internal_revenue_service number release date index number ----------------------- --------------------------------------- ---------------------------------- ---------------------------- ------------------------------ - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc fip b02 plr-103408-05 date date ------------- ------------- ------------------- --------------------------------------- ----------------------------------------- legend taxpayer ---------------------------------------------------------------------- state month llc1 city project state tax_credits a dear -------------- taxpayer you have requested a ruling that taxable_income earned by taxpayer from state tax_credits will either be treated as qualifying_income or disregarded for purposes of sec_856 and c of the internal_revenue_code facts partnership for federal tax purposes it was formed to invest in and develop real_estate when taxpayer begins its real_estate development activities in month taxpayer will this is in reply to a letter dated date requesting a ruling on behalf of taxpayer is a domestic limited_liability_company that is currently classified as a -------------------------------------------------- ------------------ ------------ taxpayer’s principal reit asset will be its interest in llc1 a limited_liability taxpayer was organized to develop and operate the project the project will be plr-103408-05 elect to be taxable as a corporation pursuant to sec_301_7701-3 of the procedure and administration regulations and thereafter intends to elect and qualify to be treated as a real_estate_investment_trust reit under subchapter_m of chapter of the code company which will construct own and operate a large mixed-use real_estate development in city known as the project the project will include two separate buildings that will include rental apartments retail and entertainment space constructed on land contaminated by an oil spill pursuant to a recently enacted state statute the site will be eligible for a substantial amount of state tax_credits the state legislature enacted the state tax_credits statute to promote the cleanup and development of properties in designated area that have hazardous waste contamination sites eligible for the state tax_credits are designated by the state commissioner of environmental conservation the total amount of state tax_credits available to an approved development is equal to the sum of a percentage of up to three types of expenditures_for the site the cost of site preparation the cost or other basis for federal tax purposes of tangible_property principally used for commercial industrial recreational or environmental conservation purposes and the cost of on-site groundwater remediation in each case the applicable_percentage of the costs to be applied in calculating the amount of the credits is percent or percent and may be increased if certain factors are evident taxpayer currently anticipates that the project will generate up to approximately a dollars of state tax_credits over a ten year period most of the credits will likely be generated in the first two years the state tax_credits are refundable to the extent that they exceed the state tax_liabilities of the owners state tax_liability it expects to receive significant cash payments from state which will cause taxpayer to realize a significant amount of taxable_income for federal tax purposes during the first two years of the project’s development taxpayer expects that such amounts will exceed five percent of its gross revenues taxpayer expects that substantially_all of its other income will be qualifying_income for purposes of sec_856 law and analysis because taxpayer as a reit does not expect to incur a material amount of sec_856 of the code provides that in order for a corporation to be considered a reit at least percent of the corporation's gross_income excluding gross_income from prohibited_transactions must be derived from dividends plr-103408-05 interest rents_from_real_property gain from the sale_or_other_disposition of stock securities and real_property other than property in which the corporation is a dealer abatements and refunds of taxes on real_property income and gain derived from foreclosure_property commitment_fees and gain from certain_sales or other dispositions of real_estate_assets the percent gross_income_test under sec_856 of the code in order for a corporation to qualify as a reit at least percent of the corporation's gross_income excluding gross_income from prohibited_transactions must be derived from rents_from_real_property interest on obligations secured_by real_property gain from the sale_or_other_disposition of real_property other than property in which the corporation is a dealer dividends from reit stock and gain from the sale of reit stock abatements and refunds of taxes on real_property income and gain derived from foreclosure_property commitment_fees gain from certain_sales or other dispositions of real_estate_assets and qualified_temporary_investment_income the percent gross_income_test sec_61 of the code provides that except as otherwise provided gross under sec_1_856-3 of the income_tax regulations a reit that is a partner income includes all income from whatever source derived in a partnership is deemed to own its proportionate share of each of the assets of the partnership and to be entitled to the income of the partnership attributable to that share for purposes of sec_856 the interest of a partner in the partnership's assets is determined in accordance with the partner's capital interest in the partnership the character of the various assets in the hands of the partnership and items of gross_income of the partnership retain the same character in the hands of the partners for all purposes of sec_856 the legislative_history underlying the tax treatment of reits indicates that the central concern behind the gross_income restrictions is that a reit's gross_income should largely be composed of passive_income for example h_r rep no 86th cong 2d sess pincite 1960_2_cb_819 pincite states o ne of the principal purposes of your committee in imposing restrictions on types of income of a qualifying real_estate_investment_trust is to be sure the bulk of its income is from passive_income sources and not from the active_conduct_of_a_trade_or_business the legislative_history also indicates that congress intended to equate the tax treatment of reits with the treatment accorded regulated_investment_companies rics in revrul_64_247 1964_2_cb_179 a ric recovered excess management fees from its investment manager the recovery was made as a result of legal action brought against the company's former officers and directors who had owned the investment manager in revrul_74_248 1974_1_cb_167 a ric's former investment_advisor paid the company an amount the advisor had improperly received for assigning its advisory contract the payment was made pursuant to a settlement agreement that was reached after the company's shareholders filed a derivative action against the revrul_64_247 and revrul_74_248 were rendered obsolete in part for plr-103408-05 investment_advisor in both rulings the amounts in question were includible in gross_income under sec_61of the code those amounts were not however income from sources that at the time the rulings were published were described in sec_851 of the code the rulings hold nevertheless that the companies' inclusion of the amounts in gross_income did not cause the companies to fail to meet the definition of a ric contained in sec_851 provided the companies in all other respects qualified for ric status for the tax_year in question purposes of sec_851 by revrul_92_56 1992_2_cb_153 which holds that if in the normal course of its business a ric receives a reimbursement from its investment_advisor and the reimbursement is included in the ric's gross_income the reimbursement is qualifying_income under sec_851 although revrul_92_56 provides that the prior revenue rulings are in part obsolete those revenue rulings remain instructive in determining how certain payments should be treated for purposes of sec_856 through its interests in llc1 will allow it to qualify as a reit the state tax_credits derived from the development of the project should not cause the project to be other than a qualifying asset and the rental income generated by the project should satisfy the reit income tests under sec_856 and c the state tax_credits are intended to promote the remediation and development of contaminated real_estate and the furtherance of this public policy does not interfere with or impede the policy objectives of congress in enacting the income tests under sec_856 and c accordingly we rule that taxable_income associated with the receipt of the state tax_credits will not be considered in determining whether taxpayer satisfies the reit income tests under sec_856 and c other information in this case taxpayer intends that the development and operation of the project except as specifically ruled upon above no opinion is expressed concerning any federal_income_tax consequences related to the facts herein under any other provisions of the code specifically we do not rule whether taxpayer will qualify as a reit under part ii of subchapter_m of chapter of the code this ruling is directed only to the taxpayer requesting it taxpayer should attach a copy of this ruling to each tax_return to which it applies sec_6110 of the code provides that this ruling may not be used or cited as precedent plr-103408-05 is being sent to your authorized representative in accordance with a power_of_attorney on file with this office a copy of this letter sincerely yours william e coppersmith william e coppersmith chief branch office of associate chief_counsel financial institutions products enclosures copy of this letter copy for sec_6110 purposes


