t c summary opinion united_states tax_court shawn m and debra e swagler petitioners v commissioner of internal revenue respondent docket no 17724-02s filed date shawn m and debra e swagler pro sese sean r gannon for respondent dean special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time that the petition was filed unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year in issue the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority respondent determined for a deficiency in petitioners' federal_income_tax of dollar_figure the issues for decision are whether petitioners are entitled to deductions on schedule a itemized_deductions in excess of those allowed by respondent and whether petitioners are entitled to deductions on schedule e supplemental income and loss in excess of those allowed by respondent the stipulated facts and exhibits received into evidence are incorporated herein by reference at the time the petition in this case was filed petitioners resided in chicago illinois background during mr swagler was employed as a fireman by the village of oak brook mr swagler was also employed elsewhere as a carpenter and performed services for several organizations that provided carpentry services for various exhibit halls mrs swagler was employed as an office manager with anthony valentino salon for hair inc during petitioners also owned two rental properties in chicago illinois one located pincite n mcvicker avenue and the other located pincite gettysburg petitioners' individual_income_tax_return for on date petitioners jointly filed with the internal_revenue_service a form_1040 u s individual_income_tax_return for tax_year attached to the return were various schedules including schedule a and schedule e the form_1040 was prepared by joseph house in his preparation of the return mr house used books_and_records schedules and worksheets petitioners had prepared and some information they conveyed to him orally petitioners gave mr house actual receipts only for substantial expenditures such as the purchase and installation of a furnace they did not give him receipts for charitable gifts respondent issued a statutory_notice_of_deficiency to petitioners in which he disallowed certain deductions claimed on the schedules a and e for lack of substantiation schedule a itemized_deductions a unreimbursed employee_expenses on their schedule a petitioners reported unreimbursed employee_expenses in the amount of dollar_figure petitioners claimed dollar_figure of this amount was incurred by mr swagler during his employment as a fireman with the village of oak brook and itemized on form_2106 employee business_expenses were the following 1the names shown on the form_1040 are shawn m swagler and debra e fitzsimmons the names of the petitioners as shown on the petition filed date are shawn m and debra e swagler and the court refers to petitioners in this manner parking and toll fee expenses vehicle expenses other business_expenses travel and lodging_expenses dollar_figure big_number big_number mr swagler could have received reimbursement for a portion of his vehicle expenses but instead chose to deduct them on his return the other business_expenses in the amount of dollar_figure consisted of money mr swagler paid into a common meal fund at the fire station where he worked as a firefighter mr swagler worked in 24-hour shifts during which he was not permitted to leave the fire station for meals firefighters voluntarily contributed money to the optional common meal fund to pay for food for their meals mr swagler also incurred dollar_figure in travel and lodging_expenses while attending seminars and instructional training related to fire and rescue services at various locations throughout illinois petitioners claim that dollar_figure of the dollar_figure in unreimbursed employee_expenses was incurred by mrs swagler during her employment with anthony valentino salon for hair inc they itemized the expenses on form_2106 as follows dollar_figure of vehicle expenses dollar_figure for meals and entertainment_expenses and dollar_figure for professional publications 2the dollar_figure reported as being incurred by mrs swagler for meals and entertainment_expenses is one-half of the total amount reported by petitioners as being expended by mrs swagler for meals and entertainment_expenses for taxable_year it appears that petitioners claimed the dollar_figure expense for professional publications twice it was claimed once on mrs swagler's form_2106 where it was included in the total it was claimed again on a supplemental schedule as an expense added to the total expenses of both mr and mrs swagler's form sec_2106 additionally petitioners claimed that they spent dollar_figure for a phone they presented three checks payable to cellular one to show they had incurred the expense the checks however did not bear any indication of a business use for the phone respondent allowed petitioners dollar_figure of the total dollar_figure for mr swagler's vehicle expenses and all dollar_figure in parking and toll fee expenses and disallowed the remaining dollar_figure due to lack of substantiation b miscellaneous expenses petitioners reported miscellaneous expenses including tax preparation fees in the amount of dollar_figure and other expenses in the amount of dollar_figure the other expenses are as follows dollar_figure in fire service union dues dollar_figure in carpenter union dues dollar_figure for uniforms dollar_figure for uniform cleaning dollar_figure for use of a pager dollar_figure for use of a mobile phone and dollar_figure for required tools respondent allowed dollar_figure for the tax preparation fees dollar_figure in carpenter union dues and an additional dollar_figure as a reasonable allowance for the remaining expenses respondent disallowed the remainder due to lack of substantiation c gifts to charity petitioners reported gifts to charity in the amount of dollar_figure respondent disallowed the entire amount due to lack of substantiation schedule e rental expenses petitioners claimed schedule e deductions excluding depreciation pertaining to their rental properties located pincite n mcvicker avenue mcvicker and the other located pincite gettysburg gettysburg in the amounts of dollar_figure and dollar_figure respectively the expenses consisted of auto and travel_expenses insurance legal and professional fees mortgage interest water taxes and repairs in the notice_of_deficiency respondent determined that petitioners failed to substantiate adequately any amount greater than dollar_figure and disallowed dollar_figure of the expenses pertaining to mcvicker and dollar_figure of the expenses pertaining to gettysburg respondent however allowed an additional dollar_figure expense deduction for mortgage interest_paid on petitioners' rental property discussion under sec_7491 the burden_of_proof may shift to the commissioner because petitioners failed to meet the sec_7491 is effective with respect to court proceedings arising in connection with examinations by the commissioner commencing after date the date of its enactment by sec a of the internal_revenue_service restructuring and reform act of publaw_105_206 112_stat_685 requirements of sec_7491 the burden_of_proof does not shift to respondent in this case respondent's determinations are presumed correct and petitioners bear the burden of proving otherwise 290_us_111 moreover deductions are a matter of legislative grace and petitioners bear the burden of proving that they are entitled to any deduction claimed 292_us_435 welch v helvering supra pincite this includes the burden of substantiation 65_tc_87 affd per curiam 540_f2d_821 5th cir sec_162 allows a deduction for all ordinary and necessary expenses_incurred in carrying_on_a_trade_or_business sec_212 provides a deduction for all ordinary and necessary expenses paid_or_incurred with respect to management conservation and maintenance of property held for production_of_income including real_property sec_1_212-1 income_tax regs generally a taxpayer must establish that deductions taken pursuant to sec_162 and sec_212 are ordinary and necessary expenses and must maintain records sufficient to substantiate the amounts of the deductions claimed sec_6001 43_tc_824 sec_1_6001-1 e income_tax regs with respect to certain business_expenses specified in sec_274 however more stringent substantiation requirements apply sec_274 disallows deductions for traveling expenses gifts and meals and entertainment as well as for listed_property unless the taxpayer substantiates by adequate_records or by sufficient evidence corroborating the taxpayer's own statement the amount of the expenses the time and place of the expense the business_purpose of the expense and the business relationship to the taxpayer of the persons involved in the expense the term listed_property is defined in sec_280 and includes passenger vehicles cellular phones and other similar telecommunications equipment such as pagers see sec_280f v the