t c memo united_states tax_court howard bruce coates and tandi a coates petitioners v commissioner of internal revenue respondent docket no filed date kenneth w klingenberg and kenneth t mcconkey for petitioners jamie m stipek for respondent memorandum findings_of_fact and opinion morrison judge the respondent in this case the irs issued a notice_of_deficiency to the petitioners howard bruce coates coates and tandi a coates collectively the coateses for the taxable_year in this notice the irs disallowed a casualty-loss deduction of dollar_figure and determined a deficiency of dollar_figure and a penalty under sec_6662 of dollar_figure the coateses timely filed a petition under sec_6213 for redetermination of the deficiency we have jurisdiction under sec_6214 the following issues remain unresolved i the amount of the coateses’ casualty-loss deduction if any for the taxable_year we hold that they are entitled to a casualty-loss deduction of dollar_figure ii whether the coateses are liable for a sec_6662 penalty for the taxable_year we hold that they are not liable findings_of_fact the parties stipulated some facts and those facts are incorporated by reference the coateses resided in oklahoma when they filed the petition in the coateses owned a large amount of land in seminole county oklahoma one tract was acres that consisted of three adjacent areas acres on which they resided referred to here as property a acres of unless otherwise indicated all section references are to the internal_revenue_code in effect for the taxable_year and all rule references are to the tax_court rules_of_practice and procedure therefore an appeal of our decision in this case would go to the u s court_of_appeals for the tenth circuit see sec_7482 unless the parties designate the court_of_appeals for another circuit see id para undeveloped woodlands referred to here as property b and other acres coates testified that he had bought property a and property b from his mother many years before evaluating this claim with the rest of the record we agree with this testimony except that some of the land was acquired jointly by coates and tandi a coates some of the land was acquired from coates’s father not just coates’s mother and the record does not support the claim that the coateses paid for the land as opposed to having received it as a gift property a consisted of acres it included the coateses’ house which was their personal_residence and two barns the coateses built the house in they used some of the land to farm and to graze cattle property a is pincite7 ew seminole oklahoma property b adjacent to property a consisted of acres of undeveloped woodland thousands of mature oak trees grew on the land the oldest oak trees were years old the woodland was populated by wild turkeys deer wild boars rabbits and squirrels the coateses used the land recreationally to hunt fish and hike they did not charge anyone for use of the land property b is within sec_3 and of township north range east this township is in whether the coateses purchased property a and property b or received them as gifts is relevant to the adjusted bases of property a and property b which are discussed infra part i b and infra part i e respectively seminole county oklahoma a township comprise sec_36 sections of land a section is a square piece of land the sides of which are each one mile the larger coates family ie the coateses coates’s parents and coates’s siblings owned big_number acres of land that they refer to as the ranch the ranch included the coateses’ acres of which property a and property b were a part the coates family had owned the ranch since at least and coates grew up there on date the coateses commissioned an appraisal the appraisal of acres that included the acres of property a the coateses owned all acres the appraisal concluded that the fair_market_value of the acres was dollar_figure on date a tornado hit seminole county oklahoma the tornado cut through the ranch significantly damaging property a and flattening the woodland of property b the center of the tornado leveled a roughly mile-wide path and the accompanying high winds uprooted trees as far as an additional half- mile on either side of the tornado’s path at trial coates described the damage we lost--this land the tornado just absolutely devastated it i mean it just pulverized it it just mowed it down all the big huge oaks were just uprooted and left i t was just laid open it was just mowed down just literally mowed down on property a the tornado damaged the house and barns tore down fences and knocked down trees and on property b it demolished -90 of the oak trees without the tree canopy cover property b became covered in dense impassable scrub the land no longer provided a suitable habitat for the wild turkeys deer and wild boars only the squirrels and rabbits remained after the tornado the coateses had property insurance on property a the insurance covered damage to the house and barns but not to the land or fences after the tornado the coateses’ insurance_company farm bureau insurance examined the house and barns and estimated the costs of repairing them at roughly dollar_figure-dollar_figure because the coateses believed that their insurance_company had underestimated the costs they hired a loss-recovery advocacy service crossroads insurance recovery advocates llc crossroads to provide an estimate of the cost to repair the house and barns on property