department of th internal revenu washington d treasury ‘service b oct - ve hh tt tax_exempt_and_government_entities_division urics legend taxpayera company m l l ira x companyn ira annuity y bank o bank p ira z date date date date date amountl amount2 dear page on you submitted a request fo service in which you ask the service to waive to found in sec_408 of the internal rev you received of an individual_retirement_annuity following facts and representations letter_ruling to the internal revenue 0-day rollover period requirement me code with respect to a distribution ‘our ruling_request is based on the taxpayer a formerly maintained ira x w _ taxpayer a received a distribution of the fu se ahount amount consisted of th company m on or about date amount of his ira x amount an individual_retirement_annuity ira taxpayer a purcha the next day date annuity y from company n in the amount of amount and of his calendar_year issued to taxpayer a on or about date ira conti ibution said annuity_contract was approximately one and one-half months a received a check in the amount of amount fr approximately cancellation of ira annuity y taxpayer a mailed the check that he receiv subsidiary of bank o to purchase a certificate of subsequently received documentation from bank violated the rollover restriction found in code sec hee on or about date taxpayer company n evidencing his lwo weeks later on or about date bd from company n to bank p a eposit ira z taxpayer a d indicating that his purchase of ira z ion d b based on the above facts and representatighs you request the following letter_ruling and revproc_2003_16 that pursuant to code sec_408 i lr b date taxpayer a is granted a period of time not te of this letter_ruling to accomplish a to exceed days as measured from the dé lint ira set up and maintained in his rollover into an individual retirement acco pceived from company n on or about name of the ira y annuity proceeds he r onsisted of amount previously to the extent said proceeds date distributed from ira x with respect to your ruling_request code requirements which a_trust must meet in order to account ira bection a provides the general onstitute an individual retirement ta pt as otherwise provided in this an individual_retirement_plan shall be ee as the case may be in the manner gg ae code sec_408 provides that exc subsection any amount_paid or distributed out of included in gross_income by the payee or distribu provided under sec_72 page code sec_408 provides that sectidn d does not apply to a he requirements of sections rollover_contribution if such contribution satisfie sec_408 and d b sec_408 does not apply to code sec_408 provides that b individual for whose benefit the any amount_paid or distributed out of an ira to th account is maintained if the entire amount received including money and any other_property is paid into an ira other than an endow individual not later than the 60th day after the day distribution iment contract for the benefit of such on which he receives the payment or code sec_408 provides that th amount described in subparagraph a i received retirement account or individual retirement annuit ending on the day of such receipt such individual that subparagraph from an individual retirement a which was not includible in his gross_income bec paragraph does not apply to any y an individual from an individual if at any time during the 1-year period ceived any other amount described in count or individual_retirement_annuity ise of the application of this paragraph code sec_408 provides in rele vant part that the secretary may waive the 60-day requirement under subparagraph a where the failure to waive the requirement would be against equity or good cons other events beyond the reasonable control of the ‘ience including casualty disaster or ndividual subject_to such requirement date provides that -day rollover requirement pursuant to f the code the service will consider all rors committed by a financial to death disability hospitalization revproc_2003_16 ilr b in determining whether to grant a waiver of the sec_402 of the code or d i o relevant facts and circumstances including er institution inability to complete a rollover due incarceration restrictions imposed by a foreign cduntry or postal error the use of the yment by check whether the check was amount distributed for example in the case of pa cashed and the time elapsed since the distrib taph d does not apply to the code sec_408 provides that para yle year to an individual retirement distribution of any contribution paid during a tax account or for an individual_retirement_annuity if tion occurred a such distribution is received on or bef extensions of time for filing such individual’s ret b no deduction is allowed under section e the day prescribed by law including lirn for such taxable_year with respect to such contribution and c such distribution is accompanied by th e amount of net_income attributable to such contribution page in the case of such a distribution for purposes described in subparagraph c shall be deemed to taxable_year in which such contribution is made of sec_61 any net_income nave been earned and receivable in the in this case taxpayer a received a distribution totaling amount from his ira the next day date x on or about date yunt which consisted of amount annuity y from company n in the amount of and an amount equal to his permitted calendar ye ira annuity y contravened the has been made by taxpayer a that his purchase o s of this letter_ruling we will assume requirements of code sec_408 and for purpos said contribution constituted a valid rollover con ira contribution no assertion taxpayer a purchased ira shortly after date on or about da check from company n in the amount of amount annuity y this check was received within ole the extent of amount was ineligible to be rolle limitation found in code sec_408 a received from company n to purchase a certificat later discovered that the ira contribution violated result constituted an excess_contribution to hi sec_4 taxpayer a received a evidencing his cancellation of ira and thus at least to f date over into an ira because of the ough taxpayer a used the check he of deposit ira z from bank p he paz sec_408 and as a z with respect to the ruling requested code authorize the service to extend the 60-dal circumstances however the service may only gi a rollover where the distribution concerning whic for rollover treatment in this case taxpayer a the check that he received from company n to th since taxpayer a was ineligible to roll over the day rollover period never attached to amount extension of time to complete an action which ta sec_408 and rev_proc y rollover period under certain ant an extension of time to accomplish ithe extension is requested was eligible as ineligible to roll over into an ira extent the check totaled amount mount portion of said check the hus the service cannot grant an payer a could not undertake thus with respect to your ruling_request ye conclude as follows since taxpayer a was ineligible to roll o ira set up and maintained in his name t proceeds he received from company n on said distribution totaled amount he is n accomplish said rollover of amount x into an individual_retirement_account distribution of the ira annuity y to the extent or about date bt granted any period of time to this ruling letter is based on the accuracy of the facts and representations made in the ruling_request page any questions regarding this ruling letter should be directed to esquire of this group hejmay be reached at sincerely yours vy fees sl anager ’ employee_plans technical group phone or fax enclosures deleted copy of ruling letter notice of intention to disclose


t c memo united_states tax_court sarah grossnickle petitioner v commissioner of internal revenue respondent docket no filed date sarah grossnickle pro_se david a indek for respondent memorandum findings_of_fact and opinion ruwe judge respondent determined a dollar_figure deficiency in petitioner’ sec_2010 federal_income_tax as well as additions to tax of dollar_figure and dollar_figure pursuant to sec_6651 and respectively in his posttrial brief respondent concedes the sec_6651 addition_to_tax the issues remaining for decision are whether petitioner is entitled to various schedule c profit or loss from business deductions for the taxable_year whether petitioner was required to file a federal_income_tax return for the taxable_year and whether petitioner is liable for an addition_to_tax under sec_6651 findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference petitioner resided in maryland at the time she filed her petition petitioner was over the age of in the taxable_year during the taxable_year petitioner conducted business as an independent real_estate agent associated with re max realty group re max re max provided petitioner with shared office space that included telephone and internet service petitioner was issued a form 1099-misc miscellaneous income for reporting dollar_figure of nonemployee compensation from re max of this amount unless otherwise indicated all section references are to the internal_revenue_code code in effect for the year at issue and all rule references are to the tax_court rules_of_practice and procedure re max withheld dollar_figure to cover expenses petitioner incurred as a real_estate agent in the stipulation of facts respondent concedes that petitioner is entitled to deduct business_expenses of dollar_figure that re max withheld from petitioner in the taxable_year as discussed infra petitioner claims deductions for additional professional fees and expenses_incurred in some of which respondent has conceded petitioner did not file a federal_income_tax return for the taxable_year alleging that she did not have enough gross_income to have a filing requirement on date respondent issued to petitioner a notice_of_deficiency for the taxable_year after trial on date petitioner filed a motion to supplement the record to allow the introduction of petitioner’s exhibits 9-p 10-p and 11-p we will grant petitioner’s motion but note that this evidence has only a small effect on the outcome opinion the commissioner’s determinations in a notice_of_deficiency are generally presumed correct and the taxpayer bears the burden of proving that the determinations are in error rule a 290_us_111 petitioner does not contend and the evidence does not establish that the burden_of_proof shifts to respondent under sec_7491 as to any issue of fact a petitioner’s claimed deductions deductions are a matter of legislative grace and the taxpayer bears the burden of proving entitlement to any deduction claimed rule a 503_us_79 292_us_435 sec_6001 requires the taxpayer to maintain records sufficient to establish the amount of each deduction claimed see also sec_1 a income_tax regs sec_162 allows as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business see 122_tc_305 a trade_or_business expense is ordinary for purposes of sec_162 if it is normal or customary within a particular trade business or industry and is necessary if it is appropriate and helpful for the development of the business 320_us_467 308_us_488 in contrast sec_262 disallows deductions for personal living or family_expenses if the taxpayer establishes that an expense is deductible but is unable to substantiate the precise amount we may estimate the amount bearing heavily against the taxpayer whose inexactitude is of his or her own making see 39_f2d_540 2d cir the taxpayer must present sufficient evidence for the court to form an estimate because without such a basis any allowance would amount to unguided largesse 245_f2d_559 5th cir 85_tc_731 however sec_274 overrides the cohan_rule with regard to certain expenses see 50_tc_823 aff’d per curiam 412_f2d_201 2d cir sec_1_274-5t temporary income_tax regs fed reg date under sec_274 the taxpayer must meet stricter