substantiation requirements of sec_274 are designed to encourage taxpayers to maintain records together with documentary_evidence substantiating each element of the expense sought to be deducted sec_1_274-5t temporary income_tax regs fed reg date employee business_expenses a vehicle expenses petitioners claimed deductions for their vehicle expenses as unreimbursed employee business_expenses the prerequisites to deductibility of vehicle expenses_incurred by an employee are first that the expenses be nonreimbursable outlays and second that the expenses be substantiated in accordance with the requirements of sec_274 sec_162 sec_274 under sec_274 substantiation by means of adequate_records requires a taxpayer to maintain a diary a log or a similar record and documentary_evidence that in combination are sufficient to establish each element of each expenditure or use sec_1_274-5t temporary income_tax regs fed reg date to be adequate a record must generally be written each element of an expenditure or use that must be substantiated should be recorded at or near the time of that expenditure or use sec_1_274-5t temporary income_tax regs fed reg date thus under sec_274 no deduction may be allowed for expenses_incurred for use of a passenger_automobile on the basis of any approximation or the unsupported testimony of the taxpayer bradley v commissioner tcmemo_1996_461 golden v commissioner tcmemo_1993_602 in any event under sec_162 petitioners are not entitled to deduct expenses for which they have been or could have been reimbursed 788_f2d_1406 9th cir deduction not allowable to the extent that the employee is entitled to reimbursement from the employer affg tcmemo_1984_533 79_tc_1 same 56_tc_936 affd without published opinion 456_f2d_1335 2d cir same mr swagler claimed a deduction for vehicle expenses but he failed to keep any mileage records and could have been reimbursed by his employer mrs swagler also claimed a deduction for vehicle expenses but she did not provide any documentation to substantiate them and her testimony failed to address them respondent allowed petitioners a deduction for vehicle expenses in the amount of dollar_figure because petitioners have failed to prove that the determination is erroneous the court sustains respondent on this issue b travel and lodging meals and entertainment_expenses the deduction of travel_expenses away from home including meals_and_lodging under sec_162 is also conditioned on such expenses' being substantiated by adequate_records or by other_sufficient_evidence corroborating the claimed expenses pursuant to sec_274 sec_1_274-5t temporary income_tax regs fed reg date although mr swagler testified that he attended various fire and rescue training sessions throughout illinois he failed to provide any documentation with respect to his claimed travel and lodging_expenses respondent's disallowance of petitioners' claimed travel and lodging_expenses is sustained c other business_expenses respondent disallowed petitioners' deduction for mr swagler's payments into the firefighter's common meal fund mr swagler is in the trade_or_business of being an employee 67_tc_870 affd sub nom 611_f2d_1260 9th cir 54_tc_374 where a fire department requires its firefighter-employees to make payments into a common meal fund as a condition_of_employment such expenses are ordinary and necessary within the meaning of sec_162 68_tc_422 affd 611_f2d_1260 9th cir cooper v commissioner supra pincite see also belt v commissioner tcmemo_1984_167 firefighters required by their employer to pay their share of a common mess even if they did not eat the meal could deduct the amount they paid if however a firefighter's payments into a common meal fund are not a condition_of_employment then such expenses constitute personal expenses and are not deductible pursuant to sec_262 77_tc_911 see matta v commissioner tcmemo_1990_356 phillips v commissioner tcmemo_1986_503 morton v commissioner tcmemo_1986_132 alvarado v commissioner tcmemo_1985_ affd 781_f2d_901 5th cir sloyan v commissioner tcmemo_1985_41 banks v commissioner tcmemo_1981_490 mr swagler testified that the food fund into which he contributed was optional and voluntary as such his payments into that fund are personal expenses and are not deductible miscellaneous expenses a phone and pager expenses cellular phones and pagers are included in the definition of listed_property for purposes of sec_274 and are subject_to its strict substantiation requirements petitioners submitted copies of three checks drawn on their account and payable to cellular one however there is nothing on the check copies that shows the expenditures were business-related and petitioners were unable to provide any other evidence or documentation substantiating their cellular phone and pager expenses as deductible items respondent's disallowance is sustained b other expenses petitioners did not provide any evidence or testimony pertaining to their claimed expenses for tools professional publications uniforms and related cleaning expenses or professional dues respondent allowed dollar_figure as a reasonable allowance for these expenses because petitioners have failed to prove that the determination is erroneous the court sustains respondent on this issue charitable_contributions sec_170 allows a taxpayer to deduct a charitable_contribution only if verified under regulations prescribed by the secretary sec_170 the regulations provide specific record-keeping requirements with respect to each charitable_contribution of money in a taxable_year beginning after date a taxpayer is required to maintain one of the following a canceled check a receipt or letter from the donee indicating the name of the donee the date of the contribution and the amount of the contribution or any other reliable written record showing the name of the donee the date of the contribution and the amount of the contribution sec_1_170a-13 income_tax regs at trial mr swagler conceded that petitioners could not substantiate their claimed charitable_contributions respondent's disallowance of the entire dollar_figure claim for charitable_contributions is sustained schedule e rental real_estate expense deductions respondent disallowed dollar_figure of the expenses pertaining to mcvicker and dollar_figure of the expenses pertaining to gettysburg for lack of substantiation at trial petitioners submitted a number of receipts cash register tapes and invoices to substantiate their claimed deductions with regard to most of the receipts and cash register tapes the court is unable to determine from these records what types of items petitioners purchased additionally other than handwritten notations on some of the receipts and cash register tapes petitioners failed to offer any evidence linking any of the expenses to the rental properties the court holds that petitioners offered no evidence that supports deductions in excess of the amounts allowed by respondent therefore the court sustains respondent on this issue reviewed and adopted as the report of the small_tax_case division decision will be entered for respondent


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi br - plr-137109-01 date date legend x state d1 this responds to your letter dated date submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts x began doing business under state law on d1 the shareholders of x intended that x elect to be treated as an s_corporation effective d1 however the election to be treated as an s_corporation was not timely filed law and analysis sec_1362 provides that a small_business_corporation can elect to be treated as an s_corporation sec_1362 provides when an s election becomes effective if an s election is made within the first two and one-half months of a corporation’s taxable_year then that corporation will be treated as an s_corporation for the year in which the election was made if an election is made after the first two and one-half months of a corporation’s taxable_year then the corporation will generally not be treated as an s_corporation until the following taxable_year however sec_1362 provides that if no election is made pursuant to sec_1362 or if the election is made after the date prescribed for making such an election and the secretary determines reasonable_cause existed for the failure to timely make the election then the secretary can treat such an election as timely made for that taxable_year and effective as of the first day of that taxable_year plr-137109-01 in the present case x failed to timely elect s_corporation treatment effective d1 however x has established reasonable_cause for not making a timely election and is thus entitled to relief under sec_1362 conclusion based solely on the facts submitted and representations made and provided that x otherwise qualifies as a subchapter_s_corporation we conclude that x will be recognized as an s_corporation effective d1 within days from the date of this letter x should submit a properly completed form_2553 with a copy of this