t c no united_states tax_court trinity industries inc and subsidiaries petitioner v commissioner of internal revenue respondent docket no filed date company t a member of p’s affiliated_group contracted to build barges for two established customers pursuant to an interim financing_arrangement part of the purchase_price was deferred until months after the delivery of each barge the two customers later claimed damages from alleged defects in barges that they had previously purchased from t under earlier contracts they withheld deferred payments due under the later contract asserting common_law rights to offset the deferred payments against their claimed damages under the earlier contracts in reporting the affiliated group’ sec_2002 consolidated income p accrued only the payments actually received in and excluded the deferred payments held the full contract_price of the barges delivered in must be accrued that year accrual is not postponed by the purchasers’ assertion of rights to withhold deferred payments under common_law claims of offset held further amounts due to t and withheld by the obligors pursuant to common_law claims of offset are not deductible in pursuant to sec_461 i r c michael l cook jeffry m blair and william c brooks for petitioner george e gasper and garrett d gregory for respondent thornton judge trinity industries inc petitioner is the common parent of an affiliated_group_of_corporations making a consolidated_return of income the affiliated_group by notice_of_deficiency respondent determined a dollar_figure deficiency for petitioner’s taxable_year ending date all but one of the adjustments that gave rise to that deficiency have been settled the only remaining issue involves accrual of income earned by petitioner’s wholly owned subsidiary trinity marine products inc trinity for the taxable_year ending date more particularly in trinity contracted to build barges for two established customers part of the purchase_price the parties use the term petitioner to refer principally to trinity industries inc although they sometimes seem to use the term also to refer without distinction to its affiliated_group_of_corporations or its wholly owned subsidiary trinity marine products inc for simplicity and convenience we have generally adhered to the terminology used in the parties’ stipulations and arguments in date petitioner changed its yearend from mar to dec was deferred until months after the delivery of each barge the two customers later claimed damages allegedly caused by defects in barges that they had previously purchased from trinity under earlier contracts they sought to offset their unpaid deferred obligations under the later contract against claimed damages arising under the earlier contracts for the taxable_year ending date trinity was included in petitioner’s consolidated u s corporate_income_tax return petitioner an accrual basis taxpayer included in the affiliated group’ sec_2002 consolidated income payments received for barges that trinity delivered in but excluded the deferred payments in the notice_of_deficiency respondent determined that petitioner’s failure to accrue the deferred payments in resulted in an understatement of the affiliated group’ sec_2002 consolidated income which contributed to an overstatement of the consolidated_net_operating_loss that petitioner had carried back to the consolidated_return the issues for decision are whether petitioner properly excluded the withheld payments from it sec_2002 income and if petitioner was required to accrue the withheld payments in whether it may deduct the withheld payments in pursuant to sec_461 unless otherwise indicated section references are to the internal_revenue_code in effect for the year at issue and rule references are to the tax_court rules_of_practice and procedure findings_of_fact the parties have stipulated some facts which we find accordingly except as otherwise noted when it petitioned the court petitioner’s principal_place_of_business was in texas petitioner is a diversified industrial company engaged in the manufacture marketing and leasing of various products trinity manufactures inland barges primarily for commercial marine transportation companies the first contracts with flowers and florida marine in the late 1990s trinity entered into a series of contracts to build barges for j russell flowers inc flowers and separately for florida marine transporters inc florida marine hereinafter we sometimes refer to these contracts collectively as the first contracts payment under these contracts was generally due upon delivery of each barge trinity delivered the barges to flowers and florida marine on various dates between date and date petitioner the parties have stipulated that a portion of the purchase_price of the barges delivered to j russell flowers inc flowers under the first contracts was deferred for months as part of an interim financing_arrangement the stipulated contract which is in evidence provides however that the dollar_figure contract_price for each barge delivered to flowers was due within days of the invoice date an invoice was to be issued upon installation of the covers for each vessel because the stipulation is clearly contrary to the facts established by the stipulated contract we shall disregard the stipulation see 93_tc_181 accrued and reported the sales income in the taxable_year in which trinity delivered the barges the second contract with flowers and florida marine on date after the delivery and acceptance of the barges that were the subject of the first contracts trinity entered into another contract the second contract with flowers and florida marine under the second contract trinity as builder agreed to deliver certain barges to flowers as purchaser flowers had the right to assign its contractual rights to florida marine which was also a signatory to the contract with respect to a specified number of the barges the contract_price was generally dollar_figure for each barge with dollar_figure million to be paid upon completion and acceptance of each barge the contract provided for interim financing of the dollar_figure balance which the purchaser was to pay to trinity with interest within months of delivery of each barge pursuant to the second contract trinity built numerous barges and delivered them to either flowers or florida marine at various times between date and date a contract addendum dated date provided that trinity would provide two additional barges for dollar_figure each with dollar_figure payable upon completion and acceptance of each barge and payment of the dollar_figure balance deferred for months pursuant to an interim financing provision another contract addendum dated date provided for an additional six barges for dollar_figure each with payment due in full upon delivery of each barge problems with barges sold under the first contracts after the execution of the second contract problems developed with the barges that trinity had sold to flowers and florida marine under the first contracts flowers and florida marine complained that the coatings on the barges were defective and caused the barges to rust trinity denied any liability concerning this alleged defect the florida marine litigation on date florida marine filed a petition for an unspecified amount of damages in the 22d judicial court st tammany parish louisiana against petitioner trinity a coating manufacturer a coating distributor and three insurance_companies the trinity defendants on date florida marine filed a motion for leave to file a second supplemental and amending petition for damages requesting declaratory_judgment that it was entitled to offset unpaid deferred obligations under the second contract against florida marine’s claim for damages with respect to barges purchased under the first contracts in its memorandum in support of the aforementioned motion filed concurrently with the motion florida marine stated that it does not dispute that certain amounts are due trinity pursuant to the second contract but indicated that florida marine and trinity disagreed as to when the deferred payments were due the memorandum stated that florida marine had placed in escrow the amounts that trinity had claimed were past due the memorandum indicated that the declaratory_judgment action would enable the court to declare the rights of flowers marine to a set off and or credit for amounts if any owed by florida marine and to trinity under the second contract against such amounts as trinity may be indebted to florida marine under claims which are the subject of the principal action in their opposition to florida marine’s motion the trinity defendants argued that florida marine’s motion should be denied because among other reasons applicable louisiana law would not permit florida marine’s obligations under the second contract to be offset against its claim for damages with respect to barges purchased under the first contracts which were contingent uncertain and contested the flowers litigation on date flowers filed a complaint in the u s district_court for the northern district of mississippi greeneville division against petitioner trinity a coating manufacturer and a coating distributor in its complaint flowers sought an order of rescission whereby trinity would be required to repurchase from flower sec_56 barges sold under the the record does not reveal the disposition of florida marine’s motion for leave to file a second supplemental and amending petition for damages first contracts for dollar_figure less an offset credit of dollar_figure for deferred principal payments that it owed trinity under the second contract alternatively the complaint sought actual damages of not less than dollar_figure plus punitive_damages of dollar_figure million the complaint also sought a declaratory_judgment that flowers was entitled to exercise its common_law right of offset with respect to dollar_figure it owes to trinity as deferred installment payments on barge sales under the second contract plus accrued interest the complaint stated that flowers would set_aside the amounts of the deferred payments in a segregated investment account as each installment and the interest accruals become due it will then hold said segregated account as collateral security for and as an offset against any amounts that may be due flowers from trinity as a result of the allegations contained in this complaint attached as an exhibit to flowers’s complaint was a letter from flowers dated date to trinity whereby flowers proposed rescinding the first contracts with respect to the allegedly defective barges the letter stated that if trinity declined this tender offer flowers would protect itself by exercising its common_law right of offset with respect to dollar_figure in deferred installment payments that it owed trinity under the second contract the letter stated that as each of the installments came due flowers would deposit the principal and accrued interest in a segregated investment account to be held as an offset against and as collateral security for damages alleged in the complaint alternatively the letter stated that if trinity accepted the tender offer the offset and segregated account would be reversed and that flowers would then pay the deferred installments as they came due on date trinity filed a motion for partial summary_judgment arguing that flowers’s claim for setoff was improper because among other reasons flowers’s highly contested claim for unliquidated damages was not currently due and payable