substantiation requirements to be allowed a deduction under sec_162 the heightened substantiation requirements of sec_274 apply to any traveling expense including meals_and_lodging away from home any item with respect to an activity in the nature of entertainment amusement or recreation an expense for gifts or the use of listed_property as defined in sec_280f including any passenger automobiles to deduct these expenses the taxpayer must substantiate by adequate_records or by sufficient evidence corroborating the taxpayer’s own statement the amount of the expense the time and place of the expense and the business_purpose of the expense sec_274 see also oswandel v commissioner tcmemo_2007_ tax ct memo lexi sec_185 at even if such an expense would otherwise be deductible sec_274 may still preclude a deduction if the taxpayer does not present sufficient substantiation sec_1_274-5t temporary income_tax regs supra professional and licensing fees in the stipulation of facts respondent concedes that petitioner is entitled to deduct dollar_figure for annual professional and licensing fees paid in in addition to respondent’s concessions petitioner contends that she is entitled to a deduction of dollar_figure for professional and licensing fees for including dollar_figure for realtor association dues and dollar_figure for a real_estate license fee respondent argues that petitioner has not adequately substantiated that either of these expenses was paid and or incurred in in the stipulation of facts respondent concedes that petitioner is entitled to deduct promotion advertising and listing expenses of dollar_figure and professional education expenses of dollar_figure for in his posttrial brief respondent concedes that petitioner is entitled to deduct additional promotion advertising and listing expenses of dollar_figure and additional professional education expenses of dollar_figure for petitioner has sufficiently substantiated that she paid the disputed realtor association dues and licensing fees for to substantiate her realtor association dues petitioner provided an itemized invoice with a receipt from the frederick county association of realtors showing that dollar_figure was due for this receipt substantiates that petitioner paid dollar_figure for local state and national realtor association dues using a visa credit card however the tax information at the bottom of this invoice states that dollar_figure of this amount is nondeductible for federal_income_tax purposes thus petitioner is entitled to a dollar_figure deduction for realtor association dues for to substantiate the payment of her real_estate license fee petitioner submitted a money order receipt from the u s postal service showing that dollar_figure was payable to the real_estate commission on date accordingly petitioner is entitled to a deduction of dollar_figure for the cost of her real_estate license fee for the invoice indicates that petitioner paid dollar_figure for her local state and national realtor association dues and a voluntary dollar_figure rpac contribution the invoice states that the nondeductible portion of local association dues is dollar_figure the nondeductible portion of state association dues is dollar_figure and the nondeductible portion of national association dues is dollar_figure in addition the invoice states that all rpac contributions are nondeductible home_office space supplies and equipment in his posttrial brief respondent concedes that petitioner is entitled to deduct dollar_figure for office supplies and equipment expenses paid in petitioner contends that she is also entitled to a home_office expense deduction of dollar_figure for at trial petitioner testified that she rented from her sister approximately square feet of living space for dollar_figure per month and dedicated square feet to about square feet of this rented space to her real_estate business petitioner estimates that she is entitled to a home_office expense deduction of dollar_figure per month for respondent argues that petitioner has not provided sufficient information about the home_office to substantiate the expense as a general_rule sec_280a provides that no deduction otherwise allowable to an individual shall be allowed with respect to the use of a dwelling_unit which is used by the taxpayer during the taxable_year as a residence the term dwelling_unit is defined as a house apartment condominium mobile home boat or similar_property and all structures or other_property appurtenant to such dwelling_unit sec_280a however sec_280a contains an exception to the general disallowance of subsection a in pertinent part sec_280a provides sec_280a exceptions for certain business or rental use limitation on deductions for such use -- certain business use --subsection a shall not apply to any item to the extent such item is allocable to a portion of the dwelling_unit which is exclusively used on a regular basis-- a as the principal_place_of_business for any trade_or_business of the taxpayer b as a place of business which is used by patients clients or customers in meeting or dealing with the taxpayer in the normal course of his trade_or_business or c in the case of a separate structure which is not attached to the dwelling_unit in connection with the taxpayer’s trade_or_business for an expense related to a dwelling_unit to fit within this exception some portion of the dwelling_unit must be used regularly and exclusively for the taxpayer’s trade_or_business see scully v commissioner tcmemo_2013_229 at petitioner has failed to demonstrate that any portion of the dwelling_unit was regularly and exclusively used for business purposes in petitioner testified at trial that she rented approximately square feet of living space from her sister for dollar_figure per month according to petitioner square feet to about square feet of this space was dedicated to her real_estate business as support petitioner offered into evidence two google aerial view photographs of a residential structure with handwritten notations petitioner did not produce any documentation receipts or canceled checks to substantiate the rental arrangement furthermore petitioner did not offer sufficient evidence to prove that the to square feet of purported office space was regularly and exclusively used for her real_estate business because petitioner has not proven that she rented a dwelling_unit or that a portion of it was regularly and exclusively used for business purposes we cannot allow her any deduction attributable to a home_office phone and internet expenses in his posttrial brief respondent concedes that petitioner is entitled to deduct dollar_figure for communication expenses and dollar_figure for a miscellaneous expense for petitioner contends that she is entitled to additional deductions for various phone and internet expenses_incurred in carrying on her real_estate business in including dollar_figure to verizon wireless in date for business phone internet dollar_figure to verizon wireless for three months of estimated business phone expenses and dollar_figure to her sister consisting of dollar_figure per month for internet use in the purported home_office respondent argues that petitioner has not substantiated any of these expenses petitioner has failed to demonstrate that she incurred and or paid any of the claimed phone and internet expenses for to substantiate the first phone internet expense petitioner offered into evidence a verizon wireless bill providing that dollar_figure was due on the account by date however petitioner did not provide any documentation receipts or corresponding credit card charges to substantiate that this bill was paid or that it was for business purposes additionally petitioner did not offer any documentation to substantiate that she incurred or paid dollar_figure for a business phone expense in petitioner also testified that she paid her sister dollar_figure per month for internet access to research upload download and update listings and email clients however petitioner did not provide any documentation bills or receipts to show that she incurred or paid this expense accordingly we conclude that petitioner has failed to substantiate the claimed phone and internet expenses in excess of the amounts already allowed by respondent business mileage petitioner argues that she is entitled to a dollar_figure deduction for car and truck expenses resulting from mileage driven during her real_estate activities in petitioner contends that she lost her original mileage calendar during her move in november and december of thus to substantiate her claimed mileage petitioner offered into evidence at trial a typewritten statement that showed only total business miles and the total dollar amount claimed according to petitioner this statement provides e xtremely conservative estimate s and a guesstimat e of miles she drove from her home to re max and while showing properties respondent argues that petitioner has not substantiated any of her claimed business mileage for petitioner’s claimed mileage is subject_to the heightened substantiation requirements of sec_274 see sec_274 sec_280f as applicable to vehicle expenses sec_274 requires the taxpayer to substantiate by adequate_records the mileage the time and place of the use and the business_purpose of the use see solomon v commissioner tcmemo_2011_ tax ct memo lexi sec_90 at substantiation by adequate_records requires the taxpayer to maintain an account book a diary a log a statement of expense trip sheets or a similar record prepared contemporaneously with the use or expenditure and documentary_evidence eg receipts or bills of certain expenditures see sec_1_274-5 income_tax regs sec_1_274-5t temporary income_tax regs fed reg date a log that is kept on a weekly basis is considered contemporaneous for this purpose see sec_1_274-5t temporary income_tax regs fed reg date the level of detail required for substantiating by adequate_records the business use of listed_property depends on the facts and circumstances of such use see id subdiv ii c fed reg the typewritten statement that petitioner offered at trial for is insufficient substantiation under the requirements of sec_274 in her posttrial submission petitioner offered a more detailed log that was prepared after the trial however the source of this information and petitioner’s methodology in its preparation are not adequately explained and the log does not rise to the level of credibility of a contemporaneous record accordingly petitioner is not entitled to any deduction for car and truck expenses for b filing requirement petitioner contends that she was not required to file a federal_income_tax return petitioner’s position appears to be that her profit or gain from her real_estate activities ie nonemployee compensation of dollar_figure minus claimed trade_or_business_expenses does not equal or exceed