t c no united_states tax_court dennis e and paula w lofstrom petitioners v commissioner of internal revenue respondent docket no filed date ps are mr lofstrom h and paula lofstrom w-2 h was previously married to dorothy lofstrom w-1 in satisfaction of his alimony obligations to w-1 h transferred his dollar_figure interest in a contract_for_deed to w-1 along with dollar_figure in cash ps deducted as alimony the value of the contract_for_deed in addition ps claimed to operate the first floor of their residence as a bed and breakfast b b and deducted related expenses h a retired doctor also claimed to be engaged in the business of writing for profit and ps deducted expenses attributable to h’s writing activities held a contract_for_deed is a third-party debt_instrument under sec_1_71-1t q a-5 temporary income_tax regs fed reg date ps may not deduct as alimony the value of a contract_for_deed transferred to w-1 because it does not constitute a cash payment id see sec_61 sec_71 sec_215 and b held further ps may not deduct expenses for a hotel or like establishment because they used the b b for personal purposes for an indeterminate amount of time and they failed to substantiate the expenses sec_280a c d f b g held further ps may not deduct writing activity expenses where they failed to show that h was engaged in the activity of writing for profit sec_162 sec_183 sec_1_183-2 income_tax regs steven z kaplan for petitioners melissa j hedtke for respondent opinion kroupa judge respondent determined a dollar_figure deficiency in petitioners’ federal_income_tax for and a dollar_figure deficiency for after concessions the issues for decision are whether petitioners may claim an alimony deduction for dollar_figure in for the transfer of a contract_for_deed because we find the contract_for_deed does not constitute cash or a cash_equivalent we hold that they may not 1petitioners conceded several deductions including auto expenses legal expenses for mr lofstrom’s divorce real_estate appraisal expenses closing costs flood insurance recovery costs tax_return preparation fees land abstract costs utilities travel_expenses and other expenses claimed on schedule f profit or loss from farming and schedule c profit or loss from business whether petitioners may deduct dollar_figure in for expenses_incurred in the operation of a bed and breakfast b b because we find they used the b b for personal purposes for an indeterminate period and failed to substantiate expenses we hold that they may not deduct these expenses whether petitioners may deduct dollar_figure in and dollar_figure in for expenses related to mr lofstrom’s writing activities because we find they failed to show that mr lofstrom engaged in the activity of writing for profit we hold that they may not deduct these expenses background the parties submitted the case fully stipulated under rule the stipulation of facts and accompanying exhibits are incorporated by this reference and are so found petitioners resided in overland park kansas at the time they filed this petition trial was first scheduled for date but was continued because petitioners were in africa trial was then rescheduled for date although petitioners were represented by counsel they were not present to testify or be cross-examined we admitted several documents at trial 2all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated including petitioners’ answers to interrogatories over respondent’s objections but warned petitioners that we would accord little weight to the documents to hold otherwise would prejudice respondent because he did not have the opportunity to cross-examine petitioners regarding the authenticity of the documents or the veracity of petitioners’ answers to interrogatories we stand by that ruling the factual background is therefore based on the stipulation of facts and exhibits submitted to the court petitioner dr dennis lofstrom mr lofstrom leads a very active life for most of his life mr lofstrom lived and worked in minnesota where he raised a family of children with his wife dorothy lofstrom dorothy mr lofstrom later divorced dorothy and retired from his full-time medical practice mr lofstrom embarked at age in upon a medical missionary trip to antarctica with his second wife paula lofstrom paula petitioners embarked upon another medical missionary trip in to serve at a hospital in tanzania africa for years this case concerns three varieties of deductions that petitioners claimed in and the first relates to alimony alimony deduction mr lofstrom was ordered to pay dorothy dollar_figure per month in alimony or support maintenance payments pursuant to their divorce decree mr lofstrom stopped making payments sometime in and a year later asked a minnesota county court to terminate his alimony obligations because his salary had been substantially diminished after retirement the state court instead found mr lofstrom in arrears to dorothy for the time that he failed to pay alimony and reduced his arrearage to a judgment for dollar_figure the state court did grant mr lofstrom a reduction however in his monthly alimony payments from dollar_figure to dollar_figure shortly thereafter dorothy agreed to relinquish her past and future claims for alimony against mr lofstrom in exchange for dollar_figure cash and mr lofstrom’s interest in a contract_for_deed valued at dollar_figure the contract_for_deed entitled dorothy to principal and interest payments until the principal was fully paid payments under the contract_for_deed were to be made irrespective of when dorothy died petitioners initially deducted as alimony only the dollar_figure cash payment on their joint_return for they later amended their return for and deducted the dollar_figure value of the contract_for_deed respondent granted petitioners the dollar_figure deduction but denied the dollar_figure deduction 3the contract_for_deed was entered into between mr lofstrom as trustee of the dennis lofstrom trust and mark lofstrom the son of mr lofstrom and dorothy the contract_for_deed required a dollar_figure payment upon execution dollar_figure or more annually at a rate of dollar_figure monthly and interest at a rate of percent per year bed and breakfast and writing activity deductions petitioners also deducted expenses related to a b b that they listed as their principal trade_or_business on schedule c profit or loss from business for petitioners called the b b angel’s rest arrowhead ranch - fly in bed and breakfast and listed related gross_receipts of dollar_figure and expenses of dollar_figure petitioners allowed mr lofstrom’s daughter and her family to use the b b rent-free for an unspecified period of time that same year petitioners failed to introduce any evidence that they rented the b b to anyone else in addition petitioners deducted expenses for mr lofstrom’s writing activities in and specifically petitioners deducted dollar_figure for travel_expenses and writing supplies in and dollar_figure in respondent mailed petitioners a deficiency_notice on date disallowing their dollar_figure alimony deduction for b b-related deductions for and writing activity deductions for and petitioners timely filed a petition with the court discussion we must decide whether mr lofstrom’s transfer of a contract_for_deed constitutes deductible_alimony we must also decide 4of this amount dollar_figure is depreciation expenses which petitioners concede