office_of_chief_counsel internal_revenue_service memorandum number release date cc tege eb ec presp-130401-14 uilc date september to mark hulse cc tege fs neli from thomas scholz senior counsel cc tege eb ec subject disposition of shares under sec_424 this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent issue whether there is a disposition within the meaning of sec_424 of the internal_revenue_code code of stock acquired pursuant to an incentive_stock_option under sec_422 when the stock is converted into acquirer stock and other consideration pursuant to an acquisition that does not qualify as a reorganization under sec_368 conclusion there is a disposition within the meaning of sec_424 of stock acquired pursuant to an incentive_stock_option under sec_422 when the stock is converted into acquirer stock and other consideration pursuant to an acquisition that does not qualify as a reorganization under sec_368 there is no disposition within the meaning of sec_424 of such stock if the acquisition qualifies as a reorganization under sec_368 the two factual scenarios below illustrate the tax consequences of the stock conversion when there is no disposition within the meaning of sec_424 and when there is a disposition within the meaning of sec_424 factual scenarios scenario corporation x and corporation y are unrelated corporations that are presp-130401-14 incorporated under the laws of state b on date corporation x grants a stock_option to a an employee of corporation x since date entitling a to purchase shares of corporation x voting common_stock for dollar_figure per share the stock_option qualifies as an incentive_stock_option as defined in sec_422 on date a exercises the option when the fair_market_value of corporation x stock is dollar_figure per share and shares of corporation x voting common_stock are transferred to a on that date on date corporation x and corporation y enter into an agreement the merger agreement pursuant to which corporation y will acquire corporation x by forming a new subsidiary_corporation z that will merge with and into corporation x with corporation x surviving the merger pursuant to the merger each outstanding share of corporation x voting common_stock will be converted into one share of corporation y voting common_stock with a value of dollar_figure and dollar_figure in cash the exchange does not have the effect of the distribution of a dividend under sec_356 the stock of corporation z will be converted into voting common_stock of corporation x corporation z merges into corporation x in a transaction that qualifies as a reorganization described in sec_368 by reason of sec_368 following the merger corporation x continues in existence as a wholly owned subsidiary of corporation y since date a and corporation x have maintained a continuous employment relationship and on date a sells the shares of corporation y stock for dollar_figure per share scenario assume the same facts as in scenario except that each share of corporation x common_stock is converted into one share of corporation y common_stock with a value of dollar_figure and dollar_figure in cash the transaction does not meet the requirements of sec_368 because shareholders of corporation x did not exchange for corporation y stock voting_stock of corporation x that constitutes control percent of corporation x but rather exchanged more than percent of corporation x’s stock for cash as a result the transaction does not qualify as a reorganization under sec_368 by reason of sec_368 or any other provision of sec_368 law sec_354 provides that no gain_or_loss shall be recognized if stock_or_securities in a corporation a_party_to_a_reorganization are in pursuance of the plan or reorganization exchanged solely for stock_or_securities in such corporation or in another corporation a party to the reorganization sec_356 provides that if sec_354 or sec_355 would apply to an exchange but for the fact that the property received in the exchange consists not only of property permitted by sec_354 or sec_355 to be received without the recognition of gain but also of other_property or money then the gain if any to the recipient shall be recognized but in an amount not in excess of the sum of such money and the fair_market_value of such other presp-130401-14 property sec_358 provides that in the case of an exchange to which sec_351 sec_354 sec_355 sec_356 or sec_361 applies the basis of the property permitted to be received under such section without the recognition of gain_or_loss shall be the same as that of the property exchanged decreased by- i the fair_market_value of any other_property except money received by the taxpayer ii the amount of any money received by the taxpayer and iii the amount of loss to the taxpayer which was recognized on such exchange and increased by- i the amount which was treated as a dividend and ii the amount of gain to the taxpayer which was recognized on such exchange not including any portion of such gain which was treated as a dividend sec_368 provides that the term reorganization includes a statutory merger or consolidation under sec_368 a statutory merger otherwise qualifying under sec_368 is not disqualified by reason of the fact that stock of a corporation the controlling_corporation that is in control of the merged corporation is used in the transaction if i after the transaction the corporation surviving the merger owns substantially_all of its properties and of the properties of the merged corporation other than stock of the controlling_corporation distributed in the transaction and ii in the transaction former shareholders of the surviving corporation exchanged for voting_stock of the controlling_corporation stock of the surviving corporation which constitutes control of that corporation control is defined in sec_368 as ownership of stock possessing at least of the combined voting power of all voting classes of stock and at least of the total number of shares of all other classes of stock of the corporation sec_421 provides that if a share of stock is transferred to an individual in a transfer in respect of which the requirements of sec_422 are met then no income shall result at the time of the transfer of such share to the individual upon the exercise of the option with respect to such share sec_421 provides that if the transfer of a share of stock to an individual pursuant to his exercise of an option would otherwise meet the requirements of sec_422 except that there is a failure to meet any of the holding_period requirements of sec_422 then any increase in the income of such individual or deduction from the income of the employer_corporation for the taxable_year in which such exercise occurred attributable to such disposition shall be treated as an increase in income or a deduction from income in the taxable_year of such individual or of such employer_corporation in which such disposition occurred sec_422 provides that sec_421 applies with respect to the transfer of a share of stock to an individual pursuant to the exercise of an incentive_stock_option if no disposition of such share is made by him within years from the date of grant of the option nor within year after the transfer of such share to him and at all times during the period beginning on the date of grant of the option and ending on the day three months before the date of such exercise such individual was an employee of presp-130401-14 either the corporation granting such option a parent or subsidiary_corporation of such corporation or a corporation or a parent or subsidiary_corporation of such corporation issuing or assuming a stock_option in a transfer to which sec_424 applies sec_424 and sec_1_424-1 provide that the term disposition includes a sale exchange gift or a transfer of legal_title but does not include an exchange to which sec_354 sec_355 sec_356 or sec_1036 or so much of sec_1031 as relates to sec_1036 applies sec_1001 provides that the gain from the sale_or_other_disposition of property is the excess of the amount_realized over the adjusted_basis provided in sec_1011 for determining gain and the loss is the excess of the adjusted_basis provided in such section for determining loss over the amount_realized sec_1001 provides that the amount_realized from the sale_or_other_disposition of the property is the sum of any money received plus the fair_market_value of the property other than money received sec_1001 provides that except as otherwise provided in subtitle a the entire amount of the gain_or_loss determined under sec_1001 on the sale_or_exchange of the property shall be recognized analysis scenario in scenario the merger qualifies as a reorganization described in sec_368 sec_354 does not apply to the exchange of each outstanding share of corporation x voting common_stock for one share of corporation y voting common_stock because the corporation x shareholders are also receiving dollar_figure per share in cash and the exchange is therefore not solely for stock however sec_356 applies to the exchange of corporation x stock for corporation y stock plus cash because the exchange would qualify under sec_354 except for the receipt of cash pursuant to sec_424 the term disposition does not include an exchange to which sec_356 applies because sec_356 applies to the exchange there is no disposition within the meaning of sec_424 of the corporation x stock held by a even though a recognizes gain of dollar_figure per share on the receipt of the cash under sec_356 because a paid dollar_figure for each share of corporation x stock a’s basis in each share of the corporation x stock is dollar_figure pursuant to sec_356 a recognizes dollar_figure of gain for each share of corporation x stock in the exchange because a exchanged shares of corporation x a recognizes dollar_figure of gain in the exchange pursuant to sec_358 a’s dollar_figure basis in each share of corporation y stock received in the exchange is decreased by the dollar_figure received by a and increased by the gain of dollar_figure recognized by a a’s basis in each share of corporation y stock after the exchange is dollar_figure and the total basis of a’s shares is dollar_figure presp-130401-14 because the exchange of corporation x stock for corporation y stock is not a disposition of the corporation x stock a has satisfied the holding_period requirements under sec_422 when a sells the corporation y stock the sale of the shares on date is a qualifying disposition and a recognizes dollar_figure dollar_figure sale price - dollar_figure basis of capital_gain scenario in scenario the merger does not qualify as a reorganization described in sec_368 therefore neither sec_354 nor sec_356 applies to the exchange of each outstanding share of corporation x voting common_stock for one share of corporation y voting common_stock with a value of dollar_figure and dollar_figure in cash pursuant to sec_424 the term disposition does not include an exchange to which sec_354 or sec_356 applies because neither sec_354 nor sec_356 applies to the exchange there is a disposition within the meaning of sec_424 of the corporation x stock held by a and sec_1001 applies to the exchange because sec_1001 applies to the exchange a recognizes gain on the disposition of the corporation x stock in the amount of dollar_figure dollar_figure fair_market_value of corporation y stock dollar_figure per share x shares plus dollar_figure dollar_figure per share x shares less dollar_figure basis in the corporation x stock the exchange is a disqualifying_disposition because a has not satisfied the holding_period requirements in sec_422 at the time of the exchange therefore on the date of the exchange a must include in gross_income dollar_figure which includes dollar_figure as compensation dollar_figure fair_market_value of corporation x stock on the date of exercise of the option - dollar_figure exercise price for the corporation x stock and dollar_figure as capital_gain a’s basis in the shares of corporation y stock is dollar_figure dollar_figure per share a recognizes a capital_gain when a sells shares of corporation y stock for dollar_figure per share pursuant to sec_1001 the amount of the gain is dollar_figure please call ilya enkishev at if you have any further questions