letter attached to the relevant service_center except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative s dianna k miosi sincerely chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc dom corp plr-166883-01 date date b state x y this letter responds to your date request for a ruling under sec_305 of the internal_revenue_code code the information submitted in that letter and in subsequent correspondence is summarized below b is an investment_company registered with the securities_and_exchange_commission under the investment_company act of b is a closed-end fund incorporated in state x and its shares trade on the new york stock exchange management of b believes that the market may undervalue its stock by trading at a price less than the value of the pro_rata portion of its assets allocable to such shares in order to encourage the market to value its shares at a price more closely reflecting the value of its underlying assets b proposes to consider redeeming a portion of its stock pursuant to a tender offer collectively the proposed offer the following representations have been made in connection with the proposed offer a b intends to qualify annually and be taxed as a ric under part i of subchapter_m of the code furthermore b intends to distribute substantially_all of its investment_company_taxable_income and realized net capital_gains at least annually b b is not required by its charter by-laws or otherwise to redeem any of its stock and the shareholders of b have no right to require b to make a tender offer or otherwise redeem their stock the board_of directors of b has a fiduciary duty to b and plr-166883-01 the shareholders of b to consider the appropriateness of any share repurchase and has not in any manner relinquished this discretion in carrying out its fiduciary duties c the proposed offer if undertaken will be motivated solely by b’s business considerations and will not be motivated by any intent on b’s part to confer a federal_income_tax benefit on any of its shareholders d the proposed offer if undertaken will not be part of a plan to periodically increase the proportionate interests of any shareholder in the assets or earnings_and_profits of b e b has not redeemed any of its stock since its creation except for a tender offer and repurchase on y y transaction f the proposed offer if undertaken will be an isolated transaction and will not be related to any past or future transaction with regard to both the proposed offer if undertaken and the y transaction each of these transactions will be or was motivated by its own circumstances and for each transaction the board_of director’s approval will be or was determined independently of any other transaction and was or will be based on the facts and circumstances current at the time of approval at the present time b has no plan or absolute commitment to make any further tender offers subsequent to the proposed offer however it is possible that b may consider making additional tender offers in future years based on circumstances prevailing at that time based solely on the information submitted and the representations set forth above we rule as follows regarding the proposed offer if undertaken the redemption of b stock pursuant to the proposed offer will constitute a single and isolated transaction if undertaken the proposed offer will not result in a sec_305 deemed_distribution to any b shareholder regardless of whether such shareholder has a portion of his or her stock redeemed in the transaction see example and example of sec_1_305-3 of the income_tax regulations see also revrul_77_19 c b the above ruling addresses only the application of sec_305 to the shareholders of b who do not participate in the proposed offer if undertaken or who participate only partially we express no opinion as to the proposed offer’s tax effects under sec_302 and sec_301 on those shareholders who do participate in the proposed offer if undertaken furthermore we express no opinion about the tax treatment of the proposed offer if undertaken under any other provision of the code and regulations or the tax treatment of any conditions existing at the time of or effects resulting from the proposed offer that are not specifically covered by the above ruling this ruling letter is directed only to the taxpayer who requested it section plr-166883-01 k provides that it may not be used or cited as precedent it is important that a copy of this letter be attached to the federal_income_tax return of each taxpayer affected by the transactions described herein pursuant to a power_of_attorney on file in this office a copy of this letter is being sent to the taxpayer and the taxpayer’s second-named representative sincerely associate chief_counsel corporate by lewis k brickates acting branch chief branch office of the associate chief_counsel corporate


internal_revenue_service department of the treasury number release date index number 468a 468a washington dc person to contact telephone number refer reply to cc psi plr-106031-00 date date re request for a revised schedule of ruling amounts taxpayer parent plant location commission a commission b commission c district fund dear this letter responds to the request of taxpayer dated date for a revised schedule of ruling amounts in accordance with sec_1_468a-3 of the income_tax regulations taxpayer was previously granted a revised schedule of ruling amounts on date information for the schedule of ruling amounts was submitted on behalf of the taxpayer pursuant to sec_1_468a-3 taxpayer represents the facts and information relating to its request for a revised schedule of ruling amounts as follows taxpayer is percent owned by parent and files a consolidated federal_income_tax return with parent taxpayer has a direct ownership_interest of percent in plant which is situated at location plr-106031-00 taxpayer is under the audit jurisdiction of the district_director of district plant’s operating license expires on taxpayer is subject_to the jurisdiction of commission a which covers percent of the taxpayer’s total electric sales commission b which covers percent and commission c which covers percent for a total of percent these percentages may vary slightly from year to year the estimated base cost for decommissioning the plant is based on an independent study and is premised on the decon method commission a in docket no effective authorized nuclear decommissioning costs to be included in the taxpayer’s cost of service for ratemaking purposes for the plant in the amount of and estimated an after-tax rate of return on assets of percent through and percent after the commission also determined the total estimated cost of decommissioning to be this base cost escalated using an estimated inflation rate of percent results in an estimated future decommissioning cost of these rates were estimated after taking into consideration the tax and investment changes made to sec_468a of the internal_revenue_code by section of the energy policy act of amounts for commission b and commission c are not specifically reviewed herein there are no proceedings pending before either commission a commission b or commission c that may result in an increase or decrease in the amount of decommissioning costs for the plant to be included in taxpayer’s cost of service for ratemaking purposes the funding_period and level_funding limitation period for the plant extends from the estimated period for which the fund will be in effect is the estimated_useful_life of the plant is thus the taxpayer has calculated its qualifying percentage to be percent sec_468a of the internal_revenue_code provides that a taxpayer may elect to deduct the amount of payments made to a qualified nuclear decommissioning fund however sec_468a limits the amount_paid into the fund for any taxable_year to the lesser_of the amount of nuclear decommissioning costs allocable to the fund that is included in the taxpayer’s cost of service for ratemaking purposes for the taxable_year or the ruling_amount applicable to that year sec_468a of the code provides that no deduction shall be allowed for any payment to the nuclear decommissioning fund unless the taxpayer requests and receives from the secretary a schedule of ruling amounts the ruling_amount for any taxable_year is defined under sec_468a as the amount which the secretary determines to be necessary to fund that portion of nuclear decommissioning costs plr-106031-00 which bears the same ratio to the nuclear power plant as the period for which the fund is in effect bears to the estimated_useful_life of the plant this term is further defined to include the amount necessary to prevent excessive funding of nuclear decommissioning costs or funding of these costs at a rate more rapid than level_funding taking into account such discount rates as the secretary deems appropriate sec_468a of the code provides that a taxpayer shall be deemed to have made a payment to the nuclear decommissioning fund on the last day of the