whether petitioners may deduct b b expenses and writing activity expenses we first address who bears the burden_of_proof petitioners bear the burden to prove that respondent’s determination is wrong see rule a 503_us_79 290_us_111 moreover deductions are a matter of legislative grace and petitioners bear the burden to prove that they are entitled to the claimed deductions see 292_us_435 65_tc_87 affd per curiam 540_f2d_821 5th cir in addition where as here petitioners failed to testify we can presume that their testimony would have been unfavorable 6_tc_1158 citing 10_f2d_22 6th cir 117_f2d_442 6th cir 118_f2d_261 1st cir 111_f2d_455 9th cir 76_f2d_243 8th cir affd 162_f2d_513 10th cir 5petitioners did not move to shift the burden_of_proof to respondent sec_7491 and b nor would petitioners have qualified because they failed to present credible_evidence substantiate their claimed expenses or maintain adequate books_and_records a deduction for the value of the contract_for_deed next we address whether petitioners are entitled to deduct as alimony dollar_figure for the value of a contract_for_deed that mr lofstrom transferred to dorothy in alimony or separate_maintenance payments are deductible from income by the payor and includable in the income of the payee sec_61 sec_71 sec_215 and b the payments must meet certain requirements to be deductible however see sec_71 sec_215 among those requirements payments must be made in cash or a cash_equivalent see sec_71 a check or money order that is payable on demand is a cash_equivalent a debt_instrument that is transferred is not sec_1_71-1t q a-5 temporary income_tax regs fed reg date this is the first time that this court is asked to address whether the transfer of a third-party debt_instrument satisfies the requirements to qualify as alimony specifically we address whether the contract_for_deed that mr lofstrom transferred to 6other requirements are that the alimony must be received by a spouse under_a_divorce_or_separation_instrument the payments cannot be designated in the divorce_or_separation_instrument as a payment for something other than alimony the payee spouse and the payor spouse must not be members of the same household at the time of payment and the payments must terminate at the death of the payee spouse sec_71 a - d dorothy in part satisfaction of mr lofstrom’s accrued and future alimony obligations to dorothy qualifies as alimony a contract_for_deed is a financing_arrangement that allows a buyer or vendee to purchase property by borrowing the money for the purchase from the seller or vendor in re butler n w 2d minn here mr lofstrom had transferred property to mark lofstrom in return for periodic_payments from mark lofstrom until the full principal_amount with interest was paid the contract_for_deed represented therefore a debt obligation of mark lofstrom to mr lofstrom because the contract_for_deed transferred to dorothy is a debt_instrument of a third party it does not qualify as a cash payment and is not deductible as alimony see sec_71 sec_215 sec_1_71-1t q a-5 temporary income_tax regs 7the minnesota legislature has sanctioned contracts for deed because they provide a useful alternative financing mechanism which promotes the availability of credit and the transferability of property in re butler n w 2d minn citing minn stat sec 8further once mr lofstrom transferred the contract_for_deed to dorothy mark lofstrom’s liability to make payments under the contract would not end at dorothy’s death we note that alimony does not include a liability to make payments after the payee’s death sec_71 see also sugarman v commissioner tcmemo_1996_410 payments found in the nature of a property settlement rather than alimony where payments would not necessarily have terminated if the taxpayer died before the end of the payment stream because the taxpayer’s estate would have had a valid claim for the remainder of the payments supra accordingly we sustain respondent’s determination disallowing a deduction for the value of the contract_for_deed b bed and breakfast expenses we must next determine whether petitioners are entitled to deduct expenses related to operating a b b on the first floor of their home generally taxpayers are restricted from deducting expenses of their residences or more specifically expenses related to a dwelling_unit that taxpayers use as a personal residencedollar_figure sec_280a petitioners admit that they used their dwelling_unit at least in part as a personal_residence unless an exception applies therefore petitioners may not deduct expenses of their residence respondent argues and we agree that petitioners failed to substantiate and hence meet their burden to prove that they operated a portion of their residence as a business deducting the business portion of a dwelling_unit is restricted for example if personal_use of the business portion of a dwelling_unit exceeds the greater of days or percent 9we find no merit in petitioners’ arguments concerning the doctrines of constructive receipt or origin of claim to characterize the transfer of the contract_for_deed as alimony 10this general_rule does not apply to those expenses that are deductible regardless of any connection with a trade_or_business such as mortgage interest on the residence under sec_163 real_estate_taxes under sec_164 or casualty losses under sec_165 sec_280a of the number of days the unit is rented at fair rental value no deduction is allowed sec_280a d nor may taxpayers deduct expenses for the portion of a residence not exclusively used for business purposes see sec_280a f b see also 989_f2d_294 8th cir affirming this court’s denial of a home_office deduction based on taxpayer’s failure to show exclusive use 82_tc_919 rent-free personal_use of a unit barred a finding that the unit was used exclusively as a hotel grigg v commissioner tcmemo_1991_392 affd 979_f2d_383 5th cir personal_use includes use by a taxpayer’s lineal_descendants unless fair rental value is paid see sec_267 petitioners admit that mr lofstrom’s daughter and her family used the b b rent-free for an indefinite period of time in which constitutes personal_use by petitioners see sec_280a and because petitioners have not shown how long mr lofstrom’s daughter stayed petitioners have failed to meet their burden that personal_use of the b b did not exceed the greater of days or percent of the number of days that the unit was rented at fair rental valuedollar_figure see sec_280a sec_11petitioners vaguely assert that she stayed on a single occasion 12nor have petitioners carried their burden to prove that they rented the unit for at least days in see sec_280a stoddard v commissioner tcmemo_2002_31 rental continued a petitioners have also failed to show that they used the b b exclusively for business purposes further petitioners did not substantiate the b b expenses they produced no books_or_records substantiating among other things the amount of rent collected the number of days that guests stayed or the rates that guests paid we are left with little more than petitioners’ schedule c on which they listed marginal gross_income for the b b and substantial expenses a schedule of expenses is not sufficient to meet petitioners’ burden however see 105_tc_324 summary schedules insufficient to entitle taxpayer to claimed deductions accordingly based upon a lack of substantiation a general dearth of evidence and the