a the coateses paid crossroads roughly dollar_figure for its services crossroads’ estimate was dated date crossroads estimated that it would cost dollar_figure to repair the house and barns on property a the coateses used the crossroads estimate to negotiate with their insurance_company which ultimately compensated them dollar_figure for the damage to the house and barns on property a the coateses reported on their tax_return that the insurance reimbursement was dollar_figure this amount is the difference between the dollar_figure the coateses received from their insurance_company and the dollar_figure they paid to crossroads the coateses used the dollar_figure to repair the damage to the house and barns on property a they also incurred other costs to repair the tornado damage to property a such as the cost of repairing fences the coateses did not insure property b and did not receive any payments for damage to it coates partially cleared property b of debris seeded it with grass and repaired some fences he is still in the process of converting it to grazing use after receiving an extension of time to file the coateses timely filed their form_1040 u s individual_income_tax_return for the taxable_year on date they attached a form_4684 casualties and thefts to their form_1040 reporting a total casualty_loss of dollar_figure for damage to property a and property b as a result of the tornado the computations were reported on the form as follows property a adjusted_basis fmv before casualty fmv after casualty lesser_of decline in fmv and adjusted_basis less insurance reimbursement loss before statutory limits property b adjusted_basis fmv before casualty fmv after casualty lesser_of decline in fmv and adjusted_basis less insurance reimbursement loss before statutory limits total loss before statutory limits less statutory limits dollar_figure deduction of agi casualty_loss after statutory limits dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number the irs examined the coateses’ tax_return and questioned the casualty-loss deduction for the tornado damage in date the coateses commissioned an appraisal of property b the appraisal the exact boundaries of the appraised land are unclear this uncertainty is conveyed by the following statement in the appraisal i the appraiser have assumed that a statement made by mr coates that there are acres with damage is correct even though the legals do not match exactly and by the following note in the appraisal the legal descriptions of the tracts affected by the tornado do not completely correspond to the areas that are affected furthermore the legals that the county assessor is using also do not correspond exactly for purposes of this report i have assumed that there are actually acres that have been damaged the legals would appear to indicate that there may be as much as acres more the appraisal concluded that the best use of property b was as hunting land it concluded that the fair_market_value of property b--assuming that the tornado damage were fully remediated and property b were returned to its pre-tornado condition as hunting land--was dollar_figure as of date the appraisal estimated that it would cost dollar_figure to return property b to its pre- tornado condition see infra part i d the irs issued a notice_of_deficiency to the coateses for the taxable_year the irs disallowed the coateses’ claimed casualty-loss deduction of dollar_figure and determined an income-tax deficiency of dollar_figure and an accuracy- related penalty under sec_6662 of dollar_figure the coateses timely filed a petition for redetermination this court tried the case opinion i sec_165 deduction as a general_rule sec_165 allows a deduction for any loss sustained during the taxable_year and not_compensated_for_by_insurance_or_otherwise for taxpayers who are individuals sec_165 limits deductions under sec_165 to three categories of losses losses_incurred in a trade_or_business losses_incurred in any transaction entered into for profit but not connected with a trade_or_business and losses of property a not connected with a trade_or_business or a transaction entered into for profit and b arising from fire storm shipwreck or other_casualty or from theft these three categories of losses are provided for in sec_165 and and respectively for a loss in the third category ie sec_165 the loss is allowed as a deduction only to the extent that the amount of the loss exceeds dollar_figure and then only to the extent that the aggregate amount of such losses exceeds of the taxpayer’s adjusted_gross_income sec_165 and a the losses described in sec_165 are subdivided into two categories casualty losses which are losses arising from fire storm shipwreck or other_casualty and theft losses which are losses arising from theft see sec_1_165-7 income_tax regs imposing rules for deduction of casualty losses sec_1_165-8 income_tax regs imposing rules for deduction of theft losses the physical damage to property caused by a tornado is a casualty_loss within the meaning of sec_165 see eg howard v commissioner tcmemo_1969_277 thus the loss to property a and property b caused by the tornado is a casualty_loss the amount of a casualty_loss is the difference between the fair_market_value of the property before the casualty and the fair_market_value of the property after the casualty sec_1_165-7 income_tax regs as a general_rule the precasualty and postcasualty values must