internal_revenue_service number release date index numbers ------------------------- ------------------- ------------------------------------------------------------ ---------------- ---------------------- ----------------------------- 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 corp b04 plr-130448-06 date date legend distributing --------------------------------------- ------------------------------- ------------------------ distributing controlled ----------------------- ------------------------------- ----------------------- --------------------------------------------------------- ------------------------------- ---------------------------------- --------------------------------------------------------------------- controlled ---------------------------------------------------------------------------- --------------------------------------------------------------------- sub ----------------------------- ---------------------------------------------------------------------------- --------------------------------------------------------------------- sub ---------------------------------------------------------------------------- ------------------------------------------------------------------- sub ---------------------------------------------------------------------------- --------------------------- -------------------------------- plr-130448-06 --------------------------------------------------------------------- -------------------------- sub ------------------------------------------------------------------------ --------------------------------------------------------------------- sub ---------------------------------------------------------------------------- --------------------------------------------------------------------- sub ---------------------------------------------------------------------------- --------------------------------------------------------------------- sub ---------------------------------------------------------------------------- --------------------------------------------------------------------- sub -------------------------------------------- ------------------------------------------ ------------------------------------------- ------------------------------- ------------------------ -------------------------------------------------- ------------ ------------------------------------ llc ------------------------------------------------------------- --------------------------------------------------------------------- llc -------------------------------------------------------------------------------------------- --------------------------------------------------------------------- llc llc llc acquisition target gp --------------------------------------------------------------------- trust ---------------------------------------------------------------------- ---------------------------- ------------ ------------------------------------------------- --------------------------------------------------------------------- ------------------------------------------------------------------ --------------------------------------------------------------------- plr-130448-06 investment banks business a business b business c business d a b c d e f g h i j k l m n o date ------------------------------------------------------------------------ ------------------- ---------- ----------------------- ---------------- --------------------------- --------- -------- ------ ------ -------- --------- -------- ------------------- ------------------- --- -- ------------ ----------- ---------------------- --- ------------------- plr-130448-06 date date date date dear -------------------- ------------------------ ---------------------- -------------------- -------------------------- this letter responds to your date letter requesting rulings as to certain federal_income_tax consequences of a series of proposed and partially completed transactions the information submitted in that letter and in later correspondence is summarized below the rulings contained in this letter are based on facts and representations submitted by the taxpayers and accompanied by penalty of perjury statements executed by the appropriate parties this office has not verified any of the materials submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process moreover no determination has been made regarding whether the internal split- off and the external distribution both defined below i satisfy the business_purpose requirement of sec_1_355-2 of the income_tax regulations ii are being used principally as a device for the distribution of the earnings_and_profits of distributing distributing controlled or controlled see sec_355 of the internal_revenue_code and sec_1_355-2 or iii are part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a percent or greater interest in distributing distributing controlled or controlled see sec_355 and sec_1_355-7 summary of facts distributing is a holding_company and the common parent of an affiliated_group_of_corporations that files a consolidated federal_income_tax return distributing has a single class of publicly-traded voting common_stock outstanding the distributing common_stock and no preferred_stock outstanding no shareholder reports owning more than five percent of the distributing common_stock distributing through its subsidiaries engages in business a business b business c and business d distributing directly owns all of the outstanding_stock of each of sub sub and sub and the outstanding membership interest of llc an entity disregarded as separate from distributing for federal_income_tax purposes prior to the pre- transaction restructuring set forth below distributing directly owned a more than of the outstanding_stock of distributing while the remaining b of distributing plr-130448-06 1’s stock was directly owned by sub distributing has a single class of voting common_stock outstanding and no preferred_stock outstanding distributing directly owns all of the outstanding_stock of each of sub and sub sub directly owns all of the outstanding_stock of controlled and sub a corporation formed on date controlled directly owns all of the outstanding_stock of sub sub directly owns a c general_partnership interest in gp while sub directly owned the other d interest in gp prior to the pre-transaction restructuring below sub directly owns all of the outstanding_stock of sub pursuant to a merger agreement dated as of date acquisition target was merged into llc on date the merger controlled is a corporation that was newly formed as a wholly-owned subsidiary of distributing in order to facilitate the external distribution controlled has a single class of voting common_stock outstanding the controlled common_stock in connection with the formation of controlled distributing received all of the shares of controlled common_stock in exchange for a nominal cash contribution at the time of the external distribution controlled and its subsidiaries will be engaged in the active_conduct of business d at the time of the internal split-off controlled and its subsidiaries will be engaged in the active_conduct of business d financial information has been submitted which indicates that each of the portion of business a conducted by sub the sub business business d and the portion of business a conducted by sub the sub business has had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the past five years distributing 2's management believes that the separation of business d from distributing 2's other business segments will serve a number of corporate business purposes accordingly they have proposed and partially completed the following series of transactions pre-transaction restructuring the following steps occurred as of date i sub contributed its d interest in gp to llc a newly-formed single member limited_liability_company that was disregarded as separate from sub for federal_income_tax purposes ii sub transferred its membership interest in llc to distributing in exchange for common_stock of distributing of approximate equal value as a result of this transfer sub owned e of the outstanding_stock of distributing distributing 2's a of the outstanding_stock of distributing was reduced to f still more than and sub 2's b of the outstanding_stock of distributing was reduced to g plr-130448-06 iii distributing contributed its membership interest in llc to sub sub then contributed the membership interest in llc to controlled iv controlled contributed the membership interest in llc to sub proposed transactions except as set forth below the following transactions have been proposed to occur on approximately the same date as the external distribution v sub will convert into a limited_liability_company llc disregarded as separate from its owner distributing for federal_income_tax purposes vi sub will convert into a limited_liability_company llc disregarded as separate from its owner distributing for federal_income_tax purposes vii sub will convert into a limited_liability_company llc disregarded as separate from its owner distributing for federal_income_tax purposes viii llc will distribute to distributing certain of its assets including its equity in various entities ix for federal_income_tax purposes distributing will contribute certain assets including the stock of sub to controlled contribution x for federal_income_tax purposes distributing will distribute all of the controlled stock to distributing in exchange for a portion of distributing 2's stock of distributing of approximate equal value the internal split- off xi for federal_income_tax purposes distributing will contribute contribution the controlled stock and any other assets associated with business d to controlled