personal_use of the b b petitioners are not entitled to deduct any of the disputed expenses for any portion of their residence in we therefore sustain respondent’s disallowance of the b b expenses c writing activity expense finally we must determine whether petitioners may deduct expenses in and related to mr lofstrom’s writing activities the evidence includes manuscripts that mr lofstrom allegedly drafted including a science fiction novel called out of the mando galaxy by nnak kamon and a health and fitness book continued expenses not deductible where taxpayer did not rent residence at least days and personal_use exceeded days called a common sense approach to weight loss nutrition physical fitness and exercise for the non-fanatic of all ages we accord little weight to these submissions however because respondent did not have the opportunity to cross-examine mr lofstrom at trial respondent argues nonetheless that even considering these manuscripts petitioners have not shown that mr lofstrom engaged in his writing activities for profit we agree taxpayers may deduct ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business see sec_162 to do so taxpayers must demonstrate that they were involved in the activity on a continuous and regular basis and that their purpose for engaging in the activity was for income or profit see 480_us_23 645_f2d_618 8th cir affg tcmemo_1980_62 66_tc_312 65_tc_1 sec_1_183-2 income_tax regs whether the required profit objective exists is determined on the basis of all the facts and circumstances of each case see 315_f2d_731 9th cir affg tcmemo_1961_256 72_tc_411 affd without published opinion 647_f2d_170 9th cir sec_1_183-2 income_tax regs while a reasonable expectation of profit is not required the taxpayer’s objective of making a profit must be bona_fide see wittstruck v commissioner supra pincite 84_tc_227 affd without published opinion 782_f2d_1027 3d cir the court gives greater weight to objective factors in making the factual determination than to a taxpayer’s mere statement of intent see 781_f2d_724 9th cir affg lahr v commissioner tcmemo_1984_472 78_tc_642 affd without opinion 702_f2d_1205 d c cir sec_1_183-2 income_tax regs we consider several factors13 in determining whether mr lofstrom was engaged in the writing activity for profit including the manner in which he carried on the activity the time and effort he expended on the activity the history of income or loss with respect to the activity and the amount of 13the court generally considers nine nonexclusive factors for determining whether taxpayers engaged in an activity for profit sec_1_183-2 income_tax regs petitioners here failed to produce relevant evidence regarding many of the factors and we consequently confine our analysis to four of the nine factors the nine factors are the manner in which the taxpayer carried on the activity the expertise of the taxpayer or his advisers the time and effort expended by the taxpayer in carrying on the activity the expectation that the assets used in the activity may appreciate in value the success of the taxpayer in carrying on other activities for profit the taxpayer’s history of income or losses with respect to the activity the amount of occasional profits if any which are earned the financial status of the taxpayer and elements of personal pleasure or recreation id any profits that he earned sec_1_183-2 - income_tax regs the individual facts and circumstances of each case are the primary test and no factor or set of factors is necessarily controlling see 32_f3d_94 4th cir affg tcmemo_1993_396 722_f2d_695 11th cir affg 78_tc_471 94_tc_41 72_tc_28 sec_1_183-2 income_tax regs petitioners failed to identify the amount of time that mr lofstrom spent writing during the years at issue or whether he had anything publisheddollar_figure nor did petitioners report any gross or net_income on their returns for mr lofstrom’s writing activities rather petitioners reported a string of losses in the years at issue and in prior years from to these factors taken together indicate that mr lofstrom was not involved in the writing activity for profitdollar_figure see zuckerman v commissioner tcmemo_1984_192 substantial income from other 14petitioners claimed in their answers to interrogatories that mr lofstrom writes many nights and weekends and once had copies of something distributed free of charge 15the only information petitioners offered to prove mr lofstrom’s profit_motive was a day-of-trial deluge of miscellaneous handwritten notes correspondence with publishers a typewritten novel and hundreds of handwritten notes on health fitness and dieting we accord little weight to these documents because mr lofstrom did not testify sources losses over a number of years and tax benefits are features characteristic of an activity not operated for profit accordingly we find that petitioners failed to meet their burden to establish that mr lofstrom engaged in his writing activities with a bona_fide profit objective conclusion we sustain respondent’s determinations in the deficiency_notice for and in reaching our holding we have considered all arguments made and to the extent not mentioned we conclude that they are moot irrelevant or without merit to reflect the foregoing decision will be entered for respondent


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 corp plr-103725-08 date date legend distributing ------------------------------------------------------------------- --------------------------------------------------------------------------------- ------------------------------------------------- ------------------------------- controlled ------------------------------------------------------------------- ----------------------------------------------------------- business a -------------------------------------- date a date b date c date d year year a b c ------------------ ------------------------- ----------------- ---------------- ------- ------- -- -- -------------------- plr-103725-08 d e f g h i j k l m n o p q r s --------------- ---- ---- ------------- ------------- ------------- --------------- ----------------- ------------- ----------- ---- ---- ----------- ---- ---- ------------- dear ------------- this letter responds to your date request for rulings as to the federal_income_tax consequences of a proposed transaction the information submitted in that request and in later correspondence is summarized below the rulings contained in this letter are based on facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the materials submitted in support of the request for rulings verification of the information representations and plr-103725-08 other data may be required as part of the audit process in particular this office has not reviewed any information pertaining to and has made no determination regarding whether the proposed transaction described below i satisfies the business_purpose requirement of sec_1_355-2 of the income_tax regulations ii is used principally as a device for the distribution of the earnings_and_profits of the distributing_corporation or the controlled_corporation or both see sec_355 of the internal_revenue_code and sec_1_355-2 or iii is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest in the distributing_corporation or the controlled_corporation see sec_355 and sec_1_355-7 summary of facts distributing is the common parent of an affiliated_group_of_corporations