and trinity would never owe flowers damages in regards to the barges sold under the first contracts by order dated date the district_court denied trinity’s motion for summary_judgment withholding of deferred payments during and deferred payments fell due from flowers and florida marine with respect to barges that trinity had delivered to them under the second contract in and because the deferred payments were due months after delivery however deferred payments for barges delivered in fell due the letter further stated that the aforementioned complaint had been filed in the u s district_court for the northern district of mississippi greeneville division but that service on the defendants had been deferred days to give trinity an opportunity to respond to flowers’ tender offer only during and the parties have stipulated that flowers withheld total payments of dollar_figure of which dollar_figure was attributable to barges delivered in the parties have also stipulated that florida marine withheld additional total payments of dollar_figure of which dollar_figure was attributable to barges delivered in settlement agreement with florida marine on date trinity and florida marine entered into a settlement agreement in compromise of the disputed claims trinity agreed to credit florida marine with the dollar_figure of unpaid deferred obligations as to which florida marine had asserted a right of offset florida marine agreed to pay trinity the dollar_figure which apparently does not include accrued interest represents eight deferred payments of dollar_figure each with the earliest falling due on date and the latest on date the remaining dollar_figure of deferred payments relates to barges delivered in pursuant to the second contract the record does not reveal the exact dates on which these last-mentioned deferred payments fell due or more particularly what portion of these withheld payments might have fallen due in the dollar_figure which apparently does not include accrued interest represent sec_11 deferred payments of dollar_figure each with the earliest falling due on date and the latest on date the record does not reveal why these deferred payment amounts differ from the dollar_figure deferred payments specified under the second contract the remaining dollar_figure of deferred payments relates to barges delivered in pursuant to the second contract the record does not reveal the exact dates on which these last-mentioned deferred payments fell due or more particularly what portion of these withheld payments might have fallen due in the remaining dollar_figure balance over monthsdollar_figure trinity further agreed to repair specified barges sold to florida marine under the first contracts settlement agreement with flowers on date trinity and flowers entered into a settlement agreement trinity agreed to repurchase certain barges sold to flowers under the first contracts and to pay flowers dollar_figure in damages flowers agreed to pay trinity the dollar_figure it withheld under the second contract the settlement agreement specified that this amount was to be offset by the agreed-upon damages resulting in a payment from flowers to trinity of dollar_figure income_tax reporting petitioner used the accrual_method of accounting for all relevant periods with respect to barges delivered under the second contract in petitioner accrued the full amount of the sales including deferred payments and reported these amounts as income in dollar_figure with respect to barges delivered under the second contract in however petitioner reported the record does not reveal why the dollar_figure balance due reflected in the settlement agreement differs from the dollar_figure that the parties have stipulated florida marine withheld from trinity petitioner subsequently made an informal claim with the irs to reduce it sec_2001 income which the irs denied this claim is not at issue in this case as income only the amounts received during it excluded the dollar_figure of deferred payments as to which florida marine and flowers asserted rights of offset notice_of_deficiency in the notice_of_deficiency respondent determined that failure to accrue the deferred payments for the barges delivered in under the second contract resulted in a dollar_figure understatement of the affiliated group’ sec_2002 consolidated income and a corresponding overstatement of the consolidated_net_operating_loss carryback claimed on petitioner’s consolidated_return for the taxable_year ending date accrual_method of accounting opinion the primary issue is whether petitioner as an accrual basis taxpayer was required to accrue in deferred payments for barges that trinity delivered under the second contract in with respect to which the obligors claimed rights of offset for damages allegedly arising with respect to barges that they had previously purchased under the first contracts under the accrual_method of accounting_income is generally recognized when all the events have occurred that fix the right to receive the income and the amount of the income can be determined with reasonable accuracy sec_1_446-1 sec_1_451-1 income_tax regs consequently an accrual basis taxpayer must report income in the taxable_year in which the last event occurs which unconditionally fixes the right to receive the income and there is a reasonable expectancy that the right will be converted to money 195_f3d_216 5th cir see 107_tc_282 affd 161_f3d_1231 9th cir trinity’s delivery of each barge to flowers or florida marine unconditionally fixed its right to receive the full contract_price under the second contract absent the offset claims by flowers and florida marine there would appear to be no dispute that petitioner was required to accrue the full contract_price of each barge including deferred payments in the year of delivery indeed that is the way petitioner reported its consolidated income with respect to barges delivered under the second contract in before flowers and florida marine asserted their offset claims for barges delivered under the second contract in on the other hand petitioner accrued only the payments received upon delivery and excluded the deferred paymentsdollar_figure petitioner in the amended answer filed after trial upon the granting of respondent’s motion to conform pleadings to proof pursuant to rule b respondent asserts that petitioner improperly changed its accounting_method with respect to barges delivered in pursuant to the second contract petitioner continued contends that it was not required to accrue these deferred payments in because of florida marine’s and flowers’ claims of rights to offset the deferred payments under the second contract against damages allegedly arising under the first contracts petitioner relies upon a line of cases which stands generally for the proposition that in certain circumstances an accrual basis taxpayer need not accrue unpaid income if the obligor disputes the validity of the claim see eg n am oil consol v burnet 286_us_417 437_f2d_558 6th cir 17_tc_916 affd per order ustc par 6th cir 42_bta_359 affd 125_f2d_512 2d cir ryan v commissioner tcmemo_1988_12 affd sub nom 873_f2d_194 8th cir 117_fsupp_404 for instance in gar wood indus inc v united_states supra upon which petitioner places particular reliance the taxpayer manufactured equipment for the u s army corps of continued replies that it did not change its method_of_accounting in because the dispute with the purchasers represented a change in underlying facts within the meaning of sec_1_446-1 income_tax regs because we conclude that petitioner was required to accrue the disputed income in it is unnecessary to decide this issue engineers corps the contracts contained price redetermination clauses which authorized renegotiation of the contracts after partial performance id pincite when certain of the contracts were nearing completion the corps anticipating a price redetermination unilaterally began withholding amounts otherwise due to the taxpayer under the contracts the pricing dispute was resolved years later the court held that the taxpayer was not required to accrue the withheld amounts in the year the withholding occurred because the taxpayer never had a fixed_right to the full contract_price and the corps’ refusal to honor the contract_price negated whatever right the taxpayer otherwise had to receive the withheld amounts id pincite similarly all the other cases upon which petitioner relies involve situations in which obligors disputed the fact or amount of their liability with respect to the item to be accrued by contrast insofar as the record shows neither flowers nor florida marine ever disputed the fact or amount of its obligation to trinity under the second contract to the contrary their filings in the commercial litigation expressly acknowledged their obligations to trinity under the second contract and indicated that they were setting the withheld amounts aside in escrow or as collateral security to offset whatever damages trinity might ultimately be determined to owe them with respect to their claims under the first contracts in 360_us_446 the supreme court considered a somewhat analogous situation in which buyers withheld a portion of the sales_price to satisfy potential claims against the taxpayer seller more particularly in hansen auto dealers entered into a financing_arrangement whereby they sold customers’ installment notes to finance companies which withheld a portion of the purchase_price as security to cover possible losses on the notes the supreme court held that the auto dealers were required to accrue the withheld amounts as income when the notes were sold the court rejected the dealers’ argument that accrual was excused by their present inability to compel the finance companies to pay them the reserved amounts t he question is not whether the taxpayers can presently recover their reserves for it is the time of acquisition of the fixed_right to receive the reserves and not the time of their actual receipt that determines whether or not the reserves have accrued and are taxable id pincite the court noted that although the reserves were subject_to being offset by the dealers’ contingent liabilities to the finance company only the obligations arising from those liabilities may be offset against a like amount in the dealer’s reserve_account id pincite consequently the court reasoned any use of the reserves in paying those obligations would amount to the dealers’ receiving something of value the court stated in any realistic view we think that the dealer has ‘received’ his reserve_account whether it is applied as he authorized to the payment of his obligations to the finance company or is paid to him in cash id pincite the court concluded that the dealers must contemporaneously accrue the withheld amounts even if those funds were not available for paying the resulting tax_liability stating it is a normal result of the accrual basis of accounting and reporting that taxes frequently must be paid on accrued funds before receipt of the cash with which to pay them id pincite see also 843_f2d_163 4th cir requiring the taxpayer to accrue rents received from its apartment complex including a portion that was deposited into reserve accounts to secure the maintenance and operation of the complex 179_f2d_176 10th cir requiring the taxpayer to accrue income from highway construction contracts when the state accepted the work notwithstanding a contractual provision which permitted the state after accepting the work to withhold