the filing threshold provided as previously held petitioner did not substantiate that she maintained a home_office in for this reason any mileage claimed by petitioner for travel between her residence and the re max office is nondeductible commuting mileage see 326_us_465 73_tc_766 for in sec_6012 respondent argues that petitioner was required to file an income_tax return for tax_year the code imposes a federal tax on the taxable_income of every individual sec_1 gross_income for the purpose of calculating taxable_income is defined as all income from whatever source derived sec_61 every u s resident individual having for the taxable_year gross_income which equals or exceeds the exemption_amount is--with enumerated exceptions not applicable here--required to file an income_tax return sec_6012 for the exemption_amount for a single individual age or older is dollar_figure see sec_63 f d see also irs publication exemptions standard_deduction and filing information for use in preparing returns there is no dispute that petitioner worked as a real_estate agent in and earned nonemployee compensation of dollar_figure from re max re max issued to petitioner a form 1099-misc reporting this amount it is well settled that amounts received by a taxpayer in the form of nonemployee compensation are includable in gross_income see walbaum v commissioner t c memo at accordingly dollar_figure is includable in petitioner’s gross_income and therefore she was required to file a income_tax return c sec_6651 addition_to_tax sec_6651 imposes an addition_to_tax for the failure to timely file a return unless the taxpayer establishes that the failure was due to reasonable_cause and not due to willful neglect the addition_to_tax is equal to of the amount_required_to_be_shown_as_tax on the delinquent_return for each month or fraction thereof during which the return remains delinquent up to a maximum addition of in the aggregate id sec_7491 provides that the commissioner bears the burden of production with respect to the liability of an individual for any penalty or addition_to_tax the commissioner may meet this burden of production by coming forward with sufficient evidence indicating that it is appropriate to impose the relevant penalty 116_tc_438 as discussed above petitioner was required to file a federal_income_tax return for because the parties have stipulated that petitioner did not file a tax_return for respondent has met his burden of production in addition sec_6017 imposes a filing requirement on any individual who has net self-employment earnings_of dollar_figure or more petitioner’s net self- employment earnings for exceed this amount additionally petitioner has not offered any documentary or testimonial evidence to establish that her failure_to_file a tax_return was due to reasonable_cause and not due to willful neglect see sec_6651 petitioner contends that she had a reasonable belief that she was not required to file a tax_return for because her expenses from real_estate exceeded her income however an uninformed or unsupported belief does not constitute reasonable_cause for the failure_to_file a return 243_f2d_954 4th cir aff’g 26_tc_528 accordingly we sustain respondent’s determination of the sec_6651 addition_to_tax but note that because of our previous holdings and several concessions by the parties respondent’s original sec_6651 addition_to_tax computations in the notice_of_deficiency must be adjusted to reflect those changes in reaching our decision we have considered all arguments made by the parties and to the extent not mentioned or addressed they are irrelevant or without merit to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index number --------------------- ------------------------ -------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------- id no ---------------- telephone number -------------------- refer reply to cc psi b02 plr-134672-13 date date ------------------------------------------------------- ----------------------------------------------------------------------------- grantor distribution committee ------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- -------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------- trust state trustees ------------------------------------------------ ---------- ------------------------------------------------------ dear ----- ---------- this responds to a letter dated date and subsequent correspondence requesting rulings under sec_671 sec_2501 and sec_2514 of the internal_revenue_code the information submitted states that grantor proposes to create an irrevocable_trust trust for the benefit of himself his parents siblings and issue which he intends to execute upon receipt of a favorable private_letter_ruling from the internal_revenue_service two independent trustees are the trustees trustees of trust during grantor’s lifetime the beneficiaries of trust are grantor and his siblings however if grantor’s siblings are not living the class of permissible beneficiaries will include grantor’s parents trustees must make distributions of income and principal as directed by distribution committee and or grantor as follows at any time trustees pursuant to the direction of a majority of distribution committee with the written consent of grantor shall distribute to grantor or the beneficiaries such amounts of the net_income or principal as directed by distribution committee grantor’s consent power plr-134672-13 at any time trustees pursuant to the direction of all distribution committee members other than grantor shall distribute to the beneficiaries such amounts of the net_income or principal as directed by distribution committee unanimous member power and at any time grantor in a nonfiduciary capacity may but shall not be required to distribute to any one or more of the beneficiaries other than himself such amounts of the principal including the whole thereof as grantor deems advisable to provide for the health maintenance support and education of grantor’s issue grantor’s sole power the distribution committee may direct that distributions be made equally or unequally and to or for the benefit of any one or more of the beneficiaries of trust to the exclusion of others any net_income not distributed by trustee will be accumulated and added to principal distribution committee will be initially composed of grantor grantor’s siblings and grantor’s nephews and will cease to exist upon grantor’s death trust provides that at all times the distribution committee must consist of at least two adults other than grantor either who are members of the class of persons eligible to receive distributions of income or principal under trust or if there are not two adult members of such class who are willing and able to serve who are the parent or guardian of a member of such class of eligible distributes eligible individuals if at any time fewer than two eligible individuals are members the distribution committee shall be deemed not to exist a vacancy on distribution committee must be filled in the following order the oldest of the grantor’s adult issue who willing to serve and is not already serving as a member of distribution committee the oldest of the adult issue of grantor’s parents who is willing to serve and who is not already serving as a member of distribution committee the legal guardian if any or the parent of the oldest of the grantor’s minor issue who is not already serving as a member of distribution committee the legal guardian if any or the parent of the oldest minor issue of grantor’s parents who is willing to serve and is not already serving as a member of distribution committee grantor’s father or grantor’s mother if at any time distribution committee does not include at least two members distribution committee shall be deemed not to exist the distribution committee will cease to exist upon grantor’s death upon grantor’s death the trustee will dispose_of the then-remaining principal and undistributed_income of trust as grantor directs by a will specifically referring to this power_of_appointment the testamentary power provided that no such appointment may be made to grantor’s estate grantor’s creditors or the creditors of grantor’s estate grantor’s power includes the power to appoint outright or in trust and to create new powers in default of the exercise of grantor’s testamentary power the balance of trust will be distributed per stirpes to grantor’s then living issue in further trust if none plr-134672-13 of grantor’s issue is then living but any descendant of grantor’s parents is then living trustees are to allocate income and principal per stirpes among grantor’s parents issue in further trust if no descendant of grantor’s parents is then living trustees are to distribute the remaining income and principal pursuant to state law as if grantor had died intestate and unmarried you have requested the following rulings during the period distribution committee is serving no portion of the items of income deductions and credits against tax of the trust will be included in computing the taxable_income deductions and credits of the grantor under sec_671 the contribution of property to trust by grantor will not be a completed_gift subject_to federal gift_tax any distribution_of_property by the distribution committee from trust to grantor will not be a completed_gift subject_to federal gift_tax by any member of the distribution committee any distribution_of_property by distribution committee from trust to any beneficiary of trust other than grantor will not be a completed_gift subject_to federal gift_tax by any member of the distribution committee other than grantor ruling sec_671 provides that where it is specified in subpart e of part i of subchapter_j that the grantor or another person shall be treated as the owner of any portion of a_trust there shall then be included in computing the taxable_income and credits of the grantor or the other person those items of income deductions and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account under chapter in computing taxable_income or credits against the tax of an individual sec_672 provides that for purposes of subpart e the term adverse_party means any person having a substantial_beneficial_interest in the trust which would be adversely affected by the exercise or nonexercise of the power which he possesses respecting the trust sec_673 through specify the circumstances under which the grantor is treated as the owner of a portion of a_trust sec_673 provides that the grantor shall be treated as the owner of any portion of a_trust in which the grantor has a reversionary_interest in either the corpus or the income therefrom if as of the inception of that portion of the trust the value of such plr-134672-13 interest exceed sec_5 percent of the value of such portion sec_674 provides in general that the grantor shall be