that files a consolidated federal_income_tax return distributing has a single class of voting common_stock issued and outstanding controlled is the common parent of an affiliated_group_of_corporations that files a consolidated federal_income_tax return controlled currently has two classes of voting common_stock issued and outstanding comprised of class a and b stock that differ only in voting rights the class a stock entitles shareholders to have a vote per share the class b stock entitles shareholders to have b votes per share distributing owns all of the class b stock which represents c percent of controlled beginning in year distributing undertook a series of transactions that ultimately resulted in the acquisition of a controlling_interest in controlled's stock on date a distributing purchased approximately d shares of controlled's series one voting preferred_stock which represented approximately e percent of the value and total combined voting power of all classes of stock entitled to vote both common and preferred_stock on date b distributing acquired f percent of all non-employee owned outstanding controlled stock in exchange for distributing common_stock the reverse_merger as part of the reverse_merger the acquired shares were cancelled such that virtually all of controlled's equity except a relatively small amount of common_stock issued and outstanding held by employees and management of controlled was comprised of d shares of controlled's series one voting preferred_stock hot_stock during year distributing contributed additional capital for additional stock of controlled distributing acquired g shares of controlled's series two voting preferred_stock and h shares of controlled's class a common_stock distributing also converted approximately dollar_figurei of convertible indebtedness into j shares of controlled's class a common_stock during year following the acquisition of the additional stock described above controlled underwent a recapitalization the recapitalization in which all series one preferred series two preferred and class a common_stock held by distributing were plr-103725-08 exchanged for k shares of controlled's class b common_stock minority shareholders of controlled exchanged their shares for class a common_stock during year following the recapitalization discussed above controlled effected a reverse 1-for-2 stock split which resulted in a reduction of the total class a and b common_stock as a result distributing's ownership of the class b stock decreased from k to l following the reverse_stock_split during year controlled sold m shares of class a common_stock in an initial_public_offering as a result of the initial_public_offering distributing's ownership for sec_368 and sec_1504 purposes was reduced to approximately n percent greater than percent and o percent greater than percent respectively on date c controlled sold p shares of class a common_stock in a secondary public offering as a result of the secondary offering distributing's ownership for sec_368 and sec_1504 purposes was reduced to approximately q percent greater than percent and r percent less than percent respectively accordingly controlled became deconsolidated from the distributing affiliated_group and discontinued filing a consolidated federal_income_tax return with distributing and distributing's affiliated subsidiaries on date d distributing sold s shares of class b common_stock in a private offering as a result of the sale and in accordance with the terms of the class b common_stock the class b common_stock sold automatically converted into class a common_stock the stock sold by distributing at this time was specifically identified to include the hot_stock accordingly the hot_stock will not be distributed to distributing's shareholders as part of the distribution upon distributing's acquisition of controlled on date b both distributing and controlled were in engaged in business a financial information has been submitted indicating that business a as conducted by distributing and controlled each has had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the five years distributing management has determined that the proposed transaction will serve the following corporate business purposes i to facilitate better access by both distributing and controlled to the capital markets and ii to provide an expected higher share value for both distributing and controlled which will help both companies more efficiently acquire needed assets and services proposed transaction plr-103725-08 for what are represented to be valid business purposes distributing will distribute all of the controlled stock pro_rata to its shareholders the distribution representations the following representations are made with respect to the distribution a prior to the distribution distributing may sell additional shares of controlled stock to unrelated third parties following any such sales distributing will continue to maintain a greater than 80-percent stock interest in controlled for sec_368 purposes b with the possible exception of the issuance of stock or shares pursuant to adjustments to distributing's existing compensatory options restricted_stock deferred share arrangements and the issuance of stock or shares pursuant to distributing's existing convertible debentures no part of the controlled shares to be distributed by distributing to its shareholders will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of distributing c following the distribution distributing and controlled will each continue the active_conduct of its business independently and with its separate employees or employees of the other members of its affiliated_group d no person will hold a 50-percent_or_greater_interest in the stock of distributing or stock of controlled after the distribution within the meaning of sec_355 who did not hold such an interest immediately before the transaction e the distribution will not be used principally as a device for the distribution of the earnings_and_profits of distributing or controlled or both f other than trade account indebtedness created in the ordinary course of business through continuing transactions at terms arrived at by the parties bargaining at arm’s length payables created for all transitional services and debt being repaid in connection with the proposed transaction no intercorporate debt will exist between distributing and controlled after all the steps of the distribution are completed g any indebtedness owed by controlled to distributing after the distribution will not constitute stock_or_securities h distributing controlled and distributing shareholders will each pay their respective expenses if any incurred in connection with the distribution plr-103725-08 i payments made in connection with all continuing transactions if any between distributing and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arms' length j no two parties to the transaction are investment companies as defined in sec_368 and iv k immediately before the distribution items of income gain loss deduction and credit will be taken into account as required by the applicable inter-company transaction regulations see sec_1_1502-13 and sec_1 as in effect before the publication of t d 1995_2_cb_147 and as currently in effect sec_1_1502-13 as published by t d furthermore distributing's excess_loss_account if any with respect to