percent of the contract_price pending publication of statutory notice to any claimants against the taxpayer the instant case presents a stronger argument we believe for requiring accrual of income than commissioner v hansen supra or the other cases just cited unlike these other cases the instant case does not involve any question as to whether the right to receive income was vitiated by a contractual provision for withholding a portion of the sales_price rather as previously discussed under the second contract petitioner had a fixed and absolute right to the deferred payments as soon as each barge was delivered pursuant to the claims of offset asserted by flowers and florida marine the withheld payments were to be applied only in satisfaction of trinity’s or petitioner’s alleged obligations to them arising under the first contracts petitioner effectively received the withheld amounts when pursuant to the settlement agreement they were applied in compromise of flowers’ and florida marine’s claims in the final analysis then the offset claims affected only the timing of petitioner’s receipt of income under the second contract and not its right to receive the income petitioner’s contentions might be broadly construed as turning upon doubts as to the collectibility of flowers’ and florida marine’s debts for the deferred payments petitioner does not contend that it is entitled to a bad_debt deduction with respect to these debts and has offered no proof that the debts were wholly or partially worthless so as to meet the requirements under sec_166 for claiming a bad_debt deduction nevertheless petitioner seems to suggest broadly that apart from any question about deductions doubts about the collectibility of the debts justify postponing the accrual of the income in 292_us_182 the supreme court squarely rejected such a contention as having no merit the court stated keeping accounts and making returns on the accrual basis as distinguished from the cash_basis import that it is the right to receive and not the actual receipt that determines the inclusion of the amount in gross_income when the right to receive an amount becomes fixed the right accrues if such accounts_receivable become uncollectible in whole or part the question is one of the deduction which may be taken according to the applicable statute that is the question here it is not altered by the fact that the claim of loss relates to an item_of_gross_income which had accrued in the same year id pincite pursuant to these principles an accrual basis taxpayer generally must accrue income once the all-events test is satisfied even though payment may be postponed until a subsequent year 64_tc_632 affd 549_f2d_414 6th cir 1_tc_463 as a limited exception to this rule accrual may not be required if the income was of doubtful_collectibility or it was reasonably certain that it would not be collected as of the time the taxpayer’s right to receive the income arose harmont plaza inc v commissioner supra pincite 31_bta_730 affd 81_f2d_309 4th cir dollar_figure the income-accrual exception is narrowly applied so not to be allowed to swallow up the fundamental rule upon which it is engrafted requiring accrual georgia school-book depository inc v commissioner supra pincite the exception has typically been applied where the debtor is insolvent or in fact bankrupt harmont plaza inc v commissioner supra pincite petitioner does not contend and the evidence does not show that flowers or florida marine was insolvent or bankrupt or that the collectibility of their debts was otherwise called into question by their respective financial conditions in any event flowers and florida marine asserted their claims of offset only after the barges were delivered under the second contract and petitioner’s right to the income had become fixed in fact insofar as the record shows florida marine did not assert its under this exception the fact that the obligation later became worthless in part even though within the same taxable_year is immaterial 31_bta_730 affd 81_f2d_309 4th cir at first blush there may appear to be some tension between this statement and a statement in a memorandum opinion of this court that the income-accrual exception may apply when in the same year that a taxpayer’s right to income arises collection and receipt of the income become sufficiently doubtful or when it becomes reasonably certain that the income will not be collected elec controls serv co v commissioner tcmemo_1996_486 in that case however the court held that nonaccrual of certain contract payments was permitted in part because of the contingent nature of the taxpayer’s right to receive the payments by contrast petitioner’s right to receive the deferred payments under the second contract was unconditional and fixed upon delivery of the barges offset claims until date after the close of the taxable_year in which petitioner’s right to the income under the second contract had arisen in these circumstances postponing accrual of the income is not justified in conclusion in petitioner was required to accrue the deferred payments due on the barges delivered that year under the second contract deductibility of withheld payments under sec_461 alternatively petitioner claims that pursuant to sec_461 it is entitled to deduct dollar_figure in on the ground that it transferred this amount to flowers and florida marine in satisfaction of their disputed claims for damages with respect to allegedly defective barges that trinity delivered under the first contracts an accrual basis taxpayer generally may take a liability into account only in the taxable_year in which all events have occurred to allow the fact and amount of the liability to be determined with reasonable accuracy and economic_performance has occurred with respect to the liability sec_1_461-1 income_tax regs if a liability is contingent on the outcome of a contested lawsuit then it generally may not be taken into account until the dispute is resolved see 92_tc_1116 affd 149_f3d_1057 9th cir sec_461 provides a limited exception to this general_rule by permitting a taxpayer to deduct a contested liability provided the taxpayer has transferred assets in the same tax_year to satisfy the claimed liability sec_461 provides in relevant part sec_461 contested_liabilities -if- the taxpayer contests an asserted_liability the taxpayer transfers money or other_property to provide for the satisfaction of the asserted_liability the contest with respect to the asserted_liability exists after the time of the transfer and but for the fact that the asserted_liability is contested a deduction would be allowed for the taxable_year of the transfer or for an earlier taxable_year then the deduction shall be allowed for the taxable_year of the transfer the burden_of_proof is on petitioner to show that it satisfies all four requirements of sec_461 see rule 101_tc_282 the parties disagree primarily as to whether petitioner meets the second requirement listed above that there be a transfer of money or other_property in satisfaction of the asserted_liability petitioner contends that it transferred property to flowers and florida marine when flowers and florida marine withheld payment under the second contract as an offset against their alleged damages the record shows however that the dollar_figure of deferred payments as to which petitioner claims a deduction came due under the second contract in and flowers and florida marine cannot meaningfully be said to have withheld the deferred payments before they came due at most flowers and florida marine threatened in to withhold the deferred payments although as previously discussed the record does not establish that florida marine even asserted its offset claim before sec_461 allows a deduction only for the taxable_year of the transfer consequently even if we were to agree with petitioner that the withheld payments represented transfers of funds to flowers or florida marine we would conclude that the transfers occurred in and so that petitioner would not be entitled to the claimed deduction under sec_461dollar_figure more fundamentally we disagree with petitioner’s contention that the withholding of the deferred payments by flowers and florida marine represented a transfer by petitioner within the meaning of sec_461 the regulations require that the taxpayer transfer money or other_property beyond his control the record does not clearly establish what amount if any of deferred payments flowers or florida marine might have withheld in with respect to barges delivered in consequently if we were to construe petitioner’s claim contrary to petitioner’s own articulation of it as encompassing amounts withheld by flowers or florida marine in with respect to barges delivered in we would conclude that petitioner’s claim must fail by virtue of its failure to carry its burden to prove the amount of payments withheld in in order for money or other_property to be beyond the control of a taxpayer the taxpayer must relinquish all authority over such money or other_property sec_1 c income_tax regs as a necessary corollary and as common sense dictates before a taxpayer may transfer money or other_property beyond its control or authority it first must have the money or other_property within its control or authority obviously the deferred payments were not in petitioner’s control or authority at least not so long as flowers and florida marine withheld them by withholding the deferred payments flowers and florida marine merely perpetuated their own control_over these funds although as previously discussed trinity possessed contractual rights to the withheld payments sufficient to require accrual of the income neither trinity nor petitioner relinquished those rights at least not in but instead vigorously disputed the claimed rights of offset in contending that the withheld payments constituted a transfer within the meaning of sec_461 petitioner relies upon 149_f3d_805 8th cir petitioner’s reliance is misplaced in chernin the court held that a transfer was accomplished within the meaning of sec_461 by a court-issued writ of garnishment that forced the taxpayer to transfer funds owed to him as compensation the court reasoned that the writ of garnishment shifted actual control_over the funds from the taxpayer to the garnishees id pincite by contrast in there was no court-issued writ or other order of any competent legal authority to force trinity to transfer funds owed to it in sum we conclude and hold that in petitioner did not transfer money or other_property in satisfaction of flowers’ and florida marine’s asserted liabilities and consequently is entitled to no deduction pursuant to sec_461 to reflect the foregoing and the parties’ stipulation of settled issues decision will be entered under rule


internal_revenue_service number release date index number ------------------------------------------ ---------------------------------- --------------------------------------------- -------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------------- id no ---------------- ----------------- telephone number ---------------------- refer reply to cc psi b04 plr-104894-18 date august re --------------------------------------------------------------------- legend decedent son country cpa - -------------------------- - ---------------------------- - --------------------------------------------------------- - ------------------------------------------------ dear -------------- this letter responds to your personal representative’s letter of date requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to file a form_8939 allocation of increase in basis for property_acquired_from_a_decedent to make the sec_1022 election and to allocate basis provided by sec_1022 of the internal_revenue_code code to eligible_property transferred as a result of decedent’s death the facts and representations submitted are summarized as follows decedent died in a resident of country son in his capacity as executor of decedent’s estate retained cpa to prepare the necessary tax filings for the estate cpa failed to prepare the form_8939 before the filing deadline of date consequently the executor failed to make a sec_1022 election for decedent’s estate law and analysis sec_1022 provides that property_acquired_from_a_decedent who died after date is treated as transferred by gift and the basis of the person plr-104894-18 acquiring the property from such a decedent is the lesser_of the adjusted_basis of the decedent or the fair_market_value of the property at the date of the decedent's death sec_1022 provides in general that the basis_of_property under sec_1022 is increased by basis increase that is allocated to the property sec_1022 provides in general that basis increase is the portion of the aggregate basis increase that is allocated to the property sec_1022 and c provide that the aggregate basis increase is dollar_figure and that the aggregate basis increase is increased by-- i the sum of the amount of any capital_loss_carryover under sec_1212 and the amount of any net_operating_loss_carryover under sec_172 that would but for the decedent's death be carried from the decedent's last taxable_year to a later taxable_year of the decedent plus ii the sum of the amount of any losses that would have been allowable under sec_165 if the property acquired from the decedent had been sold at fair_market_value immediately before the decedent’s death sec_1022 provides that in the case of a decedent nonresident_not_a_citizen_of_the_united_states the aggregate basis increase under sec_1022 is dollar_figure and sec_1022 does not apply sec_1022 provides that in the case of property that is qualified spousal property the basis of such property under sec_1022 as increased under sec_1022 is increased by spousal property basis increase allocated to the property sec_1022 provides in general that spousal property basis increase is the portion of the aggregate spousal property basis increase which is allocated to the property sec_1022 provides that the aggregate spousal property basis increase is dollar_figure sec_1022 provides in general that the basis_of_property acquired from a decedent may be increased under sec_1022 or c only if the property was owned by the decedent at the time of death sec_1022 describes property that is considered to be owned by the decedent at the time of death sec_1022 provides that the basis adjustments under sec_1022 and c shall not increase the basis of any interest in property above its fair_market_value in the hands of the decedent as of the date of the decedent's death sec_1022 provides in general that the executor is to allocate the basis adjustments under sec_1022 and c on the return required by sec_6018 and that any allocation made may be changed only as provided by the secretary plr-104894-18 sec_1022 describes property that is considered to be acquired from the decedent for purposes of sec_1022 subtitle a of title v of the economic_growth_and_tax_relief_reconciliation_act_of_2001 p l stat enacted sec_2210 which made chapter the estate_tax inapplicable to the estate of any decedent who died in and chapter the generation skipping transfer gst tax inapplicable to generation-skipping transfers made in on date tax relief unemployment insurance reauthorization and job creation act of truirjca p l stat became law and sec_301 of truirjca retroactively reinstated the estate and gst taxes however sec_301 of truirjca allows the executor of the estate of a decedent who died in to elect to apply the code as though sec_301 of truirjca did not apply with respect to chapter and for property acquired or passing from a decedent within the meaning of sec_1014 thus sec_301 of truirjca allows the executor of the estate of a decedent who died in to elect not to have the provisions of chapter apply to the decedent’s estate but rather to have the provisions of sec_1022 apply the sec_1022 election notice_2011_66 2011_35_irb_184 section i a provides that the executor of the estate of a decedent who died in makes the sec_1022 election by filing a form_8939 on or before date notice_2011_76 2011_40_irb_479 extended the due_date of the form_8939 and thus the election from date to date notice_2011_66 section i d provides that the internal_revenue_service will not grant extensions of time to file a form_8939 and will not accept a form_8939 filed after the due_date except in four limited circumstances provided in section i d under this section of notice_2011_66 an executor may apply for relief under sec_301_9100-3 sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose date is prescribed by a regulation and not expressly provided by statute requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore the personal plr-104894-18 representative of decedent’s estate is granted an extension of time of days from the date of this letter to make the sec_1022 election on a form_8939 and allocate additional basis to eligible_property as provided by sec_1022 a copy of this letter should be attached to the form_8939 in accordance with the power_of_attorney on file with this office we have sent a copy of this letter to your authorized representatives except as expressly provided herein we neither express nor imply any opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter 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 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely associate chief_counsel passthroughs and special industries by lorraine e gardner _________________________ lorraine e gardner senior counsel branch office of the associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter cc


department of the treasury internal_revenue_service washington d c significant index nos date jul op e oe t contact person id number telephone number employer_identification_number dear sir or madam this in reference to your request for a private_letter_ruling dated date as modified by letters dated date and date concerning the federal tax consequences of the proposed transactions described below the information provided indicates that you the foundation were incorporated as a non-stock corporation on date and have been recognized as exempt from federal_income_tax under sec_501 of the internal_revenue_code the foundation has been determined to be a private_foundation within the meaning of sec_509 of the code the directors of the foundation are b and c husband and wife the directors their children and a partnership owned by the directors and their children own percent of the interests in x farms llc a limited_liability_company the company’ the assets of which are reai and personal_property used to operate a farm these assets include several residences one of which is used by the directors an orchard and various farm buildings b and c have subdivided the real_property owned by the company into nine parcels b and c propose to cause the company to distribute to them two of the parcels that are not part of the operating_assets of the farm b and c propose to contribute these two parcels outright to the foundation retaining no interest of any kind in the transferred parcels the foundation proposes to construct on these two parcels of land one or more buildings to be used as the site of an educational institute to be known as the x institute the institute the institute will not be separately incorporated or organized as an entity separate from the foundation the institute will hold public discussion groups panels lectures conferences and other similar an aye programs such programs may include radio television or tive internet coverage these programs will bring together experts in the field of environmentally sensitive agricultural and farming and disseminate to all parts of the agricultural community the results of the most recent and complete data on these subjects in an effort to reduce the deleterious effect of on the environment of the continual abandonment of farm_land to other uses and the continued use of environmentally hostile techniques in agriculture this exchange of ideas will be designed to promote the use of environmentally sensitive techniques throughout the agricultural community the subjects to be discussed at the programs held by the institute will include but not be limited to nontoxic farming methods small farm operations value added food processing niche crop development including medicinal and culinary herbs and related topics it is anticipated that the programs sponsored by the institute will be attended by persons in all areas of agribusiness as well as educators herbalists food scientists conservationists public policy professionals and other interested individuals some programs will be open to the general_public and advertised appropriately other programs may be open only to invited participants who will be selected based on a geographical or community of interest basis or both in some instances a fee may be charged by the foundation for attendance at the institute programs fees may be charged to participants employed by or representing for-profit entities to attend seminars at the institute and either lower or no fees shall be charged to participants representing or employed by not-for-profit entities t seminars and that the foundation will subsidize the balance is expected the revenue produced will be less than the cost of the the programs will be planned by the directors of the foundation in consultation with leading academic scientific and business professionals in the fields of agriculture environmental sciences and complementary health care officials the company will not utilize the institute or its programs as recruitment or advertising vehicles presentations may be made by officers or employees of the company at seminars presented by the institute disseminating the results of the experimentation conducted at the company but there shall be no compensation_for these presentations nor special preference shown to the company in advertising the programs the institute will not provide services or goods to or otherwise give preferential treatment to x or its officers or employees in any manner sec_501 of the code provides in part for an exemption from federal_income_tax for corporations organized and operated exclusively for charitable scientific or educational_purposes provided no part of the corporations net_earnings inures to the benefit of any private_shareholder_or_individual sec_501 -1 c of the income_tax 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 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 of the regulations provides that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest thus it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests sec_4941 of the code imposes a tax on each act of self-dealing directly or indirectly det 2s between a disqualified_person and a private_foundation sec_4941 of the code provides that the term self-dealing means any direct or indirect transfer to or use by or for the benefit of a disqualified_person of the income or the assets of a private_foundation sec_4946 a - g of the code and sec_53_4946-1 i - vii of the foundation and similar excise_taxes regulations define the term disqualified_person with respect to a private_foundation as a person who is a substantial_contributor to the foundation as defined in sec_507 a foundation_manager an owner of more than of the total combined voting power of a corporation profits interest of a partnership or beneficial_interest of a_trust or unincorporated enterprise which is a substantial_contributor to the foundation a member_of_the_family of any of the above or a corporation partnership trust or estate of which persons described above own more than of the voting power profits interest or beneficial_interest sec_4946 of the code and sec_53_4946-1 f of the regulations define the term foundation_manager as an officer director or trustee of a foundation or an individual having powers or responsibilities similar to those of officers directors or trustees of the foundation and with respect to any act or failure to act the employees of the foundation having authority or responsibility with respect to such act or failure to act ‘ sec_53 d -2 f of the regulations states that the fact that a disqualified_person receives an incidental or tenuous benefit from the use by a foundation of its income or assets will not by itself make such use an act of self-dealing thus the public recognition a person may receive arising from the charitable activities of a private_foundation to which such person is a substantial_contributor does not in itself result in an act of self-dealing since generally the benefit is incidental and tenuous in example of sec_53 d -2 f of the regulations a disqualified_person with respect to a private_foundation contributed certain real_estate to the private_foundation for the purpose of building a neighborhood recreation center in a particular underprivileged area as a condition of the gift the private_foundation agreed to name the recreation center after the disqualified_person since the benefit to the disqualified_person was only incidental and tenuous the naming of the recreation center by itself was not an act of self-dealing revrul_73_407 1973_2_cb_383 holds that the public recognition afforded by a private_foundation to a disqualified_person through the use of the disqualified person's name by the private_foundation for years is an incidental and tenuous benefit which does not constitute an act of self dealing under sec_4941 d e of the code revrul_77_367 1977_2_cb_193 holds that a nonprofit organization formed to create an operate a replica of an early american village is engaging in educational activities similar to those of a museum and qualifies for exemption under sec_501 or the code even though a corporation that donated land and a substantial percentage of the organization’s support benefits by having the village named after it and by having its name associated with the village through both the corporations’ and the organization's advertising the ruling recognized that any benefit going to the corporation was merely incidental to the benefits flowing to the general_public from access to the village and its historic structures foundation sec_4945 of the code imposes an excise_tax on each taxable_expenditure of a private ey n sec_4945 of the code and sec_53_4945-6 of the regulations state that the term taxable_expenditure means any amount_paid or incurred by a private_foundation for any purpose other than one specified in sec_170 sec_170 of the code refers to religious charitable scientific literary or educational_purposes sec_1_501_c_3_-1 of the regulations provides that in general the term educational as used in sec_501 relates to a the instruction or training of the individual for the purpose of improving or developing his capabilities or b the instruction of the public on subjects useful to the individual and beneficial to the community sec_1_501_c_3_-1 of the regulations provides examples of organizations which if they otherwise meet the requirements of sec_501 are educational example is as follows an organization whose activities consist of presenting public discussion groups forums panels lectures or other similar programs such programs may be on radio or television revrul_70_186 1970_1_cb_128 held that an organization formed to preserve a lake as a public recreational facility and to improve the condition of the water in the lake to enhance its recreational features qualifies for recognition of exemption as an organization described in sec_501 of the code rev_rul c b held that an organization formed for the purpose of preserving the natural environment by acquiring by gift or purchase ecologically significant undeveloped land and either maintaining the land itself with limited public access or transferring the land to a government conservation agency by outright gift or being reimbursed by the agency for its cost qualifies for recognition of exemption as an organization described in sec_501 of the code because it is operated exclusively for charitable purposes under sec_4946 of the code and the regulations thereunder b c and x are disqualified persons with respect to the foundation generally any use of the foundations assets for the benefit of these individuals would result in an act of self-dealing under sec_4941 however the naming of the institute and its proximity to x will result in no more than an incidental or tenuous benefit to x under the applicable regulations such tenuous or incidental benefit will not in and of itself result in an act of self dealing the foundation will provide no other_benefits or preferences to any disqualified_person under example of sec_53 d -2 f of the regulations holding seminars lectures and panel discussions about methods by which the environment can be preserved and enhanced through correct environmentally sensitive agricultural techniques are educational activities in addition the relevant precedent also suggests that activities in furtherance of environmental preservation for the benefit of the public serve generally recognized charitable purposes expenditures in furtherance of educational and charitable purposes are expenditures_for sec_170 purposes and thus are not taxable_expenditures within the meaning of sec_4945 of the code -5- accordingly we rule as follows the creation of an educational institute bearing a name similar to that of the company and disseminating to the agricultural public the results of experimentation and operation of the company will not constitute an act of self-dealing under sec_4941 of the code expenditures by the foundation to conduct the educational programs of the institute including the construction of the facilities where the programs will be conducted are not taxable_expenditures under sec_4945 of the code this private_letter_ruling is directed only to the organization that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited by others as precedent 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 eigned robert c harper dt robert c harper jr chief exempt_organizations technical branch


department of the treasury employer_identification_number contact person - id number contact telephone number uil internal_revenue_service p o box cincinnati oh release number release date date date legend x program name b program name c program name d agreement name e name f county names g state h geographic area dear k number m year n number p year q number r dollars amount s number you asked for advance approval of your scholarship grant procedures under internal_revenue_code sec_4945 this approval is required because you are a private_foundation that is exempt from federal_income_tax you requested approval of your scholarship program to fund the education of certain qualifying students our determination we approved your procedures for awarding scholarships based on the information you submitted and assuming you will conduct your program as proposed we determined that your procedures for awarding scholarships meet the requirements of code sec_4945 as a result expenditures you make under these procedures won't be taxable letter catalog number 58263t also awards made under these procedures are scholarship or fellowship grants and are not taxable to the recipients if they use them for qualified_tuition_and_related_expenses subject_to the limitations provided in code sec_117 description of your request your letter indicates you will operate a scholarship program called x you were formed to promote healthy well-being education and pre- career development of urban at-risk youth or those needing a special boost x advances your charitable and educational_purposes by promoting post-secondary education for urban youth-at-risk x will be open to prospective graduates of any high school in k counties in the h area provided they meet the additional eligibility requirements scholarships will only be awarded to those low-income youths who have satisfied the requirements of b and who have demonstrated the skills drive and commitment necessary to enroll at an accredited four year college or university b is a program you operate to fulfill your mission b provides resources to urban low-income youth to attend college and to position them to succeed in college and beyond through b you partner with students to provide financial aid advice student coaching and creation of an annual plan for the student's postsecondary education journey based on the annual plan’ students are mentored in college course selection room and board selection nutritional counseling work alternatives internships financial aid and social emotional triage you publicize x through a combination of communications to the general_public and more targeted outreach for general_public outreach the website e contains a link to your flyer which contains basic information about x including your contact information the flyer is also linked to the e facebook and linkedin sites provided to students and families currently associated with your other programs moreover you conduct targeted outreach to publicize x with a particular emphasis on f counties which are expected to have the largest pool of eligible applicants finally you compile distribution lists for the targeted outreach efforts as well as conduct research to identify and target organizations and schools considered likely to serve a significant number of eligible students in addition your flyers are commencing with funding for the fall of year m you will make n grants under x each year thereafter the number of annual grants will increase by n as each new class is added upon reaching full capacity by the fall of year p you plan to be making approximately q grants per year in any given year the number of actual grants may prove slightly higher depending on the number of students who remain in the program for five years or slightly lower depending on the number of students who subsequently become ineligible or who receive adequate aid from other sources that they do not require x to support the amount of each scholarship will depend upon the recipient's costs of attendance that are not otherwise covered by direct aid from the relevant school or other available funding sources and also will be subject_to annual and lifetime limits per student costs of attendance include only those costs that are directly related to attending an accredited four year college or university including student fees tuition and on-campus letter catalog number 58263t room arid board off-campus housing books and