department of the treasury int ernal revenue service washington d c o f f i c e o f october c h i e f c o u n s e l number release date cc pa cbs bo1 tl-n-3430-01 uil memorandum for associate area_counsel brooklyn cc sb brk attn patricia a riegger from walter ryan senior technician reviewer branch collection bankruptcy summonses cc pa cbs bo1 subject irm procedural update this provides further guidance on irm procedural update which we initially addressed in our memorandum dated date in accordance with sec_6110 it should not be cited as precedent the prior service_center advice concluded that the execution of a return under sec_6020 does not start the period of limitations for assessment and collection as provided under sec_6501 the service_center advice also stated that the 10-year collection statute under sec_6502 does not affect the clear rule in sec_6501 because field offices subsequently raised several additional_assessment issues relating to the first advice we coordinated these questions with branch of the administrative provisions and judicial practice division apjp which has jurisdiction in this area and incorporated their answers in the following discussion issue sec_1 whether a substitute for return sfr relating to an income_tax_liability is a return under sec_6020 whether sec_6501 prohibits the service from making an assessment after the taxpayer defaults on a statutory_notice_of_deficiency related to a b return when a taxpayer files a return showing a lower tax_liability than the liability assessed from a sfr whether the service may reduce the sfr assessment to tl-n-3430-01 make it equal to the amount of tax shown on taxpayer’s return or abate the entire sfr assessment and reassess the lower liability from taxpayer’s return whether sec_6501 affects the collection statute under sec_6502 given that the service has already assessed the taxpayer’s liability under the deficiency procedures and that the service does not abate such an assessment and make a new assessment when it reduces the tax_liability pursuant to a late-filed return is irm procedural update correct in requiring that the collection statute expiration date csed be adjusted so that the 10-year collection_period runs from the adjustment input date of the taxpayer’s late filed return conclusion sec_1 an sfr meets the requirements of a sec_6020 return sec_6501 does not prohibit the service from making an assessment of the amount of tax owed on a sec_6020 return execution of a sec_6020 return however does not allow the service to avoid following deficiency procedures to assess income_tax the service currently reduces the amount of the sfr assessment to make it equal to the amount of tax shown on taxpayer’s return the service does not abate the assessment and make a new assessment sec_6501 does not affect the collection statute under sec_6502 sec_6501 relates only to the statute_of_limitations within sec_6501 irm procedural update is incorrect in requiring that the csed be adjusted so that the 10-year collection_period runs from the adjustment input date of the taxpayer’s late filed return sec_6502 requires that the 10-year collection_period run from the assessment_date the only assessment_date in this situation relates to the deficiency assessment the service did not make an assessment when the taxpayer late filed his return accordingly the csed calculated from the deficiency assessment should not be changed background the problem arises in the following situation after the taxpayer fails to file a timely income_tax return the service executes a sec_6020 return and issues the taxpayer a notice_of_deficiency when the taxpayer defaults the service then makes a deficiency assessment subsequently the taxpayer files a late return showing a liability smaller than the assessed liability the service then reduces the assessed deficiency to the amount shown on the late return when the service reduces the taxpayer’s liability irm procedural update instructs employees to input a tc extending tl-n-3430-01 tl-n-3430-01 the csed ie the tc will reset the 10-year collection_period to begin from the time the taxpayer filed his late return as discussed below the service does not abate the deficiency assessment and make a new assessment based on the taxpayer’s late return substitute for return and b return discussion sec_6020 of the code provides that the service may execute a return for a taxpayer who fails to make any return required by any internal revenue law or regulation at the time prescribed or who makes willfully or otherwise a false_or_fraudulent_return sec_6020 of the code provides that a return prepared under the authority of sec_6020 is prima facie valid for all legal purposes under the authority of sec_6020 the service prepares income_tax returns for individuals who fail to file returns or who file fraudulent_returns the service prepares these returns using manual procedures and automated procedures referred to as substitute for return sfr procedures under sfr procedures the service establishes a taxpayer account on a computer system with the use of dummy_return enters a transaction code tc of and prepares and mails a thirty-day_letter to the taxpayer attached to the thirty-day_letter is an explanation of proposed adjustments as well as a tax calculation summary report the information used to compute the tax is gathered from past filings and or third party information returns the thirty-day_letter is signed by an employee with the proper delegated authority if the taxpayer fails to respond to the thirty-day_letter the service mails a statutory_notice_of_deficiency to the taxpayer with the same explanation of adjustments and tax calculation summary report that was attached to the thirty-day_letter a return prepared by the service pursuant to sec_6020 of the code must meet three requirements first the return must contain taxpayer identifying information including the taxpayer’s name address and social_security_number second the return must contain sufficient data to compute the taxpayer’s liability third the secretary or_his_delegate must sign the return see 91_tc_926 acq in result in part 1991_2_cb_1 in millsap the court concluded that an sfr ie the dummy_return along with the revenue_agent report which is generally attached to the thirty-day_letter meets the requirements of a return prepared by the service under sec_6020 first the taxpayer’s name address and social_security_number appear on the dummy_return 30-day_letter and revenue_agent report second the day letter along with the revenue_agent report or other attachments contain sufficient information to compute the taxpayer’s liability third the proper service employee authorizes the execution and signs the sfr documents we agree with the court’s conclusion assessment of b return tl-n-3430-01 tl-n-3430-01 in general where a taxpayer has not filed its own return the service must follow deficiency procedures to assess income_tax while assessment of employment_tax does not require deficiency procedures sec_6511 and sec_6512 provide for the deficiency procedures as previously stated the sfr process includes producing a b return and then completing the deficiency procedures for income_tax returns sec_6501 provides that the execution of a sec_6020 return will not start the running of the period of limitations on assessment and collection we see nothing in sec_6501 that prohibits assessment when the service prepares an sfr thus the service is correctly assessing income_tax shown on a sec_6020 return after completing the deficiency procedures taxpayer’s return after b return assessment when a taxpayer files a return after the service has made an assessment on a sec_6020 return and the service determines that taxpayer’s return is correct the service abates a portion of the b deficiency assessment to make it equal to the amount of tax shown on taxpayer’s return a new assessment is not made see irm audit_reconsideration handbook and irm audit_reconsideration for automated substitute for return sec_6501’s effect on collection statute_of_limitations under sec_6502 we do not believe that sec_6501 has an effect on the collection statute_of_limitations set forth in sec_6502 as previously stated sec_6501 provides that the execution of a sec_6020 return shall not start the running of the period of limitations on assessment and collection we believe that the term collection in sec_6501 refers to a proceeding in court for the collection of tax without assessment without the provision of sec_6501 sec_6501 would require that any collection via a proceeding in court without assessment begin within three years after the filing of a b return the execution of a sec_6020 return does not affect the running of the limitations_period after assessment however because the running of that period is not tied to the execution of any return instead the trigger for the running of the limitations_period under sec_6502 is the assessment of tax because the execution or filing of a return is not the equivalent of assessment there is no reason why the execution or filing of a sec_6020 return should affect the running of the limitations_period under sec_6502 281_us_489 clarifies that sec_6501 does not affect the collection statute in sec_6502 the court in updike ruled that once the service assessed a liability against a taxpayer where the taxpayer did not file a return the six-year now ten-year statute_of_limitations on collection began the court stated w here in a ‘no return’ case an assessment which under paragraph a may be made at any time has in fact been made proceeding to collect must be begun within six years thereafter but where there has been no assessment the proceeding may be begun at any time thus the exception listed in sec_6501 in reference to tl-n-3430-01 tl-n-3430-01 collection applies only to the statute_of_limitations as provided in sec_6501 for the collection of tax before an assessment is made the collection statute in sec_6502 is ten years from the date of any assessment it does not matter that the assessment is related to a sec_6020 return sec_6502 sec_6502 provides that the csed is calculated from the assessment of the tax see generally mertens law of federal_income_tax sec_57 apparently irm procedural update incorrectly assumed that the service made an assessment based on the taxpayer’s late return which reduced the amount previously assessed as discussed above the service does not make an assessment in this situation consequently in this situation a new csed should not be calculated based on the taxpayer’s late return showing a reduced tax_liability if you have any questions or concerns regarding the assessment issues issues one through four please contact branch of apjp pincite-4940 if you have any questions or concerns regarding the period for collection issue five please contact walter ryan pincite-3610