in exchange for additional shares of controlled common_stock approximately dollar_figureh in cash the special distribution and debt securities to be issued by controlled with a total face_amount of approximately dollar_figurei the controlled securities that will consist of a senior unsecured notes and b a senior secured term_loan xii except for the trust controlled common_stock as defined herein distributing will distribute all of the outstanding controlled common_stock pro_rata to the holders of the distributing common_stock the external distribution plr-130448-06 xiii distributing will transfer all of the controlled securities received by it in contribution to the investment banks in exchange for debt of distributing including debt of any entity disregarded as separate from distributing for federal_income_tax purposes owed to unrelated third parties at the time of the external distribution the distributing debt which the investment banks acting as principals for their own accounts will have acquired in the secondary market at least j days prior to the external distribution the debt exchange distributing expects to consummate the debt exchange in accordance with an exchange_agreement entered into by it and the investment banks no sooner than k days after the investment banks acquire the distributing debt in the secondary market pursuant to which the parties will agree to exchange an amount of distributing debt to be determined by the parties bargaining at arm's length for the controlled securities received by distributing in contribution xiv as promptly as practicable after the external distribution but in no event later than l after the external distribution distributing will pursuant to the plan_of_reorganization use the proceeds of the special distribution to repay or redeem distributing debt and or to repurchase shares of distributing common_stock pursuant to open-market purchases meeting the requirements of sec_4 b of revproc_96_30 1996_1_cb_696 in conjunction with the transactions described above distributing and controlled will enter into several agreements relating to the separation of business d from distributing 2's other businesses and certain continuing transactions between the companies including certain transitional agreements and a tax_sharing_agreement representations the following representations have been submitted with respect to contribution and the internal split-off a indebtedness if any owed by controlled to distributing after the internal split-off will not constitute stock_or_securities b the fair_market_value of the controlled stock to be received by distributing will be approximately equal to the fair_market_value of the stock of distributing surrendered by distributing in the internal split- off c no part of the consideration to be distributed by distributing in the internal split-off will be received by distributing as a creditor employee or in any capacity other than that of a shareholder of distributing plr-130448-06 d in accordance with notice_2006_81 distributing will be deemed to have elected not to apply the transitional rule_of sec_355 therefore each of distributing and controlled will treat all members of its respective separate_affiliated_group as defined in sec_355 hereinafter sag as one corporation in determining whether it meets the requirements of sec_355 regarding the active_conduct_of_a_trade_or_business e the five years of financial information submitted on behalf of business d conducted by controlled and its subsidiaries each a member of the distributing sag immediately before and following the internal split-off is representative of the present business operations of business d and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted f the five years of financial information submitted on behalf of the sub business conducted by sub a member of the distributing sag immediately before and following the internal split-off is representative of the present business operations of sub and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted g following the internal split-off llc formerly sub and controlled directly and through its controlled_subsidiaries will continue the active_conduct of their respective businesses independently and with their separate employees h the internal split-off is being carried out for the corporate business_purpose of making possible the external distribution and is motivated in whole or substantial part by this corporate business_purpose i the internal split-off is not being used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both j no intercorporate debt will exist between distributing and its subsidiaries and controlled and its subsidiaries at the time of or subsequent to the internal split-off except for payables arising under transitional agreements or otherwise in the ordinary course of business k no property will be transferred by distributing to controlled for which l an investment_credit allowed under sec_46 has been or will be claimed immediately before the internal split-off items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction treasury regulations see sec_1_1502-13 and sec_1 as in effect before the publication of t d 1995_2_cb_147 and as currently in effect sec_1_1502-13 as published by t d further distributing 1's excess_loss_account if any with respect to its stock of controlled will be included in income immediately before the plr-130448-06 internal split-off to the extent required by applicable treasury regulations see sec_1_1502-19 m except for certain payments that will be made in connection with the tax_sharing_agreement and certain service agreements that are transitional in nature payments made in connection with any continuing transactions between distributing and its subsidiaries and controlled and its subsidiaries following the internal split-off will be for fair_market_value based on terms and conditions comparable to those that would be arrived at by the parties bargaining at arm's length n no two parties to the internal split-off are investment companies as defined in sec_368 and iv o for purposes of sec_355 immediately after the internal split-off no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of distributing stock entitled to vote or percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the internal split-off p for purposes of sec_355 immediately after the internal split-off no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of controlled stock entitled to vote or percent or more of the total value of shares of all classes of controlled stock that was either acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the internal split-off or attributable to distributions on distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the internal split-off q the internal split-off is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a percent or greater interest within the meaning of sec_355 in distributing or controlled including any predecessor or successor of any such corporation immediately after the internal split-off the external distribution and the debt exchange neither distributing nor controlled will be a disqualified_investment_corporation within the meaning of sec_355 r s the total adjusted_basis and the fair_market_value of the assets to be transferred by distributing to controlled in contribution will equal or exceed the sum of a the amount of any liabilities assumed within the meaning of sec_357 by controlled in contribution b the amount of plr-130448-06 any liabilities owed to controlled by distributing if any that are discharged or extinguished in contribution and c the amount of any cash and the fair_market_value of any property other than stock and securities permitted to be received under sec_361 without the recognition of gain received by distributing from controlled if any in contribution the fair_market_value of the assets of controlled will exceed the amount of its liabilities immediately after contribution t any liabilities assumed within the meaning of sec_357 by controlled in contribution were incurred in the ordinary course of business and are associated with the assets transferred to controlled in connection with contribution u the total fair_market_value of the assets transferred to controlled by distributing in contribution will equal or exceed the aggregate adjusted_basis of the transferred assets the following representations have been submitted with respect to contribution the external distribution and the debt exchange v other than the controlled securities to be held by distributing prior to their distribution to the investment banks indebtedness if any owed by controlled to distributing after the external distribution will not constitute stock_or_securities w except for the receipt of controlled common_stock by holders of restricted distributing common_stock who have not made a valid election under sec_83 no part of the consideration to be distributed by distributing with respect to the distributing common_stock will be received by any shareholder of distributing as a creditor employee or in any capacity other than that of a shareholder of distributing x no part of the consideration to be distributed by distributing will be y received by a security holder as an employee or in any capacity other than that of a security holder of distributing the total adjusted_basis and the fair_market_value of the assets that distributing will transfer to controlled in contribution will equal or exceed the sum of a the amount of any liabilities assumed within the meaning of sec_357 by controlled in the exchange b the amount of any liabilities owed to controlled by distributing if any that are discharged or extinguished in the exchange and