business_expenses lists gifts of dollar_figure and subscriptions of dollar_figure there are no other receipts labeled as gifts or subscriptions in evidence gifts are subject_to the strict substantiation rules of sec_274 the four receipts entered into evidence do not meet those requirements additionally petitioner has not substantiated the remaining amounts reported as gift_expenses therefore petitioner is not entitled to a deduction for the amounts she listed as gift and subscription expenses for travel_expenses are also subject_to the strict substantiation rules of sec_274 the parties entered into evidence receipts for hotels and taxi rides some of those receipts have women’s summit handwritten on them petitioner provided no testimony or additional evidence to explain the business_purpose of the travel therefore respondent’s determination to disallow a deduction for petitioner’s travel_expenses reported on schedule a is sustained office supplies stamps and calendar expenses the parties entered into evidence receipts for office supplies stamps and calendar expenses of dollar_figure dollar_figure and dollar_figure respectively petitioner had business_expenses related to her brokerage business she also had business_expenses for her rental_real_estate_activities and expenses related to her charity work although petitioner was a credible witness it is clear from her testimony and the other evidence in the record that she did not keep her business and charity expenses--or her substantiation of each--separate as those facets of her life often intersected there is however an evidentiary basis in petitioner’s testimony and the other evidence presented at trial for allowing a portion of petitioner’s deduction for these expenses therefore the court will follow the cohan_rule and allow petitioner one-third of her claimed deduction for office supplies stamps and calendar expenses see cohan v commissioner f 2d pincite iii accuracy-related_penalty sec_6662 and b and authorizes a accuracy-related_penalty on the portion of an underpayment of federal_income_tax attributable to negligence or disregard of rules or regulations or a substantial_understatement of income taxdollar_figure negligence is defined as any failure to make a reasonable attempt to comply with the provisions of the code see sec_6662 sec_1_6662-3 income_tax regs there is a substantial_understatement_of_income_tax for any year if the amount of the understatement for the taxable_year exceeds the greater of of the tax required to be shown on the tax_return or dollar_figure sec_6662 116_tc_438 19respondent included boilerplate in the notice_of_deficiency that also lists any substantial_valuation_overstatement as a possible reason for his determina- tion of the accuracy-related_penalty a substantial_valuation_overstatement is not in issue here under sec_7491 the commissioner bears the burden of production with regard to penalties for an individual taxpayer higbee v commissioner t c pincite once the commissioner has met the burden of production the taxpayer has the burden of proving that the penalties are inappropriate because of reasonable_cause or substantial_authority see rule a higbee v commissioner t c pincite pursuant to sec_6664 no penalty shall be imposed under sec_6662 with regard to any portion of an underpayment if the taxpayer can show that there was reasonable_cause for such portion and that the taxpayer acted in good_faith with respect to such portion whether a taxpayer acted with reasonable_cause and in good_faith is decided on a case-by-case basis taking into account all pertinent facts and circumstances sec_1_6664-4 income_tax regs generally the most important factor is the extent of the taxpayer’s effort to assess his proper tax_liability id see also remy v commissioner tcmemo_1997_72 slip op pincite reliance on the advice of a tax professional may but does not necessarily establish reasonable_cause and good_faith for the purpose of avoiding a sec_6662 penalty 469_us_241 a taxpayer’s reliance on a competent tax professional may establish reasonable_cause and good faith when the taxpayer provides necessary and accurate information to the adviser and actually relies in good_faith on the adviser’s judgment see 593_fedappx_965 11th cir aff’g tcmemo_2013_80 115_tc_43 aff’d 299_f3d_221 3d cir respondent contends that petitioner is liable for the sec_6662 penalty because there was an underpayment due to a substantial_understatement_of_income_tax or alternatively to negligence the parties made concessions before and after trial and the court did not sustain the real-estate-related adjustments and some of the other items in the notice_of_deficiency the court finds that in the event the computations under rule establish that there is a substantial_understatement_of_income_tax then respondent has met his burden of production petitioner argues that she acted in good_faith and had reasonable_cause because she relied on her cpa petitioner testified that her cpa was a former internal_revenue_service employee petitioner’s cpa was not called as a witness at trial and petitioner provided no evidence to corroborate her testimony in regard to her cpa or to otherwise prove her cpa’s credentials that was the extent of petitioner’s argument for reliance on her cpa she entered no evidence to prove that she relied upon her cpa’s advice for any of the items reported on her return that respondent disputed in order to constitute ‘advice’ under sec_1_6664-4 income_tax regs the communication must reflect the adviser’s ‘analysis or conclusion ’ 139_tc_418 quoting 136_tc_585 aff’d 552_fedappx_250 4th cir the mere fact that petitioner engaged a cpa to prepare her return will not suffice to establish reliance the court also finds that respondent has met his burden of production with respect to the penalty for negligence or disregard of rules and regulations petitioner failed to properly substantiate her claimed deduction for a large portion of the unreimbursed employee business_expenses she reported on the schedule a attached to her return as required under sec_6001 and its corresponding regulations see 143_tc_322 she offered no evidence of reasonable_cause or good_faith for her lack of substantiation therefore petitioner is liable for an accuracy-related_penalty for negligence regarding the portion of her underpayment attributable to the disallowance of her unreimbursed employee business_expenses the court has considered all of the arguments made by the parties and to the extent they are not addressed herein they are considered unnecessary moot irrelevant or without merit to reflect the foregoing decision will be entered under rule