internal_revenue_service number release date index number ------------------------ ------------- ------------------------------------ ------------------------- -------------------------- ----------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------- id no ------------- telephone number --------------------- refer reply to cc intl b04 plr-139825-04 date date legend taxpayer corp corp corp corp corp corp foreign_entity a foreign --------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------- ------------------------------------ --------------------------------------------------------------------------------------------- -------------------------------- --------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------- -------------------------------- -------------------------------- -------------------------------- -------------------------------- -------------------------------- --------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------- ------------------------------------------- --------------------------------------------------------------------------------------------- plr-139825-04 entity b ------------------------------------------- country a ----------------- state a state b state c state d x y date a year x year z month y ----------- ---------- -------- ------------- ------ ------ ------------------- ------- ------- --------------------- this replies to a letter dated date in which taxpayer requests a ruling dear --------------- that the deferred gain that is the subject of a gain_recognition_agreement filed pursuant to sec_1_367_a_-8 is not recognized when taxpayer the u s transferor under the agreement participates in a reorganization qualifying for nonrecognition treatment under sec_368 the information submitted for consideration is substantially as set forth below representations submitted by taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for rulings verification of the factual information representations and other data may be required as a part of the audit process the rulings contained in this letter are based upon information and taxpayer is a private limited_liability_company organized under the laws of country a for u s federal_income_tax purposes it is represented that taxpayer is treated as a u s_corporation pursuant to sec_269b because the shares of taxpayer plr-139825-04 may not be transferred to any person unless corresponding shares of another u s_corporation corp are simultaneously transferred to the same person stapled corporations taxpayer is indirectly owned by corp a publicly-traded u s_corporation corp corp corp corp corp and corp are each members of the organized under the laws of state a corp 2’s indirect interest in taxpayer is described as follows corp directly owns all the stock of corp a u s_corporation organized under the laws of state b corp directly owns all the stock of corp a u s_corporation organized under the laws of state b and all the stock of corp a u s_corporation organized under the laws of state c corp and corp directly own x and y percent respectively of the stock of corp a u s_corporation organized under the laws of state b corp directly owns the stock of taxpayer and corp a u s_corporation organized under the laws of state d necessary to satisfy the ownership requirements of sec_1504 same affiliated_group_of_corporations that files a consolidated federal_income_tax return under sec_1502 and the regulations thereunder with corp as the common parent_corporation the corp consolidated_group taxpayer has taken the position that because it is a u s_corporation under sec_269b it is not included as a member of the corp consolidated_group but files a separate u s_corporation income_tax return notice c b company organized under the laws of country a prior to date a taxpayer also directly owned all the stock of foreign_entity b a private limited_liability_company organized under the laws of country a both foreign_entity a and foreign_entity b are treated as controlled_foreign_corporations as defined in sec_957 for u s federal_income_tax purposes foreign_entity b to foreign_entity a as a contribution to foreign_entity a’s capital in a transaction that taxpayer represents qualified for nonrecognition under sec_351 in order to preserve nonrecognition treatment under sec_351 taxpayer represents that it will file a gain_recognition_agreement pursuant to sec_1_367_a_-8 with its year z u s corporate federal_income_tax return hereinafter referred to as the foreign_entity b gra taxpayer directly owns all the stock of foreign_entity a a private limited_liability on date a taxpayer transferred percent of the outstanding shares of taxpayer proposes to transfer its statutory seat to state c and terminate its corporate charter in country a taxpayer represents that this transaction will constitute a reorganization described in sec_368 subsequent to this transaction the restrictions on the ability to transfer or otherwise dispose_of the shares of taxpayer without a simultaneous transfer of corresponding shares of corp will be removed the corporations will no longer be stapled after the transaction taxpayer will be a member of the corp consolidated_group taxpayer requests a ruling that the section plr-139825-04 a f reorganization will not trigger the foreign_entity b gra which would require the recognition of gain under sec_367 under sec_1_367_a_-8 a u s transferor by filing a gain law and analysis recognition agreement agrees that if the transferee foreign_corporation disposes of the stock of the transferred corporation prior to the close of the fifth taxable_year following the close of the taxable_year of the initial stock transfer the u s transferor will recognize gain realized but not recognized upon the initial transfer of the stock of the transferred corporation with interest the general_rule is that the u s transferor must recognize this gain on an amended_return filed for the year of the transfer however an election may be made to recognize this gain and interest for the year the gain_recognition_agreement is triggered corporation that triggers gain under the gain_recognition_agreement includes any sale or any disposition treated as an exchange under subtitle a income taxes of the internal_revenue_code a disposition of stock of the transferred corporation does not include certain nonrecognition exchanges described in sec_1_367_a_-8 in which the gain_recognition_agreement is retained but modified or certain transfers described in sec_1_367_a_-8 in which the gain_recognition_agreement is terminated and has no further effect under sec_1_367_a_-8 a disposition of stock of the transferred under sec_1_367_a_-8 if a u s transferor disposes of its stock of the transferee foreign_corporation in a nonrecognition_transaction and the u s transferor complies with certain reporting requirements similar to those contained in sec_1_367_a_-8 then the u s transferor shall continue to be subject_to the terms of the gain_recognition_agreement in its entirety as part of the reporting requirements under sec_1_367_a_-8 the u s transferor is required to provide a notice of the transfer with its next annual certification setting forth the description of the transfer the applicable nonrecognition_provision and the name address and taxpayer_identification_number of the transferee corporation in addition the u s transferor is required to file a new gain_recognition_agreement taking into account the new ownership structure after the transaction a f reorganization remains in existence to continue to be subject_to the terms of a gain_recognition_agreement for purposes of sec_1_367_a_-8 a u s transferor that participates in a sec_368 reorganization and merely reincorporates in another domestic jurisdiction should be treated as the same corporation for purposes of sec_1_367_a_-8 sec_368 reorganizations involve only one operating company h_r rep no 97th cong 2d sess and typically involve an insignificant modification such as the the issue is whether taxpayer as a u s transferor participating in a section plr-139825-04 reincorporation of the same corporate business with the same assets and the same shareholders surviving under a new charter 43_tc_743 aff’d 361_f2d_257 2nd cir see also sec_381 and sec_1_381_b_-1 in complying with reporting requirements similar to those contained in sec_1_367_a_-8 taxpayer should provide notice of the sec_368 reorganization and the reincorporation of taxpayer from country a to state c identifying information of the new transferee of the transferred property should be that of the taxpayer because taxpayer is treated as the same corporation immediately after the reincorporation for this purpose taxpayer should not be required to enter into a new gain_recognition_agreement instead taxpayer should provide a statement certifying that it continues to be the same taxpayer after the transaction for purposes of sec_1_367_a_-8 and remains subject_to the terms of the foreign_entity b gra in its entirety for the remaining term of the agreement the statement must be signed under penalties of perjury by a responsible_officer pursuant to sec_1 a - a thus based solely on the information submitted and the representations set forth above it is held as follows under sec_1_367_a_-8 taxpayer’s participation in a domestic to domestic sec_368 reorganization does not result in recognition of gain under the foreign_entity b gra provided taxpayer satisfies reporting requirements similar to those contained in sec_1_367_a_-8 as provided in this letter no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter under any other provisions of the code or regulations or the tax treatment of any conditions existing at the time of or effects resulting from any transactions including any other domestic to domestic sec_368 asset_reorganization that are not specifically covered by the above ruling specifically no opinion is expressed as to whether the transactions described in this ruling constitute a valid sec_351 exchange or a sec_368 reorganization and no opinion is expressed about the application of sec_269b to taxpayer see notice_2003_50 i r b this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative plr-139825-04 a copy of this letter must be attached to any income_tax return to which it is relevant sincerely s robert w lorence jr robert w lorence jr senior counsel cc intl b04 office of associate chief_counsel international