c the amount of any cash and the fair_market_value of any property other than stock and securities permitted to be received under sec_361 without the recognition of gain received by distributing from controlled in the exchange the fair_market_value of the assets of controlled will exceed the amount of its liabilities immediately after contribution plr-130448-06 z any liabilities assumed within the meaning of sec_357 by controlled in the proposed transactions were incurred in the ordinary course of business and are associated with the assets being transferred aa the total fair_market_value of the assets transferred to controlled by distributing in contribution will equal or exceed the aggregate adjusted_basis of the transferred assets bb trust which was established for the primary purpose of providing special awards for heroic acts or other special meritorious service to the company or the community at large holds approximately m shares of distributing common_stock constituting n less than of the outstanding distributing common_stock distributing will dispose_of the controlled common_stock received in the external distribution by trust such stock the trust controlled common_stock and the receipt of such stock by trust the retention as soon as practicable after the external distribution and in any event not later than o days after the external distribution cc the trust controlled common_stock will be voted in proportion to the votes cast by other shareholders of controlled dd trust has been properly treated as a grantor_trust pursuant to sec_671 at all times since its formation ee the five years of financial information submitted on behalf of the sub business conducted by sub a member of distributing 2's sag is representative of the present business operations of sub and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted ff the five years of financial information submitted on behalf of business d conducted by controlled and its subsidiaries all of which will be members of controlled 2's sag immediately following the external distribution is representative of the present business operations of business d and with regard to such business there have been no substantial operational changes since the date of the last financial statements submitted gg following the external distribution llc formerly sub and controlled directly and through its controlled_subsidiaries will continue the active_conduct of their respective businesses independently and with their separate employees hh the external distribution is being carried out for the corporate business purposes listed below and is motivated in whole or substantial part by one or more of these corporate business purposes to facilitate each of distributing 2's and controlled 2's expansion and growth by allowing each company to focus on its respective core businesses to optimize the plr-130448-06 capital structures for each of distributing and controlled and to increase the financial flexibility of distributing to enhance the ability of controlled to execute a potential acquisition strategy more effectively by creating a more attractive acquisition currency and to enhance the efficiency and effectiveness of controlled 2's equity-linked compensation ii the external distribution is not being used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both jj no intercorporate debt will exist between distributing and its subsidiaries and controlled and its subsidiaries at the time of or subsequent to the external distribution except for the controlled securities to be issued to distributing in contribution and exchanged with the investment banks in the debt exchange and payables arising under transitional agreements or otherwise in the ordinary course of business kk no property will be transferred by distributing to controlled for which ll an investment_credit allowed under sec_46 has been or will be claimed immediately before the external distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction treasury regulations see sec_1_1502-13 and sec_1 as in effect before the publication of t d 1995_2_cb_147 and as currently in effect sec_1_1502-13 as published by t d further distributing 2's excess_loss_account if any with respect to its controlled common_stock will be included in income immediately before the external distribution to the extent required by applicable treasury regulations see sec_1_1502-19 mm except for certain payments that will be made in connection with the tax_sharing_agreement and certain service agreements that are transitional in nature payments made in connection with any continuing transactions between distributing and its subsidiaries and controlled and its subsidiaries following the external distribution will be for fair_market_value based on terms and conditions comparable to those that would be arrived at by the parties bargaining at arm's length nn no two parties to the external distribution are investment companies as defined in sec_368 and iv oo for purposes of sec_355 immediately after the external distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of distributing stock entitled to vote or percent or more of the total value of shares of all classes of distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period plr-130448-06 determined after applying sec_355 ending on the date of the external distribution pp for purposes of sec_355 immediately after the external distribution no person determined after applying sec_355 will hold stock possessing percent or more of the total combined voting power of all classes of controlled stock entitled to vote or percent or more of the total value of shares of all classes of controlled stock that was either acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the external distribution or attributable to distributions on distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the external distribution qq the external distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a percent or greater interest within the meaning of sec_355 in distributing or controlled including any predecessor or successor of any such corporation the controlled securities issued to distributing in contribution will qualify as securities within the meaning of sec_361 rr ss distributing will transfer the proceeds of the special distribution to holders of distributing debt and or holders of distributing common_stock pursuant to the plan_of_reorganization distributing will deposit the proceeds of the special distribution in a segregated account until they are used as described above the payment of cash in lieu of fractional shares of controlled common_stock by the distribution agent will be solely for the purpose of avoiding the expense and inconvenience of issuing and maintaining fractional shares and will not represent separately bargained for consideration the total cash that will be paid in connection with the external distribution in lieu of fractional shares of controlled common_stock is not intended to exceed one percent of the total consideration that will be distributed to holders of distributing common_stock in the external distribution it is intended that no distributing shareholder will receive cash in lieu of fractional shares in an amount equal to or greater than the value of one full share of controlled common_stock immediately after the external distribution as defined in sec_355 and the debt exchange neither distributing nor controlled will be a disqualified_investment_corporation within the meaning of sec_355 tt uu vv the sum of a the aggregate amount of distributing debt exchanged for controlled securities in the debt exchange and b the aggregate plr-130448-06 amount of distributing debt repaid or redeemed with the special distribution will not exceed the aggregate amount of indebtedness of distributing 2's affiliated_group as defined in sec_1504 owed to unrelated third parties at the close of business on date the last full business_day before the date on which distributing 2's board_of directors authorized distributing to pursue actively the divestiture of business d rulings based solely on the information and representations submitted we rule as follows regarding contribution and the internal split-off contribution together with the internal split-off will be a reorganization under sec_368 distributing and controlled will each be a_party_to_a_reorganization under sec_368 no gain_or_loss will be recognized by distributing in contribution sec_357 and sec_361 no gain_or_loss will be recognized by controlled in contribution sec_1032 controlled 1's basis in each asset received in contribution will be the same as the basis of that asset in the hands of distributing immediately before its transfer sec_362 controlled 1's holding_period in each asset received in contribution will include the period during which distributing held the asset sec_1223 no gain_or_loss will be recognized by distributing on the internal split-off sec_361 no gain_or_loss will be recognized by and no amount will otherwise be included in the income of distributing on the internal split-off sec_355 the basis of the controlled stock held by distributing immediately after the internal split-off will equal the basis of the distributing stock surrendered by distributing in the exchange sec_358 the holding_period of the controlled stock received by distributing in the internal split-off will include the holding_period of the distributing stock surrendered in exchange therefor provided the distributing stock is held as a capital_asset on the date of the exchange sec_1223 earnings_and_profits if any will be allocated between distributing and controlled in accordance with sec_312 and sec_1_312-10 and sec_1 e based solely