t c memo united_states tax_court bosque canyon ranch l p bc ranch inc tax matters commissioner of internal revenue respondent partner petitioner v bc ranch ii l p a k a bosque canyon ranch ii l p bc ranch i inc tax_matters_partner petitioner v commissioner of internal revenue respondent docket nos filed date val j albright kyle r coleman and jim scott specially recognized for petitioners anita a gill erin r hines alicia a mazurek and alexandra e nicholaides for respondent memorandum findings_of_fact and opinion foley judge the issues for decision relating to and are whether bosque canyon ranch l p bcr i and bc ranch ii l p bcr ii were entitled to charitable_contribution deductions relating to their donations of conservation easements whether bcr i and bcr ii partnerships were required to recognize income relating to sales of partnership property and whether the partnerships are liable for sec_6662 gross_valuation_misstatement penalties findings_of_fact i bcr i bcr i was formed in date as a texas limited_partnership bc ranch inc wholly owned by alan friedman was bcr i’s general and tax_matters_partner and held a interest therein bc ranch i l p owned by mr friedman and bc ranch inc and addison partners l p owned by randolph addison sr and randolph addison jr were bcr i’s limited partners owning and interests respectively unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure on date trisept inc wholly owned by mr friedman entered into an agreement with the jack jay powell estate to purchase a big_number acre tract in bosque county texas on date trisept inc assigned its interest in the agreement to bcr i and on date bcr i purchased for approximately dollar_figure the big_number acre tract on date bcr i purchased for approximately dollar_figure an adjacent 15-acre tract immediately following these purchases bcr i owned bosque canyon ranch bc ranch a big_number acre tract between and bcr i made dollar_figure of improvements to bc ranch eg renovation of a house completion of a manmade lake and the installation of fences roads and pools in at mr friedman’s direction bcr i commenced marketing limited_partnership interests lp units and furnished prospective purchasers offering documents prepared by the addison law firm p c these documents included a confidential private_placement memorandum ppm a subscription agreement a memorandum prepared by a certified_public_accountant mark e mitchell detailing tax issues an unsigned draft document entitled bosque canyon ranch declaration of covenants conditions and restrictions declaration of covenants and an unsigned draft agreement of limited_partnership lp agreement the ppm provided that the general_partner had not requested or received a legal opinion relating to the tax consequences of an investment in bcr i in addition it provided that the addison law firm p c had rendered certain services concerning this transaction but had not performed any_tax related_services or rendered any_tax opinions in bcr i commenced marketing lp units at dollar_figure per unit each purchaser would become a limited_partner of bcr i and the partnership would subsequently distribute to that limited_partner a fee simple interest in an undeveloped five-acre parcel of property homesite parcel the distribution of homesite parcels was conditioned on bcr i granting the north american land trust nalt a conservation_easement relating to big_number acres of bc ranch on date pursuant to a deed of conservation_easement deed bcr i granted an easement easement to the nalt a sec_501 organization the deed provided that portions of the area subject_to the easement included habitat of the golden-cheeked warbler an endangered species of bird endemic to and nesting only in texas property subject_to the bcr i advised purchasers that the partnership planned to contribute approximately big_number acres of bc ranch to bcr ii which would subsequently sell its own lp units to purchasers in substantially_similar transactions bcr i would continue to own approximately big_number acres of bc ranch easement could not be used for residential commercial institutional industrial or agricultural purposes in addition bcr i retained various rights relating to the property including rights to raise livestock hunt fish trap cut down trees and construct buildings recreational facilities skeet shooting stations deer hunting stands wildlife viewing towers fences ponds roads trails and wells the homesite parcel owners and the nalt could by mutual agreement modify the boundaries of the homesite parcels provided that any such modification could not in the trust’s reasonable_judgment directly or indirectly result in any material adverse effect on any of the conservation purposes and t he area of each homesite parcel could not be increased at bcr i’s direction the nalt prepared baseline documentation relating to the easement baseline documentation the baseline documentation dated date included maps a recorded copy of the deed photographs taken in existing conditions reports ie including a site survey report dated date and prepared by peter smith a conservation biologist and a signed owner acknowledgement ie pursuant to which randolph addison jr certified that bcr i received and fully reviewed the attached baseline documentation in its entirety and that it is an accurate representation of the physical condition of the conservation area the site survey report described bc ranch and its golden-cheeked warbler habitat mr smith in completed the report using notes christopher wilson nalt’s conservation biologist took during an date bc ranch visit randolph addison jr was responsible for reviewing and executing the documentation between october and date bcr i received signed subscription agreements and payments totaling dollar_figure from lp unit purchasers the lp agreement was executed on date each limited_partner received a homesite parcel and the rights to build a house on the parcel and use bc ranch for various activities eg swimming hiking biking horseback riding and hunting no partner was required to contribute additional capital to the partnership any net cashflow would be distributed only to bc ranch inc bc ranch i l p and addison partners l p bcr i could not without the consent of the limited partners engage in any business unrelated to holding and improving its portion of bc ranch and bcr i did not anticipate conducting any for-profit activity generating any net cashflow or distributing to the limited partners anything other than homesite parcels on an undetermined future date bcr i would convey bc ranch subject_to the conservation_easement to the bosque canyon ranch association bcra a not-for-profit homeowners_association each limited_partner would receive an interest in the bcra and pay an annual fee relating to the maintenance of bc ranch’s common areas the lp units in bc ranch prospective membership in the bcra and the right to use the common areas were appurtenant to and inseparable from each homesite parcel on date the hirsh valuation group hirsh provided bcr i an appraisal report effective date valuing the easement at dollar_figure bcr i in date executed the declaration of covenants during that month bcr i executed special warranty deeds transferring homesite parcels to the limited partners ii bcr ii bcr ii was formed in date as a texas limited_partnership on date bcr i deeded approximately big_number acres of bc ranch to bcr ii on date bcr i assigned its interest in bcr ii to bc ranch i inc bc ranch i l p and addison partners l p bc ranch i inc was bcr ii’s general and tax_matters_partner and held a interest therein bc ranch i l p and addison partners l p were bcr ii’s limited partners