taxable_year if the payment is made on account of the taxable_year within 2½ months after the close of the taxable_year sec_1_468a-1 of the regulations provides that an eligible_taxpayer may elect to deduct nuclear decommissioning costs under sec_468a of the code an eligible_taxpayer as defined under sec_1_468a-1 is a taxpayer that has a qualifying interest in a nuclear power plant as defined under sec_1_468a-1 a qualifying interest is among other things a direct ownership_interest including an interest held as a tenant in common or joint tenant sec_1_468a-2 of the regulations provides that the maximum amount of cash payments made or deemed made to a nuclear decommissioning fund during any taxable_year shall not exceed the lesser_of i the cost of service amount applicable to the nuclear decommissioning fund for such taxable_year or ii the ruling_amount applicable to the nuclear decommissioning fund for such taxable_year sec_1_468a-3 of the regulations provides that in general a schedule of ruling amounts for a nuclear decommissioning fund is a ruling specifying annual payments that over the taxable years remaining in the funding_period as of the date the schedule first applies will result in a projected balance of the nuclear decommissioning fund as of the last day of the funding_period equal to and in no event more than the amount of decommissioning costs allocable to the fund sec_1_468a-3 of the regulations provides that each schedule of ruling amounts shall be based on the reasonable assumptions and determinations used by the applicable public_utility commission s in establishing or approving the amount of decommissioning costs to be included in the cost of service for ratemaking purposes taking into account amounts that are otherwise required to be included in the taxpayer's income under sec_88 of the code and the regulations thereunder each schedule of ruling amounts shall be based on the public_utility commission's reasonable assumptions concerning i the after-tax rate of return to be earned by the amounts collected for decommissioning ii the total estimated cost of decommissioning the nuclear power plant and iii the frequency of contributions to the nuclear decommissioning fund for a taxable_year plr-106031-00 sec_1_468a-3 of the regulations requires the internal_revenue_service to provide a schedule of ruling amounts that is identical to the schedule proposed by the taxpayer but no such schedule shall be provided by the service unless the taxpayer’s proposed schedule is consistent with the principles and provisions of this section sec_1_468a-3 of the regulations provides that the ruling_amount specified in a schedule of ruling amounts for any taxable_year in the level_funding limitation period shall not be less than the ruling_amount specified in such schedule for any earlier taxable_year under sec_1_468a-3 the level_funding limitation period begins on the first day of the first taxable_year for which a deductible payment is made to the nuclear decommissioning fund and ends on the last day of the taxable_year that includes the estimated date on which the nuclear power plant will no longer be included in the taxpayer’s rate base for ratemaking purposes sec_1_468a-3 of the regulations provides that the funding_period for a nuclear decommissioning fund is the period that begins on the first day of the first taxable_year for which a deductible payment is made or deemed to be made to such nuclear decommissioning fund and ends the later of i the last day of the taxable_year that includes the estimated date on which decommissioning costs of the nuclear power plant to which the nuclear decommissioning fund relates will no longer be included in the taxpayer’s cost of service for ratemaking purposes or ii the last day of the taxable_year that includes the estimated date on which the nuclear power plant to which the nuclear decommissioning fund relates will no longer be included in the taxpayer’s rate base for ratemaking purposes sec_1_468a-3 of the regulations provides that the amount of decommissioning costs allocable to a nuclear decommissioning fund is the taxpayer’s share of the total estimated cost of decommissioning the nuclear power plant multiplied by the qualifying percentage sec_1_468a-3 of the regulations provides that in general the total estimated cost of decommissioning a nuclear power plant is the reasonably estimated cost of decommissioning used by the applicable public_utility commission in establishing or approving the amount of these costs to be included in cost of service for ratemaking purposes sec_1_468a-3 of the regulations provides that a taxpayer’s share of the total estimated cost of decommissioning a nuclear power plant equals the total estimated cost of decommissioning the plant multiplied by the taxpayer’s qualifying interest in the plant plr-106031-00 sec_1_468a-3 of the regulations provides that the qualifying percentage for any nuclear decommissioning fund is equal to the fraction the numerator of which is the number of taxable years in the estimated period for which the nuclear decommissioning fund is to be in effect and the denominator of which is the number of taxable years in the estimated_useful_life of the applicable nuclear power plant sec_1_468a-3 of the regulations provides that the estimated period for which a nuclear decommissioning fund is to be in effect begins on the later of the first day of the first taxable_year for which a deductible payment is made to the nuclear decommissioning fund or deemed made or the first day of the taxable_year that includes the date that the nuclear power plant begins commercial operations as determined by the applicable public_utility commission at the time the plant was first included in the taxpayer’s rate base and ends on the last day of the taxable_year that includes the estimated date on which the nuclear power plant will no longer be included in the taxpayer’s rate base for ratemaking purposes according to sec_1_468a-3 the estimated date on which the nuclear power plant will no longer be included in the taxpayer’s rate base for ratemaking purposes is determined under the ratemaking assumptions used by the applicable public_utility commission in establishing or approving rates during the first ratemaking proceeding in which the nuclear power plant was included in the taxpayer’s rate base sec_1_468a-3 of the regulations provides that the estimated_useful_life of a nuclear power plant begins on the first day of the taxable_year that includes the date that the plant begins commercial operations as determined by the applicable public_utility commission at the time the plant was first included in the taxpayer’s rate base and ends on the last day of the taxable_year that includes the estimated date on which the nuclear power plant will no longer be included in the taxpayer’s rate base for ratemaking purposes according to sec_1_468a-3 the estimated date on which the nuclear power plant will no longer be included in the taxpayer’s rate base for ratemaking purposes is determined under the ratemaking assumptions used by the applicable public_utility commission in establishing or approving rates during the first ratemaking proceeding in which the nuclear power plant was included in the taxpayer’s rate base sec_1_468a-3 of the regulations provides that if two or more public_utility commissions establish or approve rates for electric energy generated by a single nuclear power plant then the schedule of ruling amounts shall be separately determined pursuant to the rules of sec_1_468a-3 through e for each public_utility commission that has determined the amount of decommissioning costs to be included in the cost of service for ratemaking purposes for this plant under sec_1_468a-3 this separate determination shall be based on the reasonable assumptions and determinations used by the relevant public_utility commission and plr-106031-00 shall take into account only that portion of the total estimated cost of decommissioning that is properly allocable to the ratepayer whose rates are established or approved by the public_utility commission according to sec_1_468a-3 the ruling amounts for any taxable_year is the sum of the ruling amounts for such taxable_year determined under the separate schedules of ruling amounts sec_1_468a-3 of the regulations provides that the internal_revenue_service shall not provide a taxpayer with a schedule of ruling amounts for any nuclear decommissioning fund unless the public_utility commission that establishes or approves the rates for electric energy generated by the plant to which the nuclear decommissioning fund relates has determined the amount of decommissioning costs to be included in the taxpayer’s cost of service for ratemaking purposes and has disclosed the after-tax rate of return and any other assumptions and determinations used in establishing or approving the amount sec_1_468a-3 of the regulations enumerates the information required to be contained in a request for a