theodore r rolfs and julia a gallager petitioners v commissioner of internal revenue respondent docket no filed date in ps donated a house to their local volunteer_fire_department vfd to be used for firefighter and police training exercises and eventual demolition within several days the vfd conducted two training exercises at the house and burned it down ps claimed a deduction for a charitable_contribution of dollar_figure on their federal_income_tax return for on account of their donation of the house to the vfd and amended their petition to assert that they are entitled to deduct dollar_figure the house’s reproduction cost r contends that ps are not entitled to any deduction because ps received in exchange for the property donated a substantial benefit in the form of demolition services the value of which exceeded the value of the property donated quid pro quo argument r verdate 0ct date jkt po frm fmt sfmt v files rolfs sheila united_states tax_court reports determined that ps are liable for an accuracy-related_penalty under sec_6662 i r c and in his answer asserted in the alternative an accuracy-related_penalty under sec_6662 i r c ps contend that the court should not consider r’s quid pro quo argument because it is new_matter that r raised for the first time on brief held r’s quid pro quo argument is not new_matter and will be considered as ps raised the issue in their petition held further ps did not make a charitable con- tribution within the meaning of sec_170 i r c as a result of their donation of the house because they received a substantial benefit in exchange for the donation and have failed to show that the value of the property donated exceeded the value of the benefit received 477_us_105 followed held further ps acted with reasonable_cause and are accordingly not liable for any accuracy-related_penalty under sec_6662 or h i r c michael g goller robert e dallman and michelle l mukhtar for petitioners james e schacht and mark j miller for respondent gale judge respondent determined a deficiency of dollar_figure in petitioners’ federal_income_tax for and an accuracy-related_penalty equal to percent of the under- payment under sec_6662 by their amended petition petitioners aver that they are entitled to a charitable con- tribution deduction of dollar_figure rather than the dollar_figure claimed on their return as a result of a donation of a house to a local volunteer_fire_department resulting in an overpay- ment of dollar_figure for by answer to the amended peti- tion respondent asserts that petitioners are liable for a pen- alty under for a gross_valuation_misstatement the issues for decision are whether peti- tioners are entitled to a deduction for a charitable contribu- tion under sec_170 in connection with their donation of a house to a local volunteer_fire_department for training exer- cises and demolition and whether petitioners are liable for any accuracy-related_penalty under sec_6662 sec_6662 findings_of_fact some of the facts have been stipulated and the stipulated facts and attached exhibits are incorporated in our finding sec_1 unless otherwise indicated all section references are to the internal_revenue_code_of_1986 as in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure verdate 0ct date jkt po frm fmt sfmt v files rolfs sheila rolfs v commissioner by this reference theodore r rolfs and julia a gallagher hereafter petitioners and theodore r rolfs alone peti- tioner were married during the taxable_year and filed a joint federal_income_tax return for that year petitioners resided in wisconsin at the time the petition was filed the lake property on date petitioners paid dollar_figure for a fee simple interest in a 3-acre lakefront property pincite oak- land road in the village of chenequa wisconsin lake prop- erty the lake property was on pine lake in an area known locally as lake country -a desirable residential area where lakefront houses have historically commanded premium prices the lake property was accessed by a private road owned by an association the members of which were the homeowners living on the road at the time of purchase there were several improvements on the lake property including a house lake house a detached garage a boathouse and a well and septic system the lake house originally built in approximately was a 2-story structure with big_number square feet of living space including a stone facade addition that was constructed in the 1950s the lake house was in good condition and habitable though in need of remodeling in petitioner’s view for the village of chenequa waukesha county wis- consin assessed the lake property at dollar_figure allocating dollar_figure to the land and dollar_figure to the improvements for local property_tax purposes after acquiring the lake house petitioners were initially undecided regarding whether to remodel it or tear it down their deliberations were resolved when petitioner julia a gallagher’s mother beatrice gallagher mrs gallagher suggested in late that petitioners demolish the lake house build a new house to her specifications as her resi- dence in its place and then exchange the lake property for her existing residence petitioners agreed to mrs gallagher’s proposal and they carried out the plan as described below petitioners had a cordial relationship with mrs gallagher during the periods relevant to this case verdate 0ct date jkt po frm fmt sfmt v files rolfs sheila united_states tax_court reports demolition of the lake house sometime in the latter part of petitioner determined that it would cost dollar_figure to dollar_figure to demolish the lake house and remove the debris around the same time peti- tioner learned from his brother of an individual who had claimed a charitable_contribution_deduction for donating a residence to a local fire department to be burned down peti- tioner decided to donate the lake house to the village of chenequa volunteer_fire_department vfd for firefighter training exercises and demolition in a controlled burn and to claim a charitable_contribution_deduction for the value of the lake house in early date petitioner obtained the necessary approval for the burn from the wisconsin department of natural_resources dnr subject_to petitioner’s notifying the dnr of the actual date of the burn on date petitioner sent a letter to gary wieczorek the chief of the vfd and of the chenequa police department chief wieczorek which stated as we have discussed i would like to donate our house located pincite oakland road in the village of chenequa to the fire and police depart- ments of the village for training and eventually demolition this letter shall serve as an acknowledgment that it is my intention to donate the house for such purposes the house is available immediately if any fur- ther approvals are needed please contact me chief wieczorek understood that petitioners donated the lake house to the village of chenequa for the limited purpose of using the structure for training exercises of firefighters and police and with the ultimate aim of having the vfd burn it down he also understood that petitioners expected that the lake house would be destroyed within the first part of that year chief wieczorek further understood that the vfd could not use the lake house for any other purpose than training exercises that would include its destruction by fire sometime shortly before date the chenequa police department used the lake house for a training exer- cise on date the vfd conducted an initial training exercise at the lake house on date the letter contains a typographical error in that the correct address of the lake property is oakland road verdate 0ct date jkt po frm fmt sfmt v files rolfs sheila rolfs v commissioner days after petitioner’s letter donating the lake house the vfd conducted a second training exercise and burned the struc- ture to the ground the firefighter training exercises at the lake house allowed the vfd to satisfy monthly training requirements imposed under wisconsin state law chief wieczorek believed the firefighter training exercises conducted at the lake house were superior to the training exercises otherwise available to the vfd on date chief wieczorek sent a letter to peti- tioner which stated this letter is in receipt of your donation to the village of chenequa and its fire department in the amount of dollar_figure check and the dona- tion of the use of your home pincite oakland road for training purposes the home pincite oakland road was used during the month of february for training by the critical incident team and the police department and for further training by the fire department in roof ventilation and smoke drills on date the home was destroyed at a practice fire with our mutual aid fire departments in which we practiced using water supply in a non-hydranted area chief wieczorek solicited the dollar_figure payment from peti- tioners referred to in the letter quoted above to defray the costs that the village of chenequa otherwise would incur in connection with the training exercises the vfd conducted at the lake house on date approximately weeks after the destruction of the lake house petitioners entered into a con- tract to have a new residence constructed on the lake prop- erty at a cost of approximately dollar_figure the construction_contract did not itemize the costs of construction petitioners’ income_tax return petitioners timely filed a joint federal_income_tax return for the taxable_year petitioners attached to the return a form_8283 noncash charitable_contributions reporting that the lake house had a cost or adjusted_basis of dollar_figure and that the lake house was appraised at a fair_market_value of dollar_figure the form_8283 included a declaration of appraiser signed by richard s larkin and a donee acknowledgment signed by chief wieczorek petitioners claimed on schedule a itemized_deductions a deduction of dollar_figure attributable to charitable_contributions by cash or verdate 0ct date jkt po frm fmt sfmt v files rolfs sheila united_states tax_court reports check and a deduction of dollar_figure attributable to charitable_contributions other than by cash or check which included a dollar_figure deduction claimed for the donation of the lake house petitioners attached to the return a summary appraisal report prepared by richard s larkin of larkin appraisals inc dated date in support of the charitable_contribution_deduction claimed with respect to the lake house respondent’s examination and the notice_of_deficiency for their taxable_year petitioners retained all docu- mentation that a taxpayer exercising ordinary care and pru- dence in claiming a charitable_contribution_deduction would normally keep and they maintained all records required under the internal_revenue_code the parties have stipu- lated that petitioners cooperated timely with all of respond- ent’s requests information documents meetings and interviews during the examination of their return during the examination respondent did not request access to the lake property for witnesses respondent issued to petitioners a notice_of_deficiency for disallowing the charitable_contribution_deduction of dollar_figure claimed with respect to the donation of the lake house the notice_of_deficiency stated in pertinent part