owning bcr ii’s cost_basis in its portion of bc ranch as of that date was dollar_figure and interests respectively during and bcr ii incurred ranch improvement expenses of dollar_figure and dollar_figure respectively in bcr ii commenced marketing lp units ranging from dollar_figure to dollar_figure per unit the terms of bcr ii’s offering documents were substantially_similar to the terms of bcr i’s offering documents each purchaser would become a limited_partner of bcr ii and the partnership would subsequently distribute to that limited_partner a homesite parcel the distribution of homesite parcels was conditioned on bcr ii granting the nalt a conservation_easement easement relating to big_number acres of bc ranch on date pursuant to a deed of conservation_easement deed bcr ii granted the easement to the nalt the material terms of the deed were substantially the same as those of the deed ie the deed contained nearly identical provisions relating to golden-cheeked warbler habitat retained rights and boundary modifications at bcr ii’s direction the nalt prepared baseline documentation relating to the easement baseline documentation the baseline documentation dated date included maps a recorded copy of the deed photographs taken in date existing conditions reports eg a copy of the site survey report included in the baseline documentation and a partially executed owner acknowledgement randolph addison jr was responsible for reviewing and executing the documentation throughout bcr ii received signed subscription agreements and payments totaling dollar_figure from purchasers on date hirsh provided bcr ii an appraisal report effective date valuing the easement at dollar_figure bcr ii’s lp agreement dated date was executed on date between date and date bcr ii executed special warranty deeds transferring homesite parcels to the limited partners following these transfers the limited partners of bcr i and bcr ii owned approximately acres and big_number of the remaining big_number acres were subject_to the and easements iii procedural history on its form_1065 u s return of partnership income prepared by mr mitchell bcr i claimed an dollar_figure charitable_contribution_deduction relating to the donation of the easement in addition bcr i reported capital contributions of dollar_figure on date respondent sent bc ranch inc a notice of final_partnership_administrative_adjustment fpaa determining that bcr i was not entitled to a charitable_contribution_deduction and the document was signed by the nalt but was not signed by bcr ii that it was liable for a gross_valuation_misstatement penalty and or an accuracy-related_penalty pursuant to sec_6662 and a respectively in an amended answer filed date respondent contended that the purchasers of bcr i lp units were not bona_fide limited partners and accordingly did not make bona_fide capital contributions to bcr i respondent further contended that the transactions at issue were in substance sales of real_property on its form_1065 prepared by mr mitchell bcr ii claimed a dollar_figure charitable_contribution_deduction relating to the donation of the easement in addition bcr ii reported capital contributions of dollar_figure on date respondent sent bc ranch i inc a notice of final_partnership_administrative_adjustment fpaa determining that bcr ii was not entitled to a charitable_contribution_deduction that the purchasers of bcr ii lp units were not bona_fide limited partners and accordingly did not make bona_fide capital contributions to bcr ii and that bcr ii was liable for a gross_valuation_misstatement penalty and or an accuracy-related_penalty pursuant to sec_6662 and a respectively respondent did not contend that the transactions at issue were sales of real_property bcr i and bcr ii maintained their principal places of business in dallas texas at the times their respective tax matters partners filed petitions with the court the court consolidated petitioners’ cases opinion i bcr i and bcr ii are not entitled to charitable_contribution deductions in general a taxpayer may not claim a deduction relating to a charitable_contribution of property consisting of less than the taxpayer’s entire_interest in the property see sec_170 a taxpayer may however deduct the value of a contribution of a partial interest in property if the contribution constitutes a qualified_conservation_contribution see sec_170 in general a qualified_conservation_contribution is a contribution of a qualified_real_property_interest to a sec_501 organization exclusively for conservation purposes see sec_170 b a qualified_real_property_interest includes a restriction granted in perpetuity on the use which may be made of the real_property see sec_170 such a restriction may include an easement relating to real_property see sec_1_170a-14 income_tax regs the and deeds permit modifications to the boundaries between the homesite parcels and property subject_to the easements respondent contends that the deeds violate the perpetuity requirement of sec_170 petitioners contend that the and deeds do not violate this requirement because any modifications to the boundaries of the homesite parcels were subject_to the reasonable_judgment of the nalt the exterior boundaries of the property subject_to the easements could not be modified and the overall amount of property subject_to the easements could not be decreased petitioners’ contentions relate to irrelevant facts as a result of the boundary modifications property protected by the and easements at the time they were granted could subsequently lose this protection thus the restrictions on the use of the property were not granted in perpetuity see sec_170 140_tc_1 holding pursuant to sec_170 that an easement is not a qualified_real_property_interest if the boundaries of the property subject_to the easement may be modified supplemented by tcmemo_2013_154 aff’d 774_f3d_221 4th cir accordingly the easements do not constitute qualified_real_property interests and the partnerships are not entitled to deductions relating to qualified conservation contributions see belk v commissioner t c pincite petitioners also failed to make available to the nalt documentation satisfying sec_1_170a-14 income_tax regs the partnerships reserved rights to conduct various activities ie hunting trapping construction etc having the potential to impair the easements’ conservation interests prior to date ie the easement’s grant_date and date ie the easement’s grant_date petitioners were required to make available to the nalt documentation sufficient to establish the condition of bc ranch on the date of the transfer see id this requirement ensures that the conservation interests are not adversely affected by the exercise of the reserved rights and that the donor will be able to deduct only what the donee organization actually receives see 140_tc_377 sec_1_170a-14 income_tax regs the and baseline documentation was unreliable incomplete and insufficient to establish the condition of the relevant property on the date the respective easements were granted the site survey report included in the date baseline documentation was completed in date months after the date