be determined by competent appraisal id however the difference in the values can also be evidenced by t he cost of repairs to the property id subdiv ii for this purpose the cost of repairing the property must be the actual cost incurred to repair the property not an estimate 70_tc_391 thus an estimate of the cost of repairing the property cannot be used to determine the decline in the value of the property id there is one exception if the best use of the property after the casualty would require the repair of the property then the decline in value can be inferred from an estimate of the cost of repairing the property for example in abrams v commissioner tcmemo_1981_231 41_tcm_1459 an office building was damaged by seismic continued the amount of a casualty_loss cannot exceed the adjusted_basis of the property for determining the loss from the sale_or_other_disposition of the property sec_165 sec_1_165-7 income_tax regs thus if the decline in value exceeds the adjusted_basis for determining the loss from the sale_or_other_disposition of property then the amount of the loss computed under sec_165 is limited to the adjusted_basis sec_1_165-7 income_tax regs the next step in determining the amount of a casualty_loss is to reduce the amount of the loss by the compensation received on account of the loss sec_165 sec_1_165-7 examples and income_tax regs the reduction is required for all of the types of losses described by sec_165 including sec_165 casualty losses finally adjustments must be made to account for the dollar_figure floor and the -of-adjusted-gross-income floor sec_165 and a these adjustments must be made for any sec_165 losses including casualty losses continued events the owners of the building were willing to leave the damage unrepaired id however an expert witness testified that any prospective buyer of the building would repair the damage or insist that the seller repair the damage before the sale id persuaded that the expert was correct the court determined that the decline in value of the building was equal to the estimated cost of repairing the seismic damage id pincite given the legal tests set forth above the following issues are relevant to the coateses’ sec_165 deduction for the casualty losses attributable to property a and property b issue the decline in the value of property a the adjusted_basis of property a the compensation the coateses received for the tornado damage to property a the decline in the value of property b court’s holding dollar_figure at least dollar_figure dollar_figure at least dollar_figure the adjusted_basis of property b the compensation the coateses received for the tornado damage to property b dollar_figure dollar_figure part of the opinion in which discussed i a i b i c i d i e i f we address these issues infra parts i a i b i c i d i e and i f respectively a the decline in the value of property a the evidence establishes the following facts relevant to the decline in the value of property a property a i sec_80 acres of land upon which there are three structures two barns and a house the coateses built the house in on date an appraisal was made of acres that included the acres of property a the appraisal states that the value of the acres was dollar_figure on date the tornado damaged property a it damaged all the structures tore down fences and knocked down trees the coateses had property insurance coverage on the structures on property a but did not have coverage on the land their insurance_company estimated that the cost of repairing the structures on property a was dollar_figure-dollar_figure on date crossroads estimated that it would cost dollar_figure to repair the structures on property a for this estimate the coateses paid crossroads a fee of dollar_figure the coateses’ insurance_company paid them dollar_figure for the damage to the structures on property a the coateses used the dollar_figure to repair the structures on property a the coateses incurred an unspecified amount of other costs to repair the tornado damage to property a such as to repair fences the coateses reported on their return that the value of property a before the tornado was dollar_figure and that the value of property a after the tornado was dollar_figure a difference of dollar_figure coates testified that these two values corresponded to his view of the values of property a before and after the tornado in certain instances the decline in the value of property can be inferred from the actual cost of repairing it sec_1_165-7 income_tax regs however the record does not reveal the amount that the coateses expended to remediate the tornado damage to property a they spent the entire amount they received from the insurance_company to repair the house and barns on property a but the other amounts they spent such as amounts spent to repair fences are not in evidence furthermore neither party suggests that the actual cost of repairs proves the decline in value of property a therefore we do not consider the actual cost of repairs in determining the decline in value of property a instead we determine the decline in value by following the general_rule for casualty losses this means that we calculate the value of property a before the tornado and subtract the value of property a after the tornado see id subdiv i the coateses urge us to accept coates’s calculation that the pre-tornado and post-tornado values are dollar_figure and dollar_figure respectively