on schedule a line of your return for the year ended date you claimed an itemized_deduction of dollar_figure for gifts to charity it has not been established that any amount more than dollar_figure qualifies for deduction under any section of the internal_revenue_code therefore your taxable_income for the year ended date is increased by dollar_figure a schedule of examination adjustments attached to the notice_of_deficiency shows that respondent actually determined that petitioners were entitled to a deduction for charitable con- tributions totaling dollar_figure for rather than the dollar_figure referred to in the statement quoted above the record does not include an itemization of this amount and it is unclear whether peti- tioners claimed a deduction for the dollar_figure remitted to the village of chenequa volunteer_fire_department vfd to defray the costs incurred in connection with the use of the lake house for training exercises verdate 0ct date jkt po frm fmt sfmt v files rolfs sheila rolfs v commissioner the pleadings petitioners filed a timely petition for redetermination alleging that they were entitled to a charitable_contribution_deduction of dollar_figure related to their donation of the lake house petitioners subsequently filed an amended petition in which they averred that they were entitled to a charitable_contribution_deduction for their donation of the lake house of at least dollar_figure the reproduction cost of the house resulting in an overpayment of their tax_liability by dollar_figure respondent filed an answer to amended petition denying the averments summarized above and asserting that as an alternative to the determination in the notice_of_deficiency petitioners were liable for a penalty for a gross_valuation_misstatement equal to percent of the under- payment under sec_6662 pretrial proceedings as part of the pretrial proceedings respondent requested permission for his expert witness to visit the lake property on date petitioners’ counsel informed respondent’s counsel that the lake property was then owned by mrs gallagher that same day respondent’s counsel con- tacted mrs gallagher and requested that respondent’s expert witness be permitted to enter the private road leading to the lake property for the purpose of viewing the site to aid in the preparation of a valuation report mrs gallagher denied the request respondent’s counsel informed petitioners’ counsel of this development and petitioners’ counsel subsequently informed respondent’s counsel that petitioners were unable to arrange for respondent’s expert to gain access to the lake property respondent never made a request pursuant to rule for permission to visit the lake property valuation experts a richard s larkin petitioners’ expert witness richard s larkin is president of larkin appraisals inc and he prepared the summary appraisal report attached to petitioners’ return mr rule a allows any party to serve on any other party a request to permit entry upon designated land or other_property in the possession or control of the other party verdate 0ct date jkt po frm fmt sfmt v files rolfs sheila united_states tax_court reports larkin is a member of the appraisal institute is a wisconsin certified residential appraiser and is qualified to give an opinion as to the value of real_estate in his original report mr larkin used the so-called before and after approach to determine the value of the lake house that is treating the fair_market_value of the lake house as equal to the difference between fair_market_value of the lake property with the lake house and the fair_market_value of the lake property without the lake house more specifically mr larkin determined the value of the lake property with all improvements to be dollar_figure on the basis of a compari- son to the direct sales of comparable properties he then sub- tracted from this amount i the value of the land esti- mated at dollar_figure on the basis of direct sales of comparable vacant land ii the value of the structural improvements other than the lake house estimated at dollar_figure on the basis of their replacement cost less physical depreciation and iii certain site improvements estimated at dollar_figure by sub- tracting the value of the land and improvements other than the lake house totaling dollar_figure from the direct sales market_value of the lake property with all improvements dollar_figure mr larkin arrived at what he considered the contributory value of the lake house dollar_figure as of date as part of his analysis mr larkin also estimated that the reproduction cost of the lake house was dollar_figure mr larkin later supplemented his original report to acknowledge that during the period in question there existed in wisconsin what he considered a submarket in which single-family residences were sold for the purpose of moving them to other locations mr larkin concluded that this market was not relevant to the valuation exercise he per- formed with regard to the lake house because the lake house was not going to be moved b robert a george respondent’s expert robert a george is a professional house mover mr george has contracted to move numerous houses throughout wisconsin and he is qualified to give an there apparently is no dispute that this valuation would remain the same if the valuation_date were changed to date-the date that petitioners donated the lake house to the vfd verdate 0ct date jkt po frm fmt sfmt v files rolfs sheila rolfs v commissioner opinion as to the value of houses that are sold for the pur- pose of moving them to other locations after considering the height of the lake house and his determination that the lake house could be moved only after removing the stone facade addition to the house and cutting down surrounding mature trees mr george concluded that it would cost approximately dollar_figure to move the lake house to another location in the chenequa area however mr george concluded that in view of the high cost of land in the chenequa area in comparison with the modest nature of the lake house no one would pur- chase the lake house for the purpose of moving it as any land close enough to render a move feasible would be too expensive to justify siting the modest lake house there mr george expressed the further opinion that any buyer would pay no more than a nominal courtesy amount of dollar_figure to dollar_figure for the structure as of date essentially for the purpose of ensuring that there was sufficient consid- eration to render the purchase contract binding mr george also opined that any salvage_value attributable to the struc- ture or components within the house would be offset by the cost of labor to remove those components c marcia solko respondent’s expert marcia solko is a real_estate specialist employed by the wisconsin department of transportation her primary responsibilities were to arrange for the clearing or removal of all improvements including houses from real_estate designated by the state of wisconsin for highway construction projects ms solko is qualified to give an opinion as to the value of houses that are sold for the pur- pose of moving them to other locations taking many factors into account including the height of the lake house the stone facade addition and the fact that the house sat on a concrete slab foundation ms solko con- cluded that it would be very costly to attempt to move the lake house and she doubted that anyone would buy the lake house in order to move it to another property verdate 0ct date jkt po frm fmt sfmt v files rolfs sheila united_states tax_court reports i charitable_contribution deductions opinion sec_170 provides in relevant part that a deduction is allowed for any charitable_contribution payment of which is made within the taxable_year sec_170 defines the term charitable_contribution to include a contribution or gift to or for_the_use_of inter alia a political_subdivision of a state but only if the gift is made for exclusively public pur- poses the supreme court has defined contribution or gift_for purposes of sec_170 as follows the legislative_history of the contribution or gift limitation of sec_170 though sparse reveals that congress intended to differentiate between unrequited payments to qualified recipients and payments made to such recipients in return for goods or services only the former were deemed deductible the house and senate reports on the tax bill for example both define gifts as payments made with no expectation of a financial return commensurate with the amount_of_the_gift her- nandez v commissioner 490_us_680 thus a payment of money generally cannot constitute a charitable_contribution if the contributor expects a substan- tial benefit in return 477_us_105 see also 902_f2d_1540 fed cir 449_f2d_413 further instructed that the supreme court has in ascertaining whether a given payment or property transfer was made with the expectation of any return benefit or quid pro quo we are to examine the external structural features of the transaction which obviates the need for imprecise inquiries into the motivations of individual taxpayers her- nandez v commissioner supra pincite if a charitable_contribution is made in property other than money the amount of the contribution is generally the fair_market_value of the property at the time of the contribution sec_1_170a-1 income_tax regs f air market_value for this purpose is the price at which the property would change hands between a willing buyer and a willing seller neither being under any compulsion to buy or sell and both there is no dispute that the village of chenequa and by extension the vfd qualifies as a political_subdivision of a state within the meaning of sec_170 verdate 0ct date jkt po frm fmt sfmt v files rolfs sheila rolfs v commissioner having reasonable knowledge of the relevant facts sec_1_170a-1 income_tax regs restrictions on the prop- erty’s use or marketability on the date of the contribution must be taken into account in the determination of fair_market_value see 33_tc_223 affd 238_f2d_945 2d cir deukmejian v commissioner tcmemo_1981_24 dresser v commis- sioner tcmemo_1956_54 see also revrul_85_99 1985_2_cb_83 ii the parties’ arguments a respondent’s position respondent contends that petitioners are not entitled to a deduction for a charitable_contribution in connection with their donation of the lake house to the vfd because they anticipated and received a substantial benefit in exchange for the contribution namely demolition services petitioners therefore did not make a charitable_contribution within the meaning of sec_170 as interpreted in united_states v am bar endowment supra because the fair_market_value of the lake house as donated did not exceed the fair_market_value of the demolition services petitioners received from the vfd in exchange for the donation quid pro quo argument respondent argues in the alternative that the charitable_contribution_deduction in dispute is disallowed under sec_170 because petitioners transferred to the vfd less than their entire_interest in the lake house and the lake house as donated to the vfd was worthless b petitioners’ position petitioners first contend that the burden_of_proof on all issues is shifted to respondent pursuant to sec_7491 petitioners assert that the