treated as the owner of any portion of a_trust in respect of which the beneficial_enjoyment of the corpus or the income therefrom is subject_to a power of disposition exercisable by the grantor or a nonadverse_party or both without the approval or consent of any adverse_party sec_674 provides that sec_674 shall not apply to the power in sec_674 regardless of by whom held sec_674 describes a power to distribute corpus to or for a beneficiary provided that the power is limited by a reasonably_definite_standard which is set forth in the trust instrument sec_674 provides that sec_674 shall not apply to a power exercisable only by will other than a power in the grantor to appoint by will the income of the trust where the income is accumulated for such disposition by the grantor or may be so accumulated in the discretion of the grantor or a nonadverse_party or both without the approval or consent of any adverse_party under sec_675 and applicable regulations the grantor is treated as the owner of any portion of a_trust if under the terms of the trust agreement or circumstances attendant to its operation administrative control is exercisable primarily for the benefit of the grantor rather than the beneficiary of the trust sec_676 provides that the grantor shall be treated as the owner of any portion of a_trust whether or not he is treated as such owner under any other provision of part i subchapter_j chapter where at any time the power to re-vest in the grantor title to such portion is exercisable by the grantor or a nonadverse_party or both sec_677 provides in general that the grantor shall be treated as the owner of any portion of a_trust whether or not he is treated as such owner under sec_674 whose income without the approval or consent of any adverse_party is or in the discretion of the grantor or a nonadverse_party or both may be distributed to the grantor or the grantor’s spouse held or accumulated for future distribution to the grantor or the grantor’s spouse or applied to the payment of premiums on policies of insurance on the life of the grantor or the grantor’s spouse sec_678 provides that a person other than the grantor shall be treated as the owner of any portion of a_trust with respect to which such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself or such person has previously partially released or otherwise modified such a power and after the release or modification retains such control as would within the principles of inclusive subject a grantor of a_trust to treatment as the owner thereof based solely on the facts submitted and representations made we conclude an plr-134672-13 examination of trust reveals none of the circumstances that would cause grantor to be treated as the owner of any portion of trust under sec_673 sec_674 sec_676 or sec_677 because none of the other distribution committee members has a power exercisable solely by himself to vest trust income or corpus in himself none shall be treated as the owner of any portion of the trust under sec_678 we further conclude that an examination of trust reveals none of the circumstances that would cause administrative controls to be considered exercisable primarily for the benefit of grantor under sec_675 thus the circumstances attendant on the operation of trust will determine whether grantor will be treated as the owner of any portion of trust under sec_675 this is a question of fact the determination of which must be deferred until the federal_income_tax returns of the parties involved have been examined by the office with responsibility for such examination ruling sec_2 and sec_2501 provides that a tax is imposed for each calendar_year on the transfer of property by gift during such calendar_year by any individual resident or nonresident sec_2511 provides that the tax imposed by sec_2501 applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_25_2511-2 of the gift_tax regulations provides that a gift is complete as to any property or part thereof or interest therein of which the donor has so parted with dominion and control as to leave in the donor no power to change its disposition whether for the donor’s own benefit or for the benefit of another but if upon a transfer of property whether in trust or otherwise the donor reserves any power over its disposition the gift may be wholly incomplete or may be partially complete and partially incomplete depending upon all the facts in the particular case accordingly in every case of a transfer of property subject_to a reserved power the terms of the power must be examined and its scope determined sec_25_2511-2 also provides an example where the donor transfers property to another in trust to pay the income to the donor or accumulate it in the discretion of the trustee and the donor retains a testamentary power to appoint the remainder among the donor’s descendants the regulation concludes that no portion of the transfer is a completed_gift however if the donor had not retained a testamentary_power_of_appointment but instead provided that the remainder should go to x or his heirs the entire transfer would be a completed_gift sec_25_2511-2 provides that a gift is incomplete in every instance in which a donor reserves the power to re-vest the beneficial title in himself or herself a gift is also incomplete if and to the extent that a reserved power gives the donor the power to name plr-134672-13 new beneficiaries or to change the interests of the beneficiaries as between themselves unless the power is a fiduciary power limited by a fixed_or_ascertainable_standard sec_25_2511-2 provides that a donor is considered as himself having a power if it is exercisable by him in conjunction with any person not having a substantial adverse_interest in the disposition of the transferred property or the income therefrom sec_25_2511-2 provides that the relinquishment or termination of a power to change the beneficiaries of transferred property occurring otherwise than by death of the donor is regarded as the event which completes the gift and causes the gift_tax to apply sec_25_2511-2 provides that if a donor transfers property to himself as trustee or to himself and some other person not possessing a substantial adverse_interest as trustees and retains no beneficial_interest in the trust property and no power over it except fiduciary powers the exercise or nonexercise of which is limited by a fixed_or_ascertainable_standard to change the beneficiaries of the transferred property the donor has made a completed_gift and the entire value of the transferred property is subject_to the gift_tax sec_25_2511-2 does not define substantial adverse_interest sec_25_2514-3 provides in part that a taker in default of appointment under a power has an interest that is adverse to an exercise of the power sec_25_2514-3 also provides that a coholder of a power is considered as having an adverse_interest where he may possess the power after the possessor’s death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate in 308_us_39 the taxpayer created a_trust for the benefit of named beneficiaries and reserved the power_to_revoke the trust in whole or in part and to designate new beneficiaries other than himself six years later in the taxpayer relinquished the power_to_revoke the trust but retained the right to change the beneficiaries in the taxpayer relinquished the right to change the beneficiaries the court stated that the taxpayer’s gift is not complete for purposes of the gift_tax when the donor has reserved the power to determine those others who would ultimately receive the property accordingly the court held that the taxpayer’s gift was complete in when he relinquished his right to change the beneficiaries of the trust a grantor’s retention of a power to change the beneficial interests in a_trust causes the transfer to the trust to be incomplete for gift_tax purposes even though the power may be defeated by the actions of third parties 37_tc_897 see also 51_tc_352 in this case grantor retained the grantor’s consent power over the income and principal of trust under sec_25_2511-2 a donor is considered as himself having a power if it is exercisable by him in conjunction with any person not having a substantial plr-134672-13 adverse_interest in the disposition of the transferred property or the income therefrom the distribution committee members are not takers in default for purposes of sec_25_2514-3 they are merely co-holders of the power the distribution committee ceases to exist upon the death of grantor under sec_25_2514-3 a co- holder of a power is only considered as having an adverse_interest where he may possess the power after the possessor’s death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate in this case the distribution committee ceases to exist upon grantor’s death accordingly the distribution committee members do not have interests adverse to grantor under sec_25_2514-3 and for purposes of sec_25_2511-2 therefore grantor is considered as possessing the power to distribute income and principal to any beneficiary himself because he retained the grantor’s consent power the retention of this power causes the transfer of property to trust to be wholly incomplete for federal gift_tax purposes grantor also retained the grantor’s sole power over the principal of trust under sec_25_2511-2 a gift is incomplete if and to the extent that a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries in this case grantor’s sole power gives grantor the power to change the interests of the beneficiaries accordingly the retention of the grantor’s sole power causes the transfer of property to trust to be wholly incomplete for federal gift_tax purposes further grantor retained grantor’s testamentary power to appoint the property in trust to anyone including trusts other than grantor’s estate grantor’s creditors or the creditors of grantor’s estate under sec_25_2511-2 the retention of a testamentary power to appoint the remainder of a_trust is considered a retention of dominion and control_over the remainder accordingly the retention of this power causes the transfer of property to trust to be incomplete with respect to the remainder in trust for federal gift_tax purposes finally the distribution committee possesses the unanimous member power over income and principal this power is not a condition_precedent to grantor’s powers grantor’s powers over the income and principal are presently exercisable and not subject_to a condition_precedent grantor retains dominion and control_over the income and principal of trust until the distribution committee members exercise their unanimous member power accordingly this power does not cause the transfer of property to be complete for federal gift_tax purposes see 37_tc_897 51_tc_352 accordingly based on the facts submitted and the representations made we conclude that the contribution of