t c memo united_states tax_court estate of ellie b williams deceased robert m driggers sr personal representative et al petitioners v commissioner of internal revenue respondent docket nos filed date larry smith and frank b metcalf for petitioners francis mucciolo for respondent the court consolidated the following cases herewith for trial briefing and opinion robert m driggers sr transferee docket no and estate of ellie b williams donor docket no memorandum findings_of_fact and opinion colvin judge respondent determined that petitioners are liable for estate and gift_tax deficiencies as follows estate of ellie b williams docket no deficiency dollar_figure robert m driggers sr transferee docket no year deficiency dollar_figure dollar_figure estate of ellie b williams donor docket no year deficiency dollar_figure dollar_figure the issues for decision are whether transfers by ellie b williams decedent in and of undivided one-half interests in timberland to robert m driggers sr petitioner were gifts as respondent contends or compensation_for services as petitioners contend we hold that they were gifts whether the fair market values of the undivided one- half interests in timberland decedent gave petitioner in and are dollar_figure and dollar_figure as petitioners contend dollar_figure and dollar_figure as respondent contends or some other_amounts we hold that the value of the gift is dollar_figure and the value of the gift is dollar_figure whether petitioner is liable as a transferee for decedent's gift_tax deficiencies for and we hold that he is whether the fair_market_value of decedent's undivided one-half interest in dollar_figure acres of timberland when she died was dollar_figure as petitioners contend dollar_figure as respondent contends or some other amount we hold that the value of the timberland was dollar_figure whether as respondent contends the fair_market_value of a cadillac brougham was dollar_figure at the date of decedent's death we hold that it was section references are to the internal_revenue_code rule references are to the tax_court rules_of_practice and procedure i findings_of_fact a petitioner sec_1 ellie b williams ellie b williams decedent was born in date her husband was frank williams williams they had no children williams died on date decedent inherited about big_number acres of undeveloped rural timberland and farmland in putnam county and clay county florida from him before he died williams leased the timber rights to the big_number acres to hudson pulp paper co hudson for years and gave the company an option to lease it for an additional years the lease was still in effect in under the lease hudson paid williams dollar_figure per cord of wood harvested from the property robert m driggers sr robert m driggers sr petitioner lived in green cove springs florida when the petitions were filed in these cases he was born in or petitioner's wife was williams' niece petitioner has been in the timber business since he dropped out of school in the seventh grade he was a business_associate of williams b the relationship between petitioner and decedent business relationship between petitioner and decedent decedent participated very little in williams' timber business before williams died in after williams died decedent asked petitioner to help her manage the big_number acres decedent hired petitioner and initially paid him dollar_figure a week to manage the property fix the fences sell or otherwise dispose_of the cattle on the property protect against the theft of cattle and timber and cut timber and haul it to the mill around decedent and petitioner began an arrangement under which petitioner furnished the labor to produce turpentine from the timber on decedent's property petitioner and the workers he hired tapped the pine trees on decedent's property to produce sap they took the sap to processing plants where it was made into turpentine decedent received percent of the turpentine receipts and petitioner received percent petitioner paid all of the expenses from his share petitioner and decedent had a profit-sharing arrangement from the early or mid-1960's until decedent died in petitioner and decedent agreed that petitioner would provide the know-how and labor to manage and exploit decedent's timberland and they would split the profits petitioner had authority to handle a substantial part of decedent's business affairs decedent and petitioner jointly owned some certificates of deposit and a safe deposit box they had signature_authority on each other's accounts in which they deposited money from their business they each reported their share of profits on their individual federal_income_tax returns petitioner managed most of decedent's assets however in decedent had certificates of deposit checking account and money market savings account over which petitioner did not have signature_authority at first union national bank of florida these accounts totaled dollar_figure before georgia-pacific acquired hudson and assumed the timber lease on decedent's property in georgia-pacific bought big_number acres of the property and released the remaining acres from the lease georgia-pacific paid decedent more than dollar_figure million for the big_number acres in decedent gave dollar_figure to petitioner from the proceeds of the sale after the sale decedent owned big_number acres in putnam county the putnam county property and big_number acres in clay county the clay county property petitioner hired workers to help him harvest timber from the released big_number acres petitioner divided the profits equally with decedent personal relationship between petitioner and decedent petitioner and decedent had a very close personal relationship petitioner loved decedent as if she were his mother and she loved him as if he were her son he took care of her personal matters with no expectation of compensation_for petitioner testified that decedent owned about big_number acres in putnam county and about big_number acres in clay county after she sold property to georgia-pacific the parties agree however that decedent transferred one-half interests in big_number acres in putnam county and big_number acres in clay county to petitioner example he built two homes and bought cars for her drove her because she could not drive drove her to visit her three sisters when they were sick supervised the funeral arrangements for each of her three sisters gave decedent insulin shots and cared for her during her final illness decedent died on date petitioner was the only person with her when she died the transfer from decedent to petitioner sometime before date decedent listed big_number acres of her land in putnam county florida for sale at dollar_figure per acre petitioner advised decedent to offer the property for sale at that price on date terry pacetti pacetti a real_estate broker and investor from st augustine contracted to buy the putnam county property for dollar_figure per acre sometime between april and date pacetti assigned the contract to gerald thompson associates the thompson partnership a partnership that included partners who had extensive backgrounds in real_estate on date decedent transferred to petitioner an undivided one-half interest in big_number acre sec_3 of the putnam county although the deed states that decedent transferred big_number acres to petitioner respondent agreed to value the property continued property decedent owned the other undivided one-half interest in that property the deed of transfer signed by decedent states that the transfer was made in consideration of love and affection petitioner gave decedent no money for the putnam county property the thompson partnership signed an addendum to the contract on date after pacetti assigned it to the partnership the addendum stated that as part of the sale petitioner agreed to buy big_number cords of timber for dollar_figure from the property being sold to the partnership the thompson partnership bought the big_number acres of land on date for dollar_figure per acre petitioner received no cash from the downpayment and paid dollar_figure of his own money to the buyers at the closing on the property the thompson partnership sold big_number cords of timber from the putnam county property to the lewis timber co after the thompson partnership bought the putnam county property the thompson partnership bought the putnam county property for residential development the thompson partnership applied for but could not get zoning for residential development except for the waterfront property released when the partnership bought continued transferred using petitioner's figure of big_number acres the putnam county property in date the thompson partnership defaulted on its mortgage and deeded most of the putnam county property back to decedent and petitioner because the partnership could not get the residential zoning it needed to develop the property and because the property did not have as much timber on it as the realtor tom schifanella had represented to the buyers later that year petitioner and decedent resold about acres to gerald thompson thompson for dollar_figure-dollar_figure per acre thompson sold that land to other developers at a date not specified in the record for about twice as much as he paid decedent and petitioner sold the remaining putnam county property to marc k massar for dollar_figure per acre at a date not specified in the record the transfer from decedent to petitioner on date decedent transferred to petitioner an undivided one-half interest in the clay county property the deed stated that the transfer was made for consideration of dollar_figure the deed had affixed to it a dollar_figure documentary stamp tax dated date decedent's use of a dollar_figure documentary stamp tax was a representation that the interest she transferred to petitioner was worth dollar_figure petitioner gave decedent no money for the clay county property in date decedent and petitioner sold dollar_figure acres of the clay county property to national training inc for dollar_figure per acre the parcel sold was percent uplands and percent wetlands decedent's gifts of dollar_figure to petitioner in on date decedent gave petitioner dollar_figure the memo section of the check said bequest on date decedent again gave petitioner dollar_figure decedent wrote advancement on inheritance in the memo section of the check decedent's will in her will decedent made small bequests to petitioner's son and granddaughter and other distant relatives she left most of her estate to petitioner when decedent died she owned an undivided one-half interest in acres of undeveloped rural land in clay county the estate property about percent acres of which was wetlands and a cadillac brougham worth dollar_figure she transferred or sold most of the big_number acres in clay county and big_number acres in putnam county before she died c decedent's_estate and gift_tax returns decedent did not file gift_tax returns or pay gift_tax for her and transfers to petitioner after decedent died petitioner retained a tax attorney to advise him in his work as personal representative of decedent's_estate the tax attorney discussed the transfers with petitioner concluded that the transfers were gifts and prepared gift_tax returns petitioner and decedent's other personal representative signed both returns and filed them with the internal_revenue_service in date decedent's personal_representatives reported on decedent's_estate tax_return that she had a gross_estate of dollar_figure ii opinion a whether decedent made taxable_gifts in and when she transferred undivided one-half interests in timberland to petitioner background and contentions of the parties respondent determined and contends that decedent's transfers of undivided one-half interests in timberland to petitioner in and were taxable_gifts petitioners contend that decedent made the transfers in the ordinary course of business to compensate petitioner for his many years of work for her and that decedent lacked donative_intent a transfer of property is not a taxable gift if it is made in the ordinary course of business ie is bona_fide at arm's length and without donative_intent even if the transfer is for less than adequate_and_full_consideration 8_tc_706 sec_25_2512-8 gift_tax regs decedent's_estate bears the burden of proving that decedent's transfers to petitioner of undivided interests in timberland in and were not taxable_gifts rule a petitioners argue that decedent had good business reasons for making the transfers petitioners point out that petitioner had worked for decedent since the early 1960's without compensation except for his share of profits and dollar_figure per week in the first year and that decedent could not have managed her property without petitioner's help we disagree that this shows that the transfers were not gifts sec_25_2512-8 gift_tax regs provides sec_25_2512-8 transfers for insufficient consideration transfers reached by the gift_tax are not confined to those only which being without a valuable consideration accord with the common_law concept of gifts but embrace as well sales exchanges and other dispositions of property for a consideration to the extent that the value of the property transferred by the donor exceeds the value in money_or_money's_worth of the consideration given therefor however a sale exchange or other transfer of property made in the ordinary course of business a transaction which is bona_fide at arm's length and free from any donative_intent will be considered as made for an adequate_and_full_consideration in money_or_money's_worth a consideration not reducible to a value in money_or_money's_worth as love and affection promise of marriage etc is to be wholly disregarded and the entire value of the property transferred constitutes the amount_of_the_gift love and affection between petitioner and decedent decedent and her husband had no children after decedent's husband died in petitioner whose wife was williams' niece handled many important personal matters for decedent petitioner testified that he did not expect to be paid for performing these personal services and that he loved decedent like a mother and she loved him like a son their close personal relationship suggests that decedent gave interests in the putnam county and clay county properties to petitioner out of love and affection decedent was clearly inclined to make gifts to petitioner decedent gave dollar_figure to petitioner when she sold big_number acres of timberland in decedent gave dollar_figure to petitioner in and another dollar_figure in as advances on his inheritance from her decedent left most of her estate to petitioner see cobb v commissioner tcmemo_1985_208 in deciding whether decedent's grant of an option to buy her farm was a gift court considered whether decedent had previously made gifts to the optionee petitioner received percent of the receipts less expenses from the sale of turpentine and one-half of the profits from the sale of timber petitioners do not contend that petitioner's and decedent's business agreement obligated decedent to transfer land to petitioner petitioners cite cobb v commissioner supra in which the owner of land granted an option to an unrelated_person to buy her farm at less than market_value in return for his agreement to manage the farm for her for as long as she owned it the owner died within a year after the agreement was reached resulting in a windfall to the option holder we found that the agreement was made at arm's length for business purposes and without donative_intent petitioners' reliance on cobb is misplaced in cobb the owner gave an option to buy the land as part of a business agreement here decedent was not obligated to transfer any interest in the land to petitioner as part of decedent's business arrangement with petitioner also in contrast to cobb decedent and petitioner had a very close personal relationship like mother and son and decedent left most of her estate to petitioner petitioners also cite revrul_80_196 1980_2_cb_32 and hull v commissioner tcmemo_1962_199 petitioners' reliance on revrul_80_196 supra and hull v commissioner supra is misplaced in revrul_80_196 the commissioner ruled that transfers of stock by a corporation's two shareholders to three employees were not gifts because the transfers were made in the ordinary course of business and were made for adequate_and_full_consideration the employees had no special personal relationship with the two shareholders in contrast decedent and petitioner had a close personal relationship in hull we held that the taxpayer's transfer of an interest in mineral rights to a family-owned_corporation in exchange for an annuity_payment of dollar_figure per year for life was made in the ordinary course of business despite the fact that the beneficiaries of the transaction were family members hull differs from this case because the issue there was not whether the taxpayer had donative_intent when she transferred property for less than its fair_market_value indeed the commissioner stipulated that the taxpayer believed that she had made a bona_fide sale in contrast whether decedent had donative_intent in making the and transfers is in dispute here petitioners' partnership theory petitioners argue that petitioner and decedent formed a partnership and that decedent's transfers of property to him were subject_to that partnership petitioners point out that a partnership is created if persons join together their money goods labor or skill to carry on a business and there is a community of interest in the profits and losses 327_us_280 petitioners also point out that a partnership may exist if there is joint activity joint_ownership of bank accounts the sharing of profit and loss and relinquishment or delegation of management duties to another partner or coowner 89_tc_1050 43_tc_252 affd 352_f2d_995 2d cir 25_tc_682 petitioners also cite the uniform_partnership_act which identifies three requirements necessary to establish a partnership the active_conduct of a business for profit by two or more persons as coowners fla stat ann sec west petitioners' partnership theory misses the mark first petitioner and decedent did not form a partnership under florida law because they did not coown the property used to produce timber and turpentine and they made no agreement to share losses second decedent and not a partnership owned the property when she transferred the undivided interests to petitioner third petitioner and decedent agreed that petitioner would supply the labor to exploit the timber on her property and they would share the proceeds from the sales of timber and turpentine decedent's transfer of property to petitioner was not done as part of their business agreement it was a separate voluntary act by decedent petitioners point out that petitioner agreed in date to buy dollar_figure worth of timber from the putnam county property in order to close the sale of the property to the thompson partnership petitioners contend that this shows the date transfer of the undivided_interest in the putnam county property to petitioner was a business transaction we disagree decedent transferred the property to him 3½ months before he agreed to buy the timber it has not been shown that his agreement to buy timber was foreseeable when decedent transferred the property interest to him thus we do not think the fact that petitioner agreed to buy timber from the putnam county property supports petitioners' theory that decedent's transfer of the putnam county property to him was made in the ordinary course of business decedent's gift_tax returns and the opinions of decedent's lawyers petitioners contend that the lawyers who handled the two transfers did not believe that they were gifts we disagree first the lawyer who prepared the deed testified that he did not remember why decedent made the transfer or why the deed listed love and affection as the consideration second the lawyer who prepared the deed testified that he put documentary stamps on it because he thought petitioner had bought the undivided one-half interest he received in however petitioner testified that he paid no money for the property after decedent died in petitioner retained a tax attorney to help him in his work as personal representative of decedent's_estate the tax attorney discussed the transfers with petitioner concluded that the transfers were gifts and prepared gift_tax returns which petitioner signed and filed with the internal_revenue_service petitioner's signing of the gift_tax returns is inconsistent with his position here that the transfers were not gifts conclusion we find that in light of a the fact that decedent did not agree to transfer property to petitioner as part of their business relationship b decedent's personal relationship with petitioner c her history of making gifts to him and d petitioner's signing of the gift_tax returns decedent's transfers to petitioner in and were gifts b the value of the gifts from decedent to petitioner expert testimony both parties called expert witnesses to give their opinions about the value of the undivided one-half interests in timberland decedent transferred to petitioner in and we may accept or reject expert testimony according to our own judgment and we may be selective in deciding what parts of an expert's opinion if any we will accept 86_tc_547 there were five expert witnesses at the trial three were appraisers david r elmore jr elmore for respondent and dr c donald wiggins wiggins and philip j moses moses for petitioner the opinions of petitioners' and respondent's appraisers and the positions of the partie sec_5 are as follows ps' returns petition ps' experts moses wiggin sec_1 dollar_figure dollar_figure acre big_number dollar_figure acre dollar_figure dollar_figure acre big_number dollar_figure acre deficiency notices and answers dollar_figure dollar_figure acre big_number dollar_figure acre big_number dollar_figure acre big_number dollar_figure acre big_number dollar_figure acre r's expert elmore dollar_figure dollar_figure acre big_number dollar_figure acre big_number dollar_figure acre putnam co property clay co property property in estate moses valued a fee simple interest in the three parcels of property wiggins applied discounts for fractional interests in real_estate to moses' values for the three parcels of real_property petitioners' other experts were frank scruby a florida real_estate attorney and donald pitts a florida banker respondent determined in the gift_tax notice_of_deficiency that the gift consisted of big_number acres instead of big_number acres this reduced the amount of the taxable gift however respondent does not now seek an increased deficiency based on big_number acres petitioners' experts a moses moses appraised the putnam county and clay county land he used a combined income and comparable sales market data approach he inspected the putnam county property in to estimate its volume of timber and all of the properties in question in to appraise them for estate_tax purposes he conducted timber cruises in both years to estimate the amount and value of timber on the property he considered sales of what he said was similar rural land in north florida to estimate the value of the property moses concluded that the highest_and_best_use of both properties was agricultural moses did not find any actual sales of undivided or fractional interests in comparable real_property he concluded that fractional interests in such property are not marketable b wiggins to estimate the fair_market_value of the three fractional property interests wiggins applied a 44-percent discount to one- half of the value of the fee simple estimated by moses wiggins computed a 44-percent discount through seriatim application of discounts of percent for lack of control and percent for lack of marketability he estimated that partition costs would be dollar_figure for the putnam county property dollar_figure for the clay county property and dollar_figure for the estate property because the properties are irregularly shaped parcels containing pineland swampland and riverfront acreage c scruby petitioners' expert frank scruby scruby a florida attorney with years of real_estate experience estimated that the costs of partitioning would be dollar_figure for the putnam county property transferred in dollar_figure for the clay county property transferred in and dollar_figure for the real_property in decedent's_estate in d pitts donald m pitts pitts a florida banker for years testified that banks will not make loans to the owner of a fractional interest_in_real_property without the consent of the other coowner respondent's expert--elmore elmore concluded that the highest_and_best_use of both properties was for timber growth agriculture rural residential and waterfront development purposes he used as comparable sales the date sale of the putnam county property and a sale by river farms inc to seminole electric cooperative inc he estimated that a fee simple interest in the putnam county property was worth dollar_figure dollar_figure per acre in elmore used sales that he said were comparable to estimate that a fee simple interest in the clay county property was worth dollar_figure dollar_figure per acre in he divided both of these amounts in half because decedent gave petitioner an undivided one-half interest in the two properties elmore applied no discount to take into account the fact that petitioner received undivided interests in the properties value of a fee simple interest in the land a transfer--putnam county property decedent sold the putnam county property in date for dollar_figure dollar_figure per acre respondent argues that this shows that a fee simple interest in the property was worth that amount when decedent transferred a one-half undivided_interest in the putnam county property to petitioner in date petitioners contend that a fee simple interest in the putnam county property was worth dollar_figure dollar_figure per acre we believe elmore's use of the date sale led him to overestimate the value of the putnam county property the dollar_figure per acre price exceeded the fair_market_value because of what elmore conceded at trial were unusual contract terms the effect of which elmore had not considered for example petitioner bought dollar_figure worth of timber and paid almost dollar_figure to help the buyers make the downpayment the buyers obtained an easement across the property to the waterfront property under the release clauses contained in the owner-financed mortgage the waterfront property was released from the mortgage when the buyers made the downpayment and the buyers could keep one-half of the proceeds from all future timber sales including the mortgaged property even if they did not complete the sale elmore did not know that thompson applied for but could not get zoning for a residential development except for the waterfront property released at closing he did not ascertain whether the 7-percent interest charged in the note was consistent with prevailing interest rates in and he did not conduct a timber_cruise to estimate the value of the standing timber elmore also considered as a comparable sale the sale by river farms inc to seminole electric cooperative inc elmore stated in his report that the buyer bought this property to use as an electric power generation facility however elmore did not consider whether the putnam county property could be used for that purpose elmore did not know the requirements of the florida electrical power plant siting act fla stat ch or what criteria must be met before property can be used for a power plant we believe that elmore relied too greatly on the sale to the thompson partnership and the sale of the seminole property to establish the value of the putnam county property we think he should have considered the unusual contract terms of the sale and whether the seminole property was comparable to the putnam county property we believe moses underestimated the value of the putnam county property because he understated the volume of the timber on it he subtracted years of growth from the volume of timber that he estimated was on the property in date on the erroneous assumption that no timber had been cut from the property during those years petitioner testified that he harvested timber from the property until decedent died moses estimated that the putnam county property had a total of dollar_figure cords of pine dollar_figure of pulpwood and dollar_figure cords of sawtimber in date however petitioner bought big_number cords of timber from the putnam county property in date and lewis timber co bought an additional big_number cords from the putnam county property before the thompson partnership deeded the putnam county property back to decedent and petitioner in respondent argues that moses' computation of the volume of timber on the putnam county property transferred in date is understated by at least dollar_figure cords big_number - big_number using moses' assumed prices per cord of pulpwood and sawtimber the value of the additional timber at dollar_figure per cord for pulpwood is dollar_figure or dollar_figure per acre dollar_figure big_number acres or at dollar_figure per cord for sawtimber is dollar_figure or dollar_figure per acre dollar_figure big_number acres thus respondent contends that moses' per acre value for the property should be increased to dollar_figure dollar_figure dollar_figure or dollar_figure dollar_figure dollar_figure we conclude that the value of a fee simple interest in the putnam county property was dollar_figure in dollar_figure per acre decedent gave petitioner an undivided one-half interest in the putnam county property one-half of dollar_figure is dollar_figure we discuss at paragraph ii-b-5 below to what extent we discount the value of the putnam county property because petitioner received an undivided one-half interest in it b transfer--clay county property respondent argues based on sales of comparable properties that the clay county property was worth dollar_figure dollar_figure per acre on the date of the gift in petitioners contend that the clay county property was worth dollar_figure dollar_figure per acre on the date decedent transferred an undivided one-half interest in it to petitioner elmore stated that the seminole property sold in and the putnam county property sold in to the thompson partnership were comparable to the clay county property for the reasons stated above at paragraph ii-b-4-a we believe that elmore relied too greatly on these two sales to establish the value of the clay county property elmore also used as comparable sales decedent's and petitioner's sale of dollar_figure acres of the clay county property for dollar_figure per acre and the sale of big_number acres from j p hall sons inc to georgia-pacific for dollar_figure per acre the hall property elmore's report states that the hall property was primarily about percent wetlands and that georgia-pacific bought the property for its peat deposits which had an estimated production value of dollar_figure per acre elmore did not consider whether the clay county property had peat deposits the clay county property wa sec_35 percent wetlands respondent argues that petitioners' suggestion that georgia- pacific paid more for the hall property because it had peat deposits erroneously assumes that georgia-pacific would have no production_costs we disagree elmore's report states that georgia-pacific bought the hall property for its peat deposits and clearly supports petitioners' contention that the peat deposits raised the property's sale price we believe moses understated the volume and thus the value of the timber on the clay county property that decedent transferred to petitioner in date he subtracted years' growth from the volume of the timber on the property in date he erroneously assumed that no timber had been cut from the property in those years petitioner testified that he harvested timber from the property from until decedent died in date however the record does not show how much timber petitioner harvested during those years both elmore and moses used as a comparable sale decedent's and petitioner's sale of dollar_figure acres of the clay county property for dollar_figure per acre we believe that the sale price received by decedent and petitioner for the clay county parcel dollar_figure per acre supports some increase in moses' estimated per acre value of the clay county property however the acres of clay county property were more valuable per acre than the clay county property decedent transferred to petitioner in the 329-acre parcel both parties' experts used this post-valuation date sale as a comparable sale the parties agree that it is relevant in valuing the clay county property in when decedent transferred the undivided one-half interest in it to petitioner was percent uplands and percent wetlands and was some of the best acreage owned by petitioner and decedent the clay county property transferred to petitioner wa sec_21 percent uplands and percent wetlands the 329-acre parcel sold was virtually unregulated by the water management district and other governmental agencies in contrast to the property transferred which was almost totally regulated by the water management district the army corps of engineers the florida department of environmental protection and the clay county planning department we conclude that the value of a fee simple interest in the clay county property was dollar_figure dollar_figure per acre in decedent gave petitioner an undivided one-half interest in the clay county property one-half of dollar_figure is dollar_figure we discuss at paragraph ii-b-5 below to what extent the clay county property should be discounted because petitioner received an undivided one-half interest in it discounts the applicability and extent of a discount for a fractional interest is a question of fact to be decided based on the entire record 64_tc_889 5_tc_488 courts have held that the sum of all fractional interests can be less than the whole and have used fractional interest discounts to value undivided interests 84_f3d_196 5th cir 658_f2d_999 5th cir see eg estate of wildman v commissioner tcmemo_1989_667 percent discount estate of van loben sels v commissioner tcmemo_1986_501 60-percent discount respondent offered no evidence relating to the size of the discount that should apply and concedes that a 5-percent discount should apply petitioners' expert wiggins testified that the value of petitioner's undivided one-half interests in timberland should be discounted by percent a whether petitioners' property interests should be discounted absent evidence of actual sales of fractional interests_in_real_property respondent contends that no discount larger than percent should apply because petitioner offered no evidence of actual sales of fractional interests_in_real_property we disagree pitts credibly testified that banks generally will not lend money to the owner of a fractional interest_in_real_property without the consent of the coowner we believe that moses' and pitts' inability to find sales of fractional interests in comparable real_property in florida shows that there was no market for fractional interests in such real_property respondent points out that neither moses nor elmore applied a discount for a fractional interest in real_estate we give little weight to the fact that moses did not discount the property interests at issue here because petitioner retained him to value the fee simple interests in the properties not petitioner's or decedent's undivided one-half interests in the properties b whether the discount should be limited to scruby's estimate of the cost of partitioning the property interests respondent points out that respondent's 5-percent discount equals dollar_figure big_number acres x dollar_figure x for the gift and dollar_figure big_number acres x dollar_figure x for the gift respondent argues that we should not apply a discount greater than percent because the 5-percent discount is greater than petitioners' expert's scruby's estimate of the costs of partitioning the properties we disagree first wiggins estimated that partition costs here would be substantially more than respondent's 5-percent discount that is dollar_figure for the putnam county property dollar_figure for the clay county property and dollar_figure for the estate property second respondent's percent discount does not give adequate weight to other reasons for discounting a fractional interest_in_real_property such as lack of control and the historic difficulty of selling an undivided fractional interest_in_real_property discussed below c discounts for lack of marketability and lack of control petitioners' expert wiggins testified that the fractional interests at issue here should be discounted by percent due to lack of marketability and by percent for lack of control and the necessity of resorting to partition and related costs to liquidate one's interest for a total discount of percent he concluded that a marketability discount is appropriate because of the 9-month marketing time and 10-percent real_estate commission cost involved in selling real_property in that particular market he said that the holder of a fractional interest in real_estate lacks control because he or she cannot unilaterally decide how to manage it wiggins noted that a partition action can take a considerable amount of time and expense he estimated that partition costs would be dollar_figure for the transfer dollar_figure for the transfer and dollar_figure for the estate property because the properties are irregularly shaped parcels and contain pineland swampland and riverfront acreage respondent did not cross-examine wiggins or offer any evidence to rebut wiggins' testimony respondent offered no evidence regarding the size of the discount that should apply here see 24_bta_475 court adopted the taxpayer's contention of value where the commissioner introduced no evidence to rebut the taxpayer's expert's testimony respondent argues that wiggins was not qualified to value real_property because he is a business appraiser and not a real_estate appraiser respondent contends that wiggins provided no factual basis for his conclusions that a 20-percent discount for lack of marketability should apply respondent points out that wiggins included in his report as evidence of the appropriate amount for marketability discounts a discussion of the illiquidity of privately held companies and discounts relating to sales of their stock respondent argues that we should give no weight to wiggins' opinion because he did not consider the marketability of real_property respondent argues that wiggins' use of a 30-percent discount for lack of control for the cost of partitioning the properties was not supported by any verifiable data in his reports and far exceeds scruby's estimated costs of partition we disagree that we should disregard wiggins' report because he is not a real_estate appraiser wiggins is an experienced business appraiser who has given expert opinions in valuing fractional interests in partnerships businesses and real_property we believe that he correctly considered various factors affecting the potential costs of partitioning the properties in issue he considered the time and expense of selling real_property in that particular market wiggins appropriately considered all relevant facts and gave a reasonable explanation for the discount he applied to the property interests at issue here respondent's expert elmore applied no discount to petitioner's and decedent's property interests he admitted however that an undivided one-half interest_in_real_property has a limited market and that a fractional interest may be discounted although he did not quantify the amount of the discount this generally supports petitioners' claim that the putnam and clay county properties and the estate property should be discounted because they are undivided one-half interests d whether petitioners' property interests should be discounted because of the purported partnership between decedent and petitioner petitioners argue that we should discount the putnam and clay county properties by more than percent because decedent transferred them to petitioner subject_to the purported partnership between decedent and petitioner we disagree as discussed at paragraph ii-a-3 above decedent did not contribute any property to a partnership or make any of her property subject_to a partnership thus we do not consider the part of wiggins' reports in which he valued partnership interests because they are based on the incorrect assumption that decedent transferred property interests to petitioner subject_to a partnership see lefrak v commissioner tcmemo_1993_526 court disregarded expert's report because it was premised on the faulty assumption that the seller transferred partnership interests not interests in real_estate e conclusion we adopt petitioners' contention that a 44-percent discount should be applied to value petitioner's undivided one-half interest in the putnam county and clay county properties and decedent's undivided one-half interest in the estate property we conclude that the value of petitioner's undivided one- half interest in the putnam county property in was dollar_figure and in the clay county property in was dollar_figure c whether petitioner is liable as a transferee for gift_tax respondent contends that petitioner is liable for the unpaid gift_tax due on decedent's gifts to him in and a donee is personally liable for the payment of gift_tax to the extent of the value_of_the_gift to the donee if the gift_tax is not paid when due sec_6324 sec_6901 petitioner asserted in his petition that he was not a transferee of the estate of decedent petitioners did not brief this issue we treat this as a concession by petitioners 90_tc_488 31_tc_690 affd 295_f2d_336 5th cir thus we hold that petitioner is liable as a transferee for decedent's gift_tax relating to decedent's and gifts to him d county the value of decedent's one-half interest in the clay property in her estate the gross_estate of a decedent includes the value at the death of the decedent of his or her interest in all property real or personal tangible or intangible wherever situated sec_2031 if the interest of the decedent is an undivided minority interest_in_real_property including timber the amount included in the estate is the fair_market_value of the undivided_interest see 49_tc_207 8_tc_1099 estate of campanari v commissioner t c pincite respondent contends that decedent's interest in the estate property was worth dollar_figure dollar_figure per acre when she died petitioners contend that decedent's interest in the estate property was worth dollar_figure dollar_figure per acre when she died we believe that elmore overestimated the value of the estate property because none of his comparables had as much wetlands as the acres held by the estate percent elmore admitted it would be difficult to develop property with a significant amount of wetlands the six comparables elmore considered each had better topography road frontage access to utilities and zoning than the acres held by the estate one comparable sale used by elmore was petitioner's sale of the clay county property that elmore and moses said was superior to the estate property the buyers of the comparable properties received concessions from the owners and in one case from the government as a condition for paying the purchase_price we think this shows that the prices paid for these properties were more than the fair_market_value of decedent's property we conclude that the value of a fee simple interest in the estate property was dollar_figure per acre in or dollar_figure decedent owned an undivided one-half interest in the estate property when she died one-half of dollar_figure is dollar_figure we discussed at paragraph ii-b-5 above why we apply a 44-percent discount to the clay county property we apply a 44-percent discount here for the same reasons we conclude that the value of the estate property when decedent died was dollar_figure e the value of the cadillac brougham petitioner offered no evidence that the value of the cadillac brougham when decedent died in date was not dollar_figure as determined by respondent the date southeastern edition of the n a d a official used car guide reports an average retail price of dollar_figure for a used cadillac brougham we sustain respondent's determination on this issue decisions will be entered under rule


internal_revenue_service number release date index number ----------------- ------------------- -------------------------------- ----------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------- id no ----------------- telephone number --------------------- refer reply to cc psi bo1 plr-116695-15 date october legend x ---------------------------------------------------- ------------------- a ----------------------------------------------------- -------------- b ----------------------------------------------------- ----------------- trust ---------------------------------------------------- -------------------------------------------------------- trust ---------------------------------------------------- ------------------------------------------------------- trust ----------------------------------------------------- -------------------------------------- date date date date date a --------------------- ---------------- ------------------ --------------------- -------------------------- ------ plr-116695-15 b state -------- -------- dear -------------- this responds to a letter dated date and subsequent information submitted on behalf of x by x’s authorized representative requesting relief under sec_1362 of the internal_revenue_code facts according to the information submitted and representations made within x was incorporated and made an s election effective date under the laws of state during a’s life a owned a of the shares in x through trust trust was a_trust described in sec_1361 and was an eligible shareholder of x a died on date after a’s death trust continued to be an eligible shareholder of x under sec_1361 until date as of date trust was intended to be treated as a qualified_subchapter_s_trust qsst however b the beneficiary of trust did not file a timely election to treat trust as a qsst therefore on date trust became an ineligible shareholder of x causing x’s s_corporation_election to terminate on date trust transferred b of its x shares to trust on date as of date x represents that trust was intended to be treated as a qsst however b the beneficiary of trust did not file a timely election to treat trust as a qsst on date trust distributed all of its shares in x to b b then immediately transferred the x shares to trust trust is a_trust described in sec_1361 and is an eligible shareholder of x x represents that the circumstances resulting in the failure_to_file the qsst elections for trust and trust was inadvertent and was not motivated by tax_avoidance or retroactive tax planning x and its shareholders have agreed to make such adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary law and analysis sec_1361 of the code provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under plr-116695-15 sec_1362 is in effect for such year sec_1361 defines a small_business_corporation as a domestic_corporation which is not an ineligible_corporation and which does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than class of stock sec_1361 provides that for purposes of sec_1361 a_trust all of which is treated under subpart e as owned by an individual who is a citizen or resident_of_the_united_states may be a shareholder of an s_corporation sec_1361 provides that a_trust may be an s_corporation shareholder with respect to stock transferred to it pursuant to a will but only for the 2-year period beginning on the day on which such stock is transferred to it sec_1361 provides that in the case of a qsst with respect to which a beneficiary makes an election under sec_1361 the trust is treated as a_trust described in sec_1361 and for purposes of sec_678 the beneficiary of the trust is treated as the owner of that portion of the trust which consists of stock in a s_corporation with respect to which the election under sec_1361 is made sec_1362 provides in relevant part that if an election under sec_1362 by any corporation was terminated under sec_1362 or or sec_1361 the secretary determines that the circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such termination steps were taken so that the corporation for which the termination occurred is a small_business_corporation and the corporation for which the termination occurred and each person who was a shareholder in such corporation at any time during the period specified pursuant to sec_1362 agrees to make the adjustments consistent with the treatment of such corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such termination such corporation shall be treated as an s_corporation during the period specified by the secretary conclusion based solely on the facts submitted and the representations made we conclude that x’s s_corporation_election terminated on date as a result of the failure to make a timely qsst election for trust we further conclude that the termination of x’s s election on date was inadvertent within the meaning of sec_1362 pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation as of date and thereafter provided that b files a qsst election for trust and trust with an plr-116695-15 effective date of date and date respectively with the appropriate service_center within days from the date of this letter and x's s_corporation_election is not otherwise terminated under sec_1362 a copy of this letter must be attached to the qsst elections except as specifically ruled upon above we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the code specifically we express or imply no opinion regarding x’s eligibility to be an s_corporation further no opinion is expressed or implied concerning whether trust and trust meet the requirements of a qsst under sec_1361 this ruling is directed only to the taxpayer who requested it according to sec_6110 this ruling may not be used or cited as precedent pursuant to the power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative sincerely david r haglund david r haglund branch chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes cc


internal_revenue_service number release date index number ----------------------- --------------------------------- ------------------------------ ------------------- --------------------------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc intl plr-132912-04 date date taxpayer legend legend ---------------------------------------------------------------------------------------------- ------------------------ ------------------- -------------------- -------------------------- -------------------------- ------- ------- entity individual a cpa firm ---------------------------------- date a date b year x year y dear------------------ this replies to your representative’s letter dated date in which your representative requests on behalf of taxpayer an extension of time under sec_301_9100-3 to file the election and agreement described in sec_1_1503-2 relating to the reporting of dual consolidated losses_incurred by entity in the tax_year ended on date a hereinafter the tax_year ended on date a may be referred to as year x the information submitted for consideration is substantially as set forth below the ruling contained in this letter is predicated upon facts and representations submitted by taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for a ruling verification of the factual information representations and other data may be required as a part of the audit process taxpayer owned and carried on business operations through entity which was a foreign_corporation taxpayer elected to treat entity as a disregarded_entity for federal plr-132912-04 income_tax purposes and filed a form_8832 electing such treatment effective on date b which date was prior to year x entity is a dual_resident_corporation under sec_1_1503-2 entity incurred a loss for the tax_year ended on date a and this loss was included in the consolidated_income_tax_return of taxpayer for that tax_year taxpayer engaged the services of cpa firm to prepare and review taxpayer’s federal_income_tax return for year x therefore taxpayer relied on cpa to ensure that taxpayer’s federal_income_tax return for year x included all required forms elections and or agreements to properly reflect the intended treatment of entity’s dual consolidated losses individual a is a partner with cpa firm and was the managing partner responsible for the individuals involved with the tax engagement for taxpayer when this staff reviewed the tax_return for year x the staff did not realize that an election and agreement described in sec_1_1503-2 should have been included with the tax_return as a result the tax_return was filed without the election and agreement the facts and affidavits submitted describe the circumstances that led to the discovery that the election and agreement was not filed upon this discovery cpa firm and taxpayer decided to request relief to remedy the missed filing sec_301_9100-1 provides that the commissioner has discretion to grant a taxpayer a reasonable extension of time under the rules set forth in sec_301_9100-3 to make a regulatory election under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301 -1 b provides that an election includes an application_for relief in respect of tax and defines a regulatory election as an election whose due_date is prescribed by a regulation a revenue_ruling revenue_procedure notice or announcement sec_301_9100-3 provides that requests for relief subject_to this section will be granted when the taxpayer provides evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith within the meaning of sec_301_9100-3 subject_to the conditions set forth in sec_301_9100-3 and the grant of relief will not prejudice the interests of the government within the meaning of sec_301_9100-3 in the present situation the election and agreement described in sec_1 g i is a regulatory election as defined in sec_301_9100-1 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant taxpayer an plr-132912-04 extension of time provided that taxpayer satisfies the standards for relief as set forth in sec_301_9100-3 based on the facts and information submitted we conclude that taxpayer satisfies sec_301_9100-3 accordingly taxpayer is granted an extension of time of days from the date of this ruling letter to file the election and agreement described in sec_1_1503-2 relating to the reporting of dual consolidated losses_incurred by entity in the tax_year ended on date a the granting of an extension of time is not a determination that taxpayer is otherwise eligible to file the elections and agreements sec_301_9100-1 the facts indicate that entity incurred a loss in year y the facts also indicate that taxpayer filed with its tax_return for year y the election and agreement described in sec_1_1503-2 with respect to the year y loss and the annual certification described in sec_1_1503-2 with respect to the year x loss taxpayer asks if relief is deemed necessary with respect to the annual certification filed with the tax_return for year y assuming that the annual certification filed with the year y tax_return was timely filed relief is not necessary as sec_301 applies to elections including an annual certification that have not been timely filed a copy of this ruling letter should be associated with the elections and agreements this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent no ruling has been requested and none is expressed as to the application of any other section of the code or regulations to the facts presented pursuant to a power_of_attorney on file in this office a copy of this ruling letter is being furnished to your authorized representative sincerely associate chief_counsel international by s meryl silver meryl silver reviewer enclosure copy for purposes


t c memo united_states tax_court marvin l barmes and barbara j barmes petitioners v commissioner of internal revenue respondent docket no filed date marvin l barmes and barbara j barmes pro_se timothy a lohrstorfer for respondent memorandum findings_of_fact and opinion colvin judge respondent determined a deficiency in petitioners’ federal_income_tax of dollar_figure for and an accuracy-related_penalty under sec_6662 of dollar_figure the issues for decision are whether petitioners may deduct depreciation for two automobiles for we hold that they may not - - whether petitioners may deduct as a casualty_loss for the cost of improving and restoring their pond and its surrounding grounds we hold that they may not whether petitioners are liable for the accuracy-related_penalty under sec_6662 for we hold that they are the parties agree that to the extent that we sustain respondent’s determinations increasing petitioners’ income shown on schedule c profit or loss from business a computational adjustment is required for petitioners’ self-employment_tax for unless otherwise indicated section references are to the internal_revenue_code references to petitioner are to marvin l barmes references to mrs barmes are to petitioner barbara j barmes findings_of_fact some of the facts have been stipulated and are so found a petitioners petitioners lived in fritchton indiana the fritchton residence when they filed their petition the fritchton residence is located on dollar_figure acres of land the fritchton property petitioners acquired the fritchton residence and property in there is an old farmhouse located near petitioners’ residence on the fritchton property mrs barmes’ mother lived - - in the farmhouse until she died in petitioners remodeled the farmhouse and furnished it as an office in b barbara’s gift shop general business activities in petitioners operated barbara’s gift shop and barmes wholesale barbara’s gift shop the principal_place_of_business of which was pincite main street in vincennes indiana barbara’s gift shop was a wholesale and retail business it is about miles from the fritchton residence petitioners each worked days a week at barbara’s gift shop in petitioner typically worked hours per day and mrs barmes typically worked hours per day during about percent of the time petitioner spent working for barbara’s gift shop was pincite main street and about percent was at the farmhouse in fritchton petitioner had some business meetings in the farmhouse and mrs barmes occasionally did bookwork there the farmhouse was not petitioners’ primary place of business in petitioners’ use of automobiles in petitioners bought a cadillac for dollar_figure anda corvette for dollar_figure petitioner primarily drove the cadillac and mrs barmes primarily drove the corvette during mrs barmes drove the corvette to and from petitioners’ fritchton residence and main street and for personal purposes she q4e- also used the corvette for business errands petitioner drove the cadillac to and from the fritchton residence and main street petitioners’ apartment in petitioners had an apartment above the shop pincite main street the apartment the apartment has one room about by feet with a double bed kitchen television chest of drawers dresser and couch petitioners sometimes used the apartment as a kitchen for their employees and as a first aid room petitioners spent about half of their nights at the fritchton residence in and about half at the apartment c petitioners’ cattle petitioners owned cattle the number of which is not specified in the record at the fritchton property when petitioner was at the fritchton property he fed the cattle petitioners’ son greg barmes also sometimes fed the cattle d petitioners’ pond condition of the pond before the fritchton property contained a pond which was built around the trees bordering the pond were primarily willows and also included red cedars sycamores and cottonwoods petitioners installed a geothermal heat pump in which used water in the pond to heat and cool petitioners’ fritchton residence and the farmhouse - - bight to ten red cedar trees bordering the pond were damaged or destroyed by a wet heavy snowfall that occurred in the weight of the snow broke many of the trees trees and tree limbs fell into the pond from to early petitioners did not replace those trees in petitioners caught fish in the pond and ate them the pond became stagnant and polluted late in because trees had fallen into the pond and had not been removed sediment had accumulated in the pond and the pond was surrounded by brush by the summer of the fish in the pond had died the pond was shallow and smelled bad and its banks had eroded restoration and improvement of petitioners’ pond petitioners hired shepard construction in to restore the pond shepard construction deepened the pond by removing sediment and trees from the bottom of the pond rebuilt a road around the levee removed two peninsulas from the pond created an island in the pond from sediment from the bottom of the pond and soil from the levee and removed trees surrounding the pond including some trees that had not been damaged shepard construction improved the pond beyond its pre-1991 condition and increased its value eb petitioners’ tax_return preparation of petitioners’ return before petitioners sometimes used tax preparers and certified public accountants to prepare their income_tax returns petitioners’ daughter-in-law susan barmes helped them prepare their return susan barmes had worked for petitioners since and had been married to petitioners’ son greg since she had previously worked two or three tax seasons preparing tax returns for h_r block in helping to prepare petitioners’ return susan barmes used a tax_return preparation computer_program irs publication tax guide for small_business for and irs publication depreciation petitioners’ schedule c for barbara’s gift shop petitioners reported gross_receipts of dollar_figure and a net profit of dollar_figure from barbara’s gift shop on a schedule c attached to their income_tax return petitioners deducted the following amounts of depreciation for the two automobiles they placed_in_service in date placed claimed claimed in service vehicle mileage depreciation cadillac big_number dollar_figure corvette big_number big_number petitioners claimed they used each vehicle percent for business the mileage claimed by petitioners for each vehicle was taken from odometer readings at the end of petitioners did not maintain a log or other contemporaneous written records - j- of the business use of the two automobiles for petitioners deducted expenses of dollar_figure on the schedule c they filed for barbara’s gift shop for restoring and improving their pond these expenses did not relate to barbara’s gift shop petitioners’ schedule f petitioners reported on a schedule f profit or loss from farming attached to their return that they had gross_income from their cattle activity of dollar_figure total expenses of dollar_figure and a net_operating_loss of dollar_figure f notice_of_deficiency respondent determined that petitioners were not entitled to deduct the depreciation on the cadillac and the corvette respondent also disallowed petitioners’ deduction of expenses relating to the pond opinion a whether petitioners may deduct depreciation for the cadillac and the corvette for petitioners to be entitled to deduct depreciation on their automobiles for they must prove the amount of business use of each automobile see sec_280f g petitioners must substantiate the business use of their automobiles by adequate_records or other evidence corroborating their own statement of the amount time and place and business_purpose of the automobile use see sec_274 --- - petitioners’ contentions petitioners contend that they used their cars almost exclusively for business purposes and that their use of the cars to drive between their fritchton residence and barbara’s gift shop was travel between two business offices because their cattle business was located at their fritchton residence see sec_274 280f b commuting expenses the expenses of traveling between one’s home and place of business are generally nondeductible personal expenses see sec_262 413_us_838 326_us_465 a taxpayer whose primary business activity is not located at his or her residence may not deduct expenses of traveling between the residence and the business merely because the taxpayer conducts a secondary_business at home see mazzotta v commissioner t c affd 467_f2d_943 2d cir andrews v commissioner tcmemo_1978_135 petitioners conducted their primary business pincite main street even though petitioner fed the cattle when he was at the fritchton property and he and mrs barmes worked some in the farmhouse office petitioners’ primary reason for traveling from the gift shop to the fritchton residence was personal petitioners cite heape v commissioner tcmemo_1992_660 for the proposition that the cost of travel between a taxpayer’s two places of business is business travel petitioners’ reliance on heape is misplaced in heape the taxpayer was a coal miner who also operated a farm we held that even though the taxpayer did a considerable amount of work on his farm he could not deduct his expenses of traveling between the coal mine and his home because as here the primary purpose for the trips was personal petitioners also rely on gosling v commissioner tcmemo_1999_148 and genck v commissioner tcmemo_1998_105 petitioners’ reliance on gosling and genck is misplaced in those cases we held that the taxpayers could deduct the cost of travel between a business the principal location of which was at their home and a second location for the same business in contrast the fritchton property was not the principal_place_of_business of the gift shop we conclude that the primary reason for petitioners’ travel between their gift shop and the fritchton residence was personal see commissioner v flowers supra substantiation petitioners’ only evidence of the amount of business use of the cadillac and the corvette in was petitioners’ testimony petitioner testified that his use of the cadillac was percent business and percent personal petitioners treated the trips - from petitioners’ fritchton residence to barbara’s gift shop as business use petitioners contend that a trip to the shopping mall or a restaurant is business related if the taxpayer makes a business-related telephone call while on the trip we disagree a business telephone call does not change the character of a trip from personal to business see h conf rept pincite 1984_3_cb_1 mrs barmes used the corvette for some personal purposes she did not estimate the amount of her business use of the corvette in petitioners do not have a log records or other corroboration of their testimony relating to their business use of their automobiles as required by sec_274 petitioners did not establish the percentages of business use of the two automobiles see 66_tc_879 65_tc_87 affd per curiam 540_f2d_821 5th cir 56_tc_1225 56_tc_936 affd 456_f2d_1335 2d cir thus petitioners may not deduct depreciation of the cadillac and the corvette for b whether petitioners may deduct the costs of restoring and improving their pond as a casualty_loss petitioners deducted dollar_figure on their schedule c for barbara’s gift shop for restoration of their pond petitioners now contend that they may deduct as a casualty_loss for - their cost of restoring the pond because heavy snows in the winter of that caused the cedar trees to fall into and damage the pond were sudden unexpected and unusual we disagree an individual may deduct losses arising from fire storm shipwreck or other_casualty or from theft sec_165 3_tc_1 a casualty does not include the progressive deterioration of property through a steadily operating cause 120_f2d_253 2d cir affg per curiam 42_bta_206 durden v commissioner supra petitioners contend that the trees fell into their pond from to sufficiently suddenly to constitute a casualty_loss petitioners cite bailey v commissioner tcmemo_1983_685 and helstoski v commissioner tcmemo_1990_382 to support their claim that the deterioration of their pond was not from gradual erosion but was due to a sudden event bailey and helstoski are distinguishable from this case in bailey large portions of the taxpayers’ backyard fell away in to weeks exposing the foundation of their house we held that the soil slippage occurred guickly enough to be a casualty within the meaning of sec_165 similarly in helstoski we treated as a casualty_loss storm damage to the taxpayers’ pond which immediately reduced the value of the taxpayers’ property in contrast in the instant case the pond did not deteriorate suddenly it deteriorated over a year period see 46_tc_302 durden v commissioner supra pincite petitioners contend that they properly deducted their loss in because that was when they first knew the amount of their loss see bailey v commissioner supra petitioners’ reliance on bailey is misplaced in bailey the court held that the taxpayers sustained their casualty_loss in because they could not measure their aggregate loss until that year the damage to their backyard began in date and continued until date thus in bailey unlike the instant case the casualty occurred suddenly even though it occurred in taxable years petitioners may not deduct as a casualty_loss the expenses of restoring their pond in since the damage to the pond occurred gradually c whether petitioners are liable for an accuracy--related penalty for negligence sec_6662 a respondent contends that petitioners are liable for the accuracy-related_penalty for negligence for a penalty is imposed under sec_6662 equal to percent of the part of the underpayment which is attributable to negligence or disregard of rules or regulations see sec_6662 a taxpayer is not negligent under sec_6662 if he - - or she reasonably relied in good_faith on the advice of a competent independent expert or tax professional who had all the information see 469_us_241 111_tc_215 89_tc_849 affd 904_f2d_1011 5th cir affd on other issue 501_us_868 reliance on professional advice petitioners contend that they reasonably relied on the advice of their daughter-in-law susan barmes we disagree petitioner and susan barmes testified that she spent a substantial amount of time helping petitioner prepare petitioners’ tax_return however neither petitioners nor susan barmes described any advice that she gave petitioners regarding the depreciation of their automobiles or the deduction of their restoration of landscaping expenses thus there is no evidence that petitioners relied on susan barmes’ advice on those issues petitioners contend that they were not negligent because they and susan barmes relied on irs publication tax guide for small_business and irs publication depreciation to prepare petitioners’ return we disagree petitioners did not follow the instructions contained in irs publication for example irs publication pincite states if you use your car for both business and personal purposes you must divide your expenses between business and personal_use petitioners did not segregate their business and personal_use of their automobiles similarly irs publication pincite states the cost of restoring landscaping to its original condition after a casualty may indicate the decrease in fair_market_value petitioners’ reliance on that publication to support their claim that they are entitled to claim a casualty_loss relating to the pond is unwarranted because the excerpt relied on assumes that the taxpayer has sustained a casualty_loss it does not indicate how to determine that a casualty_loss has occurred petitioners do not cite any other language from publication which supports their position here thus the publication is not authority for petitioners’ deduction of the pond restoration expenses petitioners were negligent and disregarded rules and regulations petitioners did not indicate what advice they received from susan barmes who helped prepare their return and they did not have reasonable_cause for deducting pond restoration expenses or depreciation on their automobiles without allocating between their business and personal_use we conclude that petitioners are liable for the accuracy-related_penalty for to reflect the foregoing decision will be entered under rule