court should not consider respondent’s quid pro quo argument to the effect that peti- tioners received a benefit in exchange for their donation because that respondent raised for the first time in his opening brief however if respondent is allowed to raise the quid pro quo argument petitioners contend that they donated property with a fair_market_value of dollar_figure according to a qualified_appraisal which they have shown should be valued at its this argument constitutes new_matter verdate 0ct date jkt po frm fmt sfmt v files rolfs sheila united_states tax_court reports reproduction cost of dollar_figure and that they received only an incidental benefit in return petitioners contend that sec_170 is inapplicable because in transferring the lake house to the vfd with the right to demolish it they transferred their entire_interest in the property iii sec_7491 shift in the burden_of_proof we consider as a preliminary matter petitioners’ conten- tion that the burden_of_proof has shifted to respondent pursuant to sec_7491 in general the commissioner’s determination as set forth in a notice_of_deficiency is presumed correct 290_us_111 rule a sets forth the general_rule that the burden_of_proof shall be on the tax- payer except as otherwise provided by statute or determined by the court and except that the burden_of_proof shall be upon the commissioner in respect of any new_matter increases in deficiency and affirmative defenses sec_7491 however provides an exception that shifts the burden_of_proof to the commissioner as to any fac- tual issue relevant to a taxpayer’s liability for tax if the taxpayer introduces credible_evidence with respect to such issue sec_7491 and the taxpayer satisfies certain other conditions including substantiation of any item and cooperation with the government’s requests for witnesses and information sec_7491 see also rule a petitioners contend that they have satisfied the require- ments of sec_7491 and the burden_of_proof as to all fac- tual issues affecting the deficiency in their tax should be shifted to respondent respondent contends that because he was denied access to the lake property incident to his trial preparation petitioners have not satisfied the sec_7491 requirement that they cooperate with reason- able requests by the secretary for witnesses information documents meetings specifically respondent argues petitioners have failed to show that they took reasonable steps to secure mrs gallagher’s permission for respondent’s expert witness to view the lake property petitioners contend that they had no control_over mrs galla- gher and that in any event sec_7491 imposes a interviews and a dollar_figure deduction would give rise to an overpayment for verdate 0ct date jkt po frm fmt sfmt v files rolfs sheila rolfs v commissioner cooperation requirement on taxpayers only during the exam- ination process a taxpayer bears the burden of proving that he or she has met the requirements of sec_7491 see richardson v commissioner tcmemo_2005_143 h conf rept pincite 1998_3_cb_747 the legislative his- tory underlying sec_7491 states in pertinent part the taxpayer must cooperate with reasonable requests by the secretary for meetings interviews witnesses information and documents including providing within a reasonable period of time access to and inspection of witnesses information and documents within the control of the taxpayer as reasonably requested by the secretary cooperation also includes pro- viding reasonable assistance to the secretary in obtaining access to and inspection of witnesses information or documents not within the control of the taxpayer including any witnesses information or documents located in foreign countries h conf rept supra pincite c b pincite we first observe that petitioners’ contention that the sec_7491 requirement of cooperation extends only through the examination of their return is meritless for purposes of sec_7491 the requirement of coopera- tion continues through the pretrial proceedings in the tax_court see eg 277_fedappx_122 2d cir affg tcmemo_2006_239 yearout mech engg inc v commissioner tcmemo_2008_217 krohn v commissioner tcmemo_2005_145 lopez v commis- sioner tcmemo_2003_142 affd on this issue 116_fedappx_546 5th cir we likewise are not persuaded that petitioners have met their burden of proving that they fully cooperated with respondent’s reasonable requests during the pretrial phase the parties stipulated in pertinent part that after respond- ent’s counsel informed petitioners’ counsel that mrs galla- gher had denied respondent’s request for access to the lake property advised respondent’s counsel that no arrangements could be made by the petitioners to have respondent’s expert witness see the property what is lacking in this record is any evidence of what effort if any petitioners undertook to assist in securing mrs gallagher’s cooperation to permit respondent’s expert to visit the lake property as reflected in the legislative_history congress intended that the duty_of cooperation extend to subsequently petitioners’ counsel verdate 0ct date jkt po frm fmt sfmt v files rolfs sheila united_states tax_court reports to providing reasonable assistance in obtaining access to and inspection of information not within the control of the taxpayer petitioners offered no testimony concerning their efforts to obtain mrs gallagher’s cooperation stating only that they had a good relationship with her mrs gallagher did not testify the secretary in view of this evidentiary vacuum petitioners have failed to show what reasonable assistance they offered if any with respect to respondent’s effort to obtain access to information from a person not within petitioners’ control as a result they have not satisfied the cooperation requirement of sec_7491 accordingly we hold that sec_7491 is inapplicable since the condition of the lake prop- erty permeates all factual issues in this case petitioners retain the burden_of_proof with respect to all factual issues iv analysis a respondent’s quid pro quo argument status as new_matter we must first decide whether respondent is allowed to raise his quid pro quo argument premised on 477_us_105 to the effect that petitioners are not entitled to any charitable contribu- tion deduction because the fair_market_value of the property they donated did not exceed the fair_market_value of the ben- efit they received in exchange petitioners contend that the issue was untimely raised and therefore its consideration would be prejudicial to them we have refused to consider an untimely raised issue when the opposing party is unfairly surprised and prejudiced because his defense against the issue requires the presen- tation of evidence different from the evidence relevant to the identified issues in the case see 87_tc_56 76_tc_708 59_tc_551 however we are not per- suaded that petitioners were unfairly surprised or prejudiced although petitioners’ counsel suggested to the court that mrs gallagher’s previous experi- ence with the internal_revenue_service occasioned her intransigence in the instant proceeding counsel’s statements do not constitute testimony or evidence see eg u s holding co v com- missioner 44_tc_323 verdate 0ct date jkt po frm fmt sfmt v files rolfs sheila rolfs v commissioner by respondent’s quid pro quo argument starting with the petition and continuing through their opening brief peti- tioners have cited scharf v commissioner tcmemo_1973_265 and contended that a small or incidental benefit received by a donor does not negate a finding of donative_intent scharf is quintessentially a quid pro quo case involving facts that are similar to those of the instant case in many respects scharf involved a charitable_contribution_deduction claimed for the donation of a building partially destroyed by fire to a volunteer_fire_department to be burned down for training purposes recognizing that the taxpayer’s receipt of a benefit from the building’s demolition neces- sitated a quid pro quo analysis this court observed that the circumstances presented an exceedingly close question but upheld the deduction reasoning that the public benefit of firefighter training greatly exceeded the demolition benefit received by the donor taxpayer by virtue of their reliance on scharf from the outset it is petitioners not respondent who first raised the quid pro quo issue petitioners cannot claim to have been unfairly sur- prised when respondent further developed the quid pro quo theory on brief including analyzing post-scharf develop- ments in the caselaw such as the supreme court’s decision in united_states v am bar endowment supra given peti- tioners’ reliance on scharf their contention from the outset that the benefit they received was small or incidental and scharf ’s characterization of the issue as a close one we believe it was incumbent upon petitioners to proffer whatever evidence they had bearing upon the benefit they received from the donation of the lake house and we conclude that petitioners were not unfairly surprised or prejudiced by respondent’s quid pro quo argument see 116_tc_450 92_tc_1267 affd 906_f2d_62 2d cir 91_tc_200 affd 905_f2d_1190 8th cir in addition scharf sustained a charitable_contribution_deduction for the petitioners raised their new_matter objection in their answering brief arguing that re- spondent raised the quid pro quo argument for the first time in his opening brief petitioners also contend that if respondent is allowed to raise the quid pro quo argument he should bear the burden_of_proof on the issue on account of his untimely raising of it because we conclude that petitioners raised the quid pro quo issue in their petition there are no grounds to shift the burden_of_proof to respondent verdate 0ct date jkt po frm fmt sfmt v files rolfs sheila united_states tax_court reports donation of a building to be burned down by a volunteer_fire_department whereas respondent argues that such a deduc- tion is precluded in petitioners’ case under am bar endow- ment since petitioners contend that scharf supports a deci- sion in their favor it is appropriate and important to con- sider the application of a quid pro quo analysis in this case we shall therefore consider the issue development of the quid pro quo test respondent argues that petitioners are not entitled to a charitable_contribution_deduction for their donation of the lake house because they anticipated and received a substan- tial benefit in exchange for the donation namely the demoli- tion of the lake house on a site where they intended to rebuild respondent contends that the value of the demoli- tion services received exceeded the value of the property peti- tioners transferred eliminating any charitable intent from the transaction as noted respondent relies on united_states v am bar endowment supra and on sec_1 170a- h income_tax regs in united_states v am bar endowment supra pincite the supreme court set forth the principle that a payment of money generally cannot constitute a charitable_contribution if the contributor expects a substantial benefit in return the sine qua non of a charitable_contribution is a transfer of money or property without adequate_consideration id pincite however the court also recognized that a taxpayer’s payment to a charitable_organization that is