on the information and representations submitted we rule as follows regarding contribution the external distribution and the debt exchange plr-130448-06 contribution together with the external distribution will be a reorganization under sec_368 distributing and controlled will each be a_party_to_a_reorganization under sec_368 no gain_or_loss will be recognized by distributing on its receipt of controlled common_stock the controlled securities and the special distribution in contribution sec_357 sec_361 and b no income gain loss or deduction will be recognized by distributing with respect to the controlled securities and the debt exchange other than any i deductions attributable to the fact that distributing debt may be redeemed at a premium ii income attributable to the fact that distributing debt may be redeemed at a discount iii interest_expense accrued with respect to distributing debt and iv income or gain realized on the transfer of the controlled securities in the debt exchange attributable to appreciation in the controlled securities while held by distributing after the external distribution no gain_or_loss will be recognized by controlled in contribution sec_1032 controlled 2's basis in each asset received in contribution will be the same as the basis of that asset in the hands of distributing immediately before its transfer sec_362 controlled 2's holding_period in each asset received in contribution will include the period during which distributing held the asset sec_1223 no gain_or_loss will be recognized by distributing on the external distribution sec_361 no gain_or_loss will be recognized by and no amount will otherwise be included in the income of the distributing shareholders upon their receipt of the controlled common_stock except for holders of restricted distributing common_stock who have not made a valid election under sec_83 sec_355 each distributing shareholder's basis in a share of distributing common_stock as adjusted under sec_1_358-1 shall be allocated between the share of distributing common_stock with respect to which the external distribution is made and the share of controlled common_stock or allocable portions thereof received with respect to the share of distributing common_stock in proportion to their fair market values if one share of controlled common_stock is received in respect of more than one share of distributing common_stock the basis of each share of distributing common_stock must be allocated to the shares of controlled common_stock received in a manner that reflects that to the extent possible a share of controlled common_stock is received in respect of shares of distributing common_stock acquired on the same plr-130448-06 date and at the same price if a distributing shareholder that purchased or acquired shares of distributing common_stock on different dates or at different prices is not able to identify which particular share of controlled common_stock or portion thereof is received with respect to a particular share of distributing common_stock the shareholder may designate which particular share of controlled common_stock or portion thereof is received with respect to a particular share of distributing common_stock provided the designation is consistent with the terms of the external distribution each distributing shareholder's holding_period in the controlled common_stock received will include the holding_period of the distributing common_stock with respect to which the distribution of the controlled common_stock is made provided that the distributing common_stock is held as a capital_asset on the date of the external distribution sec_1223 earnings_and_profits if any will be allocated between distributing and controlled in accordance with sec_312 and sec_1_312-10 and sec_1 e the retention is not in pursuance of a plan having as one of its principal purposes the avoidance of federal_income_tax within the meaning of sec_355 a distributing shareholder who receives cash in lieu of a fractional share of controlled common_stock will recognize gain_or_loss measured by the difference between the basis of the fractional share received as determined above in ruling and the amount of cash received sec_1001 any gain_or_loss will be treated as capital_gain or loss provided the fractional share of stock is held as a capital_asset on the date of the external distribution sec_1221 and sec_1222 we express no opinion about the tax treatment of the above transactions under caveats other provisions of the code and regulations or the tax treatment of any conditions existing at the time of or effects resulting from the above transactions that are not specifically covered by the above rulings in particular we express no opinion regarding i whether the internal split-off and the external distribution satisfy the business_purpose requirement of sec_1_355-2 ii whether the internal split-off and the external distribution are being used principally as a device for the distribution of the earnings_and_profits of distributing distributing controlled or controlled see sec_355 and sec_1_355-2 plr-130448-06 iii whether the internal split-off and the external distribution are part of a iv v vi plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a percent or greater interest in distributing distributing controlled or controlled see sec_355 and sec_1_355-7 the federal_income_tax treatment of the merger the federal_income_tax consequences of any payments made for less than fair_market_value in connection with the tax_sharing_agreement and certain service agreements that are transitional in nature and the federal_income_tax treatment of the transactions described in steps i ii iii iv v vi vii and viii procedural statements this letter is directed only to the taxpayers who requested it sec_6110 provides that it may not be used or cited as precedent a copy of this letter must be attached to any federal_income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of this letter_ruling under a power_of_attorney on file in this office a copy of this letter is being sent to your authorized representatives sincerely ___________________________________ richard k passales senior counsel branch office of associate chief_counsel corporate


internal_revenue_service number release date ---------------------------------- ----------------------------- --------------------------------------------- -------------------------------- in re --------------------------------------------- ----------------------------- -------------------------- ------------------------ - department of the treasury washington dc person to contact ---------------- id no ------------- cc ita telephone number --------------------- refer reply to plr-120248-05 date date legend a --------------------------------------------------------------- ------------------------------------------------- dates -------------------------- -------------------------- --------------------------- groups taxpayers and on attachment taxpayers and on attachment all other taxpayers on attachment dear -------------------- this letter responds to your letter and submissions of date supplementing a previous submission of march in which you requested on behalf of a above and forty other related parties the taxpayers - see attachment certain private letter rulings relating to the late-filing of forms election to have a tax_year other than a required tax_year specifically you requested that the taxpayers’ late-filed forms be considered timely filed under the authority contained in sec_301_9100-3 of the procedure and administration regulations we are pleased to address your concerns the information submitted indicates that each of the forty-one taxpayers on whose behalf rulings are requested is a partnership employing an overall accrual_method of accounting taxpayers are members of a tiered_structure as defined in sec_1_444-2t of the temporary income_tax regulations under sec_706 of the internal_revenue_code a partnership’s taxable_year must be its required_taxable_year unless among other exceptions not relevant here the partnership elects under sec_444 of the code to use a taxable_year other than its required_taxable_year sec_444 and permit an eligible_partnership to elect or change to a taxable_year only if the deferral_period of the taxable_year elected is not longer than the shorter of three months or the deferral_period of the taxable_year being changed the term deferral_period generally refers to the number of months between the beginning of the entity’s taxable_year and the close of the first required_taxable_year ending within such taxable_year in the instant circumstances taxpayers desired to elect a taxable_year ending november for their initial taxable_year which is a permitted taxable_year under sec_444 sec_444 of the code and sec_1_444-2t of the regulations provide in relevant part that entities that are part of a tiered_structure that consists only of partnerships all of which have the same taxable_year may make or continue an election under sec_444 of the code sec_1_444-3t of the regulations provides among other requirements that form_8716 must be filed by the earlier of i the 15th day of the fifth month following the month that includes the first day of the tax_year for which the election will first be effective or ii the due_date without regard to extensions of the income_tax return resulting from the sec_444 election sec_301_9100-1 of the regulations set forth rules respecting the granting of extensions of time for making certain elections under these rules the commissioner in his discretion may grant a reasonable extension of time to make a regulatory election under subtitle a provided the taxpayer acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government sec_301_9100-2 sets forth rules governing automatic extensions for regulatory elections including elections to use other than the required tax_year under sec_444 if the provisions of section' do not apply to the taxpayer's situation as in the instant case the provisions of sec_301_9100-3 other extensions may apply sec_301_9100-3 sets forth standards that the commissioner will employ in determining whether to grant discretionary relief in situations that do not meet the requirements of sec_301_9100-2 the standards applied are whether the taxpayer acted reasonably and in good_faith in the matter and whether the granting of relief will prejudice the interests of the government generally a taxpayer will be deemed to have acted reasonably and in good_faith where for example the taxpayer reasonably relied on a qualified_tax professional and that professional failed to make or advise the taxpayer to make the election at issue in the instant circumstances group taxpayers’ forms electing to use a taxable_year ending november were due on or before date group taxpayers’ forms electing to use a taxable_year ending november were due on or before date and group taxpayers’ forms electing to use a taxable_year ending november were due on or before date due to an error or misunderstanding none of the forms was timely filed however the error was not due to any lack of due diligence or prompt action on the part of any taxpayer the information submitted and representations furnished by the taxpayers and their tax professionals establish that taxpayers acted reasonably and in good_faith in respect of this matter furthermore we have determined that the granting of relief in this case will not prejudice the interests of the government within the intendment of sec_301_9100-3 accordingly the requirements of sec_301_9100-3 for the granting of relief have been satisfied within days of the date of this ruling each taxpayer should file with the irs cincinnati service_center attn entity control a form_8716 electing to use a tax_year ending november effective for its first taxable_year ending either date date or date as appropriate a copy of this letter_ruling should accompany such submission and each taxpayer should type or print at the top of the form filed under sec_301_9100-3 of the regulations this ruling is further conditioned on taxpayers complying with sec_1 1t a which provides in relevant part that for each taxable_year that a partnership has an election under sec_444 in effect the partnership must i file a return as provided in sec_1_7519-2t and ii make any required_payment as provided in sec_1_7519-2t except for the specific ruling above which is restricted to the filing of forms we express or imply no opinion concerning the federal_income_tax consequences of the facts of this case under any other provision of the code or regulations that may be applicable thereto this letter_ruling is based on facts and representations provided by the taxpayers and their authorized representatives and is limited to the matters specifically addressed no opinion is expressed as to the tax treatment of the transactions considered herein under the provisions of any other sections of the code or regulations which may be applicable thereto or the tax treatment of any conditions existing at the time of or effects resulting from such transactions which are not specifically addressed herein because it could help resolve federal tax issues a copy of this letter should be maintained with the taxpayers’ permanent records pursuant to a power_of_attorney currently on file with this office the original of this letter_ruling is being sent to the taxpayers’ authorized representative and copies are being furnished to the taxpayers and their second-designated authorized representatives a copy of this letter is also being sent to the taxpayers’ appropriate irs industry director this ruling is directed only to the taxpayers who requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent associate chief_counsel income_tax accounting s william a jackson by _________________________ william a jackson chief branch attachment enclosures copy of this letter copy for sec_6110 purposes attachment plr-119941-05 ---------------------------------------------------------------- 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t c memo united_states tax_court shane v robison and robin s robison petitioners v commissioner of internal revenue respondent docket nos filed date edward i kaplan for petitioners bryant w smith for respondent memorandum findings_of_fact and opinion cohen judge respondent determined deficiencies in petitioners’ federal_income_tax and penalties as follows year deficiency dollar_figure big_number big_number big_number big_number penalty sec_6662 dollar_figure big_number big_number big_number big_number respondent has now conceded the sec_6662 penalties the issues for decision are as follows whether petitioners were engaged in a ranching activity with the objective of making a profit within the meaning of sec_183 and if petitioners were engaged in a ranching activity with the objective of making a profit within the meaning of sec_183 whether petitioners materially participated in the ranching activity within the meaning of sec_469 unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure all monetary amounts are rounded to the nearest dollar findings_of_fact some of the facts have been stipulated and the stipulated facts are incorporated in our findings by this reference petitioners resided in utah when their petitions in these consolidated cases were filed petitioner robin s robison r robison was a retired physical therapist for the years in issue she previously started and operated her own successful physical therapy practice petitioner shane v robison s robison had a highly successful career working for a number of technology companies in silicon valley for and until date he worked as a successful computer science executive at hewlett packard in silicon valley in date he retired from hewlett packard he continues to serve on boards and as an adviser to technology-based corporations during the years in issue s robison’s wages and salary were as follows year wages salary dollar_figure big_number big_number big_number big_number the ranch in petitioners purchased a 410-acre ranch in a remote_area of southern utah at an elevation of approximately big_number feet the cost of the ranch was approximately dollar_figure million in and petitioners acquired additional acreage near and surrounding the property increasing the total property to more than acres in petitioners formed robison ranch llc robison ranch petitioners each own of robison ranch s robison has a family background in ranching and farming although neither petitioner had ever previously operated a ranch upon purchasing robison ranch petitioners were aware that it would require significant time and capital_investment on account of its poor physical condition robison ranch first operated as a horse breeding and training operation with a small cattle herd but shifted its focus entirely to cattle ranching in approximately petitioners retroactively prepared business plans for robison ranch for the years in issue from to petitioners never made a profit from robison ranch’s ranching activities the property is currently listed for sale for dollar_figure million for the years in issue robison ranch filed forms u s return of partnership income and claimed its loss deductions on its schedules f profit or loss from farming petitioners claimed robison ranch’s loss deductions for the years in issue on their schedules e supplemental income and loss in the respective amounts of dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure from to robison ranch reported over dollar_figure million in losses on its federal income tax returns from to robison ranch reported the following on its federal_income_tax returns year income expenses net_income loss dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number after the years in issue petitioners created activity logs for their time spent at robison ranch r robison reported spending in excess of big_number hours on the ranching activity during each year in issue s robison reported spending in excess of hours on the ranching activity during each year in issue when at the ranch petitioners would generally perform whatever work was needed such as maintenance work cleaning and the feeding and branding of livestock petitioners would also perform managerial duties and oversee operations petitioners were in charge of hiring and managing all ranch employees s robison was responsible for all top-level decisionmaking r robison robison ranch’s chief financial officer was responsible for all accounting and bill paying aspects preparing annual profit and loss statements and all of its employment_tax filings and insurance_policy needs she used quickbooks for robison ranch’s financial recordkeeping petitioners employed a certified_public_accountant to prepare the tax returns for robison ranch for the years in issue their personal finances were maintained separately from robison ranch’s finances petitioners employed a ranch manager and a ranch hand during the years in issue both employees lived on site and signed employment and lease agreements during the years in issue petitioners had two different ranch managers daniel reeder served as ranch manager until tabor dahl initially hired in to manage and train the ranch’s horses was promoted to ranch manager for the remaining years in issue both reeder and dahl had formal training in agriculture dahl was raised on an unregistered cattle ranch and had experience working