controlled common_stock or the excess_loss_account that distributing may have in the stock of another member that is required to be taken into account by sec_1_1502-19 will be included immediately before the distribution l the distribution is not part of a plan or series of related transactions within the meaning of sec_1_355-7 pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest within the meaning of sec_355 in distributing or controlled including any predecessor or successor of any such corporation m for purposes of sec_355 immediately after the distribution no person determined after applying sec_355 will hold distributing stock possessing percent or more of the total combined voting power of all classes of stock entitled to vote or percent or more of the total value of shares of all classes of stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution n for purposes of sec_355 immediately after the distribution no person determined after applying sec_355 will hold controlled stock possessing percent or more of the total combined voting power of all classes of stock entitled to vote or percent or more of the total value of shares of all classes of stock that was either acquired by i purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution or ii attributable to distributions on distributing stock that was acquired by purchase as defined in sec_355 and during the five-year period determined after applying sec_355 ending on the date of the distribution o the five years of financial information submitted on behalf of distributing is representative of its present operation and there have been no substantial operational changes since the date of the last financial statements submitted plr-103725-08 p the five years of financial information submitted on behalf of controlled is representative of its present operation and there have been no substantial operational changes since the date of the last financial statements submitted q the distribution is carried out for the following corporate business purposes i to facilitate better access by both distributing and controlled to the capital markets and ii to provide an expected higher share value for both distributing and controlled which will help both companies more efficiently acquire needed assets and services the distribution is motivated in whole or substantial part by these corporate business purposes r the recapitalization qualified as a tax-free reorganization pursuant to sec_368 s distributing’s acquisition of g shares of controlled’s series two voting preferred_stock and h shares of controlled’s class a common_stock in year qualified as a tax-free sec_351 exchange t on date b distributing acquired the balance approximately f percent of all non-employee owned outstanding controlled stock this was preceded by an earlier acquisition of e percent of the total combined voting power of controlled in year as a result of these two transactions distributing obtained sec_1504 and sec_368 control of controlled u at the time of the acquisition on date b business a products manufactured and marketed by controlled were substantially_similar to products manufactured and marketed by distributing v at the time of the acquisition on date b controlled employed manufacturing techniques similar to those employed by distributing w controlled's design manufacturing and testing techniques were dramatically improved by drawing upon the existing experience and know-how of distributing x following the acquisition on date b as a result of distributing's reputation within business a manufacturing industry controlled was able to attract and retain highly qualified specialists essential to expanding controlled's business based solely on the information submitted and the representations made we rule as follows on the distribution rulings plr-103725-08 no gain_or_loss will be recognized by and no amount will be included in the income of the shareholders of distributing on their receipt of the controlled stock sec_355 no gain_or_loss will be recognized by distributing upon the distribution to its shareholders of all of the controlled stock sec_355 each distributing shareholder's basis in a share of distributing stock as adjusted under sec_1_358-1 is allocated between the share of distributing stock with respect to which the distribution was made and the share or shares of controlled stock or allocable portions thereof received with respect to the share of distributing stock in proportion to their fair market values in accordance with sec_1_358-2 sec_358 and sec_358 the holding_period of the controlled stock in the hands of the distributing shareholder will include the holding_period of the distributing stock with respect to which the distribution is made provided that the distributing stock is held as a capital_asset on the date of the distribution sec_1223 earnings_and_profits if any will be allocated between distributing and controlled in accordance with sec_312 and sec_1_312-10 and sec_1_1502-33 caveats no opinion is expressed about the tax treatment of the proposed transaction described above under other provisions of the code and regulations or the tax treatment of any condition existing at the time of or effects resulting from the proposed transaction that is not specifically covered by the above rulings in particular no opinion is expressed regarding i whether the proposed transaction satisfies the business_purpose requirement of sec_1_355-2 ii whether the proposed transaction is used principally as a device for the distribution of the earnings_and_profits of the distributing_corporation or the controlled_corporation or both see sec_355 and sec_1_355-2 or iii whether the proposed transaction is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest in the distributing_corporation or the controlled_corporation see sec_355 and sec_1_355-7 procedural statements this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of this letter_ruling plr-103725-08 in accordance with the power_of_attorney on file in this office a copy of this ruling letter is being sent to your authorized representative sincerely _richard k passales________ richard k passales senior counsel branch office of associate chief_counsel corporate-


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc corp b06-plr-100157-02 date date legend parent merger sub gp sub partnership date date date year year month month state x business a n1 n2 dollar_figuren3 n4 n5 p1 p2 dear this letter responds to your date request for certain rulings regarding certain federal_income_tax consequences of a proposed transaction the information submitted in that request and later correspondence is summarized below summary of facts parent was incorporated in year in state x as successor to an entity formed in year parent is the common parent of an affiliated_group_of_corporations that file a consolidated_return for federal_income_tax purposes parent is engaged directly and indirectly through its lower tier entities in business a parent has one class of common_stock parent common_stock of which approximately n1 shares are currently outstanding parent has approximately n2 shareholders all of whom are required by the parent restated certificate of incorporation to be employees or directors of parent or its subsidiaries there are no outstanding options or warrants to purchase parent stock parent sells shares of parent common_stock