schedule of ruling amounts filed by a taxpayer in order to receive a ruling_amount for any taxable_year sec_1_468a-3 of the regulations provides that a taxpayer is required to request a revised schedule of ruling amounts for a nuclear decommissioning fund if a any public_utility commission that establishes or approves rates for the furnishing or sale of electric energy generated by a nuclear power plant to which the nuclear decommissioning fund relates increases the proposed period over which decommissioning costs of the nuclear power plant will be included in cost of service for ratemaking purposes adjusts the estimated date on which the nuclear power plant will no longer be included in the taxpayer’s rate base for ratemaking purposes or reduces the amount of decommissioning costs to be included in cost of service for any taxable_year and b the taxpayer’s most recent request for a schedule of ruling amounts did not provide notice to the service of such action by the public_utility commission sec_1_468a-3 of the regulations provides that any taxpayer that has previously obtained a schedule of ruling amounts can request a revised schedule of ruling amounts such a request must be made in accordance with the rules of sec_1_468a-3 the internal_revenue_service shall not provide a revised schedule of ruling amounts applicable to a taxable_year in response to a request for a schedule of ruling amounts that is filed after the deemed payment deadline date for such taxable_year plr-106031-00 we have examined the representations and information submitted by the taxpayer in relation to the requirements set forth in the sec_468a of the code and the regulations thereunder based solely on these representations of the facts we reach the following conclusions taxpayer has a qualifying interest in the plant and is therefore an eligible_taxpayer under sec_1_468a-1 of the regulations commissions a b and c have determined the amount of decommissioning costs to be included in the taxpayer’s cost of service for ratemaking purposes as required by sec_1_468a-3 of the regulations taxpayer as owner of the plant has calculated its share of the total decommissioning costs under sec_1_468a-3 of the regulations taxpayer has determined that pursuant to sec_1_468a-3 of the regulations the qualifying percentage is percent taxpayer has proposed a schedule of ruling amounts which meets the requirements of sec_1_468a-3 and of the regulations the annual payments specified in the proposed schedule of ruling amounts are based on the reasonable assumptions and determinations used by commissions a b and c and will result in a projected fund balance at the end of the funding_period equal to or less than the amount of decommissioning costs allocable to the fund the maximum amount of cash payments made or deemed made to the fund during any taxable_year is restricted to the lesser amount of the decommissioning costs applicable to the fund or the ruling_amount applicable to the fund as set forth under sec_1_468a-2 of the regulations taxpayer subject_to the jurisdiction of three public_utility commissions for ratemaking purposes has calculated its share of the total decommissioning costs allocable to commissions a b and c as required by sec_1_468a-3 of the regulations based on the above determinations we conclude that the taxpayer’s proposed schedule of ruling amounts satisfies the requirements of sec_468a of the code plr-106031-00 approved schedule of ruling amounts taxable years through commissions a b and c year comm a comm b1 comm c1 total approval of the schedule of ruling amounts is contingent on there being no change in the facts and circumstances known or assumed at the time this ruling is issued if any of the events described in sec_1_468a-3 of the regulations occur in future years the taxpayer must request a review and revision of the schedule of ruling amounts generally the taxpayer is required to file such a request on or before the deemed payment deadline date for the first taxable_year in which the rates reflecting such action became effective when no such event occurs the taxpayer must file a request for a revised schedule of ruling amounts on or before the deemed payment deadline of the tenth taxable_year following the close of the tax_year in which the most recent schedule of ruling amounts was received the approved schedule of ruling amounts is relevant only to those payments made to the fund payments allocable to any funds other than the fund cannot qualify for purposes of the deduction under the provisions of sec_468a of the code as stated above payments made to the fund can qualify only to the extent that they do not exceed the lesser_of the decommissioning costs applicable to the fund or the ruling amounts applicable to the fund in the taxable_year amounts for commission b and commission c are not specifically reviewed herein and are merely reprinted to arrive at the amount for the total annual ruling_amount for purposes of the review and revision under sec_1_468a-3 of the regulations the date of the schedule of ruling amounts approved by the service on date governs the review period for the commission b and commission c ruling amounts plr-106031-00 this letter_ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that this ruling may not be used or cited as precedent pursuant to sec_1_468a-7 of the regulations a copy of this letter must be attached with the required election statement to the taxpayer’s federal_income_tax return for each taxable_year in which the taxpayer claims a deduction for payments made to the fund a copy of this letter_ruling is being sent to the district_director of district sincerely yours peter c friedman assistant to the chief branch office of the associate chief_counsel passthroughs and special industries


t c summary opinion united_states tax_court jian dong sun and ming-yan shen petitioners v commissioner of internal revenue respondent docket no 15044-10s filed date edward m mcelroy for petitioners donald d priver for respondent jacobs judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless otherwise indicated all section references are to the internal_revenue_code in effect for and all rule references are to the tax_court rules_of_practice and procedure respondent determined a deficiency of dollar_figure in petitioners’ federal_income_tax and a sec_6662 accuracy-related_penalty of dollar_figure the issues for decision are whether respondent’s disallowance of deductions for various alleged business_expenses should be sustained and if so whether petitioners are liable for the sec_6662 accuracy-related_penalty background some of the facts have been stipulated and they are so found we incorporate by reference the parties’ stipulation of facts and the accompanying exhibits at the time they filed their petition petitioners resided in northern california i petitioners’ business petitioners husband and wife emigrated to the united_states from china in the early 1990s jian dong sun mr sun graduated from medical school in china and practiced medicine there as a surgeon for years during mr sun was employed part time as a dialysis technician at satellite dialysis center he began working there in he also worked part time in at el camino hospital during ming yan shen ms shen worked for stanford university medical school as well as kaiser permanente through his employment as a dialysis technician mr sun became aware of a number of shortcomings in both the equipment and techniques used in kidney dialysis mr sun devised four inventions the first of the inventions a roller bed surface was a medical bed designed to reduce the likelihood of the patients developing bedsores as well as to enable the user to move easily from the bed to a wheelchair and back again in mr sun attempted to patent this device but his application was denied because a similar device already existed and his patent application was not in the proper form mr sun’s second invention was an emergency disengagement device for patients undergoing hemodialysis or a cut-and-run device this device permitted the user to quickly and safely disconnect himself herself from the dialysis machine in case of emergency on date mr sun submitted a patent application_for this device on date the patent office rejected mr sun’s application request again on the grounds that his patent submission was not in proper form and another party had previously patented a similar device in the rejection letter the patent office noted mr sun’s lack of familiarity with patent application procedures and remarked that he should seek the services of a registered patent attorney mr sun’s third invention was an apparatus to assist with disconnecting dialysate tubing this device was designed to ease the connecting and disconnecting of the dialysis tubes the patent office rejected this patent application mr sun’s fourth invention involved a baggage claim assistance device designed to assist individuals in wheelchairs in removing their luggage from airport