accompanied by his receipt of a benefit may have a ‘dual character’ of a pur- chase and a contribution if the payment exceeds the value of the benefit received in return id pincite the court con- sequently adopted a two-part test first articulated in revrul_67_246 c b for determining when part of a dual payment is deductible first the payment is deduct- ible only if and to the extent it exceeds the market_value of the benefit received second the excess payment must be made with the intention of making a gift id internal quotations omitted the am bar endowment_test has since been incorporated into the regulations see sec_1_170a-1 income_tax regs t d 1997_1_cb_68 the test also sec_1_170a-1 income_tax regs states verdate 0ct date jkt po frm fmt sfmt v files rolfs sheila rolfs v commissioner applies where payment is made in property other than money see transam corp v united_states f 2d pincite6 petitioner had decided to demolish the lake house and con- struct another residence on the site when he contacted the vfd about donating the lake house to be burned down for training purposes consequently examining the external fea- tures of the transaction as we must see hernandez v commissioner u s pincite we find that petitioner anticipated a benefit in exchange for the contribution demo- lition of the lake house on similar facts this court decided in a memorandum opinion scharf v commissioner tcmemo_1973_265 that the taxpayer was entitled to a chari- table contribution deduction for the donation of a structure equal to its value for insurance purposes we reasoned in scharf as follows we conclude that the benefit flowing back to petitioner consisting of clearer land was far less than the greater benefit flowing to the volun- teer fire department’s training and equipment testing operations we think the petitioner benefited only incidentally from the demolition of the building and that the community was primarily benefited in its fire control and prevention operations consequently on balance we hold that the petitioner is entitled to a charitable_contribution_deduction the test applied in scharf which examines whether the value of the public benefit of the donation exceeded the value of the benefit received by the donor differs from the supreme court’s test announced years later in 477_us_105 the am bar endowment_test examines whether the fair_market_value of the contributed_property exceeded the fair_market_value of the benefit received by the donor the test applied in scharf has no vitality after am bar endowment instead we no part of a payment that a taxpayer makes to or for_the_use_of an organization described in sec_170 that is in consideration for goods or services is a contribution or gift within the meaning of sec_170 unless the taxpayer- i intends to make a payment in an amount that exceeds the fair_market_value of the goods or services and ii makes a payment in an amount that exceeds the fair_market_value of the goods and serv- ices we note also that the entirely voluntary nature of petitioners’ decision to demolish the lake house distinguishes their case from scharf v commissioner tcmemo_1973_265 mr scharf’s building had been partially destroyed by fire and was about to be condemned as unsafe when he decided to donate it to the local fire department for demolition in a training fire con- continued verdate 0ct date jkt po frm fmt sfmt v files rolfs sheila united_states tax_court reports must consider whether the value of the lake house as donated exceeded the value of the demolition services peti- tioners received application of the quid pro quo test a value of the benefit received petitioner testified that his investigation revealed that it would cost approximately dollar_figure to dollar_figure to have the lake house demolished and the debris removed this estimate is consistent with those of both of respondent’s experts who put the figure at approximately dollar_figure to dollar_figure ms solko and dollar_figure mr george petitioners nonetheless dispute the conclusion that they saved demolition costs of at least dollar_figure by virtue of their donation of the lake house to the vfd petitioner claimed in his testimony that the cost of the contract to construct the new house for mrs gallagher included dollar_figure to dollar_figure in excavation charges for clearing the remnants of the burn and the concrete foundation of the lake house petitioners argue on brief that these additional excavation costs dem- onstrate that petitioners did not save anything from the demolition resulting from the burning and therefore received no benefit from their donation of the lake house to the vfd we reject this contention first the documentary_evidence tends to undermine the claim that the construction_contract for the new residence included dollar_figure or more for exca- vation charges associated with clearing the remnants of the burn the construction_contract for the new house as included in the record does not contain any allocation of the total_contract_price for any specific cost-excavation debris removal or otherwise moreover a preprinted portion of the contract covering building site conditions has been lined through by the parties to the contract creating an inference that the contract_price did not cover any significant debris or foundation removal services second two experts plus sequently scharf ’s use of the insurance loss value less insurance proceeds received to meas- ure the value of the structure donated offers no basis for valuing the structure here where no precontribution casualty was involved because as discussed infra we conclude that the value of the lake house did not exceed the value of the demolition services we need not address the second prong of the test set forth in 477_us_105 whether the excess of the value of the donation over the value of the benefit received was transferred with the intention of mak- ing a gift verdate 0ct date jkt po frm fmt sfmt v files rolfs sheila rolfs v commissioner whomever petitioner consulted estimated the cost of demoli- tion and debris removal for the lake house as at least dollar_figure we do not believe that debris removal alone accounted for these estimates a much more plausible inference is that the cost of the labor and equipment for the demolition constituted a significant portion of the estimate on this record we are persuaded that petitioners saved at least dollar_figure in the cost of demolition services as a result of their arrangements with the vfd for the donation of the lake house for burning they accordingly received a benefit with a fair_market_value in that amount in exchange for the dona- tion b value of the property donated because petitioners received a substantial benefit in exchange for their donation of the lake house their entitle- ment to any charitable_contribution_deduction under the am bar endowment_test depends upon whether the value of the lake house as donated exceeded the value of the demolition services as noted the lake house’s value for this purpose is its fair_market_value at the time of the donation as meas- ured by the willing buyer willing seller standard in sec_1_170a-1 income_tax regs of particular importance here the fair_market_value of contributed_property must take into account any restrictions or conditions limiting the prop- erty’s marketability on the date of the contribution see cooley v commissioner t c pincite rejecting retail market_value as fair_market_value of automobiles that could not be sold at retail deukmejian v commissioner tcmemo_1981_24 rejecting real_property valuation premised on property’s development value when property’s use restricted to open space dresser v commissioner tcmemo_1956_54 rejecting real_property valuation premised on commercial use when property’s use restricted to residen- tial the restrictions or conditions that must be taken into account include those imposed by the donor incident to the contribution of the property see deukmejian v commis- sioner supra petitioners contend and we agree that their donation of the lake house to the vfd without their conveyance of the underlying land on which it was sited effected a construc- verdate 0ct date jkt po frm fmt sfmt v files rolfs sheila united_states tax_court reports tive severance of the structure from the land recognized under wisconsin law even though the structure remained affixed to the land see fitzgerald v anderson n w wis smith v waggoner n w wis tiffany real_property secs 3d ed by transferring the lake house to the vfd without the under- lying land however petitioners created a substantial restric- tion or condition on the property’s marketability namely the lake house could not remain indefinitely on the land upon which it was sited petitioners attached two additional restrictions or condi- tions on the lake house incident to its donation namely the permissible use of the lake house was restricted to firefighter and police training exercises and there was a condition that the lake house be burned down relatively soon after the conveyance petitioner’s letter memorializing the transfer though informal stated that the lake house was to be used by the vfd for training and eventually demolition and vfd chief wieczorek testified that he understood he could not use the lake house for any other purpose and that the burndown was to take place during the first part of thus in addition to being severed from its underlying land the lake house as donated could not be used for residential purposes and was subject_to a condition that it be promptly burned down petitioners offered the appraisal of their expert mr larkin in support of their claim that the lake house had a fair_market_value of at least dollar_figure when donated in his appraisal mr larkin opined that the lake house had a contributory value of dollar_figure on the basis of a before and respondent disputes whether the letters between petitioner and the vfd memorializing the donation of the lake house were sufficient to effect a constructive severance of the building from the underlying land to effect a constructive severance of a building from land the transfer ordi- narily must be in a writing in a form sufficient for a conveyance of land tiffany real prop- erty sec 3d ed respondent contends that the letters between petitioner and the vfd were insufficient under the wisconsin statute_of_frauds wis stat ann sec dollar_figure west to convey such an interest we disagree under wis stat ann sec_706 a conveyance that does not satisfy every requirement of the statute_of_frauds may nonetheless be enforced where there has been detrimental reliance see also clay v bradley n w 2d wis the vfd demolished the lake house in reliance on petitioner’s date letter con- veying the lake house to the vfd for that purpose the letter donating the lake house was dated date and the burndown by the vfd occurred days later corroborating chief wieczorek’s testimony concerning the expectation of the parties to the transfer the contract for the construction of a new house on the site was signed approximately weeks later petitioners’ contentions to the effect that there was no agreement or understanding that the house would be promptly burned down are unpersuasive verdate 0ct date jkt po frm fmt sfmt v files rolfs sheila rolfs v commissioner after approach to value which treated the value of the donated lake house as equal to the difference between the fair_market_value of the lake property with the lake house and the fair_market_value of the lake property without the lake house we find the larkin appraisal to be unpersuasive evidence that the lake house had a fair_market_value of dollar_figure as donated while the before and after method used by mr larkin has been accepted as an appropriate measure of the fair_market_value of donations of restrictive covenants on real_property such as conservation easements see eg 87_tc_892 schwab v commissioner tcmemo_1994_232 sec_1_170a-14 income_tax regs petitioners cite no authority for_the_use_of a before and after method in valuing a structure that has been severed from its underlying land and encumbered with additional restrictions on use the before and after method as used in valuing easements treats the diminution in the value of the real_property that arises from the easement as the measure of the easement’s fair_market_value see symington v commissioner supra pincite however we are not persuaded that any diminution in the value of the lake property resulting from the removal of the lake house rep- resents an accurate measure of the value of the lake house as donated to the vfd petitioners did not donate an ease- ment-ie an intangible_property right permanently encum- bering the lake property they donated a structure severed from the lake property with substantial restrictions and conditions on its use as described more fully below the before and after method employed by mr larkin takes no account of these conditions and restrictions that would affect the marketability of the severed structure see 33_tc_223 deukmejian v commis- sioner tcmemo_1981_24 dresser v commissioner tcmemo_1956_54 the larkin appraisal states that the interest valued is fee simple and unencumbered mr larkin contends that the value of the lake property for the donation purposes to it would appear that petitioners also donated a temporary easement to the vfd granting a right of access to the lake property to conduct the training exercises and controlled burn how- ever neither petitioners nor their expert addressed this element of the donation or suggested it had any value verdate 0ct date jkt po frm fmt sfmt v files rolfs sheila united_states tax_court reports which it was put was its contributory value of dollar_figure mr larkin reaches a contributory value of the lake house by starting with the fair_market_value of the lake property as a whole land the lake house and all other improvements estimated on the basis of sales of comparable residential properties ie dollar_figure and subtracting the fair_market_value of the land also estimated on the basis of sales of com- parable vacant sites plus the depreciated cost of the improvements other than the lake house ie dollar_figure however since the starting point of mr larkin’s calculation was the market_value of the lake property as a whole as measured by sales of comparable properties where the houses could remain on their sites indefinitely and were available for residential use the contributory value for the lake house he derived by subtracting the value of the land and other improvements necessarily valued the lake house on the basis of its being available for residential use and affixed to the site indefinitely thus the dollar_figure contributory value of the lake house postulated by mr larkin at best reflects the value of the lake house before taking into account its sever- ance from the underlying land the prohibition on residential use and the condition that it be burned down promptly con- sequently the property interest mr larkin appraised is not comparable to the property interest that petitioners donated to the vfd petitioners alternatively contend that the fair_market_value of the lake house as contributed to the vfd was dollar_figure its reproduction cost as estimated by mr larkin petitioners offer no expert testimony in support of this propo- sition mr larkin did not so opine petitioners merely borrow his estimate of reproduction cost and assert on brief relying on 839_f2d_420 8th cir revg 86_tc_66 and 369_fsupp_1034 e d wis that because the lake house was unique and was special use property in the hands of the donee reproduction cost is the appropriate measure of its value in their amended petition petitioners characterize their position as a claim that they are entitled to a deduction equal to the reproduction cost of the lake house on brief petitioners instead refer to replacement cost as the appropriate measure petitioners apparently treat re- production and replacement cost as synonymous terms in the circumstances we find it un- necessary to consider any differences in the two concepts verdate 0ct date jkt po frm fmt sfmt v files rolfs sheila rolfs v commissioner petitioners’ reliance on estate of palmer and first wis bankshares corp is misplaced there was nothing unique about the lake house comparable to the unique status of the properties at issue in those cases-in estate of palmer a building integral to a college campus and its activities and in first wis bankshares corp a bank structure suitable only to some public use according to the expert testimony in the record the lake house was a typical albeit modest resi- dence for its area by their own admission petitioners con- templated residing in it after remodeling in addition the structures at issue in both cases petitioners cite were donated without having been constructively severed from the land on which they were sited consequently the cir- cumstances of this case lend no support to the use of repro- duction cost an approach that also fails to account for the conditions petitioners placed on the lake house incident to the donation instead the circumstances of this case bring it squarely within the cooley line of cases which require that restrictions or conditions affecting the marketability of donated property be taken into account in determining the value of the donated property see cooley v commissioner supra deukmejian v commissioner supra dresser v commis- sioner supra see also revrul_85_99 supra p roperty otherwise intrinsically more valuable which is encumbered by some restriction or condition limiting its marketability must be valued in light of such limitation cooley v commissioner supra pincite we consider first the impact of the severance of the lake house structure from the underlying land the price at which the lake house would change hands would undoubtedly be affected by the condition that the structure could not remain affixed to its underlying land indefinitely petitioners offered no evidence concerning the impact of this condition respondent offered the testimony of two experts in the field of house moving regarding the price at which the lake house would likely sell if required to be moved from its existing site both house moving experts concluded that the likelihood of a buyer’s purchasing the lake house to move it from the site was virtually nil because the characteristics of the lake house and its site rendered a relocation of the structure infeasible we are persuaded that the expert testimony con- verdate 0ct date jkt po frm fmt sfmt v files rolfs sheila united_states tax_court reports cerning the market for the lake house as a structure to be moved provides a reasonable basis for estimating the impact on fair_market_value of the severance of the lake house from its underlying land we find that the severance rendered the lake house virtually worthless as for the impact on the lake house’s fair_market_value of the remaining conditions petitioners imposed incident to the donation the restriction of use to firefighter and police training exercises and the condition that the structure be promptly burned down there is insufficient evidence in the record to support anything beyond speculation we are per- suaded however that the impact on fair_market_value of the foregoing encumbrances would be adverse rather than bene- ficial finally as for the possibility that the lake house as encumbered by petitioners’ restrictions had a fair_market_value equal to its salvage_value respondent’s expert mr george provided expert testimony to the effect that the lake house’s salvage_value was zero on the basis of his examina- tion of photographs and a video of the lake house and a description of its features mr george opined that the value of any salvageable materials would be offset by the costs of removing them as a consequence we are persuaded by the evidence that the lake house had no salvage_value conclusion on the basis of the entire record we conclude that respondent prevails on his quid pro quo argument we are persuaded by the evidence that petitioners anticipated a substantial benefit in exchange for their donation of the lake house in the form of demolition services worth approxi- mately dollar_figure and that the fair_market_value of the lake house as donated did not exceed that figure petitioners have failed to prove the lake house had a fair_market_value exceeding dollar_figure because the expert testimony they offered to prove value failed to account for substantial conditions and restrictions imposed on the property incident to its dona- tion including in particular its severance from the under- respondent’s other expert ms solko speculated on the lake house’s salvage_value on the assumption that certain features might exist by contrast mr george examined mr larkin’s appraisal of the lake house which included photographs and a description of its features and the vfd’s videotape of its training exercises which depicts the lake house in greater detail than the photographs in the larkin appraisal verdate 0ct date jkt po frm fmt sfmt v files rolfs sheila rolfs v commissioner lying land the remaining evidence supports a conclusion that the fair_market_value of the lake house as encumbered at the time of the donation was de_minimis the lake house could not remain on the land on which it was sited could not be used for residential purposes yet had no value as a struc- ture to be moved or any salvage_value we therefore hold that petitioners are not entitled to any charitable contribu- tion deduction for the donation of the lake house because they have not satisfied the am bar endowment_test they have not shown that the market_value of the prop- erty they donated exceeded the market_value of the benefit they received in exchange b accuracy-related_penalty respondent determined that petitioners are liable for an accuracy-related_penalty under sec_6662 and amended his answer to assert petitioners’ liability for a penalty under sec_6662 for a gross_valuation_misstatement respondent argues on brief in support of the sec_6662 penalty that petitioners have an underpayment that is attributable to negligence or disregard of rules or regulations under sec_6662 to a substantial_understatement_of_income_tax under sec_6662 and or to a substantial_valuation_misstatement under sec_6662 that is aug- mented by sec_6662 because it is a gross_valuation_misstatement under sec_6664 however generally no penalty is imposed under sec_6662 with respect to any portion of an underpayment if it is shown that there was reasonable_cause for such portion and that the taxpayer acted in good_faith with respect to such portion this reasonable_cause exception generally does not apply in the case of a substantial or gross_valuation_overstatement with respect to property for which a charitable_contribution_deduction was claimed under sec_170 unless the claimed value of the property was based on a qualified_appraisal by a qualified_appraiser and the tax- given our conclusion that petitioners’ charitable_contribution_deduction is precluded under 477_us_105 we need not decide respondent’s al- ternate contentions that the deduction is disallowed pursuant to sec_170 or on account of the worthlessness of the lake property at the time of the donation verdate 0ct date jkt po frm fmt sfmt v files rolfs sheila united_states tax_court reports payer made a good_faith investigation of the value of the contributed_property see sec_6664 and the determination of whether a taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all pertinent facts and cir- cumstances sec_1_6664-4 income_tax regs peti- tioners complied with all reporting requirements maintained adequate books_and_records and fully disclosed the nature of the charitable_contribution_deduction in dispute on their return the legal issues raised by their deduction claim were not settled importantly in scharf v commissioner tcmemo_1973_265 this court held that a charitable contribu- tion deduction was available for the donation of a building albeit partially destroyed to a volunteer_fire_department for demolition in firefighter training exercises while the validity of the test applied in scharf may have been subject_to doubt after the supreme court’s refinement and clarification of the quid pro quo analysis of charitable_contribution deductions in 477_us_105 no federal court had reconsidered or questioned the scharf holding since the supreme court’s examination of the issue in the parties apparently do not dispute that the deduction petitioners claimed on their return was based on a qualified_appraisal by a qualified_appraiser while peti- tioners like their appraiser overlooked the impact on the lake house’s value of the restrictions attached to the property when it was donated a reasonable argument could be made that the house had value-which supports a finding that petitioner’s investigation of the value of the contributed prop- erty was at least in good_faith see sec_6664 on bal- ance given all the facts and circumstances including the uncertain state of the law we find that petitioners acted with reasonable_cause and in good_faith accordingly they are not liable for any penalty under sec_6662 pars and of sec_6664 as in effect for were redesignated pars and respectively by the health care and education reconciliation act of publaw_111_152 sec c a 124_stat_1069 verdate 0ct date jkt po frm fmt sfmt v files rolfs sheila rolfs v commissioner to reflect the foregoing an appropriate decision will be entered f verdate 0ct date jkt po frm fmt sfmt v files rolfs sheila


internal_revenue_service department of the treasury number release date index number u i l no washington dc person to contact telephone number refer reply to cc psi plr-129974-01 date date legend company state shareholder a dear this letter responds to a letter dated date requesting a ruling on behalf of company under sec_1362 of the internal_revenue_code the information submitted discloses that company was incorporated on a in state company has one shareholder shareholder it is represented that company has intended to be an s_corporation since a however company discovered that its s election had not been timely filed company requests a ruling under sec_1362 that its sec_1362 election will be treated as timely made for its taxable_year that began on a sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides when an s election will be effective generally if an s election is made within the first two and one half months of a corporation's taxable_year then that corporation will be treated as an s_corporation for the year in which the election is made sec_1362 provides that if an s election is made after the first two and one half months of a corporation's taxable_year then that corporation will not be treated as an s_corporation until the taxable_year following the year in which the s election is made sec_1362 provides that if no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely plr-129974-01 made for such taxable_year and sec_1362 shall not apply based on the facts submitted and representations made we conclude that company has established reasonable_cause for failing to make a timely s election for its taxable_year that began on a accordingly we conclude that company's sec_1362 election will be treated as timely made for its taxable_year that began on a however this ruling is contingent on company filing form_2553 election by a small_business_corporation with an effective date of a with the appropriate service_center within days from the date of this ruling a copy of this letter should be attached to the form_2553 except as specifically set forth above we express or imply no opinion concerning the federal tax consequences of the foregoing facts specifically we express or imply no opinion on whether company otherwise qualifies as an s_corporation pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to company this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours jeanne sullivan senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries enclosure copy for sec_6110 purposes


internal_revenue_service number release date index numbers ---------------------- ------------------------------------- --------------------------------------------- -------------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------------ telephone number -------------------- refer reply to cc psi b03 plr-127706-13 date date x ------------------------------------------------------------------------------------------------------------------------- legend country ---------------- year date ------- ---------------------- dear ------------ this letter responds to a letter dated date submitted on behalf of x by its authorized representative requesting that x be granted an extension of time under sec_301_9100-3 of the procedure and administration regulations to elect to be treated as a disregarded_entity under sec_301_7701-3 facts x was formed under the laws of country in year x represents that it is a foreign_entity eligible to elect to be classified as a disregarded_entity for federal tax purposes however x failed to timely file form_8832 entity classification election to be treated as a disregarded_entity for federal tax purposes effective date law sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in plr-127706-13 sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that except as provided in sec_301 b unless the entity elects otherwise a foreign eligible_entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides in part that for purposes of sec_301_7701-3 a member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member sec_301_7701-3 provides in part that except as provided in sec_301_7701-3 and v an eligible_entity may elect to be classified other than as provided in sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides in part that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer plr-127706-13 acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center to elect to be treated as a disregarded_entity effective date a copy of this letter should be attached to the form_8832 this ruling is contingent on the owner of x filing within days of this letter all required returns and amended income_tax returns consistent with the requested relief being effective date to the extent appropriate these returns must include but are not limited to forms information_return of u s persons with respect to foreign disregarded entities such that these forms reflect the consequences of the relief granted in this letter except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office we are sending copies of this letter to x’s authorized representatives plr-127706-13 the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination sincerely associate chief_counsel passthroughs special industries by ______ s ________________ james a quinn senior counsel branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


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 b01 plr-100176-08 date date legend x --------------------------------------------------- ----------------------------------- state --------- a ------------------------- ---------------------------------------------------- d1 --------------------- dear ---------------- this letter responds to a letter dated date and subsequent correspondence written on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code facts according to the information submitted x was incorporated under state law on d1 a x’s sole shareholder intended for x to be an s_corporation as of d1 however x’s form_2553 election by a small_business_corporation was not timely filed x requests a ruling that it will be recognized as an s_corporation effective d1 law and analysis plr-100176-08 sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1362 provides that an election under sec_1362 may be made by a small_business_corporation for any taxable_year at any time during the preceding_taxable_year or at any time during the taxable_year and on or before the 15th day of the third month of the taxable_year sec_1362 provides that if a a small_business_corporation makes an election under sec_1362 for any taxable_year and b such election is made after the 15th day of the third month of the taxable_year and on or before the 15th day of the third month of the following taxable_year then such election shall be treated as made for the following taxable_year sec_1362 provides that if a an election under sec_1362 is made for any taxable_year determined without regard to sec_1362 after the date prescribed by sec_1362 for making the election for the taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make the election the secretary may treat the election as timely made for the taxable_year and sec_1362 shall not apply x did not file a timely election to be treated as an s_corporation under sec_1362 effective d1 x has however established reasonable_cause for not making a timely election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and representations made and provided that x otherwise qualifies as a subchapter_s_corporation we conclude that x will be recognized as an s_corporation effective d1 within days from the date of this letter x must submit a properly completed form_2553 with a copy of this letter attached to the appropriate service_center except as expressly provided herein we express or imply no opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion concerning whether x otherwise qualifies as an s_corporation for federal tax purposes in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representatives this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent plr-100176-08 sincerely dianna k miosi dianna k miosi chief branch office of the associate chief_counsel passthroughs special industries enclosures a copy of this letter a copy for sec_6110 purposes


t c memo united_states tax_court michael h and barbara selter petitioners v commissioner of internal revenue respondent docket no filed date michael h selter pro_se alan r peregoy for respondent memorandum opinion armen special_trial_judge this matter is before the court on respondent's motion to dismiss for lack of jurisdiction filed date as discussed in detail below we shall grant respondent's motion to dismiss background on date respondent mailed a notice_of_deficiency to michael h and barbara selter the selters or petitioners determining a deficiency of dollar_figure in their federal_income_tax for respondent mailed the notice to petitioners at their last_known_address namely selkirk drive bethesda maryland petitioner michael h selter is a partner ina law firm located in washington d c on wednesday date at approximately a m the tax_court mailroom received an envelope containing the selters' petition contesting the notice_of_deficiency described above the envelope bears a preprinted address label listing the name and address of mr selter's law firm as the sender and the envelope identifies the court as the addressee notably the envelope does not bear any postage nor does it bear any type of postmark there is no adhesive or sticky residue in the upper right-hand corner of the envelope suggesting that postage may never have been affixed thereto further the envelope is not torn damaged or unusually soiled nor does it appear to have been abused and there are no marks or notations on the envelope indicating that it was misdirected or otherwise delayed in transit affixed to the envelope are a certified mail receipt ' although the court's zip code was erroneously listed on the address label as the zip code for the selters’ home address in bethesda maryland rather than the court’s correct zip code of a representative of the u s postal service testified that such an error would not have delayed the delivery of the petition to the court see also 76_tc_389 sticker no z and the anchors for the so-called certified mail green card used to confirm receipt an employee of the tax_court signed the green card on date and it was returned to petitioners in due course by the postal service the petition signed by both petitioners is dated date respondent filed a motion to dismiss for lack of jurisdiction on the ground that the petition was not filed within the 90-day period prescribed in sec_6213 petitioners filed an opposition to respondent's motion asserting that the petition was timely mailed to the court on date petitioners' opposition includes a declaration and a supplemental declaration signed by tyree hunt ms hunt a temporary employee of mr selter's law firm in the declaration ms hunt states that on date she delivered the envelope bearing the petition to the postal service in the supplemental declaration ms hunt states that she did not deliver the envelope bearing the petition to the postal service but rather left the envelope with other office mail for in-house pickup by a postal carrier this matter was called for hearing at the court's motions session in washington d c counsel for respondent appeared pincite unless otherwise indicated all section references are to the internal_revenue_code as amended and all rule references are to the tax_court rules_of_practice and procedure the hearing and offered argument in support of respondent's motion to dismiss also respondent called as a witness waverly vaughan ms vaughan supervisor of operations at the u s postal service located on brentwood road in washington d c the u s postal service on brentwood road is responsible for delivering mail to the tax_court ms vaughan testified that certified mail item no z was received at the brentwood road postal service either late in the evening on date or very early in the morning on date ms vaughan also testified that the normal delivery time for an item mailed from one address in washington d c to another address in washington d c i sec_1 to days ms vaughan further testified that normally an envelope lacking postage would be returned to the sender or delivered to the addressee for collection of the postage due however ms vaughan acknowledged that the postal service does on occasion mistakenly deliver mail lacking postage mr selter appeared at the motions hearing and offered argument in opposition to respondent's motion when the court informed mr selter that the court would not rely on ms hunt's conflicting declarations in deciding the case mr selter requested a continuance to allow him to call ms hunt as a witness this matter was called for a second hearing at the court's motions session in washington d c both counsel for respondent and mr selter appeared at the hearing and offered argument in respect of the pending motion mr selter informed the court that he had contacted ms hunt and that she had agreed to appear at the hearing however mr selter failed to issue a subpoena to ms hunt and she did not appear to testify however the office manager of mr selter’s firm did appear and testify also during the hearing mr selter offered as an exhibit an article titled postal service gives check in the mail' a whole new twist published in the new york times on date respondent objected to the admission of the article on the ground that it was hearsay the court deferred ruling on the admissibility of the article discussion the court's jurisdiction to redetermine a deficiency depends upon the issuance of a valid notice_of_deficiency and a timely filed petition rule a c see 93_tc_22 90_tc_142 sec_6212 expressly authorizes the commissioner after determining a deficiency to send a notice_of_deficiency to the taxpayer by certified or registered mail it is sufficient for jurisdictional purposes if the commissioner mails the notice_of_deficiency to the taxpayer at the taxpayer's last_known_address sec_6212 81_tc_42 the taxpayer in turn generally ha sec_90 days from the date the notice_of_deficiency is mailed to file a petition in this court for a redetermination of the deficiency see sec_6213 there is no dispute that respondent mailed the notice_of_deficiency to petitioners at their last_known_address on date accordingly the 90-day period for filing a timely petition with the court expired on wednesday date see id the petition in this case was not filed until wednesday date although the petition was not timely filed petitioners maintain that the petition was timely mailed to the court on date days before the expiration of the 90-day period and days before the date the petition was delivered to the court in particular petitioners offered evidence that on date petitioner michael h selter directed ms hunt to mail the petition to the court petitioners offered circumstantial evidence that ms hunt may have placed the petition in an envelope bearing postage from the law firm's private postage meter and may have placed the envelope with the firm's outgoing mail for pickup by a postal carrier in the lobby of the office building where the firm is located sec_7502 provides that in certain circumstances a timely mailed petition will be treated as though it were timely filed where the postmark in question is made by a private postage meter the provisions implementing the timely mailing timely filing rule are contained in sec_301_7502-1 b proced admin regs which provides as follows bo if the postmark on the envelope or wrapper is made other than by the united_states post office the postmark so made must bear a date on or before the last date or the last day of the period prescribed for filing the document and the document must be received by the agency officer or office with which it is required to be filed not later than the time when a document contained in an envelope or other appropriate wrapper which is properly addressed and mailed and sent by the same class of mail would ordinarily be received if it were postmarked at the same point of origin by the united_states post office on the last date or the last day of the period prescribed for filing the document however in case the document is received after the time when a document so mailed and so postmarked by the united_states post office would ordinarily be received such document will be treated as having been received at the time when a document so mailed and so postmarked would ordinarily be received if the person who is required to file the document establishes that it was actually deposited in the mail before the last collection of the mail from the place of deposit which was postmarked except for the metered mail by the united_states post office on or before the last date or the last day of the period prescribed for filing the document that the delay in receiving the document was due to a delay in the transmission of the mail and the cause of such delay if the envelope has a postmark made by the united_states post office in addition to the postmark not so made the postmark which was not made by the united_states post office shall be disregarded and whether the envelope was mailed in accordance with this subdivision shall be determined solely by applying the rule_of a of this subdivision emphasis added the validity of this regulation has been upheld see 566_f2d_646 9th cir affg tcmemo_1975_195 420_f2d_491 2d cir affg 51_tc_869 based upon the record presented we conclude that petitioners cannot avail themselves of the timely mailing timely filing rule set forth in sec_301_7502-1 6b proced admin regs in the first instance the controlling regulation contemplates that the timely mailing timely filing rule may be invoked where the petition is delivered to the court in an envelope or wrapper that contains a timely private postage meter postmark the envelope bearing the petition arrived at the court without any postmark indicating the date that it was mailed to the court although we will allow extrinsic evidence to prove the date of mailing where an envelope lacks a postmark see 65_tc_548 there is absolutely no indication that any type of postage was ever affixed to the envelope see sec_7502 regarding mailing requirements specifically including the requirement that postage be prepaid we are not persuaded by petitioners' circumstantial evidence that a timely private postage meter label was properly applied to the envelope even assuming for the sake of argument that petitioners have proven that the envelope bearing the petition was placed in the mail with a timely private postage meter postmark of date sec_301_7502-1 6b proced admin regs further requires that the petition be delivered to the court within the ordinary mailing time for that class of mail we accept ms vaughan's testimony that the ordinary delivery time for an item mailed from one location in washington d c to another location in washington d c i sec_1 to days the petition in this case was delivered to the court days after it was allegedly mailed and days after the expiration of the 90-day filing period it follows that the petition was not delivered to the court within the ordinary mailing time where a petition is mailed to the court in an envelope bearing a private postage meter postmark but the petition is not delivered to the court within the ordinary mailing time for that class of mail a