internal_revenue_service number release date index number ------------------------------------ -------------------------------------- ---------------------------------------- re ----------------------------------------------- ------------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ---------------- telephone number -------------------- refer reply to cc psi b04 plr-122285-14 date date legend trustor trustor trustor trust trust trust trust trust 1a trust 1b trust 1c trust 2a trust 2b trust 2c trust 2d trust 3a trust 3b trust 3c trust 3d trust 4a trust 4b trust 4c trust 4d a b c d e f ---------------------- ---------------------- --------------------- ------------------------------------------------------- ------------------------------------------------------------------ --------------------------------------------------------------------------- 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------ ------ ---- plr-122285-14 date date date date year year year year year year a a1 a2 a3 a4 b b1 b2 b3 b4 c c1 c2 d d1 d2 e e1 f f1 f2 f3 g financial company partnership court settlement agreement state state ------------------- -------------------------- ------------------------ ----------------------- ------ ------- ------- ------- ------- ------- ------------------ ------------------------------ --------------------------------------------- -------------------------------------- ------------------------------- ---------------------- -------------------------- --------------------------------- -------------------------------- ---------------------------- ------------------------- ------------------------------------ -------------------- ---------------------- ---------------------------- ---------------------- ------------------------- ------------------------ ------------------------- ------------------------ ---------------------- ----------------------------- ------------------- --------------------------------------- --------------------------------------------------- --------------------------------------------------- ---------------------------------------------------- ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ ---------------------------------------------------------------------- -------------------------------------------------------------------- ------------------------------------------------------------------ --------------- ------------ plr-122285-14 dear -------------- this letter responds to your authorized representative’s letter dated date requesting a ruling on the generation-skipping_transfer gst tax consequences of a court-approved settlement agreement resolving litigation arising from the administration of four trusts and other disputes facts and representations the facts and representations submitted are summarized as follows in year trustor a trustor 2’s son b trustor 1’s brother and an unrelated individual established partnership in year trustor retained e to assist him in his business and personal financial affairs e proposed that the family establish family trusts and transfer their partnership interests to these trusts the beneficiaries would include a’s children and their descendants b’s children and their descendants and c’s children and their descendants c is the deceased sister of trustor and b on date a date prior to date trustor and trustor created two irrevocable trusts to benefit the children of a b and c and the spouses and descendants of the children of a b and c d was appointed as trustee of these trusts one of these two trusts terminated the other trust is trust on date a date prior to date trustor and trustor created two other irrevocable trusts trust and trust to benefit as class a beneficiaries the children and issue of a2 a3 a4 c1 c2 d1 d2 and e and as class b beneficiaries ten-named employees of partnership and e’s spouse e1 d was appointed as trustee of these trusts subsequent to date d resigned as trustee and trustor appointed e as trustee of trust sec_1 and on date c2 a niece of trustor sec_1 and and her spouse trustor created an irrevocable_trust trust to benefit as class a beneficiaries a2 a3 a4 c1 c2 e1 and their children and issue and as class b beneficiaries f1 f2 and f3 f was general counsel for the partnership and held an interest in the partnership f1 is f’s surviving_spouse and f2 and f3 are f and f1’s children e was appointed as trustee of trust trust sec_1 and are the taxpayers requesting private letter rulings the terms of these trusts are described in detail below trust plr-122285-14 trustor and trustor funded trust with cash and interests in partnership section iii of trust designates by name the following as beneficiaries a2 a3 a4 b1 b2 b3 b4 c1 c2 the spouses of a2 a3 a4 b1 c1 and c2 and the children of a2 a3 a4 b1 b3 b4 c1 and c2 section iii also provides that trust is created for the benefit of all children of the above-named persons born after date and all children of any such after-born children who are born prior to termination of trust a2 a3 and a4 are children of a and a’s spouse a1 b1 b2 b3 and b4 are b’s children c1 and c2 are c’s children section iv a of trust provides that the trustee may distribute the net_income of the trust to any one or more of the then living_trust beneficiaries or may apply said income for the benefit of any such beneficiary or beneficiaries from time to time and in such amount or amounts as the trustee may determine in his sole discretion any income not so distributed or applied may be accumulated but any such accumulations may also be so distributed or applied thereafter as if they were then current income section iv b provides that prior to termination of the trust the trustee may distribute or apply principal of the trust to provide for or to assist in providing for any then living beneficiary such reasonable maintenance support education and medical_care as in his sole discretion the trustee deems to be appropriate section iv c provides that at the termination of trust the trustee shall distribute all remaining income and all of the principal of the trust to such one or more of the then living beneficiaries as he shall select in his sole discretion section iv d provides that in the exercise of the discretion granted to the trustee in section iv the trustee may omit entirely any one or more of the possible beneficiaries the trustee may treat beneficiaries within a group or family differently including the right to omit one or more members of any such classification and also the right to omit entirely to provide for any one or more of such groups or families section iv e provides that in the event after applying the prior provisions any part of the trust estate remains undisposed of the remaining trust estate shall be distributed to then living lawful issue of trustors by right of representation and if there be no such living lawful issue then one-half thereof respectively as to each of the trustors shall be distributed to his and her respective then living heirs at law section iv f provides that unless otherwise terminated at an earlier date under the foregoing provisions the trust shall terminate on the day prior to the date which is twenty-one years after the death of the last to survive of the beneficiaries designated by name in section iii who were living on date section vii b grants trustor the power to remove a trustee and designate a successor trustee when trustor died these powers vested in persons designated by plr-122285-14 trustor pursuant to section vii d at such time as trustor and his designate are unable or unwilling to exercise these powers then a majority of five living male adult beneficiaries may remove and appoint trustees a trustee may not include any beneficiary of trust section x provides that state law governs trust it is represented that this trust has been administered in state for several years it is represented that no additions have been made to trust since date trust and trust trustor and trustor funded trust and with cash and interests in partnership the terms of trust sec_2 and are identical section iii of trust sec_2 and designates as class a beneficiaries all children and issue born prior to termination of the trust of the following named parents a2 a3 a4 c1 c2 d1 d2 and e section iii names as class b beneficiaries ten-named employees of partnership and e1 d1 and d2 are d’s children section iv a of trust sec_2 and provides that the trustee may distribute the net current year’s income of the trust to any one or more of the then living class a beneficiaries or may apply said income for the benefit of any such class a beneficiary or beneficiaries not distributed to or applied for class b beneficiaries as provided in paragraph b of this section iv from time to time and in such amount or amounts as the trustee may determine in his sole discretion any such income not so distributed or applied may be accumulated but any such accumulations may also be so distributed to or applied for class a beneficiaries thereafter as if it were then current net_income or be distributed to or applied for any class b beneficiary as provided in section iv b section iv b provides that the trustee may distribute not to exceed a percent of each current year’s net_income of the trust to any one or more of the then living class b beneficiaries or may apply said income for the benefit of any such beneficiary or beneficiaries from time to time in such year in such amount or amounts within said limit of a percent as the trustee may determine