of the transfer the report described bc ranch as of date whereas the deed was executed on date construction on and development of the property occurred during the intervening 20-month period rendering the description untimely and unreliable in addition the date report was inexplicably included in documentation that purported to be a fully reviewed accurate representation of the property as of date the reference to the site survey report in the baseline documentation’s table of contents indicates that the table of contents was not prepared until date at the earliest in addition the site survey report included in the baseline documentation was based on a bc ranch visit thus it failed to provide a timely and accurate description of the property subject_to the easement petitioners also could not explain why the baseline documentation included photographs taken in date in rambling incoherent testimony andrew johnson president of the nalt failed to clarify these glaring inconsistencies he appeared to be unfamiliar with the baseline documentation did not know when it had been prepared or who had prepared various portions and admitted he never felt that we had to stop preparing a baseline at some artificial date and that portions of the documentation eg a map purporting to reflect the habitat of the golden-cheeked warbler were fairly imprecise the owner acknowledgment ie providing that the documentation was fully reviewed and accurately described the condition of the property in the baseline documentation was not executed prior to the date recording of the easement in addition when asked whether he had signed the owner acknowledgement in the baseline documentation prior to date ie the easement’s grant_date randolph addison jr stated i don’t know what day i signed the document in sum the baseline documentation and baseline documentation were insufficient to establish the condition of the property prior to the dates of the transfers we find meritless and reject petitioners’ substantial compliance contention ii the property transfers were disguised sales respondent established that the partnerships in effect sold homesite parcels and appurtenant rights thereto to their limited partners for dollar_figure to dollar_figure the partnerships deeded the homesite parcels to their limited partners within five months of the partnerships’ acceptance of the limited partners’ payments see sec_707 sec_1_707-3 c income_tax regs providing that a disguised sale occurs if a transfer of money or other consideration by one party would not be made but for an initial transfer of property by the other party and that transfers between a partnership and a partner the disguised sale issue was not asserted in the fpaas and is thus a new_matter see rule a respondent however has met his burden we need not determine whether the lp unit purchasers were bona_fide limited partners in the partnerships see sec_1_707-3 income_tax regs if a person purports to transfer property to a partnership in a capacity as a partner the rules of this section apply even if it is subsequently determined that such person is not a partner within a two-year period are presumed to be a sale unless the facts and circumstances clearly establish that the transfers do not constitute a sale the following facts and circumstances establish that the property transfers at issue were disguised sales the timing and amount of the distributions to the limited partners were determinable with reasonable certainty at the time the partnerships accepted the limited partners’ payments the limited partners had legally enforceable rights pursuant to the lp agreements to receive their homesite parcels and the appurtenant rights the transactions effectuated exchanges of the benefits_and_burdens_of_ownership relating to the homesite parcels the distributions to the partners were disproportionately large in relation to the limited partners’ interests in partnership profits and the limited partners received their homesite parcels in fee simple without an obligation to return them to the partnerships see sec_1_707-3 income_tax regs when transfers are not made simultaneously a disguised sale occurs only if the subsequent transfer is not dependent on the entrepreneurial risks of partnership operations see id subpara ii we reject petitioners’ contention sec_1_707-3 income_tax regs applies to disguised sales of property by a partner to a partnership sec_1_707-6 income_tax regs provides that similar rules apply to disguised sales of property by a partnership to a partner accordingly we apply such similar rules in this case that the limited partners’ payments would be at risk pursuant to the terms of the lp agreements if the easements were not granted the provisions in the agreements purporting to condition the distributions of homesite parcels on the donations of the easements to the nalt were inconsequential the easement was granted on date two days prior to the date on which the bcr i lp agreement was executed and the easement was granted in date three months prior to the date the bcr ii lp agreement was executed in addition mr friedman and randolph addison jr both testified that the partnerships would have refunded the amounts paid_by the limited partners if the easements were not granted in sum the distributions to the limited partners were made in exchange for the limited partners’ payments and were not subject_to the entrepreneurial risks of the partnerships’ operations accordingly each exchange constituted a disguised sale of partnership property by bcr i or bcr ii in exchange for each limited partner’s payments see sec_707 sec_1_707-3 income_tax regs the property sold to each limited_partner consisted of a homesite parcel and an appurtenant right to use bc ranch’s common areas ie a one-forty-seventh interest therein the disguised sales effectuated by bcr i and the disguised sales effectuated by bcr ii constituted sales by the partnerships of all of their interests in bc ranch bcr i and bcr ii were required to recognize and include in their gross_income relating to and respectively any gains relating to the disguised sales ie taking into account adjusted_basis in the property sold see sec_61 sec_707 sec_1001 sec_1_707-3 income_tax regs bcr i’s adjusted_basis in the property sold in each disguised sale ie a homesite parcel and the appurtenant rights thereto included one twenty-fourth of bcr i’s cost_basis in bc ranch and one twenty-fourth of the ranch improvement expenses the partnership incurred as of the date of the sale see sec_1016 sec_1_1016-2 income_tax regs similarly bcr ii’s adjusted_basis in the property sold in each disguised sale included one twenty-third of its cost_basis in bc ranch and one twenty-third of the ranch improvement expenses the partnership incurred as of the date of the sale see sec_1016 sec_1_1016-2 income_tax regs the partnerships did not transfer title in the common areas of bc ranch to the limited partners the lp agreements and the declaration of covenants however provided that the partnerships would eventually contribute bc ranch to the bcra and that the limited partners would receive membership interests in the bcra