taxpayer seeking to rely on the timely mailing timely filing rule must establish that the petition was actually deposited in the mail before the expiration of the 90-day period that the delay in receiving the petition was due to a delay in the transmission of the mail and the cause of the delay petitioners have not offered persuasive proof with respect to the date that the petition was actually placed in the mail we have nothing but ms hunt's conflicting declarations regarding her handling of the petition at best we are left to speculate that the envelope bearing the petition was left in the lobby of mr selter's office building on or about date for pickup by a postal carrier moreover there is no evidence in the record demonstrating that the delay in the delivery of the petition to the court was due to a delay in the -- - transmission of the mail or the cause of such delay under the circumstances we hold that the petition was not timely filed as a final matter petitioners erroneously contend that the petition should be deemed to have been timely filed pursuant to the common-law mailbox rule the common-law mailbox rule provides that proof of a properly mailed document creates a presumption that the document was delivered and actually received by the addressee see 92_tc_793 affd 909_f2d_1156 cir and cases cited therein there is no question in this case that the petition was delivered to the court on date however petitioners must establish that the petition was timely mailed to the court given the lack of satisfactory proof that the petition was placed in the mail within the 90-day filing period prescribed in sec_6213 petitioners' reliance on the common-law mailbox rule is misplaced we agree with respondent that the new york times article that petitioners offered into evidence in this case contains hearsay nevertheless we admit the article into evidence although the article indicates that the u s postal service experienced difficulties delivering certified mail in various jurisdictions during the period april through date the article does not mention washington d c as a trouble spot and we do not consider the article to be persuasive evidence that the delay in the delivery of the petition in this case was due to a delay in the transmission of the mail or the cause of such delay consistent with the preceding discussion we shall grant respondent's motion to dismiss for lack of jurisdiction to reflect the foregoing an order of dismissal for lack of jurisdiction will be entered although petitioners cannot pursue their case in this court petitioners are not without a remedy in short petitioners may pay the tax file a claim_for_refund with the internal_revenue_service and if the claim is denied sue for a refund in the federal district_court or the court of federal claims see 55_tc_138


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 tege eoeg eo1 plr-152822-08 date date entity ---------------------------------- ------------------------------------------------------------ state authority ----------- --------------------------------------------------- members ------------- --------------------------------------------------- --------------------------------------------------------- ---------------------------------------------------- ------------------------------------------------- ----------------------------------------------------- ---------------------------------------------------- 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------------------------------------------------------ ------------------------------------------------------ ----------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------- --------------------------------------------------------- ---------------------------------------------------------- ---------------------------------------------------------- dear -------------------- this letter responds to a letter from your authorized representative dated date as well as subsequent correspondence submitted on behalf of entity requesting rulings that entity’s income from certain activities is excludable from gross_income under sec_115 of the internal_revenue_code the code and that entity is excused from the requirement of sec_6033 of the code to file an annual information_return facts entity is a nonprofit corporation formed under the laws of state as part of a telecommunications project of the authority both entity and authority are organizations described in sec_501 whose members are political subdivisions of state entity is controlled by its board_of directors comprised of representatives of its members current members are listed above in the legend of this letter each member of entity must be a state a political_subdivision of a state or an entity the income of which is excluded from gross_income under sec_115 entity was created to deliver affordable broadband connectivity to largely rural areas its core objectives are to enhance educational proficiency stimulate economic development and create a reliable network delivery system for entity’s members entity leases equipment and facilities from authority to operate a telecommunications system on behalf of its members entity provides internet and data transmission services fiber leasing and network management and consulting to its members and other state municipalities enabling them to communicate more effectively and efficiently it maintains a fully staffed operations center to monitor and manage its equipment and services entity represents that it is not a party to any joint_venture or partnership with any person or entity whose income is not excluded from gross_income by sec_115 plr-152822-08 entity receives fees for the services it provides with the vast majority of this revenue coming from municipalities colleges rural libraries hospitals and other governmental organizations entity’s bylaws provide that the board_of directors after retaining a reasonable amount of entity’s income to ensure adequate cash reserves shall distribute such income to entity’s members entity’s articles of incorporation provide that upon dissolution and after payment of all of entity’s liabilities the board_of directors shall distribute entity’s assets to a state or the political subdivisions of a state for a public purpose any assets not so distributed by the board shall be distributed by a court of competent jurisdiction on the same basis law and analysis sec_115 provides that gross_income does not include income derived from any public_utility or the exercise of an essential_governmental_function and accruing to a state or a political_subdivision of a state in revrul_77_261 1977_2_cb_45 income from an investment fund established under a written declaration of trust by a state for the temporary investment of cash balances of the state and its participating political subdivisions was excludable from gross_income for federal_income_tax purposes under sec_115 the ruling indicated that the statutory exclusion was intended to extend not to the income of a state or municipality resulting from its own participation in activities but rather to the income of a corporation or other entity engaged in the operation of a public_utility or the performance of some governmental function that accrued to either a state or municipality the ruling stated that it may be assumed that congress did not desire in any way to restrict a state’s participation in enterprises that might be useful in carrying out projects that are desirable from the standpoint of a state government and which are within the ambit of a sovereign properly to conduct the ruling concluded that because the participating political subdivisions have an unrestricted right to receive in their own right their proportionate share of the investment fund’s income as it is earned the fund’s income accrues to them within the meaning of sec_115 in revrul_90_74 1990_2_cb_34 the service determined that the income of an organization formed funded and operated by political subdivisions to pool various risks arising from their obligations regarding public liability workers’ compensation or employees’ health is excludable from gross_income under sec_115 in this ruling private interests did not materially participate in the organization nor did they benefit more than incidentally from the organization sec_6033 provides in general that every organization_exempt_from_taxation under sec_501 shall file an annual informational return sec_6033 plr-152822-08 provides in general that the service may relieve an organization from filing the return required by sec_6033 if it determines that such a filing is not necessary to the efficient administration of the internal revenue laws under the authority of sec_6033 dollar_figure of revproc_95_48 1995_2_cb_418 provides that an organization that is either a governmental_unit or an affiliate of a government unit is not required to file form_990 return of organization exempt from income_tax section dollar_figure of revproc_95_48 provides that an organization is treated as an affiliate of a government unit if it is described in sec_501 and its income derived from activities constituting the basis for its exemption under sec_501 is excluded from gross_income under sec_115 entity on behalf of its members provides telecommunications services to mostly rural areas of state entity is the means by which its members can pool resources to achieve a level of communications_services no single city or county could afford to provide on its own providing telecommunications services to and for its members and other municipalities constitutes the performance of an essential government function within the meaning of sec_115 see revrul_90_74 and revrul_77_261 entity’s current income accrues to its members all of which are political subdivisions or entities the income of which is excluded from gross_income under sec_115 no private interests materially participate in the operation of or otherwise benefit more than incidentally from entity upon dissolution entity’s assets will be distributed to a state or to political subdivisions of a state for a public purpose see revrul_90_74 based solely on the facts and representations submitted by the entity we conclude that- as of the date the amendments are adopted the income of entity is derived from the exercise of an essential_governmental_function and will accrue to a state or a political_subdivision thereof for purposes of sec_115 and entity is an affiliate of a governmental_unit within the meaning of dollar_figure of revproc_95_48 consequently we hold that- entity’s income is excludable from gross_income under sec_115 and entity is not required to file form_990 except for the specific rulings above we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the plr-152822-08 code specifically we express or imply no opinion as to whether entity has unrelated_business_taxable_income under sec_512 and must file a form 990-t exempt_organization business income_tax return under a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative 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 sincerely sylvia hunt assistant chief exempt_organizations branch office of division counsel associate chief_counsel tax exempt government entities enclosure copy for sec_6110 purposes cc