these amounts were reported on the coateses’ return coates explained his reasoning for these valuations in his testimony the irs argues that coates’s views of the pre-tornado and post-tornado values should be accorded little weight because it contends his views are self- interested see 112_tc_183 stating that we are not bound to accept at face value the testimony of a landowner of the value of property if it appears to be improbable unreasonable or offered solely to serve the self-interests of the taxpayer the irs also points out that coates is not a certified appraiser and that he did not exhaustively explain his method for determining the values as the irs recognizes it is permissible for the court to consider the opinion of the landowner as to the value of land 13_tc_373 the owner has unique knowledge of the land id although the relevant fair market values before and after a casualty must generally be ascertained by a competent appraisal sec_1_165-7 income_tax regs this does not mean that the appraisal must be done by a professional appraiser it is therefore permissible for the before-and-after values in a casualty-loss situation to be determined by a court on the basis of the landowner’s opinion of these values here we give coates’s views special weight he owned property a before and after the tornado furthermore he has substantial experience working with timberland farmland and pastureland for years coates has been handling various tasks on the ranch coates has also bought and sold various properties in seminole county some of the land coates bought had been damaged by fire or was overgrown in those instances he had to restore the land to workable farmland or grazing land before reselling it in our view coates was credible and knowledgeable about the before-and-after values of property a two examples of opinions in which the court has done so are corby v commissioner tcmemo_1980_96 and guilbeau v commissioner tcmemo_1980_166 one might posit that coates’ pre-tornado valuation of the acres of property a as dollar_figure is inconsistent with the appraisal which was done by a professional appraiser the professional appraiser opined that the acres including the acres of property a was worth dollar_figure the acres valued by the professional appraiser but not valued by coates would surely be worth more than the dollar_figure difference between the professional appraisal and coates’s valuation yet the apparent inconsistency does not shake our view that coates’s valuations are reasonable the valuation of a property often does not yield a single correct answer there are often disagreements about property value even among qualified appraisers motivated by good_faith we agree with coates that the value of property a before the tornado was dollar_figure and its value after the tornado was dollar_figure this is a decline in value of dollar_figure the dollar_figure decline in value is not inconsistent with the other facts about property a in the record for example it is not inconsistent with the fact that the coateses’ insurance_company paid them only dollar_figure for the damage to property the coateses conceded that they have the burden_of_proof regarding the decline in value of property a our finding that the decline in value is dollar_figure as they assert is supported by the preponderance_of_the_evidence they have satisfied the burden_of_proof a the insurance_company was required to pay only for damage to the house and barns on property a it was not required to pay for damage to the land trees and fences thus its dollar_figure payment did not pay for the damage to the land trees and fences b the adjusted_basis of property a we consider the following facts and events regarding the adjusted_basis of property a on their tax_return the coateses reported a casualty_loss to property a of dollar_figure and to property b of dollar_figure after these amounts were adjusted for the dollar_figure floor and the -of-adjusted- gross-income floor the total casualty_loss deduction they claimed was dollar_figure the coateses reported that their adjusted_basis in property a was dollar_figure and that their adjusted_basis in property b was dollar_figure in the notice_of_deficiency the irs disallowed the dollar_figure amount that the coateses had deducted as a casualty_loss under sec_165 the notice explained it is determined that you are not entitled to a casualty_loss for taxable_year because your loss has been disallowed to the extent that reimbursements were received from your insurance_company in addition your loss is limited to the lesser_of cost or fair_market_value at the time of loss for each casualty and theft_loss you must reduce that loss by dollar_figure and by ten percent of your adjusted_gross_income accordingly taxable_income is increased dollar_figure for tax_year ended date a week before trial irs counsel explained to the coateses that the irs challenged their adjusted bases in property a and property b at trial irs counsel explained that the irs challenged the coateses’ adjusted bases in both property a and property b in its opening brief filed after trial the irs contended that p etitioners have failed to establish their adjusted_basis in property b however the irs did not make a similar contention with respect to property a the amount of a casualty_loss cannot exceed the taxpayers’ adjusted_basis in the damaged property sec_1_165-7 income_tax regs the coateses