property to trust by grantor is not a completed_gift subject_to federal gift_tax any distribution from trust to grantor is merely a return of grantor’s property therefore we conclude that any distribution_of_property by the distribution committee from trust to grantor will not be a completed_gift subject_to plr-134672-13 federal gift_tax by any member of the distribution committee further upon grantor’s death the fair_market_value of the property in trust is includible in grantor’s gross_estate for federal estate_tax purposes ruling sec_2514 provides that the exercise or release of a general_power_of_appointment created after date shall be deemed a transfer of property by the individual possessing such power sec_2514 provides that the term general_power_of_appointment means a power which is exercisable in favor of the individual possessing the power possessor the possessor’s estate the possessor’s creditors or the creditors of the individual’s estate sec_25_2514-1 provides in part that a power_of_appointment is not a general power if by its terms it is exercisable only in favor of one or more designated persons or classes other than the possessor or his creditors or the possessor’s estate or the creditors of the estate sec_2514 provides that in the case of a power_of_appointment created after date if the power is exercisable by the possessor only in conjunction with the creator of the power such power is not deemed a general_power_of_appointment sec_2514 provides that in the case of a power_of_appointment created after date if the power is not exercisable by the possessor except in conjunction with a person having a substantial interest in the property subject_to the power which is adverse to the exercise of the power in favor of the possessor such power shall not be deemed a general_power_of_appointment for purposes of sec_2514 a person who after the death of the possessor may be possessed of a power_of_appointment with respect to the property subject_to the possessor’s power which he may exercise in his own favor shall be deemed as having an interest in the property and such interest shall be deemed adverse to such exercise of the possessor’s power sec_25_2514-3 provides in part that a co-holder of a power has no adverse_interest merely because of his joint possession of the power nor merely because he is a permissible appointee under a power however a co-holder of a power is considered as having an adverse_interest where he may possess the power after the possessor’s death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate thus for example if x y and z held a power jointly to appoint among a group of persons which includes themselves and if on the death of x the power will pass to y and z jointly then y and z are considered to have plr-134672-13 interests adverse to the exercise of the power in favor of x similarly if on y’s death the power will pass to z z is considered to have an interest adverse to the exercise of the power in favor of y the powers held by the distribution committee members under the grantor’s consent power are powers that are exercisable only in conjunction with the creator grantor accordingly under sec_2514 the distribution committee members do not possess general powers of appointment by virtue of possessing this power further the powers held by the distribution committee members under the unanimous member powers are not general powers of appointment as in the example in sec_25_2514-3 the distribution committee members have substantial adverse interests in the property subject_to this power accordingly any distribution made from trust to a beneficiary other than grantor pursuant to the exercise of these powers the grantor’s consent power and the unanimous member powers are not gifts by the distribution committee members instead such distributions are gifts by grantor based upon the facts submitted and representations made we conclude that any distribution_of_property by the distribution committee from trust to any beneficiary of trust other than grantor will not be a completed_gift subject_to federal gift_tax by any member of the distribution committee further we conclude that any distribution_of_property from trust to a beneficiary other than grantor will be a completed_gift by grantor except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code specifically we express no opinion on the trust provisions permitting trustee to distribute income or principal to trustees of other qualified trusts decanting plr-134672-13 this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file a copy of this letter is being sent to x’s authorized representative sincerely bradford r poston senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


t c memo united_states tax_court health investment corp and subsidiaries petitioner v commissioner of internal revenue respondent docket no filed date steven ray mather and elliott h kajan for petitioner joyce m marr for respondent memorandum findings_of_fact and opinion cohen judge respondent determined a federal_income_tax deficiency of dollar_figure for petitioner’s tax and fiscal_year ending date after concessions the issue for decision is whether petitioner is entitled to the sec_481 adjustment resulting from a change in the method_of_accounting for bad_debts as claimed on the tax_return unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure findings_of_fact some of the facts have been stipulated and the stipulated facts are incorporated in our findings by this reference petitioner is the common parent of an affiliated_group_of_corporations at the time the petition was filed petitioner’s principal_place_of_business was in california petitioner filed consolidated federal_income_tax returns for its tax and fiscal years ending date and ernst young l l p a public accounting firm prepared petitioner’s tax returns for fiscal years ending fye in and petitioner through its subsidiaries operated five hospitals during its fye date before this tax_year petitioner used a reserve_method of accounting for bad_debts for both financial and tax_accounting in its financial_accounting petitioner maintained combined contractual and bad_debt allowances sometimes called bad_debt_reserve accounts a contractual allowance reflects amounts petitioner is not entitled to collect because of contractual agreements with healthcare payers the bad_debt allowance reflects the amount petitioner is entitled to collect but does not collect during the 1990s linda bentley bentley held the position of controller and then chief financial officer for petitioner at ernst young’s request bentley prepared a schedule entitled contractual bad_debt exp analysis for three of petitioner’s subsidiaries that she understood would be used for an application to the internal_revenue_service irs to request a change in methods_of_accounting bentley’s schedule purportedly identified the bad_debt portion in the combined contractual and bad_debt allowance accounts as of date bentley used petitioner’s accounts_receivable aging reports determined a reserve percentage for what petitioner termed financial classes groupings of similar sources of petitioner’s revenue and accounts_receivable and then categorized the classes as contractual bad_debt or a combination of the two using petitioner’s files and information obtained from petitioner’s business office where petitioner had agreed to a payment amount bentley determined what had been paid what the charges were and whether an unpaid portion was a contractual or a bad_debt allowance from this historical analysis bentley determined percentages that reflected the general collection amount for a particular class bentley applied the percentages to the respective financial classes that had combined contractual and bad_debt amounts to determine the bad_debt amount petitioner submitted a form_3115 application_for change in accounting_method to the irs requesting permission to change the method_of_accounting for bad_debts for the taxable_year that began date for three of its subsidiaries bay cities medical center bay cities jupiter bellflower doctors hospital jupiter bellflower and los angeles doctors hospital corp la doctors petitioner included documents with the form_3115 indicating that if the method_of_accounting for bad_debts were changed under sec_481 an adjustment for the amount of the reserve for bad_debts as of the close of fye date would be required as follows dollar_figure for bay cities dollar_figure for jupiter bellflower and dollar_figure for la doctors for a total sec_481 adjustment of dollar_figure these reported figures correspond to the amounts on the schedules bentley prepared for the three subsidiaries the parties entered into a consent agreement in date with the irs granting permission for the three subsidiaries to change their method_of_accounting for bad_debts from the reserve_method to the specific chargeoff method the three subsidiaries continued to use the reserve_method of accounting for bad_debts for financial_accounting purposes according to the executed consent agreement the information petitioner furnished indicates that as of the beginning of the year_of_change the adjustment required under sec_481 is computed as follows bay cities medical center dollar_figure jupiter bellflower doctors hospital big_number los angeles doctors hospital corporation big_number total adjustment increase in computing consolidated_taxable_income dollar_figure the taxpayers’ request has been determined to be a change from a category_a_method_of_accounting as defined in section dollar_figure of revproc_92_20 1992_1_cb_685 section dollar_figure of revproc_92_20 defines a category_a_method_of_accounting as a method_of_accounting that the taxpayer is specifically not permitted to use under the internal_revenue_code the income_tax regulations or a decision of the supreme court of the united_states a category a method is also a method_of_accounting that differs from a method the taxpayer is specifically required to use under the code the regulations or a decision of the supreme court of the united_states sec_5 a of revproc_92_20 provides that when there is a change in method_of_accounting from a category_a_method_of_accounting as defined in sec_3 that results in a net positive sec_481 adjustment the taxpayer must beginning with the year_of_change take the net sec_481 adjustment into account ratably over tax years in computing taxable_income the amount of the adjustment which is to be taken into account over a three-year period adjustment period is subject_to verification by the district_director upon examination of the consolidated_income_tax_return an examining agent may not propose that the taxpayers change the same method_of_accounting as that changed by the taxpayers under this ruling for a year prior to the year_of_change petitioner reported the ratable portion of the