annually to employees at a formula price generally based on the total parent stockholders’ book equity as of the prior year- end reduced by the net_book_value of the parent’s consolidated business a equipment at such year end the formula price parent common_stock cannot be traded and except for certain permitted assignments for estate_planning purposes may only be transferred back to parent for cash at the formula price in effect as of the disposition date when an employee retires passes away or otherwise terminates his employment with parent or its subsidiaries all shares of parent common_stock owned by him or his permitted transferee must be sold back to parent at the formula price and parent is required to purchase all of employee’s shares parent has outstanding several series of ten-year convertible debentures in the aggregate principal_amount of approximately dollar_figuren3 the convertible debentures are permitted to be held only by employees or directors of parent or its subsidiaries holders of convertible debentures are entitled to convert the debentures into parent common_stock during the month of month in the n4 year after the debentures’ respective issuance the debentures bear a fixed market rate of interest payable annually prior to and in connection with the restructuring as defined below parent intends to accelerate the convertibility of all convertible debentures into parent common_stock any such debentures not converted will be redeemed by parent at the face_amount plus accrued interest so that no debentures will be outstanding at the time of restructuring as defined below parent and the other members of the parent consolidated_group are accrual_method taxpayers and account for long-term business a contracts on the percentage_of_completion_method parent’s tax_year and the tax_year of most of the other members of the parent consolidated_group is a week year that ends on the last saturday in month those members of the parent consolidated_group that do not share this week tax_year have a date tax_year end parent will participate in the following series of transactions the restructuring parent will under applicable state law convert or merge all or most of its existing corporate subsidiaries into partnerships or disregarded entities for federal_income_tax purposes parent will form a wholly owned subsidiary merger sub and transfer all of parent’s assets subject_to assumption of all of parent’s liabilities to merger sub in exchange for p1 of merger sub's stock merger sub will then create a wholly-owned subsidiary gp sub and transfer a less than p2 interest in each of its assets and liabilities to gp sub in exchange for p1 of gp sub’s stock merger sub and gp sub will form a limited_partnership partnership a merger sub will contribute the remainder of the undivided interests in its assets and liabilities other than its stock in gp sub to partnership in exchange for equity interests in partnership the partnership interests and the assumption of the remaining liabilities of merger sub b gp sub will transfer its assets subject_to its liabilities to partnership in exchange for a less-than-p2 general_partner interest in partnership merger sub will merge into parent with parent surviving in connection with such merger parent will distribute of both its partnership interests and its gp sub shares to a subset of shareholders exchanging shareholders in complete redemption of all their parent common_stock which will approximate the same above stated percentage of the outstanding parent common_stock the distribution following these redemptions parent will have no more than n5 continuing shareholders and will retain of the partnership interests and of the gp sub shares parent will elect s_corporation status to be effective with its week tax_year beginning date partnership and its lower tier entities will continue to carry on the business a business formerly conducted by parent and its lower tier entities prior to the restructuring partners in partnership will include a gp sub the general_partner b the former parent shareholders limited partners and c parent as an s_corporation limited_partner it is anticipated that parent will not issue any new shares of parent common_stock after the restructuring instead it is presently contemplated that following the restructuring any employees or directors admitted as equity holders in business a will be admitted as partners in partnership subject_to formula price buy sell provisions and permanent transfer restrictions similar to those applicable to parent common_stock prior to the restructuring representations parent has made the following representations with respect to the restructuring a the principal purpose of parent’s contribution of all the business a assets to partnership through merger sub and gp sub is not the recognition of any loss directly or indirectly on any such assets in connection with the distribution rather the principal purpose of the parent’s contribution of all the business a assets to partnership through merger sub and gp sub and the restructuring as a whole is to restructure parent so that the business a business that was carried on by parent and its lower tier entities prior to the restructuring will be conducted in partnership form by partnership and its lower tier entities on a continuing basis following the restructuring b following the restructuring it is intended that partnership and its lower tier entities will continue to carry on the business a business that was carried on by parent and its lower tier entities prior to the restructuring c parent will transfer through merger sub and gp sub all of its assets other than the stock in gp sub to partnership subject_to all of its liabilities d e f g parent will report all earned_income represented by assets and liabilities that will be contributed to partnership such as receivables being reported on a cash_basis and commissions due the assets and liabilities to be contributed to partnership will also include unfinished long-term_contracts the income from which parent and partnership will report in accordance with parent’s historic method_of_accounting under sec_460 at the time of the restructuring there will be no amounts payable or receivable between partnership and gp sub on the one hand and parent on the other hand other than such obligations as may arise under indemnity arrangements to be entered into between the parties there is no intention following the restructuring to dispose_of any material assets of the business a business contributed to partnership other than transfers to lower tier entities or transfers in the ordinary course of business partnership interests and gp sub interests will be subject_to formula price buy sell provisions and permanent transfer restrictions similar to those applicable to parent common_stock prior to the restructuring h other than convertible debentures there are no outstanding options or warrants to purchase parent common_stock and there are no other outstanding instruments that are convertible into parent common_stock i j k l no notes or other obligations of parent will be distributed to a redeemed parent shareholder in the restructuring merger sub will be formed solely for purposes of facilitating the restructuring for purposes of measuring the sec_311 gain to parent on distribution of partnership interests the distributed partnership interests will