luggage carousels this device currently is in the development stage mr sun organized sun pioneer in to further his interest in developing devices that could be used in kidney dialysis ms shen worked part time for sun pioneer often acting as mr sun’s interpreter or speaking with others on his behalf mr sun obtained a business license for sun pioneer he opened a checking account for the company and applied for an employer_identification_number from the internal_revenue_service however because of his lack of knowledge of bringing products to market and his lack of knowledge of good business practices mr sun did not initially develop a business plan or keep adequate business records to improve his entrepreneurial skills mr sun attended classes taught by the small_business administration and the silicon valley small_business development center he read literature and sought the assistance of adrian pelkus the president of a squared technologies inc with respect to obtaining a u s patent for his medical inventions additionally mr sun sought advice with respect to certain technical aspects of his medical device inventions from nengli zhang of nasa and dr cindy xin huang of tufts medical center mr sun sought legal advice from an unnamed u s patent attorney he did not engage the services of that attorney for economic reasons mr sun did however engage the services of an attorney to obtain a patent in china in connection with each of his inventions mr sun drafted diagrams and explanatory notes all in chinese with regard to the device’s design construction and functionality with regard to several of his inventions mr sun had prototypes built in china and he partnered with an undisclosed individual to facilitate arrangements with chinese contract manufacturers mr sun’s relationships with his chinese partner and contract manufacturers were informal there were no written contracts mr sun conducted market research for each of his inventions he approached medical equipment distributors such as baxter healthcare dialysis parts and supplies and davita inc as well as potential consumers doctors and hospitals to discuss their interest in his inventions in mr sun stopped working as a dialysis technician in order to focus exclusively on his inventive interests mr sun’s inventive activities have not as yet generated gross_receipts petitioners reported losses all of which relate 1the chinese patent was obtained in mr sun’s brother’s name to mr sun’s inventive activities on schedule c profit or loss from business of their federal_income_tax returns as follows year net_loss dollar_figure big_number big_number big_number big_number big_number big_number petitioners reported wage and salary income as follows year wages dollar_figure big_number big_number big_number big_number big_number big_number petitioners reported gross_receipts all of which were from mr sun’s consulting activities on schedules c of their federal_income_tax returns as follows year gross_receipts -0- -0- -0- -0- dollar_figure big_number big_number at the conclusion of trial the court remarked that on the totality of the evidence and after observing mr sun’s demeanor while he was testifying the court was satisfied that he had an honest intent to earn a profit from his inventive activities the court found as a fact that during mr sun engaged in his inventive activities primarily for profit ii petitioners’ expenses during petitioners deducted numerous expenses which allegedly related to mr sun’s inventive activities on schedule c petitioners made the following expense claims schedule c expense automobile sec_179 property legal professional services office rent or lease of vehicles machinery equipment supplies taxes licenses travel meals entertainment utilities other amount dollar_figure big_number big_number big_number big_number petitioners attached a form_8829 expenses for business use of your home to their federal_income_tax return on form_8829 petitioners claimed utility expenses of dollar_figure however on line allowable expenses for business use of your home petitioners reported zero with respect to expenses for the business use of their home during ms shen and mr sun separately traveled to china ms shen visited china from march to date mr sun visited china from april to date while in china mr sun met with his partner and several contract manufacturers he also visited friends and family members the record does not reveal the business_purpose for ms shen’s visit mr sun candidly admitted that ms shen most likely visited friends and family members during her trip to china petitioners took a 7-day cruise to hawaii in date the record does not reveal the business_purpose for the cruise petitioners also twice traveled to los angeles and san diego southern california in again the record does not reveal the business_purpose of the trips we note however that petitioners’ daughter lived in san diego at trial respondent’s counsel conceded that petitioners expended the dollar amounts claimed with respect to the deducted expenses however respondent’s counsel stated that respondent did not concede that the amounts petitioners expended and deducted were for ordinary and necessary business_expenses respondent disallowed petitioners’ expense deductions on two alternative theories first respondent avers that mr sun was not engaged in a for profit activity with respect to his inventive work and therefore he could not deduct his expenses pursuant to the provisions of sec_183 alternatively 2ms shen did not testify 3in their posttrial brief petitioners concede the amount dollar_figure for their hawaiian cruise and two trips to southern california is not deductible respondent maintains that petitioners failed to establish that the deducted expenses were ordinary and necessary business_expenses within the purview of sec_162 on the basis of our finding that mr sun was engaged in an activity for profit see supra p the only basis on which respondent’s deficiency determination can be sustained is that petitioners’ expenses were not ordinary and necessary business_expenses i petitioners’ business_expense deductions discussion sec_162 allows a deduction for ordinary and necessary business_expenses paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business for an expense to be ordinary the transaction that gives rise to it must be of a common or frequent occurrence in the type of business involved 308_us_488 to be necessary an expense must be appropriate and helpful to the taxpayer’s business 290_us_111 it is well established that deductions are a matter of legislative grace and that taxpayers bear the burden of proving they are entitled to the deductions claimed rule a 503_us_79 292_us_435 taxpayers must substantiate the amount and purpose of the item deducted 65_tc_87 affd per curiam 540_f2d_821 5th cir taxpayers are required to maintain records sufficient to enable the commissioner to determine their correct_tax liability see sec_6001 43_tc_824 sec_1_6001-1 income_tax regs automobile travel and meals and entertainment_expenses are subject_to heightened substantiation requirements see sec_280f sec_274 and petitioners failed to meet these heightened substantiation requirements further we are unconvinced that the claimed automobile travel and meals and entertainment_expenses constitute ordinary and necessary business_expenses within the purview of sec_162 indeed mr sun admitted that his and ms shen’s trips to china were for pleasure as well as business petitioners failed to demonstrate that the primary purpose of their trips to china was to further mr sun’s inventive activities further they concede the amount for their hawaiian cruise and two trips to southern california is not deductible see supra note consequently petitioners’ expenses for travel to and from china hawaii and southern california are not deductible see sec_1_162-2 income_tax regs petitioners’ legal fees relate to the engagement of the services of an attorney to obtain a patent in china we are mindful that the chinese patent was obtained in mr sun’s brother’s name mr sun credibly testified as to the reason therefor ie it was much cheaper than for a foreigner to do so recognizing that chinese familial customs and business practices differ from those of the united_states we are satisfied that all of the benefits of the patent belong to mr sun consequently we hold that petitioners’ dollar_figure in legal and professional fee expenses constitute ordinary and necessary business_expenses within the purview of sec_162 as to each of the other types of expenses deducted petitioners provided no documentation or testimony which demonstrated that these expenses were ordinary and necessary business_expenses under certain circumstances if a taxpayer establishes entitlement to a deduction but not the amount the court may estimate the amount allowable 39_f2d_540 2d cir we generally will not estimate a deductible expense unless the taxpayer presents sufficient evidence to provide some basis upon