on ranches but had never previously managed a ranch petitioners held weekly meetings with robison ranch’s employees the meetings were held in person if petitioners were on site and via conference call when they were not minutes from the weekly meetings were kept and distributed to participants when purchased the structures on robison ranch were in very poor condition and none were habitable petitioners constructed robison ranch’s core operating buildings they acquired the equipment necessary to plant and harvest hay as well as tractors loaders road maintenance equipment and trucks and trailers for transporting livestock and supplies the first structures petitioners built were a horse barn a small cow barn and corrals for handling the livestock petitioners also built a woodworking shop and a cement silo so that work could be done on site in petitioners constructed a house on the property where they would stay when they were at the ranch petitioners later sold certain heavy equipment and trucks that were used to build the infrastructure to reduce unnecessary costs petitioners also purchased additional grazing permits and water rights and they improved their hay production in an effort to grow enough hay to support all of the ranch’s livestock petitioners’ horse activity initially petitioners focused robison ranch’s business on the raising and breeding of paint horses in approximately after the paint horse business proved unsuccessful petitioners decided to shift to the raising and breeding of quarter horses a more established breed petitioners were not able to make a successful business with the quarter horses and ultimately abandoned the horse selling and showing business during the years in issue petitioners sold almost all of their horses not suited for cattle ranching petitioners’ cattle ranching activity also in approximately petitioners shifted their focus to cattle ranching during the years in issue petitioners sought to raise bulls and heifers as seedstock for other ranchers as well as to become a supplier of grass-fed beef when forming robison ranch petitioners consulted with their accountant a ranch attorney other ranch owners and trainers and breeders as well as a local veterinarian dr verland king king was a local expert regarding brisket disease at high elevations cattle are at risk of brisket disease which causes fluid accumulation in a cow’s lung that can then cause it to suffocate a cow with a low pulmonary artery pressure score pap score indicates an animal with a greatly reduced risk of brisket disease because of robison ranch’s high elevation petitioners sought to purchase and breed cattle with low pap scores petitioners worked with king to test the pap scores of robison ranch’s registered cattle king kept the pap score records petitioners also kept livestock records the ranch manager was in charge of creating and maintaining these records robison ranch’s data allowed them to calculate the total cost of the herd robison ranch also tracked certain expected progeny differences epd of its herd but became more specific about the epd data it collected beginning in epd data is used as a prediction of how future progeny of each animal are expected to perform relative to the progeny of other animals in the breed or herd epds are expressed in units of measure for the trait such as pounds for birth weight robison ranch also registered their cattle with the american angus association which provided an online database in which some of robison ranch’s livestock data was kept opinion respondent determined that petitioners’ ranching activity was not an activity engaged in for profit within the meaning of sec_183 and disallowed the loss deductions relating to robison ranch that petitioners claimed on their schedules e petitioners counter that they engaged in the ranching activity with an intent to realize a profit respondent alternatively argues that if petitioners are found to be engaged in the ranching activity with an intent to realize a profit their loss deductions should be limited by the passive loss limitations of sec_469 the arguments made by the parties through counsel are tainted by extreme views of the strength of their respective positions and attacks on the motives and credibility of their opponent s they view the facts objectively only with respect to the penalties that respondent conceded we do not agree entirely with any of those arguments petitioners appeared sincere and reasonable in their testimony the weakness in their position regarding the sec_183 issue is primarily the indisputable history and magnitude of losses despite reduced losses during the years in issue and whether petitioners can expect to recoup them but for their financial position these losses could not be afforded at this point petitioners are trying to minimize losses but to prevail they must show a profit objective in addition to the sec_183 analysis we address respondent’s alternative argument that sec_469 limits petitioners’ loss deductions for the years in issue that is even if petitioners have adequately shown a profit objective the absence of reliable records is most obvious with respect to this issue and petitioners’ reply brief barely touches on respondent’s arguments in that regard i burden_of_proof neither party discusses the burden_of_proof at length respondent cites the presumption of correctness rule a and 290_us_111 for the general_rule which is that the internal revenue service’s determinations in a notice_of_deficiency are generally presumed correct and taxpayers bear the burden of proving them erroneous with respect to deductions the taxpayer almost always has that burden 503_us_79 sec_1_6001-1 income_tax regs petitioners do not contend that the burden_of_proof should shift to respondent under sec_7491 if sec_7491 had been raised the lapses in petitioners’ recordkeeping would seem the primary impediment to shifting the burden of persuasion the burden remains on petitioners ii sec_183 under sec_183 if an activity is not engaged in for profit no deduction attributable to that activity is allowed except to the extent provided by sec_183 in relevant part sec_183 allows those deductions that would have been allowable had the activity been engaged in for profit only to the extent of gross_income derived from the activity reduced by deductions attributable to the activity that are allowable without regard to whether the activity was engaged in for profit sec_183 defines an activity_not_engaged_in_for_profit as any activity other than one with respect to which deductions are allowable for the taxable_year under sec_162 or under paragraph or of sec_212 for expenses to be deductible under sec_162 trade_or_business_expenses or sec_212 expenses for production_of_income and not subject_to the limitations of sec_183 taxpayers must show that they engaged in the activity with the primary objective of making a profit 68_f3d_868 5th cir aff’g tcmemo_1993_634 the expectation of profit need not be reasonable but the taxpayer must conduct the activity with the actual and honest objective of making a profit 28_f3d_1024 10th cir aff’g 99_tc_132 94_tc_41 because petitioners were the only partners in robison ranch we need not separately determine the intent at the partnership level greater weight is given to objective facts than to a taxpayer’s self-serving statement of intent 116_tc_198 sec_1_183-2 and b income_tax regs evidence from years subsequent to the years in issue is relevant to the extent it creates inferences regarding a taxpayer’s requisite profit objective in earlier years see hoyle v commissioner tcmemo_1994_592 smith v commissioner tcmemo_1993_140 sec_1_183-2 income_tax regs provides a nonexclusive list of factors to be weighed when considering whether a taxpayer is engaged in an activity for profit these factors include the following the manner in which the taxpayer carried on the activity the expertise of the taxpayer or his advisers the time and effort expended by the taxpayer in carrying on the activity the expectation that the assets used in the activity may appreciate in value the success of the taxpayer in carrying on other similar or dissimilar activities the taxpayer’s history of income or losses with respect to the activity the amount of occasional profits if any that are earned from the activity the financial status of the taxpayer and whether elements of personal pleasure or recreation are involved in the activity all facts and circumstances are to be taken into account and no single factor or mathematical preponderance of factors is determinative westbrook v commissioner f 3d pincite hildebrand v commissioner f 3d pincite we address the most relevant factors in determining petitioners’ intent a manner in which activity is conducted carrying on an activity in a businesslike manner such as by maintaining complete and accurate books_and_records conducting the activity in a manner similar to other activities of the same nature that are profitable and making changes in operations to adopt new techniques or abandon unprofitable methods is a factor that may indicate a profit objective sec_1_183-2 income_tax regs businesslike conduct is characterized by careful and thorough investigation of the profitability of a proposed venture monitoring of a venture in progress and attention to problems that arise over time see 90_tc_74 88_tc_464 while a taxpayer need not maintain a sophisticated cost accounting system the taxpayer should keep records that enable the taxpayer to make informed business decisions see 809_f2d_355 7th cir aff’g tcmemo_1985_523 for a taxpayer’s books_and_records to indicate a profit_motive the books_and_records should enable a taxpayer to cut expenses increase profits