be valued at a percentage of the value of the entire business a business held by partnership such percentage shall be equal to the percentage of parent stock that is redeemed from the exchanging shareholders in the restructuring cf 104_tc_574 affirmed 162_f3d_1236 9th cir the management of parent is not aware of any plan or intention on the part of any partner in partnership following the restructuring to dispose_of any partnership interests except in the ordinary course of business or in connection with termination of employment rulings based solely on the information submitted and on the representations set forth above we rule as follows merger sub will be disregarded for federal_income_tax purposes as a transitory entity parent will be treated as i directly transferring a less than p2 undivided_interest in its assets subject_to a proportionate amount of its liabilities to gp sub in exchange for p1 of the stock of gp sub gp sub will be treated as if it then transferred those assets and liabilities to partnership for a less than p2 general_partner interest in partnership ii directly transferring the remainder of the undivided_interest in its assets other than the gp sub shares subject_to its remaining liabilities to partnership in exchange for the partnership interests and iii distributing a portion of the partnership interests and gp sub shares to the exchanging shareholders in exchange for their parent common_stock parent will not recognize income gain_or_loss on the contribution of all the assets it will transfer to partnership in exchange for equity interests in partnership and the assumption_of_liabilities of the transferred parent business sec_721 sec_752 the adjusted_basis of the assets of parent received by partnership will be the same as the adjusted_basis of such assets in the hands of parent sec_723 parent will recognize income or gain if any but not loss on the distribution of partnership interests and gp sub shares in redemption of the exchanging shareholder’s parent common_stock based upon the difference between the fair_market_value of the partnership interests and gp sub shares distributed on redemption and their adjusted tax basis in the hands of parent sec_311 caveat no opinion is expressed about the tax treatment of the proposed transaction under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings procedural statements the rulings contained in this letter are 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 request for rulings it is subject_to verification on examination this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to the federal_income_tax return of each taxpayer involved in the taxable_year in which the transaction is consummated pursuant to a power_of_attorney on file in this office we have sent the original of this letter to the taxpayer’s representative and a copy of this letter to the taxpayer cc sincerely yours alfred c bishop jr branch chief branch office of associate chief_counsel corporate


t c summary opinion united_states tax_court jon d dezagottis petitioner v commissioner of internal revenue respondent docket no 3497-00s filed date jon d dezagottis pro_se bradley c plovan for respondent goldberg special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority unless otherwise indicated subseguent section references are to the internal_revenue_code in effect for the year at issue and all rule references are to the tax_court rules_of_practice and procedure respondent determined a deficiency in petitioner’s federal_income_tax for the taxable_year in the amount of dollar_figure and an addition_to_tax of dollar_figure pursuant to sec_6651 some of the facts in this case have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference at the time the petition was filed petitioner lived in mechanicsburg pennsylvania in the notice_of_deficiency respondent determined that petitioner failed to report dollar_figure of income which was subject_to self-employment_tax failed to report a state of virginia income_tax refund of dollar_figure failed to report dividend income of dollar_figure failed to report interest_income of dollar_figure and was subject_to an addition_to_tax of dollar_figure pursuant to sec_6651 for failure_to_file the return by the prescribed due_date in the stipulation of facts petitioner conceded that the income_tax refund dividend income and interest_income which collectively totaled dollar_figure are includable in income for the year at issue in addition respondent conceded that credit card advances totaling dollar_figure that were initially included in the unexplained bank_deposits of dollar_figure are not includable in income therefore at trial only dollar_figure of unexplained bank_deposits treated as unreported business income is at issue after the above-mentioned concessions the remaining issues for decision are whether petitioner had unreported income of dollar_figure whether petitioner is liable for self-employment_tax on unreported income and whether petitioner is liable for an addition_to_tax under sec_665l1 a for the taxable_year adjustments to the self-employment_income tax and the deduction therefor are computational and will be resolved by the court’s holding in this case during petitioner maintained a checking account with crestar bank petitioner made various deposits into the checking account throughout the year totaling dollar_figure the various deposits are categorized as follows a state of virginia income_tax refund for dollar_figure dividend income of dollar_figure interest_income of dollar_figure overdraft protection deposits of dollar_figure credit card advances totaling dollar_figure and proceeds from stock sale transactions of dollar_figure as previously stated respondent is now contending that the difference or dollar_figure is income from unexplained bank_deposits on his tax_return petitioner reported total income of dollar_figure consisting of dollar_figure of wages and dollar_figure of taxable interest_income in the notice_of_deficiency respondent deducted these reported amounts in computing petitioner’s corrected income for some period during petitioner worked for merkle company merkle as a real_estate appraiser however petitioner cannot recollect the exact dates in that he worked for merkle furthermore petitioner is not sure whether he was an employee of merkle or an independent_contractor petitioner did not file his federal_income_tax return by the date due_date ’ additionally petitioner did not file for an extension of time to file the tax_return petitioner dated his return date thus at a minimum the return was filed more than years after the original due_date the determinations of the commissioner in a notice_of_deficiency are presumed correct and the burden is on the taxpayer to show that the determinations are incorrect rule a 290_us_111 unreported income a taxpayer’s gross_income generally includes all income from whatever source derived sec_61 a taxpayer is required to maintain records sufficient to establish the amount individual income_tax returns are generally due on apr of each year but since date was a saturday the due_date was extended until monday date the actual date the return was filed is not in the record respondent testified that the return was filed in date sec_7491 does not apply in this case to place the burden_of_proof on respondent because petitioner neither alleged that sec_7491 was