other supplies such as laptops readers calculators and lab equipment and travel_expenses directly related to attendance at the relevant school this tentative scholarship amount is further subject_to overall limits based on your available_resources and an annual per-student limitation based on need currently r dollars but subject_to potential increase in future years to reflect cost of living or other adjustments students will be eligible to participate in x for up to s years eligible students must e e have successfully completed the various requirements for graduation from a high school in one of the k counties in h have been accepted to and enroll at an accredited four year college or university as approved by b e demonstrate to your satisfaction that their expected family contribution taken from the free application_for federal student aid fafsa toward the funding of their college education as determined for purposes of the federal financial aid applications does not exceed r dollars per year eligibility for x is additionally conditioned upon the student’s ongoing agreement to apply for federal financial aid financial aid from the relevant school and scholarships from at least two organizations outside of the school attended students are required to submit evidence of these applications and awards prior to the disbursement of funds thus your scholarships are intended to supplement the substantial financial aid almost all grantees receive from the schools they attend and from other sources all interested individuals must submit part of the application and those applicants who advance to the second_phase of the process based on the assessment of the selection committee must then submit part of the application your selection committee will at a minimum consist of the individuals serving in the roles of your managing director the director of b your associate program director the b lead college financial services coordinator and the b lead college coach membership on the selection committee will depend upon continued service in one of these broader roles in addition you may choose to add a sixth selection committee member who would be independent from you this committee member would be selected based upon the particular expertise background he or she could bring to the process of identifying those students whose track record and other attributes indicate that they are likely to succeed in a four year college environment each year you expect to accept n students into the x class for that year if you have more than n eligible applicants for the available openings in that year’s class all applicants will be scored according to a rubric that ranks standardized test scores responses to essay questions grade point averages and college acceptances letter catalog number 58263t the top n students will thus be selected and a wait list will be compiled if any of the top n recipients do not accept their invitation to be part of x the next students will be selected from the wait list your related_party policy prohibits scholarship awards to family members of members of your selection committee officers directors and substantial contributors among other persons the term family members’ is defined for this purpose to include an individual's spouse ancestors children grandchildren great grandchildren and the spouses of children grandchildren and great grandchildren applicants who are accepted into x also must complete and execute a written_agreement with you known as d point average of and maintaining a full course load to agree to d requires recipients in addition to maintaining a minimum grade e attend c which is a college orientation prior to starting college work and meet regularly with a college coach provided by b as well as attend other workshops conducted by b scholarship recipients will be placed on probation for one term when gpas are lower than earning units less than full-time in an academic term and not communicating with the b college coach recipients who remain on probation for two consecutive terms will be placed on a probationary contract recipients who are on probation for three cumulative terms will also be placed on a probationary contract recipients who do not fulfill the terms of their probationary contract may be placed on a dismissal contract and or may have funding reduced or terminated and recipients who choose not to return to school after two consecutive semesters without taking classes will be considered to have voluntarily terminated their participation in x the following conditions apply in order for a scholarship to be ‘renewed for a subsequent academic term the student must satisfy the standards for enrollment at the relevant academic institution for the academic term for which renewal is sought the student must be in compliance with the terms of d including compliance with the following requirements i the student must submit his or her financial aid award letters a copy of his or her student aid report which is proof of application_for federal financial aid proof of submission of at least two other scholarship applications an approved budget and a written annual plan ii the student must have achieved a grade point average of or higher iii the student must enroll in and complete full-term units each term and iv the student must work with a b assigned college coach you will generally pay the grants directly to an educational_institution which complies with internal_revenue_code sec_170 for application directly to the student’s tuition student fees and on-campus room and board if the student satisfies the educational institution’s standards for current enrollment further policies include letter catalog number 58263t payments for off-campus housing will be made directly to the property management office or landlord you will establish a book account to which the students will be able to charge their books when the book account is not available or does not supply a student’s books students may obtain approval to purchase their books and then submit the appropriate receipts to you for approval and reimbursement qualifying school supplies are reimbursable only when they are pre-approved school-related travel_expenses will only be paid in accordance with a budget submitted annually and based on the most economical options available receipts are required for any such expenses that you advance or reimburse in the event that funds are misused the steps you take to seek recovery_of misused funds will depend upon the payee of those funds the amount_involved and other relevant circumstances in all cases you will contact the payee in writing at the payee’s most recent email or mailing address and demand prompt return of the misused funds if the payee of the misused funds is a student who remained part of x on a probationary basis the student’s b college coach and director would meet with the student to discuss a payment plan for restoration of the misused funds given the typical age financial profile of the students and the modest amounts of any advances you might make to students you do not expect to pursue legal action against a student payee who misused funds as it is not likely that legal action would result in execution of a judgment if the payee of the misused funds is a third party vendor including an educational_organization landlord or other vendor in addition to sending one or more written requests for return of the misused funds you may pursue legal recourse if the significance of the amount warranted it and you believe there is a reasonable probability that legal action would result in execution of a judgment basis for our determination the law imposes certain excise_taxes on the taxable_expenditures of private_foundations code sec_4945 a taxable_expenditure is any amount a private_foundation pays as a grant to an individual for travel study or other similar purposes however a grant that meets all of the following requirements of code sec_4945 is not a taxable_expenditure the foundation awards the grant on an objective and nondiscriminatory basis the irs approves in advance the procedure for awarding the grant the grant is a scholarship or fellowship subject_to the provisions of code sec_117 the grant is to be used for study at an educational_organization described in code sec_170 e e other conditions that apply to this determination_letter catalog number 58263t e e e e e e this determination only covers the grant program described above this approval will apply to succeeding grant programs only if their standards and procedures don't differ significantly from those described in your original request this determination applies only to you it may not be cited as a precedent you cannot rely on the conclusions in this letter if the facts you provided have changed substantially you must report any significant changes to your program to the cincinnati office of exempt_organizations at internal_revenue_service exempt_organizations determinations p o box cincinnati oh you cannot award grants to your creators officers directors trustees foundation managers or members of selection committees or their relatives all funds distributed to individuals must be made on a charitable basis and further the purposes of your organization you cannot award grants for a purpose that is inconsistent with code sec_170 you should keep adequate_records and case histories so that you can substantiate your grant distributions with the irs if necessary we've sent a copy of this letter to your representative as indicated in your power_of_attorney please keep a copy of this letter in your records if you have questions please contact the person listed at the top of this letter sincerely jeffrey i cooper director exempt_organizations rulings and agreements letter catalog number 58263t


t c memo united_states tax_court leon l zachman and estate of ione zachman deceased leon l zachman representative petitioners v commissioner of internal revenue respondent docket no filed date john r koch for petitioners tracy a martinez for respondent memorandum findings_of_fact and opinion thornton judge respondent determined the following deficiencies additions to tax and penalties with respect to petitioners’ federal_income_tax liabilities additions to tax and penalties sec sec sec year deficiency a a a b a dollar_figure dollar_figure of the -- interest due on dollar_figure big_number --- --- big_number -- -- dollar_figure sec_6653 b was repealed for x sec_6662 was enacted in generally effective for returns the due_date for which is after date the issues for decision are whether hillside farm co hillside farm a putative business_trust established by petitioners should be disregarded for federal_income_tax purposes because it lacks economic_substance we hold that it should whether petitioners are liable for additions to tax for negligence pursuant to sec_6653 for taxable years and and an accuracy-related_penalty pursuant to sec_6662 a for taxable_year we hold that they are findings_of_fact the parties have stipulated some of the facts which are so found the stipulated facts and associated exhibits are incorporated by this reference 1’ all section references are to the internal_revenue_code in effect for the years in issue all rule references are to the tax_court rules_of_practice and procedure leon and ione zachman were married until her death in leon zachman is the representative of the estate of ione zachman unless otherwise indicated petitioner hereinafter refers to leon zachman and petitioners refers to leon zachman and ione zachman petitioner resided in rogers minnesota when the petition was filed petitioners have farmed in the rogers area since prior to petitioners’ farm was held in shady elms farm a_trust promoted by lowell anderson on date petitioners transferred their farm real_property to another trust walnut leaf in petitioner attended a meeting with other farmers to hear a presentation by james noske and norb stelton about utilizing business trusts on date petitioners executed bills of sale purporting to transfer their farm equipment and livestock to hillside farm on the same date in their capacities as trustees of walnut leaf petitioners deeded their interests in the farm real_property to maplewood co maplewood on date petitioners executed a bill of sale whereby for the stated consideration of one dollar and other good and valuable consideration they transferred to on date lowell anderson was indicted by a federal grand jury in wyoming for conspiring to defraud the united_states by selling common-law trusts which were used to evade federal income taxes see 911_f2d_1422 10th cir lowell anderson died while the criminal proceedings were pending see id _- _- maplewood two life_insurance policies and an extensive assortment of personal_property including furniture china lamps home appliances a popcorn pumper and a blue madonna picture hillside farm and maplewood both purport to be business trusts formed pursuant to minnesota law the named trustees of each of these trusts are parnell inc parnell and armageddon inc armageddon nonprofit_corporations organized under the laws of south dakota these corporations are also the named trustees for numerous other business trusts the declaration of trust of hillside farm the declaration of trust dated date recites that it is made between parnell and armageddon herein referred to as trustees for the purpose of enabling the trustees to hold and manage the trust estate and to carry on business as hereinafter provided the declaration of trust further provides in pertinent part article iii shares sec_1 the beneficial_interest in this trust shall be divided into shares without par_value upon unanimous approval of the board_of trustees shares may be sold or exchanged for such consideration and on such terms as the trustees deem proper all shares shall be evidenced by trust certificates of which sic shall be signed by each of the trustees sec_2 the certificates shall entitle owners thereof to participate proportionately in all dividends and other distributions of income or principal as the trustees may from time to time in their absolute discretion declare and pay out provided that upon the termination of the trust the trustees shall distribute all of the property and accrued income to the certificate holders of record in --- - proportion that the number of shares they own bears to the total number of shares issued and outstanding sec_3 any trustee hereunder may acquire hold and dispose_of shares in this trust to the same extent and in the same way as if he were not a trustee and without affecting in any way his status or power as such sec_4 no shares shall be issued in addition to those originally specified herein except as replacements for other certificate holders as authorized by this declaration the total number of shares outstanding shall not exceed one hundred in number sec_5 transfers of shares shall be made only on the books of the business_trust and the old certificate properly endorsed shall be surrendered and canceled before a new certificate is issued provided that no transfer shall be effective until approved by unanimous vote of the board_of trustees section the rights of trust certificate holders and other persons becoming entitled to shares of the trust shall be subject_to all terms and conditions of this declaration of trust the shares shall not be personal_property and the ownership thereof shall not give any person any legal or equitable_title in or to the trust property or any part thereof but shall only entitle the owners of shares to their proportionate shares of dividends and distributions as herein provided no shareholders shall have any rights to manage or control the property affairs or business of the trust or any power to control trustees in these respects no shareholder shall have any right to a partition of the trust property or to an accounting during the continuance of the trust no part of the trust property or the income therefrom shall be liable for the debts of any trust certificate holder and no certificate holder shall have any power to sell assign transfer encumber or in any manner to anticipate or dispose_of his shares or the income produced thereby prior to the actual distribution in fact by the trustee to said certificate holder section the death insolvency or incapacity of any trust certificate holder shall not operate to terminate or dissolve the trust or affect its continuity if any certificate holder hereunder dies becomes insolvent or is placed under any legal incapacity before the termination of this trust his shares shall become null and void and shall immediately revert to the board_of trustees who shall thereupon name a replacement beneficiary or beneficiaries and issue a new certificate or certificates as provided in this declaration article iv board_of trustees sec_1 the business and property of the business_trust shall be managed by board_of trustees who shall be the persons named in the declaration of trust who shall serve until their successors are duly qualified in the event of the death incapacity resignation or retirement of any trustee a successor trustee shall be appointed by the remaining trustee or trustees sec_3 the trustees shall hold in the trust name legal and equitable_title to all property real and personal and shall have absolute and exclusive power and control_over the management and conduct of the business of the trust free from any right of control of any of the certificate holders the trustees may hold manage and dispose_of the property and business of the trust in the same manner as if they were absolute proprietors thereof subject only to the specific limitations herein contained the trustees shall have the power without limitation to purchase or otherwise acquire property and to sell exchange lease mortgage pledge or in any manner dispose encumber improve or deal with the property of the trust real or personal or any part thereof or any interest therein on such terms and for such consideration as they deem proper the declaration of trust as well as various minutes for the board meetings of its trustees bears the signatures of cheryl a foshaug president of armageddon and marti inman president of parnell neither foshaug nor inman has ever met petitioners or heard of hillside farm neither ever managed hillside farm - they each signed various papers including blank or incomplete pages at the request of james or joan noske foshaug often neither read nor understood the pieces of paper she signed as president of parnell inman took no action other than as directed by james or joan noske the minutes for the hillside farm trustees’ meeting dated date signed by foshaug and inman indicate that the trustees appointed daniel strohmeier as manager of hillside farm with authority to oversee the business operations of the trust and to issue checks to pay general operating_expenses ’ if strohmeier ever conducted business related to hillside farm it was at the direction and under the control of james or joan noske on date the u s district_court for the district of minnesota entered a final judgment of permanent injunction as to foshaug inman armageddon and parnell enjoining them under sec_7402 and sec_7408 from organizing or assisting in the organization of an abusive_tax_shelter plan or arrangement involving business trusts another case involving noske trusts scherping v commissioner tcmemo_1989_678 includes as a finding of fact that in date james and joan noske took strohmeier from an alcoholic treatment center made him a figurehead president of an entity to which the taxpayers had transferred their dairy farm assets and placed him on the taxpayers’ family farm to live and work for the last half of doing farm chores at the taxpayers’ direction --- - sometime in or john b ellering became president of armageddon and parnell and replaced strohmeier as manager of hillside farm petitioners had no official titles or offices in hillside farm armageddon or parnell initially petitioners received all trust shares in hillside farm on date petitioners surrendered their original shares in hillside farm each receiving new shares the remaining shares purportedly were transferred to bbca inc bbca an organization purporting to be a church the president of bbca was joan noske several years before the creation of hillside farm petitioner had curtailed his work on the farm because of health in date ellering was convicted by a jury in the u s district_court for the district of minnesota of conspiracy to defraud the united_states by impeding the internal_revenue_service his conviction was based on his participation with james and joan noske and imelda spaeth in a scheme to assist clients of the noskes who sought to reduce or avoid federal income taxes form business trusts that named armageddon and parnell as trustees after ellering’s criminal conviction petitioners’ cousin gerard became president of armageddon and parnell and petitioners’ son dale became managing director of hillside farm the minutes of a special meeting of the hillside farm trustees dated date and signed by inman and foshaug recite that these transfers were made upon application of the petitioners and were unanimously approved by the trustees --- - problems during the years at issue his work on the farm consisted largely of riding a tractor or baling hay no more than a few times a week ione zachman did not participate in the farm work apart from growing her own garden both before and after the creation of hillside farm petitioners’ sons dale and paul performed most of the farm work dale made most of the farming decisions dale and paul each received weekly wages for their labors all the gross_receipts from petitioners’ farming operation were sent to joan noske at a post office box in cold springs minnesota joan noske generally made provision out of hillside farm funds for paying farm expenses as well as certain of petitioners’ personal expenses including insurance medical bills income taxes and property taxes on petitioners’ residence during the years at issue joan noske did all the bookkeeping for hillside farm she prepared the federal_income_tax returns for hillside farm and at least other trusts that name armageddon and parnell as trustees she also prepared petitioners’ federal_income_tax returns for the years in issue at least twice a year petitioners received ledgers from joan noske which accounted for funds purportedly received and disbursed by hillside farm during the years at issue the -- - disbursements included dollar_figure per month to joan noske for her bookkeeping services on date the u s district_court for the district of minnesota entered a final judgment of permanent injunction as to james and joan noske finding that they had engaged in conduct subject_to penalty under sec_6700 and enjoining them from organizing assisting selling or otherwise promoting business trusts as abusive tax_shelters as part of the judgment the noskes were ordered to supply respondent’s district_director with the names