accordingly following the disguised sales the partnerships held title to bc ranch for the benefit of the limited partners the bcr i and bcr ii sales occurred on date and date respectively on those dates the purchasers of the lp units were admitted as limited partners the partnerships incurred contractual obligations to transfer the homesite parcels and the partnerships had the unrestricted right to accept and use the limited partners’ payments as consideration for the homesite parcels and appurtenant rights see 135_tc_26 holding that factors for determining when a sale occurs include how the parties treat the transaction and whether the contract creates a present obligation on the seller to execute and deliver a deed and a present obligation on the purchaser to make payments aff’d 691_f3d_1315 11th cir sec_1_707-3 income_tax regs providing that a disguised sale takes place on the date that the partnership is considered the owner of the property iii bcr i and bcr ii are liable for gross_valuation_misstatement penalties pursuant to sec_6662 a taxpayer may be liable for a penalty on the portion of an underpayment_of_tax ie required to be shown on a return that certain homesite parcels were deeded to limited partners of bcr ii before date on the dates those deeds were executed bcr ii obtained the unrestricted right to the relevant payments and accordingly the sales of those homesite parcels occurred on those dates see 135_tc_26 aff’d 691_f3d_1315 11th cir sec_1_707-3 income_tax regs is attributable to a gross_valuation_misstatement for returns filed on or before date a gross_valuation_misstatement is a misstatement of the value of property by or more of the property’s value see sec_6662 for returns filed after date the penalty applies to misstatements of the value of property by see pension_protection_act of pub_l_no sec a b stat pincite when the actual value of the property is zero and the value claimed is greater than zero the gross_valuation_misstatement penalty applies see sec_1_6662-5 income_tax regs bcr i on its form_1065 claimed a charitable_contribution_deduction valuing the easement at dollar_figure zero was the correct value relating to the easement because bcr i was not entitled to a deduction see woods v united_states u s ___ ___ 134_sct_557 holding that the gross_valuation_misstatement penalty applies to misstatements relating to legal as well as factual errors accordingly bcr i is liable for a gross valuation the court_of_appeals for the fifth circuit to which an appeal of this case would lie has held that a valuation_misstatement_penalty does not apply when a deduction is disallowed for a reason unrelated to valuation ie it is disallowed because it is not legally permitted see 902_f2d_380 5th cir rev’g tcmemo_1988_408 862_f2d_540 5th cir aff’g 89_tc_912 woods rejects the distinction between legal and factual valuation misstatements see woods v united_states u s ___ ___ 134_sct_557 misstatement penalty unless it demonstrates that it acted reasonably and in good_faith see sec_6664 sec_1_6662-5 income_tax regs bcr i is entitled to raise a reasonable_cause defense relating to the gross_valuation_misstatement penalty because the hirsh report was a qualified_appraisal by a qualified_appraiser and bcr i’s reliance on hirsh and mr mitchell constituted a good-faith investigation of the easement’s value see sec_6664 142_tc_279 notwithstanding its actions relating to the qualified_appraisal of the easement bcr i did not act reasonably or in good_faith with respect to the documentation requirements of sec_1_170a-14 income_tax regs the baseline documentation was insufficient unreliable and incomplete and bcr i’s submission of this documentation to the nalt did not constitute a reasonable attempt to comply with sec_170 and the related regulations randolph addison jr failed to effectively supervise or review the nalt’s slipshod preparation of the baseline documentation and bcr i thereby failed to satisfy its responsibility relating to the preparation of the documentation any reliance on the nalt by bcr i was accordingly unreasonable moreover bcr i failed to make any plausible contentions sufficient to establish reasonable_cause accordingly bcr i is liable for a sec_6662 gross_valuation_misstatement penalty relating to the underpayment_of_tax attributable to claiming a charitable_contribution_deduction bcr ii on its form_1065 claimed a charitable_contribution_deduction valuing the easement at dollar_figure zero was the correct value relating to the easement because bcr ii was not entitled to a deduction see woods u s at ___ s ct pincite effective for returns filed after date taxpayers may not claim a reasonable_cause defense for gross_valuation_misstatements relating to charitable_contribution deductions see sec_6664 accordingly bcr ii is liable for a sec_6662 gross_valuation_misstatement penalty relating to the underpayment_of_tax attributable to claiming a charitable_contribution_deduction contentions we have not addressed are irrelevant moot or meritless to reflect the foregoing decisions will be entered under rule


department of the treasury internal_revenue_service washington d c uil numbers date apr 1s ctl employer_identification_number legends parent b cc x dear sir or madam contact person id number telephone number t g0 this letter responds to the request of counsel for parent b and c dated date fora ruling regarding a proposed reorganization of one charity b along with the creation of two new supporting charities parent and c b is exempt from federal_income_tax under sec_504 c of the internal_revenue_code code and is classified as a public charity under sec_509 simultaneously with the submission of the ruling_request parent and c submitted applications for recognition of exemption from federal_income_tax under sec_501 and requested classification as supporting organizations under sec_509 favorable determination letters were issued to both parent and c initially b was formed as a resource to serve x a governmental agency in dealing with current and expected changes under the federal student_loan program since its formation b has served x by using its technical and processing resources to resolve issues initiating a pilot program for comprehensive processing of death and disability claims and assuming the guarantor responsibilities for a particular state in order for b to assist x the revenues generated by b’s bankruptcy processing services were intended to serve as an interim financing mechanism to subsidize the activities requested by x the reserve generated by bankruptcy processing services is restricted to funding initiatives of x in response to dramatic changes in the student_loan industry b has been forced to reconsider its overall operations strategy so that it will be able to sustain its guarantor and bankruptcy services for the benefit of the student borrowers in connection with this strategic reexamination b has concluded that it should form taxable subsidiaries to carry on certain activities that are highly regarded in the market place but which are not directly related to or an integral part of b’s mission or would otherwise be regarded as potential