claimed sec_481 adjustment on form_1120 u s_corporation income_tax return dated date form_1120 as follows bay cities dollar_figure dollar_figure jupiter bellflower big_number big_number la doctors big_number big_number big_number total on the form_1120 petitioner claimed current_year deductions for bad_debts of dollar_figure for bay cities dollar_figure for jupiter bellflower and dollar_figure for la doctors on the attached schedule m-1 reconciliation of income loss per books with income per return petitioner reported the deductions on the return not charged against book income for this year for the three subsidiaries to calculate these book-to-tax adjustments petitioner used the figures bentley calculated as the bad_debt_reserve account balances as of fye date and hence the beginning of the next fiscal_year date and subtracted the bad_debt allowance amounts as of fye date as follows bad_debt allowance amounts form_1120 date date schedule m-11 bay cities jupiter bellflower la doctors dollar_figure dollar_figure big_number big_number big_number big_number dollar_figure big_number big_number 1line deductions on this return not charged against book income this year for the form_1120 petitioner filed for fye date petitioner used this same method to calculate the bad_debt_reserve amounts for these subsidiaries and used the following fiscal_year beginning and ending amounts for the bad_debt allowance amounts bad_debt allowance amounts date date form_1120 schedule m-1 bay cities jupiter bellflower la doctors dollar_figure big_number big_number dollar_figure big_number 2dollar_figure big_number big_number 1bay cities was temporarily closed at the end of fye apr 2line deductions on this return not charged against book 3line expenses recorded on books this year not deducted income this year on this return 4line upon review of documents that petitioner supplied for each of the three subsidiaries during the irs examination of petitioner’s federal_income_tax return an irs revenue_agent prepared a worksheet on or before date noting that those documents identified two different amounts for petitioner’s bad_debt_reserve as of date one amount was petitioner’s reported sec_481 adjustment on the form_3115 as reported ratably on the form_1120 the revenue_agent identified a different amount on worksheets prepared by ernst young the ernst young worksheet amounts were calculated for each subsidiary by multiplying the subsidiary’s combined contractual allowance and bad_debt allowance account amount by an allowance percentage to determine the bad_debt allowance amount with the remainder allocated to the contractual allowance the bad_debt allowance amounts ernst young calculated for the subsidiaries as of date are as follows dollar_figure for bay cities dollar_figure for jupiter bellflower and dollar_figure for la doctors using these figures the ratable portion of the sec_481 adjustment is dollar_figure the revenue_agent requested documentation to verify petitioner’s determination of the bad_debt_reserve amounts as of date for the three subsidiaries as claimed on the tax_return in response an ernst young accountant acting as petitioner’s representative during the examination provided for each subsidiary the calculation used to derive the bad_debt_reserve amount the documents provided showed each subsidiary’s bad_debt_reserve equal to the gross accounts_receivable multiplied by a bad_debt percentage per client the revenue_agent concluded that the percentages could not be explained or verified and thus the bad_debt_reserve amounts were not proper the revenue_agent did not question petitioner’s calculated balances of the bad_debt reserves as of date used to compute the corresponding schedule m-1 adjustments for each of the three subsidiaries according to the ernst young worksheets supplied dollar_figure for bay cities dollar_figure for jupiter bellflower and dollar_figure for la doctors to calculate these amounts the same method was used as that used for fye date the revenue_agent concluded that the amounts of the bad_debt reserves as of date on the ernst young worksheets were the correct figures--not the amounts that bentley calculated that were reported on the consent agreement and tax_return using the ernst young worksheet amounts the revenue_agent determined that petitioner’s sec_481 adjustment should be reduced by dollar_figure because petitioner included an adjustment in income of dollar_figure that should have been dollar_figure and petitioner should have reported aggregate schedule m-1 adjustments decreasing taxable_income by dollar_figure and a schedule m-1 adjustment decreasing taxable_income by dollar_figure rather than aggregate schedule m-1 adjustments of dollar_figure thus decreasing the sec_166 bad_debt deduction by dollar_figure the revenue agent’s calculations resulted in a net increase to taxable_income of dollar_figure dollar_figure less dollar_figure for fye date the form 886-a explanation of adjustments attached to the date notice_of_deficiency sent to petitioner stated that it is determined that the deductions for bad_debts resulting from an authorized change in accounting_method for taxable_year ending date is disallowed to the extent of dollar_figure because the sec_481 adjustment was computed incorrectly accordingly your taxable_income for the taxable_year ending date is increased dollar_figure opinion petitioner argues that respondent’s redetermination of the date bad_debt_reserve amount is barred by the consent agreement and is not properly raised in the notice_of_deficiency petitioner further asserts that respondent bears the burden_of_proof regarding the redetermination of the bad_debt_reserve amount because this is a new_matter according to rule a petitioner argues that respondent violated the consent agreement term that prohibits respondent from proposing that petitioner change the method_of_accounting for a year before the year_of_change petitioner asserts that respondent applied an improper accounting_method to determine the bad_debt_reserve amount that resulted in a taxable_income increase respondent’s revenue_agent explained at trial that he did not adjust the date bad_debt_reserve amounts using an accounting_method that petitioner began using in fye date he analyzed documents that petitioner supplied and determined that the ernst young bad_debt_reserve amounts for fye date and hence for the fiscal_year that began date were the figures that should be used for the sec_481 adjustment and not those reported on the form_3115 and tax_return that bentley calculated no change in method_of_accounting was proposed for fye date and the consent agreement subject_to verification by the district_director upon examination of petitioner’s consolidated tax_return was not violated we also reject petitioner’s argument that the notice_of_deficiency did not provide notice that the basis for respondent’s adjustment to the bad_debt deduction included a determination of bad_debt allowance amounts as of date sec_7522 provides that a notice_of_deficiency shall describe the basis for and identify the amounts if any of the tax due interest additional_amounts additions to the tax and assessable_penalties included in such notice an inadequate description shall not invalidate such notice the purpose of sec_7522 is to give the taxpayer notice of the commissioner’s basis for determining a deficiency see 112_tc_183 the objective language in the notice_of_deficiency remains the controlling factor id pincite the notice sent to petitioner stated that the sec_481 adjustment was computed incorrectly petitioner supplied the figures for the sec_481 adjustment with the application_for the accounting_method change and subsequently used them for the filed form_1120 bentley’s schedules for the three subsidiaries identified these figures as the bad_debt allowance amounts as of date these computed amounts were different from those respondent contends are correct as identified on the ernst young worksheets and resulted in respondent’s income adjustments during the examination the revenue_agent identified the issue and requested that petitioner verify the amounts petitioner reported nothing in the notice is inconsistent with respondent’s position in this case unlike shea v commissioner supra petitioner objects to our consideration of how respondent’s adjustments occurred as going behind the statutory notice the events of the audit however are relevant to petitioner’s claims regarding the adequacy of the notice see generally id they are also relevant to petitioner’s claims that the court should excuse petitioner’s belated production at trial of additional schedules used by bentley because petitioner was surprised by respondent’s position we conclude that the notice apprised petitioner of the basis for respondent’s adjustment and that petitioner was neither surprised nor prejudiced regarding respondent’s position that the amounts of the bad_debt reserves as of date are in dispute petitioner next asserts that respondent raised a new_matter regarding the redetermination of the bad_debt allowance amounts and thus the burden_of_proof shifts to respondent see rule a respondent acknowledges that the recomputation of the amounts of petitioner’s bad_debt reserves as of date was not expressly mentioned in the notice but asserts that it is implicit in respondent’s explanation that the sec_481 adjustment was computed incorrectly if the commissioner advances a new_theory that either alters the original deficiency or requires presentation of new evidence the commissioner bears the burden_of_proof as to this new_matter shea v commissioner supra pincite 93_tc_500 we conclude that respondent has not advanced a new_theory by redetermining the amounts of the bad_debt reserves as of date because these amounts are a direct component of the sec_481 adjustment see sec_481 48_tc_586 thus the burden_of_proof remains with petitioner see shea v commissioner supra pincite respondent argues that petitioner overstated the ratable portion of the sec_481 adjustment for the year in issue by dollar_figure aggregate bad_debt_reserve amount for three subsidiaries as of date dollar_figure as identified by bentley and reported by petitioner less dollar_figure as identified on the ernst young worksheets and determined as the correct amount by respondent this difference results in a decrease of petitioner’s claimed deduction for bad_debts under sec_166 and an increase in income respondent asserts that petitioner has not established that the amounts it claimed as the balances of the bad_debt reserves for the three subsidiaries as of date equaled the deductions previously claimed for federal_income_tax purposes petitioner counters that petitioner’s determination of the bad_debt allowances as of date is vastly more reliable and accurate than respondent’s determination and that respondent used the