and addresses of all purchasers of the business trusts on file with the minnesota secretary of state which list armageddon and parnell as corporate trustees subsequently the noskes identified hillside farm and maplewood as being among the business trusts involved in the injunction action in date joan and james noske were convicted of among other things conspiracy to defraud the united_states by impeding the internal_revenue_service and conspiracy to evade federal income taxes the convictions were based on the noskes’ participation in a scheme to assist their clients in reducing or avoiding federal income taxes by forming business trusts which named armageddon and parnell as trustees it was further determined that the noskes participated in a scheme whereby their clients would transfer all of their income-producing property to - li - the business trusts and then issue percent of their trust shares to bbca thus effectively evading the assessment and payment of percent of their clients’ federal_income_tax liability hillside farm filed federal_income_tax returns for through reporting schedule f income from petitioners’ farming operation during the years at issue hillside farm reported that percent of its net_income was distributed to petitioners ’ the trust itself paid no taxes respondent determined that petitioners are taxable on hillside farm’s gross_income because the creation of hillside farm and the subsequent transfer of petitioners’ assets thereto was a sham_transaction lacking in economic_substance because petitioners have improperly attempted to assign their income to hillside farm and because petitioners are taxable on the trust income under the grantor_trust_rules in sec_671 through opinion if the creation of a_trust has no real economic_effect and alters no cognizable economic relationships it will be disregarded for federal_income_tax purposes our guidepost is the economic_substance of the transaction see zmuda v ’ hillside farm claimed an income distribution_deduction for percent of its reported distributable_net_income but it failed to report the recipient of the remaining percent of its net_income commissioner 79_tc_714 affd 731_f2d_1417 9th cir markossian v commissioner 73_tc_1235 this rule applies even if the trust is recognized pursuant to state law as a business_trust or other form of jural entity see zmuda _ v commissioner supra whether a_trust lacks economic_substance is a question of fact see 992_f2d_789 8th cir affg per curiam tcmemo_1991_508 relevant factors include whether the taxpayer’s relationship as grantor to the property differed materially before and after the trust’s formation whether the trust had an independent_trustee whether an economic_interest passed to other beneficiaries of the trust and whether the taxpayer felt bound by any restrictions imposed by the trust or by the law of trusts see markosian v commissioner supra pincite5 muhich v commissioner tcmemo_1999_192 the burden_of_proof is on petitioners see rule this is not the first occasion we have had to examine trust arrangements devised and promoted by the noskes on each occasion we determined that they were sham entities used by taxpayers to avoid income_tax see eg scherping v commissioner tcmemo_1998_288 paulson v commissioner tcmemo_1991_643 affd without published opinion 994_f2d_843 8th cir paulson v commissioner tcmemo_1991_508 affd 992_f2d_789 8th cir scherping v commissioner tcmemo_1991_384 chase v commissioner tcmemo_1990_615 chase v commissioner tcmemo_1990_164 affd 926_f2d_737 8th cir scherping v commissioner tcmemo_1989_678 the evidence clearly establishes that hillside farm lacked economic_substance and was merely a paper entity created for the primary purpose of reducing petitioners’ federal_income_tax petitioners’ relationship to their property did not differ materially before and after the creation of hillside farm although petitioners purported to transfer all their income- producing personal_property to hillside farm in reality they retained dominion and control_over it with their sons providing most of the labor in return for weekly wages the record does not establish that parnell and armageddon were independent trustees or that they performed any significant duties or exercised any significant control or power over the farm contrary to the terms of article iv sec_3 of the declaration of trust parnell and armageddon did not have absolute and exclusive power and control_over the management and conduct of the business petitioners concede that inman and foshaug were strangers to hillside farm and were nothing more than figurehead presidents of the corporate trustees merely signing documents often blank or incomplete at the instigation of the noskes the use of strangers as signers of organizational documents and the absence of any meaningful role by nominal trustees in the operation of the trust are evidence that the purported trust lacks economic_substance see para techs trust v commissioner tcmemo_1994_366 affd without published opinion sub nom anderson v commissioner 106_f3d_406 9th cir and cases cited therein petitioners also concede that strohmeier served no meaningful function as manager of hillside farm similarly there is no evidence that strohmeier’s successor ehllering served any meaningful function as manager of hillside farm ’ in fact there is no evidence that hillside farm ever conducted any business at all ’ upon the alleged creation of hillside farm no economic_interest passed to any beneficiary other than petitioners nor does the record establish that the subsequent purported transfer petitioner testified that ellering made some decisions about farm activities but he was unable to offer specific examples stating that we just talked about the weather and see what would be the best thing to do he testified that his sons rather than ellering made all decisions about when to plant crops cut hay and such dale zachman testified that there had been instances when the purchase of new farm machinery had been delayed for ellering’s approval but when guestioned he could not recall a specific instance on brief petitioners seek to attribute to parnell and armageddon the activities of the noskes arguing that parnell and armageddon controlled hillside farm’s checkbook through the agency of the noskes petitioners have not established however that the noskes were in fact the agents of parnell or armageddon there is no mention of the noskes in the declaration of trust there is no evidence that the noskes were authorized to or actually did assume the fiduciary duties allegedly imposed on the corporate trustees under the purported trust documents rather the totality of the evidence strongly suggests that the noskes provided petitioners with bookkeeping services for which they were compensated and bad advice as part of a conspiracy to defraud the united_states for which they were imprisoned -- - to bbca of percent of petitioners’ shares in hillside farm was a valid conveyance of petitioners’ economic interests to the contrary at trial petitioner vigorously asserted that he never knowingly authorized or intended any such transfer of shares to bbca similarly on brief petitioners argue that there were no valid transfers to bbca petitioners argue that hillside farm was created for estate- planning purposes to keep the farm together in the family it is unclear however how the establishment of hillside farm would accomplish any such objective under article iii section of the declaration of trust if any trust certificate holder dies before termination of the trust his shares become null and void and shall immediately revert to the board_of trustees who shall thereupon name a replacement beneficiary or beneficiaries accordingly the creation of hillside farm would have provided petitioners no assurance that the farm would remain in their family to the contrary under the terms of the declaration of trust absolute power over the disposition of the farm property either during their lives or upon the death of either petitioner would have resided with parnell and armageddon in any event the expectancy of an estate-planning advantage does not establish -- - entitlement to an income_tax advantage see prindle intl marketing ubo v commissioner tcmemo_1998_164 contending that they received only a share of the hillside farm income petitioners argue that they should be taxed only on the share they actually received ’ it is axiomatic however that taxation is concerned with actual command over the property taxed--the actual benefit for which the tax is paid and that the transfer of formal legal_title will not operate to shift the incidence of taxation attributable to ownership of property where the transferor continues to retain significant control_over the property transferred 435_us_561 see sundance ranches inc v commissioner tcmemo_1988_535 affd without published opinion 9th cir petitioners clearly retained sufficient power and control_over the farm to be properly treated as the recipients of the income ‘lt on brief petitioners also argue that creation of the hillside farm allowed petitioner to qualify for social_security without reduction for personal_service_income the record is devoid of evidence regarding any such purpose in any event that petitioners may have wished to evade earned_income restrictions for social_security purposes scarcely bolsters their case for recognizing the trust for federal_income_tax purposes the record does not establish what ultimately happened to the percent of hillside farm income allegedly distributed to bbca cf 64_f3d_435 8th cir in a case involving the transfer of a family farm business to a noske trust of which bbca was a beneficiary the taxpayers received cash back from bbca on a regular basis for tax purposes cf 333_us_591 hutcherson v commissioner tcmemo_1984_165 in light of our holdings on these issues we need not reach respondent’s alternative argument that petitioners should be taxed on the hillside farm income under the grantor_trust_rules additions to tax and penalties respondent determined that petitioners are liable for additions to tax under sec_6653 for taxable years and and an accuracy-related_penalty under sec_6662 for taxable_year sec_6653 a imposes an addition_to_tax equal to percent of the underpayment if any part of the underpayment is attributable to negligence sec_6653 b imposes an addition_to_tax equal to percent of the interest payable on the portion of the underpayment attributable to negligence sec_6662 imposes a 20-percent penalty on any portion of an underpayment that is attributable to negligence negligence is the lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the same circumstances see 85_tc_934 petitioners have the burden of proving that respondent’s determinations are incorrect see rule a 58_tc_757 petitioners argue only that because there is no underpayment_of_tax there is no amount upon which to compute additions to tax -- - or penalties we have sustained respondent’s determination that petitioners understated their federal_income_tax liability for taxable years and accordingly petitioners’ argument must fail petitioners have not established that they used reasonable care in ascertaining their income_tax_liability for these years they have not shown that they reasonably relied on a competent professional adviser independent of those persons who were involved in marketing these abusive trusts we sustain respondent’s determinations on this issue to reflect the foregoing decision will be entered for respondent