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-137408-13 date date --------------------------------------------------------------------------------- ----------------------------------------------------- --------------------------------------------------------------------- --------------------------------------------------------------------------------- legend taxpayer ---------------------------------------------------------------------------------------------------------------- parent plant a plant b ---------------------------------------------------------------------------------------------------------- location commission date date date p d fund director ---------------------------------------- ------------------------------------------------- -------------------------- --------------------------- -------------------- ----------- ----------- -------------------------------------------- --------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------ dear ------------------ this letter responds to your request dated date for a ruling concerning whether certain payments made to employees and certain payments of transitional decommissioning costs constitute nuclear decommissioning costs as defined in sec_468a of the internal_revenue_code and sec_1_468a-1 of the income_tax regulations plr-137408-13 taxpayer represents the facts and information relating to its request for rulings as follows taxpayer a corporation is a wholly-owned subsidiary of parent taxpayer owns a p percent interest in both plant a and plant b and is responsible for d percent of the cost of decommissioning each plant the plants are at location and the amended operating license of plant a is scheduled to expire on date and the operating license of plant b is scheduled to expire on date on date taxpayer notified the nuclear regulatory commission that both plants had permanently ceased operations with respect to nuclear decommissioning costs that are included in the taxpayer’s cost of service for ratemaking purposes as well as for other matters taxpayer is subject_to regulation by commission taxpayer maintains a separate fund for each of the plants commission has authorized collections of amounts for decommissioning from ratepayers and the service has approved schedules of ruling amounts for contributions to these funds in the transition of the plants from operational status to a safe shutdown and then to physical dismantlement of the plants and restoration of the site as required by commission and the nuclear regulatory commission the operational workforce of the plants will be reduced overall the taxpayer has broadly described the types of tasks to be performed by employees during the decommissioning process as follows to plan and design all of the logistical and technical aspects required to take a nuclear power plant from an operational-ready status to safe shutdown and non-operational status to a fully dismantled and restored site to ensure the safe and orderly transition of the plants from an operational-ready status to safe shutdown and non- operational status maintain the plants in a safe condition during the actual dismantlement of the plants and dismantle remove and restore the site to its regulatory and legally required condition when employees are no longer needed for operation and or any phase of the decommission process those employees are released from service with the taxpayer rules of the commission allow the collection of decommissioning amounts for the severance and other assistance payments to separated employees who become unemployed as a result of decommissioning in addition to the severance payments described above taxpayer will incur transitional decommissioning costs these costs are described by the taxpayer broadly as follows preparation for physical decommissioning of the units consolidation and restoration of the facilities of the plants and the site upon which they are located security for the plants and the surrounding site communication with affected communities regarding the permanent retirement of the plants and plans for decommissioning of the plants and staffing costs incurred as a result of the permanent retirement and prior to the commencement of physical dismantlement of major components of the plants plr-137408-13 many of the costs described above will be paid in the first instance by taxpayer for reasons of administrative necessity these costs will then be reimbursed to taxpayer by the fund taxpayer requests the following rulings severance payments constitute nuclear decommissioning costs within the meaning of sec_468a and sec_1_468a-1 and therefore can be paid out of the funds for the related plant transitional decommissioning costs constitute nuclear decommissioning costs within the meaning of sec_468a and sec_1_468a-1 and therefore can be paid out of the funds for the related reimbursement by the funds to the taxpayer of severance payments and transitional decommissioning costs represent a permissible use of the funds under sec_468a and sec_1_468a-5 and sec_1 468a- b i and is not a prohibited self-dealing transaction under sec_1_468a-5 sec_468a was added to the code in by deficit_reduction_act_of_1984 pub_l_no sec_468a allows owners operators of nuclear power plants to currently deduct the future costs of decommissioning a nuclear power plant by making contributions to a fund prior to when economic_performance occurs sec_468a and sec_1_468a-2 generally require the owner operator to include in gross_income amounts that are distributed from a fund in addition to any deduction under sec_468a for contributions to a fund sec_468a recognizes that an owner operator may deduct otherwise deductible nuclear decommissioning costs such as under sec_162 for which economic_performance within the meaning of sec_461 occurs during a taxable_year sec_468a limits the use of the amounts in a fund to satisfying any liability of any person contributing to the fund for the decommissioning of a nuclear power plant the payment of administrative and other incidental_expenses of the fund and making investments sec_1_468a-1 states in part that nuclear decommissioning costs means all otherwise deductible expenses to be incurred in connection with the entombment decontamination dismantlement removal and disposal of the structures systems and components of a nuclear power plant whether that nuclear power plant will continue to produce energy or has permanently ceased to produce electric energy such term includes all otherwise deductible expenses to be incurred in connection with the preparation for decommissioning such as engineering and other planning expenses and all otherwise deductible expenses to be incurred with respect to the plant plr-137408-13 after the actual decommissioning occurs such as physical security and radiation monitoring expenses sec_162 generally allows a deduction for the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business sec_468a provides that under regulations prescribed by the secretary for purposes of sec_4951 the fund shall be treated in the same manner as a_trust described in sec_501 this section is implemented by sec_1_468a-5 sec_1_468a-5 states that the excise_taxes imposed by sec_4951 apply to each act of self- dealing between the fund and a disqualified_person in part sec_1_468a-5 defines self-dealing for purposes of sec_468a and the regulations thereunder as any act described in sec_4951 except i a payment by a nuclear decommissioning fund for the purpose of satisfying in whole or in part the liability of the electing taxpayer for decommissioning costs of the nuclear power plant to which the nuclear decommissioning fund relates sec_1_468a-5 provides that the term disqualified_person includes each person described in sec_4951 and sec_53_4951-1 sec_4951 of the code provides the term disqualified_person with respect to a_trust includes a contributor to the trust and a trustee of the trust sec_1_468a-5 provides that if at any time during the taxable_year a qualified nuclear decommissioning fund does not satisfy a requirement of sec_1_468a-5 the service may in its discretion disqualify all or a portion of the fund as of the date that the fund does not satisfy such requirements sec_1_468a-5 provides that if all or any portion of a qualified nuclear decommissioning fund is disqualified under sec_1_468a-5 the portion of the qualified nuclear decommissioning fund that is disqualified is treated as distributed to the electing taxpayer on the date of the disqualification such a distribution shall be treated for purposes of sec_1001 as a disposition of property held by the qualified nuclear decommissioning fund in addition the electing taxpayer must include in gross_income for the taxable_year that includes the date of disqualification an amount equal to the product of the fair_market_value of the assets of the fund determined as of the date of disqualification reduced by certain amounts including any_tax that is imposed on the income of the fund is attributable to income taken into account before the date of the disqualification or as a result of the disqualification and has not been paid as of the date of the disqualification and the fraction of the qualified nuclear decommissioning fund that was disqualified under sec_1_468a-5 we have examined the representations and information submitted by the taxpayer in relation to the requirements set forth in sec_468a and the regulations plr-137408-13 thereunder based solely upon these representations of the facts we conclude that severance payments and transitional decommissioning costs are nuclear decommissioning costs within the meaning of sec_468a and sec_1_468a-1 the expenses as broadly described by taxpayer are incurred in connection with the entombment decontamination dismantlement removal and disposal of the structures systems and components of a nuclear power plant we note that we are not ruling on any particular expense but on broad categories of expense and emphasize that each specific expense must satisfy the tests in sec_468a and the regulations thereunder regarding the reimbursement by the funds of severance payments and transitional decommissioning costs paid initially by the taxpayer we conclude that such reimbursements are within the exception to the self-dealing rules contained in sec_1 468a- b i that section defines self-dealing for purposes of sec_468a and the regulations thereunder as any act described in sec_4951 except i a payment by a nuclear decommissioning fund for the purpose of satisfying in whole or in part the liability of the electing taxpayer for decommissioning costs of the nuclear power plant to which the nuclear decommissioning fund relates here the reimbursement of severance payments and transitional decommissioning costs made by the funds are made for the purpose of satisfying the liability of taxpayer for decommissioning costs of the nuclear power plant to which the fund relates and are therefore not self-dealing thus the reimbursement by the funds to the taxpayer of severance payments and transitional decommissioning costs represent a permissible use of the funds this reimbursement constitutes an amount distributed from a fund as described in sec_468a and sec_1_468a-2 we note that this ruling applies only to reimbursement of the amounts paid for the severance payments and the transitional decommissioning costs by the taxpayer and not any additional_amounts such as service fees or any other_amounts not solely to reimburse taxpayer for decommissioning costs actually paid except as specifically determined above no opinion is expressed or implied concerning the federal_income_tax consequences of the transaction described above specifically no determination is made whether the independent decommissioning study conforms to industry standards and practices 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 your authorized representatives we are also sending a copy of this letter_ruling to the director sincerely peter c friedman senior technician reviewer branch passthroughs special industries