which an estimate may be made 85_tc_731 petitioners have not provided us any basis to estimate any allocation of expenses to business purposes to conclude this portion of our opinion except for petitioners’ legal and professional fee expenses of dollar_figure we sustain respondent’s disallowance of the business_expense deductions claimed on the basis that petitioners failed to carry their burden_of_proof ii sec_6662 accuracy-related_penalty sec_6662 imposes a 20-percent penalty on that portion of an underpayment_of_tax attributable to inter alia negligence or disregard of rules or regulations as provided in sec_6662 or a substantial_understatement_of_income_tax as provided in sec_6662 negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal_revenue_code sec_6662 108_tc_147 negligence also includes any failure by the taxpayer to keep adequate books_and_records or to substantiate items properly sec_1_6662-3 income_tax regs the term disregard includes any careless reckless or intentional disregard sec_6662 the sec_6662 accuracy-related_penalty does not apply where the taxpayer shows that there was reasonable_cause for the underpayment and that he acted in good_faith sec_6664 such a showing depends on the facts and circumstances of each case and includes the knowledge and experience of the taxpayer and the reliance on the advice of a professional such as an accountant sec_1_6664-4 income_tax regs respondent has the burden of production pursuant to sec_7491 to satisfy that burden respondent must produce sufficient evidence showing that it is appropriate to impose the penalty see 116_tc_438 on the record before us respondent has satisfied his burden by producing evidence that petitioners were negligent in failing to keep books_and_records and in failing to substantiate their claimed deductions petitioners have not demonstrated that there was reasonable_cause for their underpayment_of_tax or that they acted in good_faith although mr sun sought advice regarding the technical aspects of establishing a business the record does not reveal that he sought advice from a tax professional regarding the deductibility of his expenses to conclude this portion of our opinion petitioners have failed to prove that they are not liable for the sec_6662 penalty petitioners have neither argued nor offered evidence that an exception exists which would excuse them from the penalty we therefore sustain respondent’s determination that petitioners are liable for the sec_6662 penalty however respondent must recompute the amount of the penalty to reflect the recalculation of petitioners’ business_expenses this can be done in the rule computation we have considered all of petitioners’ contentions and we conclude they are without merit irrelevant and or moot to reflect the foregoing decision will be entered under rule


internal_revenue_service department of the treasury release number release date date uil code taxpayer_identification_number form tax_year s ended org person to contact id number contact numbers telephone fax certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your organization's exempt status is necessary if you do not agree with our position you may appeal your case the enclosed publication the examination process explains how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process if you request a conference we will forward your written_statement of protest to the appeals_office and they will contact you for your convenience an envelope is enclosed if you and appeals do not agree on some or all of the issues after your appeals_conference or if you do not request an appeals_conference you may file suit in united_states tax_court the united_states court of federal claims or united_states district_court after satisfying procedural and jurisdictional requirements as described in publication letter rev catalog number 34801v page you may also request that we refer this matter for technical_advice as explained in publication dollar_figure -xempt organization appeal procedures for unagreed issues lf a determination_letter is issued to you based on technical_advice no further administrative appeal is available to you within the irs on the issue that was the subject of the technical_advice if you accept our findings please sign and return the enclosed form_6018 consent to proposed adverse action we will then send you a final letter revoking your exempt status if we do not hear from you within days from the date of this letter we will process your case on the basis of the recommendations shown in the report of examination and this letter will become final in that event you will be required to file federal_income_tax retums for the tax period s shown above file these retums with the ogden service_center within days from the date of this letter unless a request for an extension of time is granted file returns for later tax years with the appropriate service_center indicated in the instructions for those returns you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is nota substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a iegally correct_tax determination or cxtend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however sec that a tax matter that may not have been resolved through nommal channcls gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate al if you have any questions please call the contact person at the telephone number shown in the heading of this letter f you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sincerely marsha a ramirez director eo examinations enclosures publication publication form_6018 report of examination envelope letter rev catalog number 34801v schedule no form 886-a explanations of items sins or rev date name of taxpayer year period ended org 20xx tax identification_number legend org organization name xx date xyz state issue whether an organization that fails to submit sufficient information and or records in order to conduct an examination should have their exempt status revoked facts on december 20xx the organization was sent a letter stating that according to our records they had paid wages in excess of dollar_figure during the 20xx year the letter went on to state that we had no record of a form_990 return of organization exempt from tax being filed they were requested to submit a copy of this return if it had been filed publication your rights as a taxpayer was attached to this letter see exhibit a when no information had been received by january 20xx the organization was sent a letter stating that we had not received any response to our december letter they were advised that sec_1_6033-2 of the income_tax regulations requires exempt_organizations to submit additional information necessary for the purpose of inquiring into its exempt status regardless of whether or not it is required to file an annual information_return see exhibit b on february 20xx another letter was sent to the organization stating that if the requested information is not received by march 20xx we would assume that they do not plan to submit it and we would have no alternative but to proceed based upon the information we had available this letter was sent certified mail see exhibit c to date no response has been received and according to our records the return was never filed by the organization law sec_1_6033-2 of the income_tax regulations states in part as follows every organization which is exempt from tax whether or not it is required to file an annual information_return shall submit such additional information as may be required by the internal_revenue_service for the purpose of inquiring into its exempt status sec_6652 of the internal_revenue_code provides for a penalty of dollar_figure for each day the return is late up to a maximum of dollar_figure or percent of the gross_receipts of the organization unless reasonable_cause exists for the late filing revrul_59_95 c b provides that the failure or inability of an organization to file a required information_return can result in termination of the organization’s exempt status because the organization is not complying with the conditions required for continuation of exempt status form 886-a internal_revenue_service department of the treasury- catalog number 20810w publish no irs gov page of schedule no or form bb6-a explanations of items -_e rev date year period ended 20xx name of taxpayer org tax identification_number legend org organization name xx date xyz state government's position inasmuch as the organization has not provided the requested information and has refused to file the form_990 for the year ended june 20xx we propose to revoke the org’s exempt status under sec_501 of the internal_revenue_code effective july 20xx as a taxable entity the organization will be required to file the appropriate federal_income_tax return form 886-a internal_revenue_service department of the treasury- catalog number 20810w publish no irs gov page of