in his sole discretion any portion of such a percent of each year’s current income not so distributed or applied may be accumulated but any such accumulations not to exceed in the aggregate the sum of dollar_figureb may also be distributed or applied thereafter to any one or more of the then living class b beneficiaries as if said amount was then current net_income section iv c provides that prior to termination of the trust the trustee may distribute or apply principal of the trust to provide for or to assist in providing for any then living class a beneficiary such reasonable maintenance support education and medical_care as in his sole discretion the trustee deems to be appropriate plr-122285-14 section iv d provides that at termination of the trust the trustee shall distribute all remaining income and all of the principal of the trust to such one or more of the then living class a beneficiaries as he shall select in his sole discretion the trustee shall not distribute any principal to any class b beneficiary section iv e provides that in the exercise of the discretion granted to the trustee the trustee may omit entirely any one or more of the possible beneficiaries the trustee may treat beneficiaries within a class or group or family differently including the right to omit one or more members of any such classification and also the right to omit entirely to provide for any one or more of such classes groups or families section iv f provides that in the event after applying the prior provisions any part of the trust estate remains undisposed of then the remaining trust estate shall be distributed to the then living lawful issue of trustors by right of representation and if there be no such living lawful issue then one-half thereof respectively as to each of the trustors shall be distributed to his and her respective then living heirs at law section iv g provides that unless terminated at an earlier date under the foregoing provisions the trust shall terminate on the day prior to the date which is twenty-one years after the death of the last to survive of the class a beneficiaries designated in section iii who were living on date section vii b grants trustor the power to remove a trustee and designate a successor trustee when trustor died these powers vested in persons designated by trustor pursuant to section vii d at such time as trustor and his designate are unable or unwilling to exercise these powers then a majority of five living male adult beneficiaries may remove and appoint trustees a trustee may not include any beneficiary of trust or trust respectively section x provides that state law governs trust and trust it is represented that these trusts have been administered in state for several years it is represented that no additions have been made to trust sec_2 or since date trust trustor and his spouse c2 funded trust with cash subsequently the trustee of trust purchased interests in partnership it is represented that sufficient gst_exemption was allocated to trust to result in an inclusion_ratio of zero and that no additions have been made to trust since its creation article iii of trust designates as class a beneficiaries a2 a3 a4 c1 c2 e1 and their children and issue who are born prior to termination of trust article iii names as class b beneficiaries f1 f2 and f3 plr-122285-14 article iv a provides that the trustee may distribute the net current year’s income of trust to or apply said income for the benefit of any one or more of the then living class a or class b beneficiaries in such amount or amounts as the trustee may determine in his sole and absolute discretion any such income not so distributed or applied may be accumulated but any such accumulations may also be distributed or applied thereafter as if it were then current net_income article iv b provides that at the termination of trust the trustee shall distribute all remaining income and all of the principal of the trust to such one or more of the then living class a beneficiaries as he shall select in his sole and absolute discretion no distribution of principal shall be made to any class b beneficiary article iv c provides that in the exercise of the discretion granted to the trustee in article iv the trustee may omit entirely any one or more of the possible beneficiaries the trustee may treat beneficiaries within a class differently including the right to omit one or more members of any such classification and also the right to omit entirely to provide for any one or more class a or class b beneficiaries article iv d provides that in the event after applying the prior provisions any part of the trust estate remains undisposed of the trustee shall distribute any remaining part of the trust estate to the then living class a beneficiaries in equal shares article iv e provides that unless terminated at an earlier date under the foregoing provisions the trust shall terminate on the day prior to the date which is twenty-one years after the death of the last to survive of the class a beneficiaries designated in section iii who were living as of date article iv f provides that at any time the trustee may in his absolute and uncontrolled discretion and for any reason which to him seems to justify such action terminate trust and deliver and pay over the trust estate to the beneficiaries as provided in article iv b as their own absolute property free of the trust article vii b grants the original trustee of trust e and any successor trustee the power to remove a trustee and designate a successor trustee article x provides that state law governs trust litigation and settlement agreement in year a3 her then-spouse and their three children sued e challenging among other things e’s exercise of his discretionary distributions authority to discontinue distributions to them this case settled years later pursuant to this settlement e reinstated distributions to a3’s children but not a3 trustor died in year in that year e appointed g a relative and financial company e’s wholly-owned company as plr-122285-14 successor co-trustees to trusts e also converted partnership into a corporation and executed a shareholder agreement some beneficiaries of the trusts objected to certain provisions in the shareholder agreement to the appointment of g and financial company as co-trustees and to e’s distribution practices alleging that e made distributions to his family at the expense of a1’s descendants in year some of the beneficiaries complained about e’s distribution practices and e’s proposal to sell the partnership in year e discontinued distributions from trusts to a1’s descendants a1 and her adult descendants sued e g and financial company alleging breach of fiduciary duty and self-dealing a1 and her adult descendants requested the appointment of an interim trustee permanent removal of the current trustees and an accounting of the trusts the case was referred to mediation subsequently the parties entered into a settlement agreement to divide the trusts and appoint new trustees for each divided trust pending the issuance of a private_letter_ruling a trustee advisory committee was appointed to include a4 c1’s son c2’s son and e1 upon receipt of the private_letter_ruling and the division of trusts into subtrusts g and financial company will resign in favor of successor trustee s the successor trustees will be selected by a number of the beneficiaries in each subtrust the division will be as follows trust will be divided pro_rata into three unequal subtrusts trust 1a will benefit a2 a3 a4 b1 b2 b3 and b4 trust 1b will benefit c1 b1 b2 b3 and b4 trust 1c will benefit c2 b1 b2 b3 and b4 as provided in trust each subtrust will also benefit the spouses of these individuals all children of the above-named persons born after date and all children of any such after-born children who are born prior to termination of trust trust and trust will each be divided pro_rata into four unequal subtrusts the class a beneficiaries of trust sec_2a and sec_3a include the children and issue of a2 a3 a4 d1 and d2 the class a beneficiaries of trust sec_2b and sec_3b include the children and issue of c1 d1 and d2 the class a beneficiaries of trust sec_2c and sec_3c include the children and issue of c2 d1 and d2 the class a beneficiaries of trust sec_2d and sec_3d include the children and issue of e d1 and d2 the class b beneficiaries of each subtrust include the same ten-named employees of partnership as provided in trust sec_2 and e1 however who is a class b beneficiary of trust sec_2 and is not a class b beneficiary of trust sec_2a sec_2b sec_2c sec_3a sec_3b or sec_3c e1 is a class b beneficiary of trust sec_2d and sec_3d trust will be divided pro_rata into four unequal subtrusts the class a beneficiaries of trust 4a include a2 a3 a4 and their children and issue the class a beneficiaries of trust 4b include c1 and her children and issue the class a beneficiaries of trust 4c include c2 and her children and issue the class a beneficiaries of trust 4d includes e1 and her children and issue the class b beneficiaries of each subtrust includes f1 f2 and f3 as provided in trust plr-122285-14 the settlement agreement provides that trust sec_1a sec_2a and sec_3a will be allocated c percent of the aggregate value of the sum of the combined value of trusts subject_to certain adjustments set forth in the settlement agreement the balance of trusts will be allocated as follows trust sec_1b sec_2b sec_3b and sec_4b - d percent trust sec_1c sec_2c sec_3c and sec_4c - e percent and trust sec_2d sec_3d and sec_4d - f percent each subtrust will have its proportionate share of the assets and bear its proportionate share of the liabilities of its parent trust other than the separation of beneficiaries the dispositive terms of each subtrust are the same as those of its parent trust the termination_date of each subtrust is the same as the termination_date of its parent trust the trustee provisions of trusts will be modified in each subtrust to reflect the terms of the settlement agreement each subtrust designates beneficiaries of such trust who have the power to remove a trustee and appoint a successor trustee who is an independent_trustee each subtrust defines the term independent_trustee as a person who is not i a beneficiary of the trust with respect to which such trustee is serving ii a person who has transferred or joined in the transfer or property to such trust or iii a_related_or_subordinate_party to any person described in clauses i or ii within the meaning of sec_672 the situs provisions of trust sec_1 and will be modified in the related subtrusts to reflect a change_of trust situs from state to state the settlement agreement is contingent upon receipt of a favorable private_letter_ruling ruling requested you have requested a ruling that the terms of the settlement agreement will not cause distributions from or the termination of any interest in trust or the related subtrusts to be subject_to the gst tax law and analysis sec_2601 of the internal_revenue_code imposes a tax on every generation-skipping_transfer under a of the tax_reform_act_of_1986 the act the gst tax is generally applicable to generation-skipping transfers made after date however under b a of the act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the gst tax does not apply to a transfer under a_trust that was irrevocable on date except to the extent the transfer is made out of corpus added to the trust by an actual or constructive_addition after date plr-122285-14 sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax under sec_26_2601-1 hereinafter referred to as an exempt trust will not cause the trust to lose its exempt status for gst tax purposes in general unless specifically provided otherwise the rules contained in this paragraph are applicable only for purposes of determining whether an exempt trust retains its exempt status for generation-skipping_transfer_tax purposes the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of capital_gain for purposes of sec_1001 sec_26_2601-1 provides that a court-approved settlement of a bona_fide issue regarding the administration of the trust or the construction of terms of the governing instrument will not cause an exempt trust to be subject_to the provisions of chapter if- the settlement is the product of arm’s length negotiations and the settlement is within the range of reasonable outcomes under the governing instrument and applicable state law addressing the issues resolved by the settlement a settlement that results in a compromise between the positions of the litigating parties and reflects the parties’ assessments of the relative strengths of their positions is a settlement that is within the range of reasonable outcomes sec_26_2601-1 provides that a modification will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust a modification of an exempt trust will result in a shift in a beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst transfer or the creation of a new gst transfer furthermore a modification that is administrative in nature that only indirectly increases the amount transferred for example by lowering administrative costs or income taxes will not be considered a shift in a beneficial_interest in a_trust sec_26_2601-1 example considers a situation in which in grantor who was domiciled in state x executed an irrevocable_trust for the benefit of grantor’s issue naming a state x bank as trustee under the terms of the trust the trust is to terminate in all events no later than years after the death of the last to die of certain designated individuals living at the time the trust was executed the provisions of the trust do not specify that any particular state law is to govern the administration and construction of the trust in state x the common_law rule_against_perpetuities applies to trusts in a state y bank is named as sole trustee the effect of changing trustees is that the situs of the trust changes to state y and the laws of state y govern the administration and construction of the trust state y law contains plr-122285-14 no rule_against_perpetuities in this case however in view of the terms of the trust instrument the trust will terminate at the same time before and after the change in situs accordingly the change in situs does not shift any beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the transfer furthermore the change in situs does not extend the time for vesting of any beneficial_interest in the trust beyond that provided for in the original trust therefore the trust will not be subject_to the provisions of chapter sec_26_2601-1 example considers a situation in which in grantor established an irrevocable_trust for the benefit of his two children a and b and their issue under the terms of the trust the trustee has the discretion to distribute income and principal to a b and their issue in such amounts as the trustee deems appropriate on the death of the last to die of a and b the trust principal is to be distributed to the living issue of a and b per stirpes in the appropriate local court approved the division of the trust into two equal trusts one for the benefit of a and a’s issue and one for the benefit of b and b’s issue the trust for a and a’s issue provides that the trustee has the discretion to distribute trust income and principal to a and a’s issue in such amounts as the the trustee deems appropriate on a’s death the trust principal is to be distributed equally to a’s issue per stirpes if a dies with no living descendants the principal will be added to the trust for b and b’s issue the trust for b and b’s issue is identical except for the beneficiaries and terminates at b’s death at which time the trust principal is to be distributed equally to b’s issue per stirpes if b dies with no living descendants principal will be added to the trust for a and a’s issue the division of the trust into two trusts does not shift any beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the division in addition the division does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust therefore the two partitioned trusts resulting from the division will not be subject_to the provisions of chapter sec_26_2601-1 example considers a situation in which in grantor executed an irrevocable_trust for the benefit of grantor’s issue naming a bank and five other individuals as trustees in the appropriate local court approves a modification of the trust that decreases the number of trustees which results in lower administrative costs the modification pertains to the administration of the trust and does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification in addition the modification does not extent the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust therefore the trust will not be subject_to the provisions of chapter no guidance has been issued concerning the partial_termination or modification of a_trust that may affect the status of a_trust that is exempt from gst tax because sufficient plr-122285-14 gst_exemption was allocated to the trust to result in an inclusion_ratio of zero at a minimum a partial_termination or modification that would not affect the gst status of a grandfathered trust should similarly not affect the exempt status of such a_trust accordingly in this case the analysis under sec_26_2601-1 is the same for trust as it is for trust sec_1 and in the present case trust sec_1 and are exempt from gst tax because trust sec_1 and were irrevocable prior to date and no additions have been made to trust sec_1 or on or after date it is represented that trust is exempt from gst tax because sufficient gst tax exemption was allocated to trust to result in an inclusion_ratio of zero and no additions have been made to trust since its creation in this case the beneficiaries and trustees had many disagreements and engaged in numerous lawsuits for many years there were many bona_fide issues regarding administration of the trusts and construction of the terms of the trusts the most recent litigation resulted in settlement agreement the parties were represented by separate counsel the facts provided and representations made support a conclusion that the settlement is a product of arm’s length negotiations and is within the range of reasonable outcomes under the terms of trust sec_1 and and applicable state law settlement agreement represents a compromise between the positions of the litigating parties and reflects the parties’ assessments of the relative strengths of their positions pursuant to settlement agreement the trusts will be divided except for dividing along beneficiary lines and the modification of the trustee provisions the subtrusts are nearly identical to the parent trusts the division of trust sec_1 and pursuant to the settlement agreement does not shift a beneficial_interest in any trust to a beneficiary who occupies a lower generation than the person or persons who held the interest before the division moreover the division does not extend the time for vesting of any beneficial_interest in trust or beyond the period provided for in the parent trusts the modification of the trustee provisions in the subtrusts is administrative in nature finally the change_of trust situs of the subtrusts will not change the termination_date of any of the subtrusts accordingly the change in situs does not shift a beneficial_interest in any trust to a beneficiary who occupies a lower generation than the person or persons who held the interest before the division and does not extend the time for vesting of any beneficial_interest in the divided trusts beyond the period provided for in the parent trusts accordingly based upon the facts submitted and the representations made we conclude that the terms of the settlement agreement will not cause distributions from or the termination of any interest in trust or or the subtrusts to be subject_to the gst tax plr-122285-14 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely lorraine e gardner senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc intl plr-126479-00 date date legend taxpayer corporation x entity corporation y date one date two dear this replies to a letter dated date in which taxpayer requests an extension of time under sec_301_9100-3 to file a corrected annual certification described in sec_1_1503-2 for the tax_year ended on date two to include a certification of the dual_consolidated_loss incurred by entity in the tax_year ended on date one additional information was submitted in a letter dated date the information submitted for consideration is substantially as set forth below the ruling contained in this letter is predicated upon facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for a ruling verification of the factual information representations and other data may be required as a part of the audit process taxpayer is the parent of a consolidated_group which included corporation x corporation x is the parent of entity and entity incurred dual consolidated losses in the tax years ended on dates one and two in each tax_year taxpayer timely filed an election under sec_1_1503-2 about three months after the close of the tax_year ended on date two corporation y acquired_corporation x including entity this acquisition resulted in entity ceasing to be a member of taxpayer’s consolidated_group in order to avoid the recapture of the plr-126479-00 previously claimed dual consolidated losses of entity taxpayer filed a closing_agreement with the internal_revenue_service in reviewing the closing_agreement the service notified taxpayer that the election under sec_1_1503-2 filed with respect to the dual_consolidated_loss incurred in the tax_year ended on date two failed to certify the dual_consolidated_loss incurred in the tax_year ended on date one as required by sec_1_1503-2 the failure to certify the dual_consolidated_loss with respect to the tax_year ended on date one was due to the fact that the employee responsible for certifying the loss left the tax department of corporation x before taxpayer filed its tax_return for the tax_year ended on date two also in months prior to the acquisition of corporation x by corporation y corporation y’s tax department underwent significant staff reductions as a result of the company’s restructuring plan as a result of the acquisition of corporation x together with acquisitions of two additional publicly held corporations a week later corporation y’s tax resources were stretched thin sec_301 -1 b defines a regulatory election as an election whose due_date is prescribed by a regulation a revenue_ruling revenue_procedure notice or announcement sec_301_9100-1 provides that the commissioner has discretion to grant a taxpayer a reasonable extension of time under the rules set forth in sec_301_9100-3 to make a regulatory election under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides that requests for relief subject_to this section will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government in the present situation the annual certification is a regulatory election as defined in sec_301_9100-1 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant taxpayer an extension of time provided that taxpayer satisfies the rules set forth in sec_301_9100-3 based on the facts and circumstances of this case we conclude that taxpayer satisfies the standards of sec_301_9100-3 accordingly taxpayer is granted an extension of time until days from the date of this ruling letter to file a corrected annual certification described in sec_1_1503-2 for the tax_year ended on date two to include a certification of the dual_consolidated_loss incurred by entity in the tax_year ended on date one plr-126479-00 the granting of an extension of time to file the annual certification is not a determination that taxpayer is otherwise eligible to file the annual certification -1 a no ruling has been requested and none is expressed as to the application of any other section of the code or regulations to the facts presented a copy of this ruling letter should be associated with the annual certification this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file in this office a copy of this letter is being sent to your authorized representatives sincerely s allen goldstein___________________________ reviewer office of the associate chief_counsel international


t c memo united_states tax_court robert and joyce dirkse petitioners v commissioner of internal revenue respondent docket no filed date gerald w kelly jr for petitioners nicholas j richards for respondent memorandum findings_of_fact and opinion jacobs judge respondent determined deficiencies and accuracy-related_penalties under sec_6662 with respect to petitioners’ federal income taxes as follows penalty year deficiency sec_6662 a dollar_figure dollar_figure big_number big_number - - these deficiencies stem from respondent’s determination that petitioners’ aplary tree-farming and rental activities hereinafter collectively referred to as petitioners’ schedule c activities conducted during and the years in issue were not activities engaged in for profit resulting in the disallowance of claimed losses attributable to these activities the issues for decision are whether petitioners’ schedule c activities were engaged in for profit and whether petitioners are liable for the sec_6662 accuracy-related_penalties all section references are to the internal_revenue_code as in effect for the years in issue findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the exhibits submitted therewith are incorporated herein by this reference background petitioners husband and wife resided in corona california on the date they filed their petition contesting respondent’s determinations for each of the years in issue petitioners electronically filed joint federal_income_tax returns included as a part of these returns were separate schedules for each of petitioners’ schedule c activities these returns were prepared by a paid return preparer employed by h_r block robert dirkse petitioner was raised in a small farming community in wisconsin during his teenage years petitioner worked on his grandfather’s farm assisting his family in planting and growing vegetables and flowers for most of his professional career petitioner was employed as a public school teacher at the high-school level teaching biology chemistry and general science courses petitioner subsequently became a school principal at the elementary-school level and during the years in issue he was a supervisor at the adult school prior to and during the years at issue joyce dirkse mrs dirkse was employed as a registered nurse petitioners’ apiary activities in the early 1980's petitioner became interested in beekeeping as a consequence of teaching a science class for gifted students in petitioners acquired a swarm of bees from the father of one of petitioner’s students and purchased apiary beekeeping equipment and clothing petitioners thereafter joined the local beekeeping society initially petitioners raised their bees in hives located on someone else’s property in petitioners acquired a 10-acre tract of land in corona california the corona property where they moved their beehives and worked them corona is approximately miles from cerritos where petitioners then q4e- resided petitioners then moved their beehives to cerritos but in petitioners relocated their beehives back to the corona property in response to neighbors’ complaints petitioners’ apiary activities never generated a profit the following chart sets forth the revenues and expenses from petitioners’ apiary activities between and year revenue bxpenses dollar_figure dollar_figure big_number big_number big_number big_number the record does not reveal the revenue and expenses from petitioners’ apiary activities prior to petitioners’ tree-farming activities---rojo international in while attending the los angeles county fair petitioners visited a booth manned by the california macadamia society the macadamia society and inquired as to the feasability of raising macadamia trees on their corona property they joined the macadamia society and attended meetings in order to learn about the care and cultivation of macadamia trees petitioners hired the president of the macadamia society as a consultant she made specific recommendations as to the type of macadamia trees that should be planted on petitioners’ corona property relying upon these recommendations in petitioners planted ungrafted macadamia trees on their corona property - based upon their research and consultation with members of the macadamia society petitioners calculated that once the macadamia trees reached maturity which took between and years each tree would produce approximately pounds of marketable nuts the advice petitioners received proved to be erroneous many of the trees failed to fully develop during the first year in order to restore their crop petitioners planted new saplings using a technique that in the prior year petitioners’ consultant had recommended against using in petitioners installed a gravity water irrigation system on the corona property notwithstanding the installation of the irrigation system the macadamia trees failed to produce the guantity of marketable nuts that petitioners expected moreover in petitioners lost of their trees due to frost damage only a portion of the number of trees lost were ever replanted as a hedge against the poor yields of macadamia nuts petitioners decided to plant fuyu persimmon trees on the corona property in petitioners planted persimmon trees on a portion of the unused land at their corona property following a 3-year gestation period the persimmon trees yielded a marketable crop of fruit as the trees and crops grew they required more attention petitioners hired a part-time laborer carlos ramirez mr ramirez in on several occasions petitioners hired migrant workers to assist mr ramirez -- - the workers were paid on a per-project basis performing such tasks as packaging and selling the nuts and fruit watering and pruning the trees and performing general maintenance around the corona property in addition to hiring these workers petitioners improved the roads to provide easier access to the corona property and installed feet of fencing to prevent thieves from stealing their macadamia nut and persimmon produce initially petitioners attempted to sell their nut and fruit produce at the fuyu co-op in temecula california however the co- op’s quality standards prevented a substantial portion of petitioners’ produce from being sold in an attempt to increase revenues mr ramirez on behalf of petitioners began selling the macadamia nuts and persimmon fruit at roadside stands however this activity ceased after mr ramirez was confronted by competing vendors and the local authorities regarding his lack of the required business licenses thereafter petitioners derived most of their revenue through consigning their goods at swap meets unsold produce was often donated to charity during the years in issue petitioner generally visited the corona property three times a week during weekday trips he typically spent the night at the corona property and returned to his full-time job the following morning on weekends petitioner usually stayed at least one night and often he stayed until sunday evening before returning home to cerritos mrs dirkse often accompanied petitioner on weekend visits petitioners failed to maintain mileage logs for their trips to the corona property while at the corona property petitioner often assisted in the harvesting and packing of the macadamia nuts and persimmon fruit petitioners grouped their tree-farming activities e their macadamia nut and persimmon fruit operations which they called rojo international as a single schedule c activity the tree- farming activities never generated a profit the following chart sets forth the revenues and expenses from petitioners’ tree-farming activities between and year revenue bxpenses s440 dollar_figure big_number big_number big_number big_number big_number the record does not reveal the revenue and expenses from petitioners’ tree-farming activities prior to rental_activity beginning in the early 1980’s petitioners were employed on a part-time basis as teacher trainers for the christian reform church the church frequently petitioners allowed church members to use the corona property for religious retreats petitioners maintained six trailers on the corona property during the religious retreats church members were housed in petitioners’ trailers for which petitioners received a nominal rental fee --- - in petitioners disassociated themselves from the church and began renting the trailers to individuals seeking weekend getaways petitioners failed to obtain the requisite permits or business licenses for this activity petitioners’ rental activities which for the years in issue petitioners listed as a consulting activity never generated a profit the following chart sets forth the revenues and expenses from petitioners’ rental activities between and year revenues bxpenses dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number the record does not reveal the revenue and expenses from petitioners’ rental activities prior to miscellaneous during the years the revenues from petitioners’ schedule c activities totaled dollar_figure whereas the claimed expenses from these activities totaled dollar_figure on their and federal_income_tax returns petitioners reported the following income and schedule c losses year income schedule c loss dollar_figure dollar_figure big_number big_number --- - in the internal_revenue_service audited petitioners’ return and determined that no change thereto was required petitioners did not maintain a business bank account during the years at issue revenues and expenses for each of the schedule c activities were channeled through their personal checking account notice_of_deficiency in the notice_of_deficiency respondent determined that petitioners’ schedule c activities were neither entered into for profit nor were the claimed expenses relating thereto substantiated subsequently respondent conceded that most of the claimed expenses were paid_or_incurred consequently respondent disallowed the deductions attributable to those activities for and dollar_figure and dollar_figure respectively respondent alternatively determined that the losses from petitioners’ schedule c activities constituted passive_activity_losses that were subject_to the deduction limitations of sec_469 moreover respondent imposed sec_6662 accuracy-related_penalties for the years in issue opinion schedule c activities the primary issue is one of fact whether petitioners entered into or carried on all or any of their schedule c activities with -- - an intent to make a profit ’ if petitioners did not have the requisite profit_motive as respondent maintains then all deductions exceeding the revenue attributable to those activities would be disallowed pursuant to sec_183 respondent contends that petitioners lacked the requisite intent to make a profit in carrying out their schedule c activities specifically respondent asserts that petitioners did not conduct their schedule c activities in a businesslike manner never earned a profit from any of these activities and are unlikely to do so in the near future and realized substantial tax savings by offsetting the income from their primary occupations with their schedule c losses on the other hand petitioners maintain that they entered into and carried out their schedule c activities with an intent of for purposes of applying sec_183 we treat all three of petitioners’ schedule c activities as a single activity in ascertaining what constitutes an activity or activities of a taxpayer we take into account the facts and circumstances of each case see sec_1_183-1 income_tax regs generally the most significant factors in making this determination are the degree of organizational and economic interrelationships of the various undertakings and the business_purpose which is or might be served by carrying on the operations separately or in a trade_or_business setting see id in the case at bar petitioners contend that they entered into each of their schedule c activities with the intent of supplementing their retirement income all three activities were operated with the same business_purpose and each shared the resources and capital of the others in sum each schedule c activity was organizationally and economically dependent upon the others on brief petitioners treated all three of their schedule c activities as one activity making a profit petitioners assert that they operated their schedule c activities in a businesslike manner petitioners maintain that because the apiary and tree-farming activities were inherently high risk businesses that often require a lengthy startup_period their history of losses relating thereto was not uncommon accordingly petitioners maintain that they were willing to incur substantial startup costs with the expectation that eventually their schedule c activities would provide them with supplemental retirement income for the reasons set forth below we agree with respondent and conclude for each of the years at issue petitioners’ schedule c activities were not engaged in for profit ’ we begin our analysis with the applicable statutory provisions pursuant to sec_183 deductions with respect to an activity_not_engaged_in_for_profit generally are limited to the amount of gross_income derived from such activity sec_183 c defines an activity_not_engaged_in_for_profit as any activity other than one with respect to which deductions are allowable for the taxable_year under sec_162 or under paragraph or of because we find that petitioners’ schedule c activities were not engaged in or carried on for profit we need not decide respondent’s alternative position that petitioners’ schedule c losses were passive_activity_losses subject_to the limitations imposed under sec_469 -- sec_212 accordingly sec_183 is considered in_pari_materia with sec_162 and sec_212 see sec_1_183-2 income_tax regs the basic standard for determining whether an expense is deductible under sec_162 and sec_212 and thus not subject_to the limitations of sec_183 is the following a taxpayer must show that he or she engaged in or carried on the activity with an actual and honest objective of making a profit see 893_f2d_656 4th cir affg 91_tc_686 781_f2d_724 9th cir affg lahr v commissioner tcmemo_1984_472 90_tc_74 sec_1_183-2 income_tax regs although a reasonable expectation of profit is not required the taxpayer’s profit objective must be bona_fide see 91_tc_371 85_tc_557 while the focus of this test is on the subjective intent of the taxpayer objective criteria may also be used see independent elec supply inc v commissioner supra sec_1_183-2 income_tax regs sets forth a nonexclusive list of factors to be considered in determining whether an activity is engaged in or carried on for profit these factors are the manner in which the taxpayer carried on the activity the expertise of the taxpayer or his advisers the time and effort expended by the taxpayer in carrying on the activity the expectation that assets used in the activity may appreciate in value the success of the taxpayer in carrying on other similar or dissimilar activities the taxpayer’s history of income or losses with respect to the activity the amount of occasional profits if any which are earned the financial status of the taxpayer and whether elements of personal pleasure or recreation exist no single factor is necessarily relevant or dispositive rather the facts and circumstances of the case ultimately control see 94_tc_41 further the determination of a taxpayer’s profit_motive is made on a yearly basis see 333_us_591 we now apply each of these factors to the facts in this case manner of carrying on the activity the fact that a taxpayer carries on an activity in a businesslike manner and maintains complete and accurate books_and_records may indicate that the activity was engaged in for profit see 72_tc_659 sec_1 b income_tax regs adapting new techniques and abandoning methods that are economically inefficient may also support the the record does not reveal whether petitioners ever engaged in other similar or dissimilar activities thus we find a discussion of petitioners’ success in these activities to be nongermane conclusion that the taxpayer possessed the requisite profit_motive see 72_tc_28 here the record reveals numerous instances where petitioners did not conduct their schedule c activities in a businesslike manner petitioners failed to acquire the necessary local business licenses to sell their produce resulting in lost revenue petitioners did not maintain any formal business plans budgets ledgers or other accounting_records in addition they did not possess any mileage logs or formal records of payments made to their undocumented workers in this regard petitioners were unable to substantiate some of their claimed deductions