applicable nor established that he fully complied with the substantiation requirements of sec_7491 a a of his or her income sec_6001 sec_1 6001-l1 a e income_tax regs in the absence of adequate books_and_records the commissioner may reconstruct a taxpayer’s income by any reasonable method see sec_446 348_us_121 the bank_deposits method has long been recognized as a reasonable method to reconstruct income where the taxpayer’s records are inaccurate or incomplete see 64_tc_651 affd 566_f2d_2 6th cir though not conclusive bank_deposits are prima facie evidence of income id the commissioner is not required to show that all deposits constitute income and need not show a likely source of that income see id pincite 46_tc_821 at trial petitioner testified that the remaining unidentified deposits totaling dollar_figure were derived from additional credit card cash advances and from earnings from merkle however petitioner presented absolutely no evidence to corroborate his testimony no credit card receipts or earning statements were presented at trial petitioner testified that he entered into many credit card cash advance transactions during but he could not estimate the amount further petitioner testified that he couldn’t exactly say nor even guess roughly what his earnings may have been from merkle for the year at issue we find the testimony given by petitioner to be too vague and based too much upon conjecture to establish that the dollar_figure of bank_deposits at issue were derived from credit card cash advances earnings from merkle or a combination of both furthermore we find no other evidence in the record which establishes that the dollar_figure of funds deposited into petitioner’s checking bank account were nontaxable in the absence of such evidence we must find for respondent on this issue self-employment_tax respondent determined that petitioner is liable for self- employment_tax on the unreported income sec_1401 imposes a tax on the self-employment_income of individuals self-employment_income means the net_earnings from self- employment derived by an individual sec_1402 in general net_earnings_from_self-employment means the gross_income derived by an individual from any trade_or_business that he or she carries on reduced by allowable deductions attributable thereto sec_1402 petitioner bears the burden of showing that respondent's determination is erroneous rule a cf jones v commissioner tcmemo_1994_230 affd without published opinion 68_f3d_460 4th cir o’rourke v commissioner tcmemo_1993_603 affd without published opinion 60_f3d_834 9th cir when asked at trial about his employment status petitioner testified that he would venture to guess that he was an independent_contractor however petitioner presented no evidence at trial establishing his employment status with merkle or the amount of compensation he received from the company by presenting absolutely no evidence establishing that the dollar_figure of unreported income is not subject_to self-employment_tax petitioner has not met his burden with respect to this issue accordingly we hold that petitioner is liable for self- employment_tax on the dollar_figure of unreported income sec_665l1 a addition_to_tax respondent determined an addition_to_tax as a result of petitioner’s failure to timely file his federal_income_tax return for the year at issue sec_6651 imposes an addition_to_tax for failure_to_file a timely tax_return the addition_to_tax is equal to percent of the amount of the tax required to be shown on the return if the failure_to_file is not for more than month sec_6651 an additional percent is imposed for each month or fraction thereof in which the failure_to_file continues to a maximum of percent of the tax id the addition_to_tax is imposed on the net amount due sec_6651 the addition_to_tax is applicable unless a taxpayer establishes that the failure_to_file was due to reasonable_cause and not willful neglect sec_665l a if a taxpayer exercised ordinary business care and prudence and was nonetheless unable to file the return within the date prescribed by law then reasonable_cause exists sec_301_6651-1 proced admin regs willful neglect means a conscious intentional failure or reckless indifference 469_us_241 petitioner testified that he did not file his federal_income_tax return in a timely fashion because he had difficulty at trial petitioner offered two reasons for his difficulty in filing a timely return for the year at issue first petitioner claimed that he moved from maryland to pennsylvania petitioner did not explain how his move had any bearing on filing his tax_return years late the act of moving from one state to another is certainly not reasonable_cause to file a late return second petitioner claimed that he lost his earnings form provided by merkle petitioner failed to offer any basis why losing the form caused a 2-year delay in filing his return unavailability of records without more is not reasonable_cause for failing to file a timely return regan v commissioner tcmemo_1987_512 petitioner’s federal_income_tax return was due on date petitioner did not file his return until years later and offered no rational explanation for his failure_to_file his return timely petitioner failed to show that he exercised ordinary care is liable for respondent is reviewed division and prudence in this case accordingly petitioner the addition_to_tax under sec_6651 sustained on this issue and adopted as the report of the small_tax_case decision will be entered under rule


significant index number department of the treasury internal_revenue_service washington d c tax exempt ando government entities division tier’ 24' ad re taxpayer dear this letter constitutes notice that approval has been granted for your request for a 5-year automatic_extension for amortizing the unfunded liabilities as of july for the above-named plan which are described in sec_431 b b and b of the internal_revenue_code code and sec_304 b b and b of the employee_retirement_income_security_act_of_1974 erisa this extension is effective with the plan_year beginning july established as of july this extension applies to the eligible amortization charge bases the extension of the amortization periods of the unfunded liabilities of the plan was granted in accordance with sec_431 of the code sec_431a of the code requires the secretary to extend the period of time required to amortize any unfunded_liability of a plan for a period of time not in excess of years if the plan submits an application meeting the criteria stated in sec_431 the plan has submitted the required information to meet the criteria in sec_431 including a certification from the plan's actuary that i absent the extension under subparagraph a the plan would have an accumulated_funding_deficiency in the current plan_year or any of the succeeding plan years ii the plan_sponsor has adopted a plan to improve the plan's funding status iti the plan is projected to have sufficient assets to timely pay expected benefits and anticipated expenditures over the amortization period as extended and iv the notice required under paragraph a has been provided we have sent a copy of this letter to the and to the this ruling is directed only to the taxpayer that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited by others as precedent if you require further assistance in this matter please contact sincerely yours manager ep actuarial group