- 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 b03 plr-125458-11 date date legend x ----------------------------------------------------------------------------------------------------- ------------------------ state ---------------- a date date a b c d e f ----------------------------------------------------------------------------------------------------- -------------------------- ------------------------- ---------------------- ----- ----- ----- ------------ ------------ ------------ dear -------------- plr-125458-11 this letter responds to a letter dated date and subsequent correspondence submitted on x’s behalf by its authorized representative requesting certain rulings with respect to the proposed redemption of x stock facts x was incorporated in state on date x elected to be treated as a subchapter_s_corporation effective date prior to date x was taxed as a subchapter_c_corporation at the time of the proposed redemption x will have accumulated_earnings_and_profits x has represented that it has one class of stock a directly owns a shares of voting_stock and b shares of non-voting stock in x x proposes to redeem for cash c shares of a’s non-voting stock x represents that a owns either directly or constructively pursuant to attribution_rules under sec_318 d of the voting shares and e of the non-voting shares of x after the redemption a will still own d of the voting shares and his interest in non-voting shares will be f x represents that the proceeds from the redemption are based on the fair_market_value of the stock at the time the redemption agreement was made as determined by an independent appraisal x also represents that the aggregate amount of the redemption will not exceed x's sec_1368 accumulated_adjustments_account immediately before the redemption x further represents that there are no outstanding options or warrants to purchase x stock nor are there any outstanding debentures or other obligations that are convertible into x stock or would be considered x stock no shareholder of x has been or will be obligated to purchase any of the stock to be redeemed the redemption is an isolated transaction no redemptions have been made in the last five years and no future redemptions are planned x has no plan or intention to issue redeem or exchange additional shares of its stock x requests the following rulings that the redemption of a’s non-voting x stock will except as provided in sec_1368 be treated as a distribution_of_property to which sec_301 applies that the distributions from x for the redemption will not be included in the gross_income of a to the extent the total distributions by x during the taxable_year do not plr-125458-11 exceed the amount in x's accumulated_adjustments_account at the close of the taxable_year and to the extent that the distributions do not exceed the adjusted_basis of a in a’s x stock after taking into account the adjustments described in sec_1367 and that the redemption will not create a second class of stock under sec_1361 and thus will not terminate x’s subchapter_s_election law sec_1371 provides that except to the extent otherwise provided in title_26 and except to the extent inconsistent with subchapter_s subchapter_c applies to an s_corporation and its shareholders sec_302 provides that if a stock_redemption does not qualify under sec_302 it will be treated as a distribution to which sec_301 applies under sec_302 a stock_redemption is treated as an exchange if the redemption is not essentially_equivalent_to_a_dividend under sec_302 is substantially disproportionate under sec_302 is in complete redemption of the shareholder's interest under sec_302 or is a partial_liquidation under sec_302 sec_301 generally treats a distribution_of_property in the manner provided under sec_301 sec_1368 except to the extent provided in sec_1368 overrides sec_301 sec_1368 provides that a distribution_of_property made by an s_corporation with respect to its stock to which but for sec_1368 sec_301 would apply is treated in the manner provided in sec_1368 or c whichever applies sec_1368 provides that in the case of a distribution described in sec_1368 by an s_corporation which has no accumulated_earnings_and_profits the distribution shall not be included in gross_income to the extent that it does not exceed the adjusted_basis of the stock sec_1368 provides that in the case of a distribution described in sec_1368 by an s_corporation which has accumulated_earnings_and_profits that portion of the distribution which does not exceed the accumulated_adjustments_account shall be treated in a manner provided by sec_1368 sec_1368 provides that sec_1368 and c are applied by taking into account to the extent proper the adjustments to the basis of the shareholder's stock described in sec_1367 and the adjustments to the accumulated_adjustments_account that are required by sec_1368 plr-125458-11 revrul_95_14 1995_1_cb_169 holds that when an s_corporation shareholder receives proceeds in a redemption that is characterized as a distribution under sec_301 the entire redemption is treated as a distribution for purposes of sec_1368 that reduces the corporation's accumulated_adjustments_account sec_1361 provides that the term s_corporation means with respect to the taxable_year a small_business_corporation for which an election under sec_1362 is in effect for the year sec_1361 provides that the term small_business_corporation means a domestic_corporation that among other things does not have more than one class of stock accordingly s_corporations may not have more than one class of stock sec_1_1361-1 of the income_tax regulations provides that a corporation that has more than one class of stock does not qualify as a small_business_corporation except as provided in sec_1_1361-1 relating to instruments obligations or arrangements treated as a second class of stock a corporation is treated as having only one class of stock if all outstanding shares of stock of the corporation confer identical rights to distribution and liquidation proceeds differences in voting rights among shares of stock of a corporation are disregarded in determining whether a corporation has more than one class of stock sec_1_1361-1 provides that the determination of whether all outstanding shares of stock confer identical rights to distribution and liquidation proceeds is made based on the corporate charter articles of incorporation bylaws applicable state law and binding agreements governing distribution and liquidation proceeds collectively the governing agreements sec_1_1361-1 provides that buy-sell agreements among shareholders agreements restricting the transferability of stock and redemption agreements are disregarded in determining whether a corporation's outstanding shares of stock confer identical distribution and liquidation rights unless a principal purpose of the agreement is to circumvent the one class of stock requirement of sec_1361 and the agreement establishes a purchase_price that at the time the agreement is entered into is significantly in excess of or below the fair_market_value of the stock agreements that provide for the purchase or redemption of stock at book_value or at a price between fair_market_value and book_value are not considered to establish a price that is significantly in excess of or below the fair_market_value of the stock and thus are disregarded in determining whether the outstanding shares of stock confer identical rights for purposes of sec_1_1361-1 a good_faith determination of fair_market_value will be respected unless it can be shown that the value was substantially in error and the determination of the value was not performed with reasonable diligence conclusion plr-125458-11 based solely on the information submitted and the representations made we conclude as follows because the redemption does not qualify as an exchange pursuant to sec_302 or sec_302 applies to the redemption therefore the redemption of a’s non-voting x stock will except as provided in sec_1368 be treated as a distribution_of_property to which sec_301 applies the distributions from x for the redemption will not be included in the gross_income of a to the extent the total distributions by x during the taxable_year do not exceed the amount in x's accumulated_adjustments_account at the close of the taxable_year and to the extent that the distributions do not exceed the adjusted_basis of a in a’s x stock after taking into account the adjustments described in sec_1367 and the redemption will not create a second class of stock under sec_1361 that would cause the termination of x’s subchapter_s_election except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed regarding whether x was or is otherwise eligible to be treated as an s_corporation this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative the ruling contained in this letter is 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 ruling_request it is subject_to verification on examination sincerely s richard t probst senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes