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 ita b07 plr-110197-13 date date re request for private_letter_ruling for asset classification under sec_168 legend taxpayer city date year x y ----------------------------------------------------------- ------------------------------ ---------------------------- ------- ---------- ---------- dear --------------------- this letter responds to a letter dated date and supplemental information dated date submitted by taxpayer requesting a ruling regarding the classification of certain interior non-load bearing partitions for purposes of sec_168 of the internal_revenue_code facts taxpayer represents that the facts are as follows taxpayer is an individual that uses the cash_method_of_accounting and files his federal_income_tax returns on a calendar-year basis taxpayer’s business activities are that of a wholesale retail and leasing distributor of lighting and construction related products with associated administrative activities and professional engineering services and a lessor of building space and the use of certain improvements taxpayer plans to own a building with certain improvements containing approximately x square feet located in city the owned property this building is a rectangular two story facility with an entry lobby and central corridor in the middle of the long side of the rectangular building the central corridor runs from the front parking lot plr-110197-13 to the rear parking lot and connects an elevator tower on the front of the building with an enclosed fire stair tower on the rear to the building two additional exit fire stairs occur one at each end of the building along the short sides of the rectangle public restrooms and mechanical rooms feed off the central corridor taxpayer anticipates initially occupying the owned property for use in its business further taxpayer is contemplating leasing a portion of or all of the owned property space with certain improvements to another party taxpayer anticipates to lease the owned property to the general_public further taxpayer leases from a third party approximately y square feet of space in a building in city the leased property taxpayer has plans in place to remodel the leased property including adding and paying for certain improvements taxpayer anticipates initially occupying the leased property for use in its business further taxpayer is contemplating sub-leasing all or a portion of taxpayer’s leased property to a sub-lessee taxpayer anticipates to sub-lease the leased property to the general_public in completing the finish out of the owned property and in completing the remodeling and finish out of the leased property taxpayer anticipates purchasing paying for and depreciating two types of interior non-load bearing drywall partition systems i a zip type drywall partition system and ii a conventional drywall partition system taxpayer will place in service both types of partition systems during the taxable_year ending date the year taxable_year the zip type drywall partition system consists of the zip type partition elements that include zip type drywall partitions ie removable reusable gypsum drywall panels finished and painted removable zip tape and joint compound removable reusable studs and tracks and removable reusable screws and the zip type partition attachments that include removable reusable panel coverings removable reusable base and crown trim removable reusable integral door units removable reusable internal utilities removable reusable integral glazing and removable reusable cabinets on the zip type drywall partitions the zip type partition uses a releasable adhesive on the zip tape over the panel joint unlike other drywall joint tapes a person can zip the zip tape up without the tape breaking even after the joint compound has significantly cured when zipped up the zip tape removes the joint compound that covers it and then exposes the screws under the zip tape in a manner that allows screw removal and then disassembly of the zip type partition for removal and re-use a pull tab is on the zip tape to alert remodel contractors that this joint tape is the type that can be zipped up for disassembly of the partition the zip type partition is designed and constructed to be movable it can be readily removed and can remain in substantially the same condition after removal as before or it can be moved and reused stored donated or sold in its entirety removal plr-110197-13 of the zip type partition does not cause any substantial damage to the zip type partition itself or to the building taxpayer anticipates that the zip type partitions may need to be moved in order to accommodate the associated reconfigurations of the interior space within the owned property and leased property the conventional drywall partition system includes gypsum board partitions studs joint tape and covering joint compound the joint tape cannot be removed without breaking after the joint compound has had time to significantly cure the removal of the joint tape and a conventional drywall partition can be easily accomplished only by demolition of the partitions disassembly or deconstruction of a conventional drywall partition in a manner that provides for easy reuse is not practical because the screws are beneath the non-removable joint tape and the covering joint compound the conventional drywall cannot be easily removed and cannot remain in substantially the same condition after removal as before or it cannot be moved and reused stored donated or sold in its entirety removal of the conventional drywall partition causes substantial damage to the partition itself but does not cause substantial damage to the building taxpayer anticipates installing conventional drywall partitions within the owned property and leased property in locations not subject_to expansion contraction or reconfiguration taxpayer also represents the following the zip type partitions to be placed_in_service during the year taxable_year are not inherently permanent structures under the factors described in 65_tc_664 the conventional drywall partitions to be placed_in_service during the year taxable_year are inherently permanent structures under the factors described in whiteco industries rulings requested taxpayer requests the following rulings taxpayer’s zip type partitions installed within the owned property and leased property are included in asset cla sec_57 distributive trades and services of revproc_87_56 1987_2_cb_674 as clarified and modified by revproc_88_22 1988_1_cb_785 for purposes of sec_168 taxpayer’s conventional drywall partitions installed within the owned property and leased property are classified as nonresidential_real_property under sec_168 plr-110197-13 law and analysis sec_167 provides a depreciation allowance for the exhaustion wear_and_tear including a reasonable allowance for obsolescence of property used in a trade_or_business or held_for_the_production_of_income the depreciation deduction provided by sec_167 for tangible_property placed_in_service after generally is determined under sec_168 this section describes two methods_of_accounting for determining depreciation allowances the general depreciation system in sec_168 and the alternative_depreciation_system in sec_168 under either depreciation system the depreciation deduction is computed by using a prescribed depreciation method recovery_period and convention for purposes of sec_168 or sec_168 the applicable_recovery_period is determined by reference to class_life or by statute sec_168 provides that the term class_life means the class_life if any that would be applicable with respect to any property as of date under sec_167 determined without regard to sec_167 and as if the taxpayer had made an election under sec_167 as in effect on the day before the date of enactment of the revenue reconciliation act of prior to its revocation sec_167 provided that in the case of a taxpayer who elected the asset_depreciation_range_system of depreciation the depreciation deduction was based on the class_life prescribed by the secretary which reasonably reflects the anticipated useful_life of that class of property to the industry or other group sec_1_167_a_-11 of the income_tax regulations sets out the rules for asset classification under former sec_167 property is included in the asset_guideline_class for the activity in which the property is primarily used_property is classified according to primary use even though the activity in which such property is primarily used is insubstantial in relation to all the taxpayer’s activities sec_1_167_a_-11 provides that in the case of a lessor of property unless there is an asset_guideline_class in effect for lessors of such property the asset_guideline_class for such property shall be determined as if the property were owned by the lessee however in the case of an asset_guideline_class based upon the type of property such as trucks or railroad cars as distinguished from the activity in which used the property shall be classified without regard to the activity of the lessee revproc_87_56 sets forth the class lives of property subject_to depreciation under sec_168 the revenue_procedure establishes two broad categories of depreciable assets asset classes dollar_figure through that consist of specific assets used in all business activities and asset classes through that consist of assets used in specific business activities the same depreciable asset can be described in both an asset category that is asset classes dollar_figure through and an activity category that is asset classes through in which case the item is classified in the asset plr-110197-13 category see 111_tc_105 item described in both an asset and an activity category furniture and fixtures is placed in the asset category asset cla sec_57 distributive trades and services of revproc_87_56 includes assets used in wholesale and retail trade and personal and professional services asset cla sec_57 also includes sec_1245 assets used in marketing petroleum and petroleum products assets in this class have a recovery_period of years for purposes of sec_168 and years for purposes of sec_168 sec_168 defines the term nonresidential_real_property as meaning sec_1250 property that is not residential_rental_property as defined in sec_168 or property with a class_life of less than years nonresidential_real_property has a recovery_period of years for purposes of sec_168 and sec_40 years for purposes of sec_168 sec_168 defines the terms sec_1245 property and sec_1250 property as having the meanings given such terms by sec_1245 and sec_1250 respectively sec_1245 defines the term sec_1245 property as meaning any property that is or has been property of a character subject_to the allowance for depreciation provided in sec_167 and is either personal_property or certain other_property described within sec_1245 through f see also sec_1_1245-3 sec_1 b defines personal_property as meaning tangible_personal_property as defined in sec_1_48-1 relating to the definition of sec_38 property for purposes of the investment_tax_credit and intangible personal_property sec_1_48-1 provides that tangible_personal_property means any tangible_property except land and improvements thereto such as buildings or other inherently structures including items that are structural_components of such buildings or structures sec_1250 defines the term sec_1250 property as meaning any real_property other than sec_1245 property as defined in sec_1245 that is or has been property of a character subject_to the allowance for depreciation provided in sec_167 see also sec_1_1250-1 