or evaluate the overall performance of the operation see abbene v commissioner tcmemo_1998_330 petitioners kept many financial and administrative records such as weekly meeting minutes employment contracts payroll tax returns insurance policies and payments and formal leases for employees who lived on robison ranch although petitioners’ records were voluminous respondent argues that petitioners’ administrative and financial recordkeeping was more akin to a conscious attention to detail than to something used to analyze expenses or improve profitability see 72_tc_411 aff’d 647_f2d_170 9th cir petitioners contend that r robison used quickbooks’ profit and loss statements to monitor the ranch’s finances and cut costs we believe petitioners used them for the important purposes of cutting expenses increasing profits and evaluating the overall performance of the operation see id however there is no evidence that they used them to create budgets or make income projections which would have been advantageous and further indicative of operating in a businesslike manner see 544_f3d_900 8th cir aff’g tcmemo_2007_309 foster v commissioner tcmemo_2012_207 slip op pincite petitioners also kept multiple records regarding their cattle though these records varied during the years in issue robison ranch’s animal records significantly improved with the hiring of dahl as ranch manager in particularly in regard to epd data which petitioners had begun to track better in petitioners were able to use their cattle records to make meaningful projections as well as make educated decisions in regard to cattle purchases and sales current and future the improved data recording during the years in issue evidences petitioners’ increasingly businesslike approach to robison ranch’s cattle activity respondent also argued that petitioners had no written business plan for robison ranch numerous court opinions mention that a businesslike operation often would involve a business plan see eg wesinger v commissioner tcmemo_1999_372 petitioners retroactively created business plans for the years in issue which were largely narratives of the actions petitioners took during those years the fact that petitioners had no written business plan does not negate a profit_motive as a business plan can be evidenced by actions see annuzzi v commissioner tcmemo_2014_233 at phillips v commissioner tcmemo_1997_128 stating that written financial plan not required for 32-horse farm where business plan was evidenced by action nevertheless a business plan likely would have aided petitioners in creating analyses for the future financial management or planning of the activity see foster v commissioner tcmemo_2012_207 slip op pincite maintaining an additional bank account for the activity separate from a taxpayer’s personal finances is indicative of an activity being carried on in a businesslike manner see wayts v commissioner tcmemo_1992_82 finding horse racing and breeding activity was carried on in a businesslike manner because it had a separate bank account citing pryor v commissioner t c memo petitioners’ separate_maintenance of their personal finances and robison ranch’s are indicative of operating in a businesslike manner perhaps the most important indication of whether an activity is being performed in a businesslike manner is whether the taxpayer implements methods for controlling losses including efforts to reduce expenses and generate income see dodge v commissioner tcmemo_1998_89 aff’d without published opinion 188_f3d_507 6th cir petitioners contend that they made changes to their operating methods adopted new techniques and abandoned unprofitable methods that contributed to their losses the record supports this contention petitioners made changes in their ranching activity when they realized that certain operations would not be profitable changing robison ranch’s operation two times--from paint horses to quarter horses to a registered cattle herd cf williams v commissioner tcmemo_2018_48 at finding cattle operation was not carried on in a businesslike manner because taxpayer did not make changes or transition his operation for years despite continued losses petitioners also sought to reduce expenses by obtaining increased water rights producing their own hay purchasing additional grazing permits selling unnecessary equipment and increasing the tracking and recording of epd data for their cattle herd all of these decisions were business decisions designed to reduce expenses and were not made merely on the basis of petitioners’ whim or fancy see welch v commissioner tcmemo_2017_229 at petitioners were able to reduce their expenses which led to a decrease in their net losses for the years in issue petitioners’ implementation of operating changes to combat continued losses indicates their intention to make a profit after carefully considering the evidence we conclude that this factor favors petitioners b expertise of the taxpayer or his her advisers the taxpayers’ expertise research and study of an activity as well as their consultation with experts may be indicative of a profit_motive see sec_1 b income_tax regs s robison has a family background in ranching and farming although he had never previously operated a ranch petitioners consulted with persons who were knowledgeable about ranching including a ranch attorney other ranch owners trainers and breeders and their veterinarian see givens v commissioner tcmemo_1989_529 a profit objective was indicated where the taxpayer sought and acquired advice in all aspects of tennessee walking horse breeding from experienced owners trainers and a veterinarian petitioners also sought advice regarding the business elements of starting robison ranch from their accountant in the face of mounting losses it would have been prudent to seek further business advice however we believe this factor favors petitioners c taxpayers’ time and effort devoted to the activity the taxpayers’ devotion of much of their personal time and effort to carrying on an activity may indicate a profit_motive particularly if the activity does not involve substantial personal or recreational aspects sec_1_183-2 income_tax regs a profit_motive may also be indicated if a taxpayer employs competent and qualified persons to carry on such activity id petitioners hired professionals to manage robison ranch employing a full-time ranch manager and a ranch hand during the years in issue both of whom lived on site petitioners also conducted weekly meetings with robison ranch employees while dahl was not an expert in registered angus cattle ranching nor had he managed a ranch previously he was experienced in cattle ranching having been raised on an unregistered cattle ranch further petitioners made use of a local veterinarian who was an expert regarding brisket disease and the effects of high altitudes on cattle this factor favors petitioners d expectation that the activity’s assets may appreciate an expectation that assets used in the activity will appreciate may indicate a profit_motive even if the taxpayers derive no profit from current operations id subpara however a profit objective may be inferred from such expected appreciation of the activity’s assets only where the appreciation exceeds operating_expenses and is sufficient to recoup the accumulated losses of prior years see golanty v commissioner t c pincite hillman v commissioner tcmemo_1999_255 respondent argues that petitioners’ objective must include recoupment of all of robison ranch’s past losses this expectation is too high see welch v commissioner at an overall profit is present if net_earnings and appreciation are sufficient to recoup the losses sustained in the ‘intervening years’ between a given tax_year and the time at which future profits were expected helmick v commissioner tcmemo_2009_220 slip op pincite citing 45_tc_261 aff’d 379_f2d_252 2d cir therefore the question is not whether petitioners would recoup all of robison ranch’s losses but whether they would recoup the losses between the years in issue and the hoped-for profitable future see id pincite petitioners did not provide a valuation of robison ranch there is not enough evidence in the record to determine the current value of or petitioners’ adjusted_basis in the ranch property and we are therefore unable to determine the amount of appreciation if any accordingly this factor is neutral e taxpayers’ history of income or loss from the activity a history of continued losses with respect to the activity may indicate the lack of profit_motive see sec_1_183-2 income_tax regs while a series of losses during the startup stage of an activity may not necessarily indicate a lack of profit_motive a record of large losses over many years is persuasive evidence that a taxpayer did not have such a motive see golanty v commissioner t c pincite an activity’s cumulative losses should not be of such a magnitude that an overall profit on the entire operation including recoupment of past losses could not possibly be achieved bessenyey v commissioner t c pincite petitioners realized no profits whatsoever in years of engaging in their ranching activity petitioners contend that the years in issue are the startup stage for their cattle ranching activity see burrus v commissioner tcmemo_2003_ finding that losses_incurred in the first six years of a cattle activity occurred during its startup stage however petitioners began their cattle operation in approximately thus the years in issue are beyond the startup stage further despite reduced expenses and increased profits during the years in issue petitioners produced no detailed or concrete plans as to how to further reduce their losses or as to when they expect to make a profit the