sources of unrelated_business_income if directly conducted by b to adequately segregate b’s nonexempt activities from b's exempt_activities and to protect b from potentially excessive unrelated business activities the newly formed taxable subsidiaries which will be wholly-owned by parent will undertake the expanded activities as a result of the reorganization parent will be established and will exercise oversight of b c and the taxable entities parent will provide strategic direction provide oversight to operations authorize amendments to the certificates of incorporation and bylaws of the above entities and appoint and remove members of the boards of directors of b c and the taxable entities the board_of directors of parent shail consist of nine members seven of the members will be current board members it is anticipated the remaining two members shall be independent persons with backgrounds similar to those currently on b’s board b will continue to provide guarantor services for a particular state and provide bankruptcy processing services with respect to student loans on a national basis no change in b's charitable purposes or activities services is contemplated c wiil provide grants for education retated projects in furtherance of the exempt purposes of b the funding for c will come primarily from the profits of the taxable subsidiaries via distributions of dividends received by the parent the initial board_of directors of c will consist of nine members all of the members will be members of the parent's board_of directors and will be appointed by parent parent intends to form one taxable holding_company to oversee the taxable subsidiaries the taxable holding_company shall own the stock of the taxable subsidiaries that will undertake the expanded activities the taxable holding_company and the taxable subsidiaries are expected to conform to substantially_similar structural and operational guidelines initially established by parent and subsequently implemented by the respective boards of directors of such taxable subsidiaries after the reorganization is complete parent has represented that it will have general oversight powers but will not be involved in the day-to-day management of the taxable holding_company or any of the taxable subsidiaries the taxable subsidiaries will provide services to parent b c and other unrelated entities the taxable entities will provide technology services and management services manage default aversion programs and collection services for unrelated parties and market and manage alternative student loans parent has represented that any services provided by the taxable subsidiaries to parent b and or c shall be at cost parent will maintain control_over the taxable holding_company through its appointment powers to the holding company's board this governance structure will allow parent to maintain contro of the holding_company without being involved in the day-to-day management decisions of the hoiding company there are not expected to be any common officers of parent and the holding_company and the responsibilities for the day-to-day operations of the holding_company will be vested in individuals who do not share such responsibilities with parent b or c in connection with the reorganization funds assets services and or personnel may be transferred by and among the various entities to the extent parent b or c provides funds assets services and or personnel to the taxable subsidiaries parent b and c have represented that those transactions will be structured on an arm’s length basis to ensure that the tax-exempt participants are paid at least fair_market_value for their participation subject_to x’s regulatory limitations further any such transactions with the taxable subsidiaries will produce revenues that are insubstantial to the specific exempt_organization when compared to the exempt organization's total financial receipts and will be incidental to the exempt organization's primary purpose b will share office space furniture and computer equipment with the taxable subsidiaries the sharing of office space done pursuant to written agreements will be based upon units of measure reflective of costs incurred by the separate entities for example expenses associated with real and personal_property including utilities and cleaning will be allocated based upon usage contemporaneous time logs will be maintained and shared expenses monitored to ensure that b does not subsidize the holding_company and its subsidiaries b proposes to reorganize in order to enhance the loan services provided and assure they are delivered to students in the most high quality and cost-effective manner the reorganization will improve b's viability stability and strength and it will be more readily able to provide efficient delivery of loan services with minimal operating costs furthermore the new separate taxable subsidiaries will enable further growth of the organization by attracting talented professionals which will benefit b’s existing beneficiaries with more services and will benefit c’s charitable_class with funding lastly the reorganization will enable b to make its services more accessible through enhanced internet applications and improved economies of scale you have requested a ruling that after amendment of the bylaws of b and the reorganization including the proposed transfers of assets and activities and the sharing of personnel services facilities and expenses by and between parent c and the taxable subsidiaries b will continue to qualify as an organization described in sec_501 of the code and as an organization other than a private_foundation as described in sec_509 of the code the activities of the taxable subsidiaries will not be attributed to parent b or c and will not jeopardize the continued tax-exempt status of parent b or c b's transfer of assets and liabilities in the reorganization to c and parent will not generate unrelated_business_taxable_income to b c or parent under sec_511 through of the code parent's transfer of assets and liabilities to the taxable subsidiaries in exchange for the common_stock of the taxable subsidiaries will not generate unrelated_business_taxable_income to parent under sec_512 of the code neither the earnings_of the taxable subsidiaries nor the dividend income received by the - parent will constitute unrelated_business_taxable_income to b c or parent under sections of the code i tax exempt status of b and c law sec_501 of the code provides in part for the exemption from federal_income_tax of organizations that are organized and operated exclusively for religious charitable scientific or educational_purposes provided no part of the net_earnings inure to the benefit of any shareholder or individual sec_1_501_c_3_-1 of the income_tax regulations regulations provides that an organization will be regarded as operated exclusively’ for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 of the code an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose at revrul_67_149 1967_1_cb_133 provides that an organization that carries on no other operations other than to receive contributions and incidental investment_income and