reported that their adjusted_basis in property a was dollar_figure this exceeds dollar_figure the amount that we found to be the loss to property a although the irs initially challenged the coateses’ adjusted_basis in property a the irs’s posttrial brief does not make such a challenge the brief does challenge the coateses’ calculation of their adjusted_basis in property b in our view the irs has waived the issue of the coateses’ adjusted_basis in property a see rule 117_tc_117 n for the full dollar_figure although we do not know why the irs chose not to pursue its challenge to the coateses’ adjusted_basis in property a in its brief we observe that there was evidence at trial that it cost the coateses dollar_figure to build the house on property a this would have increased the coateses’ adjusted_basis in property a by dollar_figure see sec_1016 providing that proper adjustment in respect of property must be made for expenditure properly chargeable to capital_account sec_1 a -1 income_tax regs providing that no deduction allowed for amount_paid for new buildings decline in value to be considered a casualty_loss the coateses’ adjusted_basis in property a must be at least dollar_figure we hold that the coateses’ adjusted_basis in property a is at least dollar_figure c the compensation the coateses received for the tornado damage to property a as explained above the amount of a loss under sec_165 must be reduced by the compensation received the coateses paid dollar_figure to crossroads for its estimate of the damage to property a the coateses received dollar_figure from their insurance_company for property a on their tax_return the coateses reported that they received insurance payments totaling dollar_figure from losses attributable to property a resulting from the tornado the parties stipulated petitioners received insurance reimbursements totaling dollar_figure for wind damage to property a in its posttrial briefs the irs argued that the amount of compensation should be considered to be dollar_figure unreduced by the dollar_figure payment to crossroads however the irs failed to argue that this court should set_aside the stipulation that the total insurance reimbursements were dollar_figure this stipulation suggests that the dollar_figure received by the coateses from the if property a and property b were considered a single property then we should compare the adjusted bases for the combined property to the loss attributable to the combined property however the coateses do not argue that property a and property b should be considered one property insurance_company should be reduced by their dollar_figure payment to crossroads stipulations are binding unless otherwise permitted by the court rule e the irs did not request that the court relieve it of the stipulation therefore we need not determine on the merits whether the amount of compensation received by the coateses was dollar_figure the amount received from the insurance_company without reduction for their dollar_figure payment to crossroads or dollar_figure the dollar_figure minus the dollar_figure the stipulation means that the amount of reimbursement should be computed as the net amount dollar_figure accordingly we hold that the coateses received compensation of dollar_figure for their loss thus the total casualty_loss attributable to property a before statutory limitations is dollar_figure in summary property a adjusted_basis fmv before casualty fmv after casualty lesser_of a decline in fmv and b adjusted_basis less insurance reimbursement loss before statutory limits dollar_figure big_number big_number big_number big_number dollar_figure d the decline in value of property b the evidence establishes the following facts relevant to the decline in the value of property b property b consisted of acres of undeveloped woodland before the tornado before the tornado property b was covered with mature trees it was populated by wild turkeys deer wild boars rabbits and squirrels it was used by the coateses recreationally including for hunting they charged no fees for_the_use_of the land because its tree cover prevented grass from growing property b could not be used as grazing land before the tornado the tornado of date demolished much of the tree cover exposed to the sun the ground became overrun by dense scrub unsuitable for wild turkeys deer and wild boars after the tornado coates made some efforts to convert the land for use as grazing land he partially cleared the land he seeded it with grass he also built fences he has not yet finished converting the land for grazing use the amount spent so far is not in evidence on their tax_return the coateses reported that the fair_market_value of property b before the tornado was dollar_figure and the fair_market_value of property b after the tornado was dollar_figure the difference dollar_figure is equal to dollar_figure multiplied by acres the dollar_figure amount was coates’s conservative estimate of the cost of clearing an acre of property b so that it could be used for grazing coates testified that the dollar_figure pre-tornado valuation of property b reported on the coateses’ return was his view of the value of property b before the tornado he explained that similar properties in the area sold for dollar_figure to dollar_figure per acre coates testified that dollar_figure per acre was a conservative estimate of the cost of clearing property b for grazing use he