possibility of a speculative profit is insufficient to outweigh the absence of profits for a sustained period of years see chandler v commissioner tcmemo_2010_92 the possibility of a speculative profit did not outweigh more than years of losses reported for the taxpayer’s horse activity this factor strongly favors respondent f taxpayers’ financial status substantial income from sources other than the activity may indicate that the activity is not engaged in for profit see sec_1_183-2 income_tax regs this is particularly true if the losses from the activity generate substantial tax benefits golanty v commissioner t c pincite a taxpayer with substantial income unrelated to the activity can more readily afford a hobby see wesley v commissioner tcmemo_2007_78 petitioners’ substantial income from s robison’s career has allowed them to continue their ranching activity in spite of years of losses further the activity has also generated tax savings in the form of net losses that offset that income resulting in much smaller after-tax burden for the years in issue this factor favors respondent g conclusion this is a very close case and our determination for the years in issue is limited to the facts found for those years after weighing all the facts and circumstances in the light of the relevant factors we conclude that petitioners engaged in their ranching activity for the years in issue with the requisite profit objective petitioners’ activities cannot be characterized as a hobby during those years petitioners’ efforts to reduce robison ranch’s expenses and the resulting decrease in petitioners’ net losses during the years in issue are most persuasive accordingly we reject respondent’s disallowance of the loss deductions relating to the ranching activity under sec_183 iii sec_469 passive_activity we must now consider whether petitioners’ losses from robison ranch were passive under sec_469 loss deductions from a passive_activity are generally allowed for the years in which the losses are sustained only to the extent of passive_activity income sec_469 d in general a passive_activity is a trade_or_business in which the taxpayer does not materially participate sec_469 a taxpayer materially participates in an activity when he or she is involved on a regular continuous and substantial basis sec_469 a passive_activity_loss is the amount by which the aggregate losses from all passive activities for the taxable_year exceed the aggregate income from all passive activities for such year sec_469 passive_activity_losses are suspended until the taxpayer either has offsetting passive_income or disposes of the taxpayer’s entire_interest in the passive_activity sec_469 g application of sec_469 might permit petitioners a future use of the accumulated but disallowed losses particularly if they are able to sell the ranch at the currently listed price sec_469 g petitioners’ activities in operating through the ranch manager suggest characterization of the activity as passive--that of an investor that was the observation of the court at the conclusion of the trial and our impression has not been altered in general a taxpayer is treated as materially participating in a trade_or_business if the taxpayer is involved in the operations of the trade_or_business on a regular continuous and substantial basis sec_469 a taxpayer can establish material_participation by satisfying any one of seven tests provided in the regulations sec_1_469-5t temporary income_tax regs fed reg date see miller v commissioner tcmemo_2011_219 bailey v commissioner tcmemo_2001_296 of these the two following tests are most relevant to the case the individual participates in the activity for more than hours during such year based on all of the facts and circumstances the individual participates in the activity on a regular continuous and substantial basis during such year sec_1_469-5t temporary income_tax regs supra material_participation of a taxpayer in an activity is determined separately for each taxable_year and the taxpayer generally has the burden of proving material_participation see sec_469 see also harrison v commissioner tcmemo_1996_509 in determining whether a taxpayer materially participates the participation of the spouse of the taxpayer shall be taken into account sec_469 we therefore treat petitioners as a unit for the purposes of participation generally any work done by an individual in connection with an activity in which he or she owns an interest at the time the work is done is treated as participation of the individual in the activity sec_1_469-5 income_tax regs however activity performed in an individual’s capacity as an investor does not qualify as participation in an activity unless the individual is directly involved in the day-to-day management of the activity sec_1_469-5t and b temporary income_tax regs fed reg date investor-related activities not qualifying as material_participation include studying and reviewing financial statements or reports on operations preparing or compiling summaries or analyses of the finances or operations of the activity for the individual’s own use and monitoring the finances or operations of the activity in a nonmanagerial capacity id a 500-hour test the extent of an individual’s participation in an activity may be established by any reasonable means id subpara contemporaneous daily time reports or logs are not required id while the regulations permit some flexibility with respect to the evidence required to prove material_participation we are not required to accept postevent ballpark guesstimates nor are we bound to accept the unverified undocumented testimony of taxpayers see estate of stangeland v commissioner tcmemo_2010_185 shaw v commissioner tcmemo_2002_35 scheiner v commissioner tcmemo_1996_554 the records petitioners introduced for the years at issue provide a broad overview of their time spent at robison ranch these records predominantly appear to be estimates prepared noncontemporaneously with the exception of the minutes kept from the weekly conference calls petitioners had with ranch employees the annual log petitioners provided for each tax_year reports hours assigned to activities years after the fact in preparation for trial and based solely on their judgment and experience as to how much time the activities must have taken them the weekly minutes indicate that petitioners were typically working on activities such as minutes payroll_taxes and house issues the annual logs also include similar activities such as generating payroll paying bills communicating with staff members and the hiring and firing of ranch employees petitioners’ weekly minutes and annual logs also fail to show what specifically petitioners did day to day and exactly how much time they spent on matters directly relating to the ranch making it impossible to conclude that this activity was conducted outside of an investor-type capacity see iversen v commissioner tcmemo_2012_19 we do not doubt that while away from robison ranch petitioners spent time on ranch activities talking on the telephone to the ranch manager and employees reading articles on cattle ranching receiving bills and correspondence and maintaining the financial and business records also we acknowledge that while at robison ranch petitioners participated in and assisted with the cattle operation ranch maintenance and improvements however a very significant portion of the time petitioners spent on robison ranch activities appears to have been in the capacity of investors not involved in the day-to-day activities or management these hours cannot be counted toward the 500-hour test of subparagraph nor towards participation on the regular continuous or substantial basis required by subparagraph discussed below see sec_1 5t f ii b temporary income_tax regs supra b facts_and_circumstances_test under sec_1_469-5t and b temporary income_tax regs fed reg date a taxpayer’s management activities under the facts_and_circumstances_test shall not be taken into account if another person also receives compensation_for management services relating to the activity or if another person spends more time performing management services relating to the activity than the taxpayer the presence of a full-time paid ranch manager at the ranch for all of the years at issue disqualifies petitioners’ time working on robison ranch management services from counting towards their participation as a result petitioners do not meet the facts_and_circumstances_test under subparagraph see sec_1_469-5t temporary income_tax regs supra c conclusion the weight of the evidence before us does not establish that during the years at issue the majority of hours petitioners spent were hours spent in a capacity other than as investors after the hours attributable to investor types of activities are subtracted and in the light of the fact that robison ranch employed a full-time ranch manager petitioners did not spend the required hours on the robison ranch activity nor were they engaged on a regular continuous and substantial basis as required under sec_469 and the related regulations we conclude that petitioners did not materially participate in robison ranch and it was a passive_activity petitioners’ losses reported for the years at issue with respect to the ranching activity are subject_to the passive loss limitations imposed by sec_469 and these losses are suspended until petitioners either have offsetting income or dispose_of their entire_interest in robison ranch in reaching our conclusions we have considered all arguments made by the parties and to the extent not mentioned above we conclude they are moot irrelevant or without merit to reflect the foregoing decisions will be entered under rule