petitioners also failed to keep separate bank accounts they intermingled their personal funds with those of their schedule c activities and paid all expenses from this account petitioner testified that he decided against using a separate business account because the bank charged a per check fee despite incurring losses over a number of years there is no convincing evidence in the record indicating that petitioners undertook meaningful action to control or rectify the continual stream of losses arising from their schedule c activities petitioners’ losses increased during the years between and for instance petitioners claimed big_number miles on their return as the distance traveled in connection with their schedule c activities at trial they conceded that the actual number of miles was approximately big_number -- - from dollar_figure in to dollar_figure in in fact petitioners acknowledged that they are unable to predict when or if their schedule c activities will become profitable consequently this factor weighs against a finding of a profit_motive expertise of taxpayer or advisers preparation for an activity after conducting an extensive study or consultation with experts regarding the accepted business practices of the activity may indicate a profit_motive where the taxpayer conducts the activity in accordance with such study or advice see sec_1_183-2 income_tax regs conversely a taxpayer’s failure to obtain expertise in the activity may indicate a lack of profit_motive see 809_f2d_355 7th cir affg tcmemo_1985_523 prior to entering into their schedule c activities petitioners consulted with and relied upon the advice of members of the macadamia and persimmon societies as well as an experienced beekeeper moreover they spent a considerable amount of time and effort researching their schedule c activities indeed when the advice of a paid consultant turned out to be incorrect petitioners were able to identify the source of the problem and take remedial action the fact that petitioners consulted technical noneconomic experts does not necessarily indicate that they carried on their -- - schedule c activities for profit see hillman v commissioner tcmemo_1999_255 considering all the years of substantial losses petitioners did little to demonstrate an expertise for the economics of these operations consequently this factor weighs against a finding that petitioners’ schedule c activities were carried on with the intent to make a profit see kahla _v commissioner tcmemo_2000_127 time and effort expended in the activity the fact that a taxpayer devotes much of his or her personal time and effort in carrying on an activity particularly if the activity does not have substantial recreational aspects may indicate a profit_motive see sec_1_183-2 income_tax regs during the years at issue petitioner traveled to their corona property at least three times a week and often spent the weekends there accompanied by mrs dirkse while on the property petitioner spent significant periods of time supervising his laborers as well as assisting in the tree-farming and apiary activities in addition petitioners conducted many of the retreat activities and managed the rental of their trailers moreover they often spent their free time learning about apiary and tree farming consequently this factor weighs in favor of finding a profit_motive a expectation that assets may appreciate an expectation that assets used in the activity will appreciate may indicate a profit objective see sec_1 b income_tax regs accordingly a profit_motive may be inferred even where there are no operating profits so long as the appreciation in value of the activity’s assets exceeds its operating_expenses of the current_year and its accumulated losses from prior years see 72_tc_411 affd 647_f2d_170 9th cir petitioners purchased the corona property in in order to relocate their apiary activity not for speculative appreciation although petitioner testified regarding the appreciation of land in the vicinity of the corona property there is no credible_evidence in the record as to the value of petitioners’ property or that any appreciation in the assets used in petitioners’ schedule c activities will exceed the cumulative losses of their schedule c activities consequently this factor weighs against finding a profit_motive history of income or losses from the activity a history of losses over an extended period of time may indicate the absence of a profit objective see allen v commissioner t c pincite although a long history of losses is an important criterion it is not necessarily determinative see engdahl v commissioner t c pincite allen v commissioner -- - supra for instance a series of startup losses or losses sustained because of unforeseen circumstances beyond the taxpayer’s control may not indicate a lack of profit_motive see sec_1 b income_tax regs no profits have ever been generated from petitioners’ schedule c activities and none are expected in the near future petitioners have been conducting their schedule c activities well beyond the length of time that can be reasonably called the startup_period and there is no evidence in the record indicating that their schedule c losses are the result of unforeseen circumstances rather the extended period of losses is attributable to petitioners’ unchecked expenditures and their failure to develop a suitable market for their produce indeed the growing disparity between petitioners’ losses and revenue stream is indicative of an unprofitable undertaking and is inconsistent with petitioners’ purported intent to provide supplemental income consequently this factor weighs against a finding of a profit_motive the amount of occasional profits barned if any if an activity generates only small infrequent profits and typically generates large losses the taxpayer conducting the activity may not have a profit objective see golanty v commissioner supra pincite sec_1_183-2 income_tax regs as stated petitioners have never made a profit from their schedule c activities and there is no indication from the record that petitioners can realistically expect profitability in the near future consequently this factor weighs against a finding of a profit_motive taxpayer’s financial status substantial income from sources other than the activity in guestion particularly if the losses from the activity generate substantial tax benefits may indicate that the activity is not engaged in for profit see hillman v commissioner supra sec_1_183-2 b income_tax regs for and petitioners had dollar_figure and dollar_figure respectively in unrelated gross_income during the same years they claimed dollar_figure and dollar_figure respectively in schedule c losses petitioners used these losses to reduce their gross_income by percent for and percent for these reductions led to substantial tax savings for petitioners consequently this factor weighs against a finding of a profit_motive blements of personal pleasure or recreation the existence of recreational elements in an activity may indicate that the activity is not engaged in for profit on the other hand where an activity lacks any appeal other than profit a profit_motive may be indicated see hillman v commissioner supra sec_1_183-2 income_tax regs - - nothing in the record indicates that petitioners used the corona property or their schedule c activities to derive personal pleasure or recreation consequently this factor weighs in favor of finding a profit_motive to conclude after giving due consideration to the record as a whole we find that during the years in issue petitioners did not carry on their schedule c activities with an intent to make a profit accordingly we sustain respondent’s disallowance of petitioners’ schedule c losses sec_6662 accuracy-related_penalty we next consider whether petitioners are liable for the sec_6662 accuracy-related_penalties for the years in issue sec_6662 imposes a penalty equal to percent of any portion of an underpayment_of_tax that is attributable to negligence or disregard of rules or regulations or to a substantial_understatement of tax see sec_6662 b and b negligence includes any failure of the taxpayer to make a reasonable attempt to comply with the provisions of the internal_revenue_code and disregard includes any careless reckless or intentional disregard of the internal_revenue_code or its rules or regulations sec_6662 the accuracy-related_penalty will be imposed unless the taxpayers can demonstrate that they acted in good_faith and with reasonable_cause with respect to the --- - underpayment see sec_6664 c in determining the applicability of sec_6664 we weigh the particular facts and circumstances of each case see sec_1_6664-4 income_tax regs petitioners maintain that the sec_6662 accuracy-related_penalties should not be imposed because they made a reasonable attempt to prepare accurate tax returns and relied upon the advice of a professional tax preparer in addition petitioners note that their returns for and earlier years were audited and resulted in the internal revenue service’s accepting the schedule c activity losses as reported on those returns on the other hand respondent maintains that petitioners as educated individuals should have known that the size of the losses claimed in relation to their sales combined with the enjoyment and tax benefits they derived from the activity was ‘too good to be true’ moreover respondent asserts that petitioners’ misclassification of their rental activities as consulting on their tax returns as well as petitioners’ overstatement of their automobile business mileage see supra note mandates the imposition of the sec_6662 accuracy related penalties although we are troubled by petitioners’ misclassification of their rental activities and the overstatement of their business mileage on balance we agree with petitioners and thus hold that -- - the sec_6662 accuracy-related_penalty should not be imposed for either year under consideration we have considered all arguments made by the parties for contrary holdings and to the extent not discussed find them to be without merit to reflect the foregoing decision will be entered for respondent with respect to the deficiencies and for petitioners with respect to the addition_to_tax under sec_6662