make contributions to sec_501 organizations qualifies for exemption from tax under sec_501 c of the code in rev rut 1978_1_cb_148 a_trust created by an exempt hospital for the sole purpose of accumulating and holding funds to be used to satisfy malpractice claims against the hospital and from which the hospital directs the bank-trustee to make payments to claimants is operated exclusively for charitable purposes after the reorganization the stated purposes of b will be the same charitable purposes which first qualified b for recognition of exemption b's activities will be in furtherance of those purposes the sharing of assets and services among these related exempt entities contribute to the accomplishment of b’s purposes in a manner similar to the organization described in revrul_78_41 1978_1_cb_148 therefore because parent b and c continue to be organized and operated for charitable purposes as defined in sec_1_501_c_3_-1 of the regulations the reorganization and the transactions involved in it will not affect the exempt status of parent b and c under sec_501 c of the code a parent's exempt status may be jeopardized if the commercial activities of its subsidiary can be considered to be activities of the parent for federal_income_tax purposes a parent_corporation and its subsidiaries are separate taxable entities so long as the purposes for which the subsidiary is incorporated are the equivalent of business activities or the subsidiary subsequently carries on business activities see 319_us_436 that is where a corporation is organized with a bona_fide intention that it will have some real and substantial business function its existence may not generally be disregarded for tax purposes 431_f2d_227 e cir however where the parent_corporation so controls the affairs of the subsidiary that it is a mere instrumentality of the parent the corporate entity of the subsidiary may be disregarded 483_f2d_1098 cir whether the activities of a separately incorporated taxable subsidiary may be attributed to its parent is a question of fact clearly in this instance the taxable subsidiary was formed for a valid business_purpose b is assured that the parent and c will be responsible to b’s needs after the reorganization the activities of a separately organized subsidiary of parent will not be attributed to the parent where the day-to-day management of the subsidiary is separate from the parent and a majority of the subsidiary’s directors are unrelated to the parent therefore the mere ownership of stock of a taxable subsidiary and receipt of dividends on that stock will not adversely affect the exemption of b c and the parent i unrelated_trade_or_business income law sec_511 of the code imposes a tax on the unrelated_business_taxable_income of organizations exempt from federal_income_tax under sec_501 of the code sec_512 of the code defines the term unrelated_business_taxable_income as gross_income derived by an organization from an unrelated_trade_or_business regularly carried on by it less the allowable deductions which are directly connected with such trade_or_business sec_512 of the code sets forth the modifications referred to in sec_512 of the code which exciudes all dividends from the computation of unrelated_business_income sec_513 of the code defines the term unrelated_trade_or_business as any trade_or_business the conduct of which is not substantially related aside from the need of such organization for income or funds or the use it makes of the profits derived to the exercise or performance by such organization of its exempt_function sec_513 of the code provides that the term trade_or_business includes any activity which is carried on for the production_of_income from the sale_of_goods or the performance of services sec_1 a of the regulations provides that gross_income of an exempt_organization subject_to the tax imposed by sec_511 of the code is includible in the computation of unrelated_business_taxable_income if it is income from a trade_or_business such trade_or_business is regularly carried on by the organization and the conduct of such trade_or_business is not substantially related other than through the production of funds to the organization's performance of its exempt functions sec_1_513-1 of the regulations provides that in determining whether trade_or_business from which a particular amount of gross_income derives is regularly carried on within the meaning of sec_512 of the code regard must be had to the frequency and continuity with which the activities productive of the income are conducted and the manner in which they are pursued for example specific business activities of an exempt_organization will ordinarily be deemed to be regularly carried on if they manifest a frequency and continuity and are pursued in a manner generally similar to comparable commercial activities of non-exempt organizations sec_1_513-1 of the regulations provides that in general gross_income derives from unrelated_trade_or_business within the meaning of sec_513 of the code if the conduct of the trade_or_business which produces the income is not substantially related other than through the production of funds to the purposes for which exemption is granted the presence of this requirement necessitates an examination of the relationship between the business activities which generate the particular income in question -- the activities that is of producing or distributing the goods or performing the services involved -- and the accomplishment of the organization's exempt purposes sec_1_513-1 of the regulations provides that trade_or_business is related to exempt purposes in the relevant sense only where the conduct of the business activities has a causal relationship to the achievement of exempt purposes and is substantially related for purposes of sec_513 of the code only if the causal relationship is a substantial one thus for the conduct of trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of the services from which the gross_income is derived must contribute importantly to the accomplishment of those purposes where the production or distribution of the goods or the performance of the services does not contribute importantly to the accomplishment of the exempt purposes of an organization the income from the sale of the goods or the performance of the services does not derive from the conduct of related trade_or_business whether activities productive of gross_income contribute importantly to the accomplishment of any purpose for which an organization is granted exemption depends in each case upon the facts and circumstances involved sec_512 of the code provides special rules for certain amounts of income an exempt_organization receives from a controlled_entity sec_512 of the code provides that notwithstanding sec_512 and of the code an organization controlling_organization receiving a specified_payment from another entity which it controls controlled_entity shall include such payment as an item_of_gross_income derived from an unrelated_trade_or_business to the extent such payment reduces the net_unrelated_income of the controlied entity or increases any net_unrelated_loss of the