wrong concept the wrong accounting_method and the wrong schedules to redetermine the bad_debt allowances as of date for the three subsidiaries despite petitioner’s rhetoric neither the ernst young calculations nor respondent’s reliance on them has been shown to result in an erroneous adjustment sec_166 provides that taxpayers are allowed a deduction for any debt which becomes worthless within the taxable_year the specific chargeoff method before being repealed by the tax_reform_act_of_1986 publaw_99_514 100_stat_2361 sec_166 provided that alternatively accrual basis taxpayers could use the reserve_method to deduct a reasonable addition to a reserve for bad_debts see 439_us_522 as we explained in bird mgmt inc v commissioner supra pincite essentially a bad_debt_reserve constitutes an estimate of the loss which can reasonably be expected to result from worthlessness of debts outstanding at the close of the taxable_year under the reserve_method when specific debts become worthless they are charged against the reserve and serve to reduce the credit balance therein then if any amount which has been charged against the reserve is subsequently collected the collection does not result in the receipt of income but the amount collected is credited to the reserve if the credit balance in the reserve at the end of the year is not adequate to cover the reasonably expected loss with respect to the debts outstanding at the end of the year then an addition is made to the reserve to bring the credit balance to the appropriate amount and such addition is deductible and the general_rule is well established that any balance in a reserve for bad_debts existing when the reserve becomes no longer necessary must be included in taxable_income since the amount of such balance represents amounts which have been previously deducted when a taxpayer changes from the reserve_method of bad_debt accounting to the specific chargeoff method the credit balance in the reserve_account is returned to income in the year_of_change see 300_f2d_247 9th cir affg 34_tc_679 sec_481 requires that the adjustments necessary to prevent amounts from being duplicated or omitted be taken into account when the taxpayer’s taxable_income is computed under a method_of_accounting that is different from the method used to compute taxable_income the preceding year sec_481 and sec_1_481-4 income_tax regs provide that the adjustment required may be taken into account in determining taxable_income in the manner and subject_to the conditions agreed to by the commissioner and the taxpayer or prescribed by regulations the taxpayer has the burden_of_proof as to the proper sec_481 adjustment see hitachi sales corp of am v commissioner tcmemo_1994_159 supplemented by tcmemo_1995_84 because of the change in accounting_method for bad_debts from the reserve_method to the specific chargeoff method petitioner was required to report the credit balance remaining in the bad_debt_reserve accounts as of date see sec_481 arcadia sav loan association v commissioner supra whether a taxpayer is on the specific chargeoff or the reserve_method of treating bad_debts there must be an annual review of doubtful accounts_receivable to ascertain whether certain accounts are either uncollectible or that there is reasonable probability that they are not collectible 149_f2d_585 9th cir accordingly ernst young prepared worksheets for each subsidiary that identified the bad_debt_reserve account amounts including fiscal years petitioner used the reserve_method of accounting for financial purposes during all relevant years respondent contends that it is these amounts that petitioner should have used to calculate the sec_481 adjustment--not the figures that bentley calculated and petitioner used although bentley conducted an extensive exercise to analyze the combined contractual and bad_debt allowance accounts as of date we are not persuaded that the ascertained bad_debt allowance amounts are more accurate than those of the ernst young worksheets for purposes of determining petitioner’s sec_481 adjustment petitioner did not call anyone from ernst young to explain those worksheets or to reconcile discrepancies according to bentley’s prepared schedule and explanation it appears her determination regarding each outstanding receivable supports an analysis of bad_debts for partial or total worthlessness a determination of partial and total worthlessness of bad_debts is important for the specific chargeoff method because a taxpayer may claim a deduction when a business debt becomes either partially or wholly worthless sec_166 as respondent notes bentley’s calculations do not purport to reconcile the amounts that she determined to be the balances of the bad_debt_reserve accounts as of date to the amounts deducted on petitioner’s federal_income_tax returns for bad_debt expenses in earlier years and before the accounting_method change the bad_debt credit balance remaining in petitioner’s allowance account as of date is reported for tax purposes under sec_481 see arcadia sav loan v commissioner supra pincite we sustain respondent’s determination that the bad_debt_reserve account amounts calculated by ernst young should be used for purposes of the sec_481 adjustment because petitioner has not established that those amounts are incorrect petitioner argues that respondent’s position causes petitioner to be taxed twice on the same income the testimony of bentley is inconclusive about whether a protective claim_for_refund protects petitioner in this regard in any event we address only the year before us in reaching our decision we have considered all arguments made by the parties to the extent not mentioned or addressed they are irrelevant or without merit to reflect concessions and our conclusions stated above decision will be entered under rule


tax exempt and government entities omen peiurennatrevenueseavice y 201124038q washington d c se ter aest uniform issue list mar legend company a llc b plan x dear kkk kkk kkk this is in response to a request for a private_letter_ruling dated date revised by letters dated date and date submitted on your behalf by your authorized representative concerning the applicability of sec_409 of the internal_revenue_code the code to an employee_stock_ownership_plan esop your authorized representative submitted the following facts and representations in support of the request company a is a domestic s_corporation and is the sole member of llc b company a has established plan x an esop within the meaning of code sec_4975 the assets of plan x will consist primarily of shares of company a’s stock company a represents that it has a single class of common_stock with a combination of voting power and dividend rights that is the greatest of any class of common_stock of any member of company a’s controlled_group llc b did not make an election under sec_301_7701-3 of the treasury regulations regulations to be taxed as a corporation based on the above facts and representations your authorized representative has requested a ruling that the common_stock of company a will-not fail to satisfy the definition of employer_securities as that term is defined under code sec_409 with respect to employees of llc b kkk page code sec_4975 provides in pertinent part that an employee_stock_ownership_plan must be designed to invest primarily in qualifying employer_securities which is defined in sec_4975 as any employer_security within the meaning of sec_409 code sec_409 defines the term employer_securities as common_stock issued by the employer or by a corporation that is a member of the same controlled_group which is readily_tradable on an established_securities_market code sec_409 provides that if there is no common_stock which meets the requirements of paragraph the term employer_securities means common_stock issued by the employer or by a corporation which is a member of the same controlled_group having a combination of voting power and dividend rights equal to or in excess of- a that class of common_stock of the employer or of any other such corporation having the greatest voting power and b that class of common_stock of the employer or of any other such corporation having the greatest dividend rights sec_301_7701-2 of the regulations provides that for purposes of this section and sec_301_7701-3 a business_entity is any entity recognized for federal tax purposes including an entity with a single owner that may be disregarded as an entity separate from its owner under sec_301 that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the code a business_entity with only one owner is classified as a corporation or is disregarded if the entity is disregarded its activities are treated in the same manner as a sole_proprietorship branch or division of the owner sec_301_7701-3 of the regulations provides that a business_entity that has a single owner and that is not classified as a corporation under sec_301 b or an eligible_entity can elect to be classified for federal tax purposes as an association and thus a corporation under sec_301_7701-2 or to be disregarded as an entity separate from its owner sec_301_7701-3 of the regulations provides that unless the entity elects otherwise a domestic eligible_entity is- i a partnership if it has two or more members or ii disregarded as an entity separate from its owner if it has a single owner company a is the sole member of llc b llc b has not made an election under sec_301_7701-3 of the regulations to be taxed as a corporation therefore llc b as a disregarded_entity for federal_income_tax purposes under section will be classified by default under sec_301_7701-3 ii _ wes page a llc b will be regarded as a division of company a with llc b's assets and liabilities attributed to company a because llc b will be regarded as a division of company a the stock of company a stock a will be treated as stock issued by the employer with respect to the employees of llc b for purposes of sec_409 accordingly based on your representation that stock a otherwise meets the requirements of sec_409 we conclude that the common_stock of company a will not fail to satisfy the definition of employer_securities as that term is defined under code sec_409 with respect to the employees of llc b this ruling letter is based on the assumption that plan x is otherwise qualified under code sec_401 and sec_4975 at all relevant times this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited by others as precedent a copy of this ruling letter has been sent to your authorized representative in accordance with a power_of_attorney on file with this office if you wish to inquire about this ruling please contact please address all correspondence to se t ep ra t2 sincerely yours dw ty oh donzell employee_plans technical group littlejohn manager enclosures deleted copy of ruling letter notice of intention to disclose cc eek