sec_1_1250-1 defines real_property as meaning any property that is not personal_property within the meaning of sec_1_1245-3 and also provides that sec_1250 property includes among other things a building or its structural_components within the meaning of sec_1_1245-3 pursuant to sec_1 c the terms building and structural_components have the meanings assigned to those terms in sec_1_48-1 sec_1_48-1 defines the term structural_components as including such parts of a building as walls partitions floors and ceilings as well as any permanent coverings therefore such as paneling or tiling windows and doors plr-110197-13 plumbing and plumbing fixtures such as sinks and bathtubs electric wiring and lighting fixtures sprinkler systems and other components relating to the operation or maintenance of a building the senate_finance_committee in s rept no 1978_3_cb_321 issued in connection with the enactment of the revenue act of publaw_95_600 92_stat_2767 stated the following in addition the committee wishes to clarify present law by stating that tangible_personal_property already eligible for the investment_tax_credit includes special lighting including lighting to illuminate the exterior of a building or store but not lighting to illuminate parking areas false balconies and other exterior ornamentation that have no more than an incidental relationship to the operation or maintenance of a building similarly movable and removable partitions are considered tangible personal and not structural_components consequently under existing law this property is already eligible for the investment_tax_credit revrul_75_178 1975_1_cb_9 provides that the classification of property such as movable partitions as personal or inherently permanent should be made on the basis of the manner of attachment to the land or the structure and how permanently the property is designed to remain in place this determination of permanency of the property that is whether the property in question is inherently permanent is made by applying the factors set forth in 65_tc_664 acq 1980_1_cb_1 no one factor is decisive see jfm inc and subsidiaries v commissioner tcmemo_1994_239 the whiteco factors are is the property capable of being moved and has it in fact been moved is the property designed or constructed to remain permanently in place are there circumstances that tend to show the expected or intended length of affixation that is are there circumstances that show the property may or will have to be moved how substantial a job is removal of the property and how time- consuming is it how much damage will the property sustain upon its removal what is the manner of affixation of the property to the land the depreciation classification of taxpayer’s zip type partitions and conventional drywall partitions depends on whether the partitions are inherently permanent structures this determination is made by the application of the whiteco factors zip type partitions taxpayer represents that the zip type partitions to be placed_in_service during the year taxable_year are not inherently permanent structures under the factors described in whiteco industries this representation is a material representation based solely on plr-110197-13 this representation we conclude that the zip type partitions are tangible_personal_property for depreciation purposes during the year taxable_year taxpayer will place in service zip type partitions in buildings comprising the owned property and the leased property taxpayer anticipates initially occupying the entire owned property and leased property for use in its business taxpayer represents that its business activity is that of a wholesale retail and leasing distributor of lighting and construction related products with associated administrative activities and professional engineering services asset cla sec_57 includes these business activities accordingly the zip type partitions in the owned property and leased property are includible in asset cla sec_57 when taxpayer occupies the owned property and leased property for use in its business activity however taxpayer is contemplating leasing a portion of or all of the owned property space to another party further taxpayer is contemplating sub-leasing all or a portion of taxpayer’s leased property to a sub-lessee accordingly the depreciation classification of the zip type partitions when used by the lessee s of the owned property or the sub-lessee s of the leased property depends upon the business activity of such lessee s or sub-lessee s see sec_1_167_a_-11 taxpayer anticipates to lease the owned property and to sub-lease the leased property to the general_public the business activity of leasing space in buildings to the general_public is described in asset cla sec_57 of revproc_87_56 accordingly the zip type partitions in the owned property and leased property are includible in asset cla sec_57 when taxpayer leases the owned property and sub-leases the leased property to the general_public conventional drywall partitions taxpayer represents that the conventional drywall partitions to be placed_in_service during the year taxable_year are inherently permanent structures under the factors described in whiteco industries this representation is a material representation based solely on this representation we conclude that the conventional drywall partitions are structural_components of the buildings comprising the owned property and leased property and therefore are classified as nonresidential_real_property under sec_168 conclusions based solely on the facts and representations submitted we conclude that taxpayer’s zip type partitions installed within the owned property and leased property are included in asset cla sec_57 of revproc_87_56 for purposes of sec_168 plr-110197-13 taxpayer’s conventional drywall partitions installed within the owned property and leased property are classified as nonresidential_real_property under sec_168 the rulings contained in this letter are based upon information and representations submitted by taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter under any other provisions of the code moreover no opinion is expressed or implied as to i whether taxpayer’s zip type partitions are not inherently permanent structures under the factors described in whiteco industries inc ii whether taxpayer’s conventional drywall partitions are inherently permanent structures under the factors described in whiteco industries inc iii whether taxpayer has a depreciable_interest in the zip type partitions or the conventional drywall partitions or iv the proper asset class in revproc_87_56 for the zip type partitions if taxpayer leases the owned property or sub-leases the leased property to persons engaged primarily in one business activity this letter_ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office we are sending a copy of this letter_ruling to taxpayer’s authorized representative we also are sending a copy of this letter_ruling to the appropriate operating division director sincerely kathleen reed kathleen reed branch chief branch office of associate chief_counsel income_tax accounting enclosures copy of this letter copy of sec_6110 purposes


t c memo united_states tax_court darryl shawn and melonee yevette bundridge petitioners v commissioner of internal revenue respondent docket no filed date darryl shawn bundridge pro_se lisa kuo for respondent memorandum findings_of_fact and opinion wright judge respondent determined a deficiency of dollar_figure and an accuracy-related_penalty of dollar_figure in petitioners' federal_income_tax for and a deficiency of dollar_figure and an accuracy- related penalty of dollar_figure in petitioners' federal_income_tax for the parties have agreed to certain adjustments for the taxable years and the following issues remain for decision whether petitioners are entitled to deduct rental expenses for in excess of those conceded by respondent whether petitioners are entitled to deduct mileage expenses for and in excess of those conceded by respondent whether petitioners' cost_of_goods_sold for for their business of hi fidelity record was correctly reported on schedule c of their amended federal_income_tax return whether the markup percentage used by respondent for the goods sold was correct in determining petitioners' gross_receipts for and whether petitioners are liable for the accuracy-related_penalties under sec_6662 a for and findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein petitioners resided in rialto california when their petition was filed all section references are to the internal_revenue_code in effect for the years at issue unless otherwise indicated all rule references are to the tax_court rules_of_practice and procedure petitioners were married during and they were divorced in during and petitioner darryl bundridge worked full time as a los angeles police officer during and petitioner melonee bundridge worked at atchison topeka santa fe railway in petitioners started their schedule c business known as hi fidelity record also known as high fidelity records hi fidelity record sold records cassette singles cassettes compact discs batteries and blank cassette tapes in the retail market in rialto california as of date petitioners operated the business out of rented space from hub properties later on date they relocated to rialto discount mall petitioners bought their supply of records cassettes and compact discs from abbey road distributors abbey road which was located in los angeles california petitioners made these purchases at abbey road's pickup counter in los angeles and paid for them mainly in cash petitioners filed a u s individual_income_tax_return form_1040 for the taxable_year on schedule c profit or loss from business of their return petitioners reported the following in regard to hi fidelity record gross_receipts expenses advertising dollar_figure - - car and truck insurance office expense other business property rent repairs and maintenance supplies tax and licenses utilities business phone water page phone alarm none big_number big_number big_number in the notice_of_deficiency respondent disallowed all expenses claimed on the schedule c for petitioners filed a u s individual_income_tax_return form_1040 for the taxable_year they filed an amended u s individual_income_tax_return form 1040x for the taxable_year stating that schedule c had been changed due to an inter- office bookkeeping audit on schedule c of their return and their amended return petitioners reported the following for hi fidelity record original return amended_return gross_receipts dollar_figure dollar_figure expenses which included advertising car and truck insurance office expense other business property rent repairs and maintenance supplies tax and licenses utilities business phone none big_number none big_number none big_number none big_number big_number big_number big_number none big_number none big_number none water page phone alarm none none none none none none in the notice_of_deficiency respondent disallowed all expenses claimed on the schedule c for the taxable_year petitioners' and federal_income_tax returns were prepared by bernadette henderson of green's tax service and their amended return was prepared by lee green of green's tax service at the end of the trial respondent orally moved for leave to conform the pleadings to the evidence under rule b petitioners did not object we took the motion under advisement opinion as a preliminary matter we consider whether respondent's motion to conform the pleadings to the evidence should be granted respondent's motion is for leave to file an amended answer for an increased deficiency and penalty the deficiency for would be increased from dollar_figure to dollar_figure resulting from the correction of the gross_receipts to dollar_figure and the cost_of_goods_sold to dollar_figure the penalty for would be increased from dollar_figure to dollar_figure on their schedule c petitioners claimed dollar_figure as the amount of supplies the parties agreed that the goods purchased cost_of_goods_sold for was dollar_figure this was based on the total purchases from abbey road respondent moved pursuant to rule b to increase the deficiency see sec_6214 rule b provides that issues tried by consent when issues not raised by the pleadings are tried by express or implied consent of the parties they shall be treated in all respects as if they had been raised in the pleadings the court upon motion of any party at any time may allow such amendment of the pleadings as may be necessary to cause them to conform to the evidence and to raise these issues but failure to amend does not affect the result of the trial of these issues whether a motion seeking an amendment should be allowed is within the sound discretion of the court 304_f2d_136 9th cir if there is unfair surprise or prejudice to the opposing party then the motion to amend should be denied we do not find that granting respondent's motion to amend would result in unfair surprise to petitioners in the notice_of_deficiency respondent listed an adjustment for gross_receipts sch c for and but respondent did not state a dollar adjustment on the schedule b of the notice_of_deficiency the explanation for this adjustment stated that t his issue has been opened for examination and can still be audited petitioners did not object to respondent's oral motion to conform the pleadings to the evidence further evidence necessary to decide the issue of the additional deficiencies was presented at trial petitioners did not object to testimony regarding this matter and even questioned the witnesses about it petitioners' pretrial memorandum included the following issues for trial inventory markup percentage for the amount of inventory unsold at the end of and gross_income for in view of petitioners' actions we find that the issues were tried with their implied consent accordingly we will grant respondent's motion to amend his answer to conform to the evidence so as to assert an increased deficiency and penalty for respondent has the burden of proving however that petitioners are liable for the increased deficiency and penalty rule a issue rental expenses deductions are matters of legislative grace and only as there is clear provision therefor can any particular deduction be allowed 292_us_435 sec_162 provides in part that sec_162 in general --there shall be allowed as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business including-- rentals or other_payments required to be made as a condition to the continued use or possession for purposes of the trade_or_business of property to which the taxpayer has not taken or is not taking title or in which he has no equity in petitioners claimed a deduction for rental expenses in the amount of dollar_figure respondent has agreed that petitioners were entitled to deduct dollar_figure of the dollar_figure claimed deduction respondent estimated the monthly rental payment to hub properties to be dollar_figure on the basis of the prior lease contract adjusted for an estimated increase petitioners presented no substantiation to reflect the actual payments to hub properties respondent allowed months january to march of of rental expenses paid to hub properties but disallowed any allowance for april on date petitioners relocated to rialto discount mall renting space from april through date respondent allowed months of rent based on the amounts substantiated by checks the following summarizes respondent's computations hub properties no substantiation february january march april checks of rialto discount mall rental expenses allowed dollar_figure big_number big_number -0- dollar_figure the full amount of the check was dollar_figure but dollar_figure of the payment was the security deposit petitioners argue that respondent should have allowed the april payment to hub properties and the missing two monthly payments to rialto discount mall for the months disallowed petitioners provided no documentary_evidence that the claimed expenses were paid and provided no other evidence to corroborate their claim therefore we conclude that petitioners failed to substantiate that the claimed expenses were paid_or_incurred thus petitioners are not entitled to rental expenses in excess of those allowed by respondent in issue mileage expenses sec_162 allows a deduction for all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business including traveling expenses while away from home in the pursuit of a trade_or_business a deduction for transportation_expenses is also allowed for local travel from one business location to another sec_162 sec_274 both traveling expenses and transportation_expenses are subject_to the substantiation requirements of sec_274 which provides in part that sec_274 substantiation required --no deduction or credit shall be allowed-- under sec_162 or sec_212 for any traveling expense including meals_and_lodging while away from home with respect to any listed_property as defined in sec_280f sec_280f provides that listed_property means continued unless the taxpayer substantiates by adequate_records or by sufficient evidence corroborating the taxpayer's own statement a the amount of such expense or other item b the time and place of the travel c the business_purpose of the expense or other item and d the business relationship to the taxpayer of persons entertained using the facility or property or receiving the gift in petitioners did not claim a deduction for car and truck expenses on their schedule c respondent has agreed that petitioners were entitled to deduct dollar_figure for car and truck expenses in that year in petitioners claimed a deduction for car and truck expenses in the amount of dollar_figure they also claimed the same dollar_figure on their amended return respondent has agreed that petitioners were entitled to dollar_figure of the dollar_figure claimed for car and truck expenses in in allowing dollar_figure for car and truck expenses in both and the revenue_agent based his conclusion on the number of trips from rialto california to abbey road in los angeles california the agent testified that petitioners originally approximated that one trip per week was taken after securing invoices from abbey road which totaled in and in the agent estimated that two trips were taken per week for a total of trips per year continued any passenger_automobile for 2½ months of invoices were missing petitioners argue that the deduction for car and truck mileage should be based on trips in and trips in because of the number of invoices they point to the testimony of mr ginsburg the custodian of records at abbey road who stated that the invoices contained language that the merchandise was purchased and picked up in los angeles however petitioners did not provide any evidence such as a diary or log to corroborate the number of trips that occurred petitioners did not maintain any records such as an account book diary log or trip sheets to substantiate the claimed mileage expense deductions petitioners failed to substantiate the mileage expenses by adequate_records sec_1 5t c i temporary income_tax regs fed reg date they also failed to substantiate the mileage expenses by other_sufficient_evidence sec_1_274-5t temporary income_tax regs fed reg date consequently petitioners are not entitled to the claimed car and truck expenses in excess of the dollar_figure in and the dollar_figure in conceded by respondent issue cost_of_goods_sold supplies cost_of_goods_sold is subtracted from gross_receipts from sales to determine gross_income from sales sec_1_61-3 income_tax regs the cost of goods purchased for resale is determined by making proper adjustments for opening and closing_inventory and purchases sec_1_162-1 income_tax regs petitioners did not determine their cost_of_goods_sold for and instead they listed purchases from abbey road as the deductible expense supplies respondent concedes that petitioners are entitled to cost_of_goods_sold equal to the amount of goods purchased during the year for petitioners and respondent do not agree on the amount of goods purchased on petitioners' schedule c they claimed supplies of dollar_figure and on their amended schedule c they claimed supplies of dollar_figure petitioners now contend that the cost_of_goods_sold for was less than dollar_figure respondent concedes that petitioners are entitled to cost_of_goods_sold of dollar_figure in we sustain respondent's allowance of cost_of_goods_sold in of dollar_figure as claimed by petitioners in their amended return issue markup percentage and gross_receipts taxpayers are required to maintain records including the documentation of transactions expenses etc sec_6001 it is well established that if a taxpayer's records are inadequate to permit a verification of the returns or if the records are unreliable the commissioner may determine the taxpayer's taxable_income by other reasonable means including the percentage markup method see 374_f2d_96 6th cir affg tcmemo_1965_162 267_f2d_879 5th cir affg tcmemo_1956_260 232_f2d_678 6th cir affg per curiam tcmemo_1955_31 22_tc_893 under the percentage markup method gross_receipts are determined by adding a percentage to the cost_of_goods_sold the burden_of_proof is on petitioners to show that respondent's method does not clearly reflect income rule a see sec_446 since petitioners did not keep books to show gross_receipts from sales it was permissible for respondent to apply a markup percentage to determine their gross_receipts for and in on their schedule c petitioners claimed supplies of dollar_figure and stated gross_receipts of dollar_figure a markup of over percent later petitioners and respondent agreed that the amount of purchases cost_of_goods_sold was dollar_figure on the basis of the cost_of_goods_sold respondent asserted that petitioners had gross_receipts in of dollar_figure using the markup of percent reflected on petitioners' amended return in on their schedule c petitioners listed gross_receipts of dollar_figure a markup of percent and in their amended_return they listed gross_receipts of dollar_figure a markup of percent as noted above respondent conceded that the cost_of_goods_sold in was dollar_figure on the basis of the cost_of_goods_sold respondent asserted that petitioners had gross_receipts in of dollar_figure as stated in the amended_return a markup of percent petitioners argue that respondent's markup percentage is excessive they assert that the sale price and markup percentage were as follows sale price markup percentage compact discs cassettes cassette singles records dollar_figure dollar_figure dollar_figure dollar_figure overall average in support of this petitioners point to mr ginsburg's testimony regarding the typical sale price of music products he stated that the typical list prices for release products on sale were compact discs cassettes dollar_figure dollar_figure dollar_figure dollar_figure in evaluating petitioners' conclusion that the overall markup percentage is percent we begin with their asserted sale price petitioners attempted to establish their sale price by mr ginsburg's testimony regarding the typical price for release products on sale and by receipts from target blockbuster music and circuit city however mr ginsburg stated he had no knowledge of what petitioners were actually selling their products for and petitioners presented no evidence regarding the prices they sold the products for we are not persuaded of the accuracy of petitioners' stated sale prices we find the list price set by the music industry as stated in the invoices from abbey road to be a more accurate reflection of petitioners' sale prices the invoices provide the following list prices for the purchases made by petitioners list prices batteries cleaning kits blank cassette tapes cassette singles maxicassette records cassettes compact discs dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure next we evaluate the markup percentage petitioners contend that there was a constant markup percentage for each item percent for compact discs percent for cassette singles percent for cassette singles and percent for records while petitioners suggest constant purchase prices petitioners in fact purchased the goods with varying list prices at varying costs examining a sample of the invoices from and the markup percentage varied for each product as follows markup percentage batteries cleaning kits blank cassette tapes records cassette singles maxicassette cassettes compact discs the markup percentage of percent used by respondent in both and is consistent with the sample invoices we examined petitioners have not shown that the markup percentage was otherwise thus we find that petitioners have failed to meet their burden_of_proof in regard to and that respondent has met his burden for the increased deficiency in we hold that petitioners had gross_receipts of dollar_figure in and dollar_figure in issue sec_6662 accuracy-related_penalties respondent determined that petitioners are liable for accuracy-related_penalties for and under sec_6662 because the underpayments of income_tax for those years were attributable to negligence petitioners contend that they are not liable for the accuracy-related_penalties for either year sec_6662 imposes a penalty equal to percent of the part of the underpayment_of_tax that is attributable to negligence sec_6662 and b for purposes of sec_6662 negligence is a failure to reasonably attempt to comply with the provisions of the internal_revenue_code sec_6662 negligence is defined as 'lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstance ' 85_tc_934 quoting marcello v commissioner 380_f2d_499 5th cir a taxpayer has the burden of proving that the commissioner's determination of an addition_to_tax is in error 79_tc_846 the accuracy-related_penalty under sec_6662 does not apply to any part of an underpayment if the taxpayer shows that there is reasonable_cause for that part of the underpayment and that the taxpayer acted in good_faith based on the facts and circumstances sec_6664 in petitioners' closing statement and posttrial brief they argue that they are not liable for the penalties because of their reasonable and good_faith efforts citing lyons v commissioner tcmemo_1991_84 in lyons the taxpayers had a reasonable system for maintaining financial records and preparing their tax returns in addition the taxpayers had a relationship with an accountant who prepared their returns while many of the relevant records were unavailable to the taxpayers the court noted that many of the records were relinquished in a bankruptcy proceeding and some of the records were not recovered from their accountant the court determined that the taxpayers were not liable for the negligence_penalty petitioners argue that they made repeated attempts to retrieve all records and receipts from their accountant who died date petitioners' and returns were prepared by bernadette henderson of green's tax service and petitioners' amended return was prepared by lee green of green's tax service petitioners did not testify on their own behalf to describe the circumstances in regard to the preparation of the returns and they did not call anyone involved with green's tax service instead in closing arguments mr bundridge described their reliance on their accountant lee green however there is no evidence in the record to support petitioners' conclusion that their good_faith reliance on the accountant constituted reasonable_cause therefore we sustain respondent's determinations with respect to the penalties for and to reflect the foregoing an order will be issued granting respondent's motion and a decision will be entered under rule


internal_revenue_service number release date cc ita tl-n-5008-00 uilc date internal_revenue_service national_office field_service_advice memorandum for associate area_counsel cc lm rfp chi attn christa a gruber from associate chief_counsel cc ita subject treble damage payments under the antitrust laws disclosure statement this writing may contain privileged information any unauthorized disclosure of this writing may have an adverse effect on privileges such as the attorney client privilege if disclosure becomes necessary please contact this office for our views this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent legend a b c date date date date date date date u s court a u s court b dollar_figurea dollar_figureb dollar_figurec dollar_figured issue whether payments made by a to b and c to settle a pending and an anticipated civil suit respectively arising from alleged price-fixing and antitrust violations are deductible in full conclusion a’s deduction for a payment to b to settle a pending civil suit under sec_4 of the clayton act is limited by sec_162 but a’s payment to c to settle an anticipated civil suit may be deducted in full facts on date a pled guilty to two counts of a two-count criminal information filed in u s court a charging a with two violations of the sherman antitrust act relating to sales of point-of-purchase displays to b and c the information asserted a conspiracy in unreasonable restraint of interstate trade and commerce concluding in date u s court a imposed a fine of dollar_figurea a and the united_states agreed in light of pending antitrust treble damage litigation in u s court b between a and b and likely antitrust treble damage litigation in u s court a between a and c that an order of restitution would not be appropriate a and b entered into a settlement agreement on date whereby a agreed to pay b dollar_figureb in seven installments over seven years six of which installments would pay off a promissory note given by a to b for a portion of the amount due no interest or legal fees were included in the agreement a subsequently made two payments to b on date and date in complete satisfaction of the liability and the promissory note between a and b was cancelled on date a entered into a settlement agreement and release with c whereby a agreed to pay c dollar_figurec and dollar_figured to c’s law firm in complete satisfaction of all claims arising from relating to or resulting from matters alleged or investigated in the justice_department action the justice_department action refers to the above-mentioned criminal case and the criminal antitrust investigation of the point-of-purchase display industry the agreement and release provided that each party shall bear its own costs and expenses in reaching the agreement on date a made payments to c in accordance with the settlement agreement for the year ended date a deducted the total amount of all settlement payments made to b and c resulting in an nol carry-back in almost the full amount of the settlement payments a characterized the nol as a specified liability pursuant to sec_172 and carried it back to each of the ten prior years the revenue_agent is proposing disallowance of the deduction pursuant to sec_162 law sec_162 provides that if in a criminal proceeding a taxpayer is convicted of a violation of the antitrust laws or his plea of guilty or nolo contendere to an indictment or information charging such a violation is entered or accepted in such a proceeding no deduction shall be allowed under subsection a for two-thirds of any amount_paid or incurred- on any judgment for damages entered against the taxpayer under sec_4 of the clayton act or in settlement of any_action brought under such sec_4 on account of such violation or related violation sec_1_162-22 provides that an amount may be considered as paid in settlement of an action even though the action is dismissed or otherwise_disposed_of prior to such settlement or the complaint is amended to eliminate the claim with respect to the violation or related violation analysis for both settlement payments at issue a meets the first requirement of sec_162 which is a criminal conviction of a violation of the antitrust laws or a plea of guilty or nolo contendere to an indictment or information it is the second part of the law which brings two different results for a’s payments to b and c the analysis is straightforward and based on the unambiguous words in the statute sec_162 imposes the two-thirds limitation on a deduction of any amount_paid or incurred in settlement of any_action brought under sec_4 the settlement cannot relate to an anticipated action it must be an action brought the payment to b is subject_to the two-thirds limitation as the payment was made to settle civil antitrust litigation between the parties the settlement with c though clearly stemming from the criminal antitrust investigation and the information to which a pled guilty did not settle an action brought under sec_4 in s rept no 1969_3_cb_597 the committee discusses the criminal underpinning for the partial denial of the deduction the criminal requirement of sec_162 has been met in this case with respect to the payment to c but the requirement for a civil_action has not been met the senate report states i t is provided that if a taxpayer is convicted in a criminal proceeding for the violation of the federal antitrust laws or pleads guilty or nolo contendere then no deduction is to be allowed for two-thirds of any amount_paid on any judgment for damages against the taxpayer or for settlement of any_action brought under sec_4 of the clayton antitrust act id there is nothing in the legislative_history for sec_162 which indicates any legislative intent to forego the requirement for a civil_action brought under the clayton act rather sec_1_162-22 does extend the scope of the statute but only to settlements of actions brought which are no longer active at the time the settlement is made that is the regulation applies the two-thirds limitation to settlements of an action that has been dismissed or otherwise_disposed_of prior to the settlement and to settlements where the claim has been amended to eliminate the requisite claim prior to the settlement it is our opinion that sec_162 does not apply to civil settlements where no civil_action has been brought as discussed above the statute is unambiguous on this point further the government lost this exact issue in 84_tc_1319 aff’g another issue 806_f2d_263 9th cir unpublished table decision in fisher the court held that sec_162 does not apply to amounts paid prior to the commencement of an action under sec_4 of the clayton act the court read the plain language of sec_162 as requiring an action brought under sec_4 of the clayton act in order to trigger the two-thirds disallowance because the claimant in fisher settled with the taxpayer prior to filing a complaint under the clayton act the court held that sec_162 did not apply to the payments made to the claimant in this case since c did not commence a civil_action under sec_4 of the clayton act against a a’s settlement payment to c is fully deductible heather maloy by clifford m harbourt senior technician reviewer branch income_tax accounting


department of the treasury internal_revenue_service washington d c wun - uniform issue list se tep- pt cas wee ms legend surviving_spouse a decedent a ira x custodian p amount m trost t state c date i date date date date date subtrust a subtrust b subtrust c tee hiatal eae wee aoe nee e wee nae ae wee ee eee ee wae vee page os dear this is in response to your request for a private_letter_ruling submitted by your authorized representative dated date as supplemented by correspondence dated date concerning the proper treatment of a distribution from decedent a’s individual_retirement_account ira x under sec_408 of the internal_revenue_code the code your authorized representative has submitted the following facts and representations decedent a was born on date and died on date at age decedent a was a resident of state c at his death state c is a community_property_state decedent a was survived by his spouse surviving_spouse a whose date of birth was date decedent a died testate at the time of his death decedent a maintained ira x with custodian p the beneficiary designation on file with custodian p listed trust t executed on date as amended on date as the beneficiary of ira x as of the date of the death of the decedent the value of ira x was amount m decedent a attained age before his death accordingly his required_beginning_date for minimum required distributions pursuant to code sec_401 was aptil of the year following his death decedent a died before reaching his required_beginning_date no distributions have been made from ira x since decedent a’s date of death on date decedent a and surviving_spouse a executed a revocable_trust declaration creating a_trust trust t trust t was amended and restated on date initially decedent a and surviving_spouse a were the co-trustees of trust t on date decedent a named trust t as the beneficiary of ira x section of trust t provides in relevant part that at the death of decedent a surviving_spouse a became the sole trustee of trust t section dollar_figure of trust t provides that state c law shal govern the validity construction interpretation and administration of trust t and all sub-trusts created under its terms sec_2 of trust t provides in relevant part that any community_property transferred to trust t shall remain community_property after the transfer and shall be called the community_trust estate page trust t provides in article that upon the death of the first of decedent a and surviving_spouse a to die trust t is to be subdivided into subtrust a subtrust b and subtrust c article of trust t provides that the subtrust a is to consist of the survivor's separate trust property and the survivor spouse’s interest in the community_trust estate subtrust b is to consist of the minimum pecuniary amount necessary as a marital_deduction to eliminate any federal estate_tax in the estate of the first spouse to die the trustee is given the power to satisfy the marital_deduction amount in cash or in_kind is to consist of the deceased spouse’s separate_property and or partly in each subtrust c the remainder of the decedent’s community_property trust estate article governs the operation of trust a surviving_spouse a as the surviving_spouse is the sole beneficiary of subtrust a during her lifetime pursuant to sec_5 and of trust t surviving_spouse a is entitled to receive the entire net_income and principal determined by the trust t trustee to be appropriate for her health education support comfort welfare and happiness to maintain at a minimum the surviving spouse’s accustomed manner of living furthermore sec_5 of trust t provides that at any time during surviving_spouse ‘a's life the trust t trustee is required to distribute all or any part of the trust including accrued income and undistributed_income to such one or more persons and entities including the surviving_spouse or the surviving spouse’s estate and on such terms and conditions outright in trust or by creating a further’ power_of_appointment as surviving_spouse a requests by a document that refers to this power_of_appointment during her life surviving_spouse a is the sole beneficiary of subtrusts b and c with respect to subtrust b article of trust t states the trustee should pay all income to surviving_spouse a at least annually and as much of the principal as is necessary for the beneficiary's health education maintenance and support to maintain the beneficiary's accustomed manner of living with respect to subtrust c article of trust t states that the trustee shall pay to surviving_spouse a as much of the income and principal as is necessary for the beneficiary’s health education maintenance and support to maintain the beneficiary’s accustomed manner of living section dollar_figure of trust t provides in summary that the trustee of trust t surviving_spouse a may in her reasonable discretion divide the trast property in any manner that she deems appropriate including on anon pro-rata basis ithas been represented that under the laws of state c the above-cited language of article of trust t gives the trustee of trust t the power to distribute any or all of the assets held in subtrust a to surviving_spouse a for any purpose when surviving_spouse a as beneficiary requests the trustee to do so a page as sole trustee surviving_spouse a has dominion and control_over the assets of trust t consistent with the language of section dollar_figure of trust t the trustee of trust t proposes to allocate the ira x proceeds to subtrust a the survivor's trust consistent with both the language of article of trust t and with the law of state c as the sole lifetime beneficiary of subtrust a surviving_spouse a intends to demand payment of the ira x proceeds from subtrust a in a single sum as trustee of trust t surviving_spouse a will then pay herself the ira x proceeds within days of the date that the custodian p distributes the ira x proceeds to the trustee of trust t surviving_spouse a will roll over said ira x proceeds into an individual_retirement_account set up and maintained in the name of surviving_spouse a based on the above facts and representations you through your authorized representative request rulings that that surviving_spouse a may be treated as the payee or distributee of ira x that ira x does not represent an inherited individual_retirement_account within the meaning of sec_408 with respect to surviving_spouse a that surviving_spouse a is eligible to roll over the distribution of the proceeds of ira x into an individual_retirement_account set up and maintained in her own name pursuant to code sec_408 as long as the rollover of such distribution occurs no later than the 60th day from the date the ira x proceeds are distributed from ira x to surviving_spouse a as the trustee of trust t and that surviving_spouse a will not be required to include in gross_income for federal_income_tax purposes for the year in which the amounts are distributed from ira x and the year in which the above-referenced rollover is timely made if different any portion of the amounts distributed from ira x and contributed to the individual_retirement_account set up and maintained in surviving_spouse a's name with respect to your ruling requests code sec_408 provides that except as otherwise provided in this subsection any amount_paid or distributed out of an individual_retirement_plan shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 code sec_408 provides that sec_408 does not apply to a rollover_contribution if such contribution satisfies the requirements of sec_408 and gbb code sec_408 a i provides that sec_408 does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the account ase page is maintained if the entire amount received including money and any other_property is paid into an ira other than an endowment_contract for the benefit of such individual not jater than the 60th day after the day on which he receives the payment or distribution code sec_408 provides in pertinent part that in the case of an inherited ira sec_408 shall not apply to any amount received by an individual from such account and no amount transferred from such account to another ira shall be excluded from income by teason of such transfer and such inherited account shall not be treated as an ira for purposes of determining whether any other amount is a rollover_contribution code sec_408gi provides that an ira shall be treated as inherited if the individual for whose benefit the account is maintained acquired such account by reason of the death of another individual and such individual was not the surviving_spouse of such other individual thus pursuant to code sec_408 ii a surviving_spouse who acquires ira proceeds from and by reason of the death of her husband may elect to treat those ira proceeds as her own and roll them over into her own ira code sec_408 provides generally that sec_408 does not apply to any amount required to be distributed pursuant to code sec_408 code sec_408 provides that this section sec_408 shall be applied without regard to any community_property_laws qn date final income_tax regulations regulations were published in the federal_register with respect to code sec_401 a and a see also lr b date sec_1_408-8 of the regulations question and answer provides that a surviving_spouse of an ira owner may elect to treat the spouse's entire_interest as a beneficiary in an individual's ira as the spouse's own ira in order to make this election the spouse must be the sole beneficiary of the ira and have an unlimited right to withdraw amounts from the ira if trust is named as beneficiary of the ira this requirement is not satisfied even if the spouse is the sole beneficiary of the trust the preamble to the regulations provides in relevant part that a surviving_spouse who actually receives a distribution from an ira is permitted to roll that distribution over into his her own ira even if the spouse is not the sole beneficiary of the deceased's ira as jong as the rollover is accomplished within the requisite day period a rollover may be accomplished even if ira assets pass through either a_trust and or an estate in this case information your authorized representative has submitted and the documentation that supports your ruling_request support the proposition that surviving_spouse a as the trustee of trust t is authorized by the terms of trust t to allocate the ira x proceeds to subtrust a once allocated thereto surviving_spouse a is authorized page to request in writing the payment of the ira x assets to herself in a single sum upon receipt of said written request surviving_spouse a as trust t trustee is permitted to make said single sum distribution of the ira x proceeds to herself as beneficiary of subtrust a additionally with respect to any code sec_408 implications the service notes that the property laws of state c determine what is or is not community_property thus surviving_spouse a’s community_property interests in tra x and other_property owned by decedent a at his death were created under the laws of state c and not under the federal_income_tax laws the language of trust t requires that surviving_spouse a’s interest in the community_trust estate including ira x be allocated to subtrust a thus the trustee of trust t surviving_spouse a had no discretion as to which of the three trust t subtrusts to allocate surviving_spouse a‘s community_property interest the allocation of ira x the value of which did not exceed the value of surviving_spouse a’s community interest in decedent a’s property to subtrust a is permitted pursuant to the language of section dollar_figure of trust t determining if ira x was is community_property and as sucb which of the three subtrusts was is to receive said ira x lies outside the scope of code sec_408 in summary the service notes that however once ira x is properly allocated to subtrust a pursuant to the terms of trust t the service must apply the requirements of code sec_408 to determine whether ira x may be contributed into an ira set up and maintained in the name of surviving_spouse a we note that under the facts stated above surviving_spouse a is the sole trustee of trust t additionally as subtrust a beneficiary she has the right under the terms of trust t applicable to subtrust a to receive the income of subtrust a and also to request any and all of the principal of subtrust a including ira x under this set of facts we believe it is appropriate to treat surviving_spouse a as the payee and beneficiary of ira x for purposes of code sec_408 and sec_408 thus with respect to your ruling requests we conclude that that surviving_spouse a may be treated as the payee or distributee of ira x for purposes of code sec_408 that ira x does not represent an inherited individual_retirement_account within the meaning of sec_408 with respect to surviving_spouse a that except as noted below surviving_spouse a is eligible to roll over the distribution of the proceeds of ira x into an individual_retirement_account set up and maintained in her own name pursuant to code sec_408 as long as the page7 rollover of such distribution occurs no later than the 60th day from the date the ira x proceeds are distributed from the ira x to surviving_spouse a as the trustee of trust t and that surviving_spouse a will not be required to include in gross_income for federal_income_tax purposes for the year in which the amounts are distributed from ra x and the year in which the above-referenced rollover is timely made if different any portion of the amounts distributed from ira x and contributed to the individual_retirement_account set up and maintained in surviving_spouse a's name this ruling letter assumes that ira x either is or was qualified under code sec_408 at all times relevant thereto it also assumes that the rollover ira to be set up by surviving_spouse a will also meet the requirements of code sec_408 at all times relevant thereto finally it assumes that surviving_spouse a’s rollover of the ira x distribution will be made within the time frame referenced in code sec_408g note this letter_ruling does not authorize surviving_spouse a’s contributing amounts required to be distributed under code sec_401 a applicable to iras pursuant to code sec_408 with respect to calendar years beginning with the calendar_year of decedent a’s death and ending with the calendar_year of rollover if any into her rollover ira this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited by others as precedent a copy of this letter is being sent to your authorized representative in accordance with a power_of_attorney on file in this office no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto a page if you have any questions please call id at - -orfaxat sincerely yours ‘rances v employee_plans technical group manager sloan enclosures deleted copy of letter_ruling notice of intention to disclose ocr eee eae eae wae


internal_revenue_service department of the treasury p o box ben franklin station washington dc contact person telephone number refer reply to cc dom p si - plr-100756-99 date mar index number legend partnership partnership ii agency project state city plr-100756-99 u i l n i i p j n i o l a o c h m a i dear this letter responds to your letter dated date and subsequent correspondence submitted on behalf of agency and partnership ii requesting a letter_ruling under sec_42 of the internal_revenue_code and sec_1_42-13 of the income_tax regulations to correct an administrative error in an allocation of the low-income_housing_credit dollar amounts agency and partnership i represent that the facts are as follows plr-100756-99 facts -3- partnership is a state limited_partnership that was formed to acquire develop and operate the project a low-income_housing project consisting of a units located in city on b partnership submitted an application to agency for an allocation of low-income_housing tax_credits which referenced c buildings with a total of a units in the project on d partnership was granted low-income_housing tax_credits for the project on e partnership received its f carryover agreement from agency to carryover f low- income housing tax_credits pursuant to sec_42 on gq partnership il was established as a state limited_partnership and ownership of the project was transferred from partnership to partnership ii the change in ownership had no effect on the amount of low-income_housing tax_credits granted to the project on h agency requested information for processing the form_8609 by i partnership il had submitted all of the information requested by agency inj agency discovered an administrative error while reviewing the information submitted by partnership ii for the form_8609 the administrative error is in the carryover agreement which indicates that the project consists of k building rather than c buildings in addition the estimated eligible_basis in the carryover agreement did not break down the costs for each building when the carryover agreement was issued by agency reference was not made to the b application_for low-income_housing tax_credit which indicated buildings agency issued the carryover agreement based upon the information submitted with the carryover agreement the fact that the project was issued only k building_identification_number bin is an administrative error project would comprise c buildings therefore the original f carryover agreement inaccurately reflected the intent of partnership and agency at the time the document was completed it was always the intent of partnership and agency that the in early partnership l was informed by agency that a request for a private_letter_ruling would be needed partnership il and agency actively obtained information and reviewed the necessary regulations to determine the proper procedures for filing a private_letter_ruling request plr-100756-99 agency represents that if it was aware that the project included additional buildings agency would have made the f carryover allocation pursuant to sec_42 rather than sec_42 in connection with the above statement of facts agency represents that it intended to make a project-based allocation to the project pursuant to sec_42 the number of buildings in the project was not material to the carryover allocation for the project and the fact that the project had c residential buildings rather than k would not have affected a the amount of low-income_housing tax_credit allocated to the project b the ranking of the project in agency's f allocation round or c any other aspect of the carryover allocation for the project ruling requested agency and partnership ii request the internal_revenue_service to rule that agency may amend the f carryover allocation to include bins for the m buildings added to the project and allocate the appropriate amount of low-income_housing tax_credit to each of the c buildings in the project not exceeding dollar_figuren for the entire project required under sec_1_42-13 agency and partnership ii hereby agree to such conditions as the secretary considers appropriate if the above ruling_request is granted as law and analysis under sec_42 state and local housing_credit agencies may correct administrative errors and omissions concerning allocations and recordkeeping within a reasonable period of time after their discovery sec_1_42-13 defines an administrative error or omission as a mistake that results in a document that inaccurately reflects the intent of the agency at the time the document is originally completed or if the mistake affects a taxpayer a document that inaccurately reflects the intent of the agency and the affected taxpayer at the time the document is originally completed sec_1_42-13 however provides that an administrative error or omission does not include a misinterpretation of the applicable rules and regulations under sec_42 in the present case agency committed an administrative error when the f carryover agreement referenced k building when the actual number of residential buildings was c this error was not a misinterpretation of the applicable rules and regulations under sec_42 however as a result of this error the f carryover allocation did not accurately reflect the intent of agency and partnership at the time the document was executed the intent of agency was to allocate the same amount of credit to the project notwithstanding the number of the buildings in the project further the change does not affect the amount of housing_credit_dollar_amount allocated to the project the plr-100756-99 ranking of the project in agency's f allocation round nor any other aspect of the carryover allocation for the project thus a correctable administrative error occurred in this situation under the represented facts the f carryover allocation is the credit allocating document under sec_1_42-13 the secretary must pre-approve a correction of an administrative error or omission if the correction is not made before the close of the calendar_year of the error or omission and the correction requires a numerical change to the credit_amount allocated for the building or project the correction would involve a numerical change to the credit_amount allocated to the k building that properly received a bin in the present case based solely on the representations and the relevant law and regulations set forth above we rule as follows agency committed an administrative error when it failed to identify the actual number of residential buildings in the project in the carryover agreement submitted to partnership i because of that administrative error the f carryover allocation inaccurately reflects the intent of agency and partnership when the f carryover allocation was executed agency and partnership ii requested to correct the administrative error within a reasonable period of time after becoming aware of the administrative error agency will assign bins to accurately reflect that there are c residential buildings in the project and agency will allocate low-income_housing tax_credit to each of the c residential buildings in the project not exceeding dollar_figuren for the entire project to correct this administrative error agency must do the following amend the f carryover allocation to include bins for the m additional buildings in the project and to allocate the appropriate amount of low-income_housing tax_credit to each of the c buildings in the project not exceeding dollar_figuren for the entire project the new bins do not have to be in sequential order with the existing k bin and the existing k bin shail continue in effect on the amended f plr-100756-99 carryover allocation agency should indicate that it is making the correction under sec_1_42-13 and attach a copy of the amended f carryover allocation to an amended form_8610 annual low-income_housing_credit agencies report for f and file the amended form_8610 with the service when completing the amended form_8610 agency should follow the specific instructions on the form_8610 under the heading amended reports no opinion is expressed or implied regarding the application of any other provisions of the code or regulations specifically we express no opinion on whether the project qualifies for the low-income_housing tax_credit under sec_42 nor the validity of the project's costs included in eligible_basis this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours harold e burghart assistant to the branch chief branch office of assistant chief_counsel passthroughs and special industries enclosure copy


internal_revenue_service number release date index number 468a ----------------- ---------------------------- ---------------------------------------------- ----------------------- ----------------------------- 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 b6 plr-114624-09 date september re schedule of deduction amounts schedule of ruling amounts ------------------------------------------------- legend taxpayer plant parent director location commission a commission b commission c method fund dear ------------ --------------------------------------------------------------------------------- -------------------------------------------------- -------------------------------------------------- ---------------------------------------- --------------------------------- --------------------------------- ---------------------------------------------------------------------------------- -------------------------- --------------------------------------------------- ------------------------------------------------------------ ------------------------------------------------- ---------------------------------------------------------- ------------------------------------------- this letter responds to your letter dated --------------------- requesting a revised initial schedule of deduction amounts and a revised schedule of rulings amounts pursuant to sec_468a and a f of the internal_revenue_code and sec_1_468a-3t and 8t of the temporary income_tax regulations a previous schedule of deduction plr-114624-09 amounts had been given to taxpayer by letter dated --------------------- that schedule provided that taxpayer was permitted to make a special transfer pursuant to sec_468a and the temporary regulations thereunder in ------- however because that letter was not received by taxpayer until after the date in --------by which a special transfer would have to be made in order for such special transfer to be considered made in ------- this subsequent request was necessary information was submitted pursuant to sec_1 468a- 3t e and 8t d taxpayer represents the facts and information relating to its request for a schedule of deduction amounts and ruling amounts as follows taxpayer a subsidiary of parent is included in a consolidated_return filed by parent taxpayer is the sole owner of the plant taxpayer is also the operator of the plant the plant is situated at location plant’s amended operating license has been extended to expire on ----------------------- the estimated base cost for decommissioning plant is based on an independent study and the proposed method of decommissioning the plant is method taxpayer is subject_to the jurisdiction of commission a commission b and commission c ------------------------------------------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------ the taxpayer’s demand related costs including decommissioning costs are allocated as follows commission a is ------- percent commission b is --------percent and commission c is --------percent these percentages fluctuate somewhat from year to year for commission a the estimated cost of dollar_figure----------------- -----------------dollars was used as a base cost for decommissioning the plant the estimated cost of decommissioning the plant in future ------- dollars is dollar_figure------------------- the methodology used to convert the ---------------- dollars to future dollars was by escalating section ------ ------------costs at an inflation rate of -------percent for the ------------years and then -------- percent for the remaining years to license expiration and escalating section ---------------- costs to -------percent for the entire period the assumed after-tax rate of return to be earned by the amount collected for decommissioning is -------percent for commission b the estimated cost to decommission the plant is dollar_figure--------------- --------------------------- dollars the estimated cost to decommission the plant in future dollars is dollar_figure------------------in ------- dollars in arriving at this estimated future plr-114624-09 decommissioning cost it is assumed that decommissioning costs will escalate at a rate of -- percent annually for the ----------- years and then at a rate of -- annually in the years remaining until license expiration the assumed after-tax rate of return to be earned by the amount collected for decommissioning is -------percent for commission c the estimated decommissioning cost is dollar_figure----------------- in ------ ------- dollars the estimated future cost of decommissioning the plant is dollar_figure------------------ ---------------------------------dollars the estimated decommissioning cost in ----------------- dollars was converted to future dollars based on the assumption that section -------------- decommissioning costs will escalate at an annual rate of ------------------------percent ------ ----------for the ------------years and then at an annual rate of ----------------------percent ----- ----------for the remaining years until license expiration and that section ---------------------- ------------------------------------------------------------------------------------------------------costs will escalate at the rate of -----percent for the entire period the assumed after-tax rate of return to be earned on assets of the decommissioning fund is -- percent sec_468a as amended by the energy tax incentives act of the act publaw_109_58 119_stat_594 allows an electing taxpayer to deduct payments made to a nuclear decommissioning reserve fund sec_468a limits the amount that may be paid into the nuclear decommissioning fund in any year to the ruling_amount applicable to that year prior to the changes made by the act the deduction was limited to the lesser_of the amount included in the utility’s cost of service for ratemaking purposes or the ruling_amount generally as a result only regulated utilities could take advantage of sec_468a the act amendment of sec_468a eliminated the cost-of-service limitation accordingly decommissioning costs of an unregulated nuclear power plant may now be funded by deductible contributions to a qualified nuclear decommissioning fund sec_468a 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_tax year is defined under sec_468a as the amount which the secretary determines to be necessary to fund the total nuclear decommissioning cost of that nuclear power plant over 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 prior to the changes made by the act deductible contributions were limited to the amount necessary for an electing taxpayer to fund the plant’s post-1983 nuclear decommissioning costs determined as if decommissioning costs accrued ratably over the estimated_useful_life of the plant provided that the taxpayer elected to establish a fund in prior_law also did not allow a taxpayer electing to establish a fund later plr-114624-09 than to contribute to that fund any amount in excess of that amount necessary to fund the ratable portion of the plant’s nuclear decommissioning costs beginning in the year the fund is established sec_468a now allows a taxpayer to contribute to a nuclear decommissioning fund the entire cost of decommissioning the plant including both the pre-1984 amount that was denied under the law prior to the act as well as any amount attributable to any year after in which a taxpayer had not established a fund under sec_468a sec_468a provides that the deduction for the contribution of the previously-excluded amount is allowed ratably over the remaining useful_life of the nuclear plant sec_468a provides that a taxpayer shall be deemed to have made a payment to the nuclear decommissioning fund on the last day of a taxable_year if the payment is made on account of such taxable_year and is made within months after the close of the tax_year this section applies to payments made pursuant to either a schedule of ruling amounts or a schedule of deduction amounts sec_1_468a-1t a 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-1t b of the regulations is a taxpayer that has a qualifying interest in any portion of a nuclear power plant a qualifying interest is among other things a direct ownership_interest sec_1_468a-2t b provides that the maximum amount of cash payments made or deemed made to a nuclear decommissioning fund during any_tax year shall not exceed the ruling_amount applicable to the nuclear decommissioning fund for such taxable_year the limitation on the amount of cash payments for purposes of sec_1 468a- 2t b does not apply to any special transfer permitted under sec_1_468a-8t sec_1_468a-3t a provides that in general a schedule of ruling amounts for a nuclear decommissioning fund is a ruling specifying annual payments that over the tax 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-3t a provides that to the extent consistent with the principles and provisions of this section each schedule of ruling amounts shall be based on reasonable assumptions concerning the after-tax rate of return to be earned by the amounts collected for decommissioning the total estimated cost of decommissioning the nuclear plant and the frequency of contributions to a nuclear decommissioning fund for a taxable_year under sec_1_468a-3t a the internal_revenue_service shall provide a schedule of ruling amounts identical to the schedule proposed by the taxpayer but no plr-114624-09 such schedule shall be provided by the service unless the taxpayer's proposed schedule is consistent with the principles and provisions of that section sec_1_468a-3t a provides that the taxpayer bears the burden of demonstrating that the proposed schedule of ruling amounts is consistent with the principles of the regulations and that it is based on reasonable assumptions that section also provides additional guidance regarding how the service will determine whether a proposed schedule of ruling amounts is based on reasonable assumptions for example if a public_utility commission established or approved the currently applicable rates for the furnishing or sale by the taxpayer of electricity from the plant the taxpayer can generally satisfy this burden_of_proof by demonstrating that the schedule of ruling amounts is calculated using the assumptions used by the public_utility commission in its most recent order in addition a taxpayer that owns an interest in a deregulated nuclear plant may submit assumptions used by a public_utility commission that formerly had regulatory jurisdiction over the plant as support for the assumptions used in calculating the taxpayer’s proposed schedule of ruling amounts with the understanding that the assumptions used by the public_utility commission may be given less weight if they are out of date or were developed in a proceeding for a different taxpayer the use of other industry standards such as the assumptions underlying the taxpayer's most recent financial assurance filing with the nrc are described by the temporary regulations as an alternative means of demonstrating that the taxpayer has calculated its proposed schedule of ruling amounts on a reasonable basis sec_1_468a-3t a further provides that consistency with financial_accounting statements is not sufficient in the absence of other supporting evidence to meet the taxpayer’s burden_of_proof