controlled_entity there shail be allowed all deductions of the controlling_organization directly connected with amounts treated as derived from an unrelated_trade_or_business under the preceding sentence sec_512 of the code provides that the term specified_payment means any interest annuity royalty or rent revrul_68_225 1968_1_cb_283 provides that a charity which conducts charitable and educational programs that foster and promote fair housing would not generate unrelated_business_taxable_income by receiving a fee for providing consulting services to local businesses relating to securing housing for the minority employees of those businesses in revrul_69_463 1969_2_cb_131 a hospital provided administrative services and leased space to a private medical group the ruling noted that the presence of the medical group contributed importantly to the hospital’s mission and therefore the rental income was not unrelated_business_taxable_income because the transfers of cash assets and personnel by b among parent and c permit them to carry out their respective tax-exempt operations these activities are related to their tax-exempt status accordingly such transfers will not constitute unrelated business activity and therefore will not give rise to unrelated_business_taxable_income under sec_511 through additionally the mere investment of a capital_contribution the transfer of assets and liabilities will not in and of itself cause the parent to receive unrelated_business_taxable_income the parent's receipt of dividends will be excluded from the computation of unrelated_business_taxable_income because sec_512 of the code provides that specified_payments a controlling_organization receives from another entity which it controls is included in the gross_income derived from an unrelated_trade_or_business however sec_512 does not include dividends in the definition of the term specified_payment moreover the taxable_income of the taxable subsidiaries will not be construed as unrelated_business_taxable_income to parent b and c for federal_income_tax purposes parent b and c are respected as separate entities since parent b and c were established with a bona_fide intention that they will have real and substantial business functions therefore their existence will not be disregarded accordingly we rule as follows after amendment of the bylaws of b and the reorganization including the proposed transfers of assets and activities and the sharing of personnel services facilities and expenses by and between parent c and the taxable subsidiaries b will continue to qualify as an organization described in sec_501 of the code and as an organization other than a private_foundation as described in sec_509 of the code the activities of the taxable subsidiaries will not be attributed to parent b or c and will not jeopardize the continued tax-exempt status of parent b or c b's transfer of assets and liabilities in the reorganization to c and parent will not generate unrelated_business_taxable_income to b c or parent under sec_5114 through of the code parent's transfer of assets and liabilities to the taxable subsidiaries in exchange for the common_stock of the taxable subsidiaries will not generate unrelated_business_taxable_income to parent under sec_512 of the code neither the earnings_of the taxable subsidiaries nor the dividend income received by the parent will constitute unrelated_business_taxable_income to b c or parent under sections of the code this ruling is directed only to the organization that requested it sec_6110 of the code provides that this ruling may not be used or cited by others as precedent this ruling is limited to the applicability of the provisions of the sections of the code as noted above this ruling is based on the understanding that there will be no material changes in the facts upon which it is based if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter sincerely doh te hor pe sy robert c harper jr manager exempt_organizations technical group 2g


internal_revenue_service number release date index number ------------------------ ----------- ------------------ -------------------------------- - department of the treasury washington dc person to contact --------------------- id no ------------- telephone number --------------------- refer reply to cc psi - plr-119082-05 date october ------- --------- ----------- -------------- --- ------------------------------ legend x ------------------------------------------ a -------------------------------------------- state d1 year dear --------------- submitted on behalf of x requesting that the service grant x an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make an election under sec_754 of the internal_revenue_code limited_partner of x on d1 of year a died x inadvertently failed to timely file a sec_754 election sec_754 provides that if a partnership files an election in accordance with the regulations prescribed by the secretary the basis of partnership property is 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 the information submitted states that x is a state limited_partnership a was a this responds to a letter dated date and subsequent correspondence sec_1_754-1 of the income_tax regulations provides that an election sec_301_9100-1 provides that the commissioner may grant a reasonable plr-119082-05 to all transfers of interests in the partnership during the taxable_year with respect to which the election was filed and all subsequent taxable years a transfer of an interest in a partnership on the death of a partner is eligible for the sec_754 election the value of the partnership_interest reported on the estate_tax_return including discounts is the value used to determine the basis of the partnership_interest and the adjustment to basis of partnership property under sec_743 and sec_754 see generally sec_1_1014-3 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 extension of time to make a regulatory election or a statutory election but no 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_9100-1 defines the term regulatory election as 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 determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief 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 conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time for days from the date of this letter to make an election under sec_754 effective year 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 federal tax consequences of the facts described above under any other provision of the code provides that it may not be used or cited as precedent except as specifically set forth above no opinion is expressed concerning the based solely on the information submitted and the representations made we this ruling is directed only to the taxpayer requesting it sec_6110 sec_301_9100-3 provides the standards the commissioner will use to plr-119082-05 being sent to x’s authorized representatives pursuant to a power_of_attorney on file with this office a copy of this letter is sincerely heather c maloy associate chief_counsel passthroughs and special industries copy of this letter copy for sec_6110 purposes enclosures cc