sec_1_468a-3t b provides that in general the ruling_amount for any_tax year in the funding_period shall not be less than the ruling_amount for any earlier tax_year under sec_1_468a-3t c the funding_period begins on the first day of the first tax_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 last day of the estimated_useful_life of the nuclear power plant to which the fund relates sec_1_468a-3t c provides rules for determining the estimated_useful_life of a nuclear plant for purposes of sec_468a in general under sec_1_468a-3t c i a if the plant was included in rate base for ratemaking purposes for a period prior to date the date used in the first such ratemaking proceeding as the estimated date on which the nuclear plant will no longer be included in the taxpayer’s rate base is the end of the estimated_useful_life of the nuclear plant sec_1_468a-3t c i b provides that if the nuclear plant is not described in sec_1_468a-3t c i a the last day of the estimated_useful_life of the nuclear plant is determined as of the date the plant is placed_in_service under sec_1_468a-3t c i c any reasonable method may be used in determining the estimated_useful_life of a nuclear power plant that is not described in sec_1_468a-3t c i a plr-114624-09 sec_1_468a-3t d 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 sec_1_468a-3t d provides that a taxpayer's share of the total estimated cost of decommissioning a nuclear power plant equals the total estimated cost of decommissioning such plant multiplied by the taxpayer's qualifying interest in the plant sec_1_468a-3t e 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-3t f 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-3t e 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 sec_1_468a-8t a provides that under the provisions of sec_468a as described above a taxpayer may make a special transfer of cash or property to the nuclear decommissioning fund this special transfer is not subject_to the sec_468a limitation the amount of the special transfer is the present_value of the pre-2005 nonqualifying percentage of the estimated future costs of decommissioning the nuclear plant that was disallowed under sec_468a prior to the act sec_1_468a-8t a defines the pre-2005 nonqualifying percentage as equal to percent reduced by the sum of the qualifying percentage used in determining the taxpayer’s last schedule of ruling amounts for the fund under sec_468a as it existed prior to the act and the percentage transferred in any previous special transfer sec_1_468a-8t a provides that the taxpayer is not required to transfer the entire amount eligible for the special transfer in one year but must take any prior special transfers into account in calculating the pre-2005 qualifying percentage further pursuant to sec_1_468a-8t c a taxpayer making a special transfer in more than one year must request a new schedule of deduction amounts in connection with each special transfer sec_1_468a-8t b provides that the deduction for the special transfer is allowed ratably over the remaining useful_life of the nuclear plant under sec_1 468a- 8t b iii the deduction for property contributed in a special transfer is limited to the lesser_of the fair_market_value of the property or the taxpayer’s basis in the property under sec_1_468a-8t b the taxpayer recognizes no gain_or_loss on the special transfer of property the taxpayer’s basis in the fund is not increased by reason of the plr-114624-09 special transfer of property and the fund’s basis in the property transferred in the special transfer is the same as the transferee’s basis in that property immediately prior to the special transfer sec_1_468a-8t c provides that taxpayer may not make a special transfer to a qualified nuclear decommissioning fund unless the taxpayer requests from the irs a schedule of deduction amounts in connection with such transfer a request for a schedule of deduction amounts may be made in connection with a request for a schedule of ruling amounts but in such case the calculations for both the schedule of ruling amounts and the schedule of deduction amounts must be separately_stated as stated above prior to the changes made by the act deductible contributions were limited to the lesser_of the amount necessary to fund the plant’s post-1983 nuclear decommissioning costs or the amount necessary to fund the plant’s decommissioning costs for that portion of the plant’s estimated_useful_life for which a fund had been established under that prior_law taxpayer was allowed to contribute --------percent of the amounts for commission a --------percent of the amounts for commission b and ----------percent for commission c necessary to fully decommission its share of the plant sec_468a allows a taxpayer to contribute to the nuclear decommissioning fund the pre-1984 amount that was denied under the law prior to the act commission a the present_value of the taxpayer’s commission a jurisdictional portion of the previously excluded estimated future decommissioning costs is dollar_figure----------------as of ------- ---------------------- the special transfer amount the taxpayer’s pre-2005 nonqualifying percentage of estimated future decommissioning costs of the unit is --------percent the estimated_useful_life of the plant as defined in sec_1_468a-3t c ends in ---- ------- therefore taxpayer seeks to deduct the special transfer amount ratably in ------- ------------- commission b the present_value of the taxpayer’s commission b jurisdictional portion of the previously excluded estimated future decommissioning cost is dollar_figure----------------as of --------- ---------------------- the special transfer amount the taxpayer’s pre-2005 nonqualifying percentage of estimated future decommissioning cost of the unit is --------percent the estimated_useful_life of the plant as defined in sec_1_468a-3t c ends in ---- ------- therefore taxpayer seeks to deduct the special transfer amount ratably in ------- ------------- commission c plr-114624-09 the present_value of the taxpayer’s commission c jurisdictional portion of the previously excluded estimated future decommissioning cost is dollar_figure----------------as of --------- ---------------------- the special transfer amount the taxpayer’s pre-2005 nonqualifying percentage of estimated future decommissioning costs of the unit is ----------percent the estimated_useful_life of the plant as defined in sec_1_468a-3t c ends in ------- therefore taxpayer seeks to deduct the special transfer amount ratably in ---- -------------------- on ------------------- taxpayer made a special transfer of assets to the fund the taxpayer’s cost_basis in the transferred assets at the time of transfer is approximately dollar_figure------------------and the fair_market_value of those assets is dollar_figure----------------- we have examined the representations and information submitted by the taxpayer in relation to the requirements set forth in sec_468a and the regulations thereunder based solely upon these representations of the facts we conclude that the the total for the commissions of the present_value of the previously excluded decommissioning cost is dollar_figure----------------- therefore taxpayer may make a special transfer of dollar_figure--------------------------- and may ratably deduct the amount contributed for the --------------------------tax years as set forth below year ---------- ---------- schedule of deduction amounts deduction amount ---------------------- ---------------------- the special transfer amount stated above is the maximum amount permitted to be transferred to the fund under sec_468a we note that the amount of special transfer permitted above includes the amount transferred by taxpayer on ------------------- -------- prior to submission of this ruling_request if taxpayer transfers a lesser amount to the fund the taxpayer may deduct that lesser amount ratably over the period of years described above further in the event that taxpayer transfers a lesser amount than permitted above in ------- in order to make an additional special transfer in a later year including a special transfer of the difference between the special transfer amount stated above and the lesser amount transferred in ------- taxpayer must request a new schedule of deduction amounts and in that request must take the ------- transfer into account and recalculate the pre-2005 qualifying percentage in such request we note that if taxpayer elects to make a special transfer of property for all or a portion of this special transfer the amount of the transfer is the lesser_of the fair_market_value of the property transferred or the basis of the property in the hands of the plr-114624-09 taxpayer immediately prior to the transfer in either event the deduction of the taxpayer with respect to the property is limited to the taxpayer’s basis in the property furthermore regarding taxpayer’s request for a revised schedule of ruling amounts we have examined the representations and information submitted by the taxpayer in relation to the requirements set forth in sec_468a and the regulations thereunder based solely upon 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-1t b of the regulations taxpayer as owner of the plant has calculated its share of the total decommissioning costs under sec_1_468a-3t d of the regulations taxpayer has proposed a schedule of ruling amounts which meets the requirements of sec_1_468a-3t a 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 commission 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 pursuant to sec_1_468a-3t a taxpayer has demonstrated that by following the assumptions approved by the commissions the proposed schedule of ruling amounts is consistent with the principles of sec_468a and the regulations thereunder and that such schedule is based on reasonable assumptions the maximum amount of cash payments made or deemed made to the fund during any_tax year is restricted to the ruling_amount applicable to the fund as set forth under sec_1_468a-2t b of the regulations based solely on the determinations above we conclude that the taxpayer’s proposed schedule of ruling amounts satisfies the requirements of sec_468a of the code schedule of ruling amounts year ---------- commission a ---------------------- commission b -------------------- commission c total -------------------- ---------- -------------------- -------------------- -------------------- ------------ -------------------- -------------------- -------------------- --------------------- - --------------------- - --------------------- plr-114624-09 ------- ---------- ------------ ------- ---------- -------------------- -------------------- -------------------- -- -------------------- -- -------------------- -- -- - -------------------- -------------------- -------------------- if any of the events described in sec_1_468a-3t f 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 except as specifically determined above no opinion is expressed or implied concerning the federal_income_tax consequences of the transaction described above this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides 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 the taxpayer we are also sending a copy of this letter_ruling to the director pursuant to sec_1_468a-7t a a copy of this letter must be attached with the required election statement to the taxpayer's federal_income_tax return for each tax_year in which the taxpayer claims a deduction for payments made to the fund sincerely peter c friedman senior technician reviewer branch passthroughs special industries cc