testified that a more realistic estimate might be dollar_figure per acre because of the tediousness and dangerousness of the work at dollar_figure per acre it would cost dollar_figure to clear property b such that it could be used for grazing coates further testified that the most economical use of property b is to turn it into grazing land he explained that he had not yet been able to convert it to grazing land because of lack of money and time in the coateses obtained an appraisal of property b the appraisal stated that the land would be most valuable as hunting land that it would cost dollar_figure to restore the land to hunting use and that after the land was restored to hunting use its value would be dollar_figure the appraisal indicates that the appraiser was uncertain about the boundaries of property b although coates partially cleared property b and seeded it with grass the actual cost of clearing and reseeding property b is not in the record furthermore neither the coateses nor the irs takes the position that coates’s actual costs should be used to directly determine the decline in value of property b see sec_1_165-7 income_tax regs instead we determine the decline in value of property b by computing the value of property b before the tornado minus the value of property b after the tornado see id subdiv i as for the value of property b before the tornado the irs argues that we should accord little weight to coates’s view because he is not a licensed real_estate appraiser and because his testimony about the value of property b is self-serving coates testified that the value of property b before the tornado was dollar_figure the pre-tornado value reported on the return we found his testimony reliable he has substantial experience buying and selling property in seminole county he has special knowledge of property b as its owner we find that the value of property b before the tornado was dollar_figure as for the value of property b after the tornado we find that the evidence supports coates’s claim that the value was dollar_figure first coates testified that the best use of property b after the tornado was to convert it to grazing land his views are credible because he is experienced in converting land from one use to another to make it more valuable furthermore he has already partially converted property b to grazing land thus proving by expenditure of his own money the genuineness of his view that property b is most valuable as grazing land because we find that the best use of property b after the tornado is as grazing land our next task is to determine its value if land is most valuable in a use other than its current use its value equals what its value would be after it was converted to the new use minus the estimated cost of converting it see eg 709_f2d_1012 5th cir 667_f2d_243 1st cir 208_f2d_269 n 3d cir 125_tc_227 thus the value of property b should be equal to its value after it has been converted to grazing land minus the cost of converting it to grazing land as for the value of property b as grazing land coates testified convincingly that property b was more valuable as timberland than as grazing land we have already found property b’s value as timberland property b was timberland before the tornado and we found that property b’s pre-tornado value was dollar_figure because property b’s value as timberland was dollar_figure and because its value as grazing land is less than its value as timberland it follows that its value as grazing land is less than dollar_figure as to the cost of converting property b to grazing land we were convinced by coates’s explanation of how expensive and tedious it would be to convert tornado-damaged land to grazing land as a result we believe that the cost would be at least dollar_figure the amount coates assumed when he reported the post-tornado value on his return thus far the following propositions relevant to the value of property b after the tornado have been established the value of property b after the tornado is equal to the value of property b as grazing land minus the cost of converting tornado-damaged property b to grazing land the value of property b as grazing land is less than dollar_figure the cost of converting tornado-damaged property b to grazing land is dollar_figure or more from these three propositions it follows that the value of property b after the tornado is dollar_figure or less it is the coateses’ litigating position that the value is dollar_figure they do not contend that the post-tornado value of property b is less than dollar_figure the post-tornado value of the land would be less than dollar_figure if either a its value as grazing land is less than dollar_figure or b the cost of converting property b to grazing land is more than dollar_figure but because the coateses do not argue for a post-tornado value below dollar_figure we need not let v be the value of the land after the tornado let v be the value of the g t land after conversion to grazing land let c be the cost of converting the land from tornado-damaged land to grazing land the three propositions can be expressed as t g g v v c v big_number c dollar_figure rearranging the first proposition v v c yields v v c combining this with the second proposition v big_number it follows that tv c big_number this equation becomes big_number v c combining this equation with the big_number v c dollar_figure and big_number v dollar_figure rearranged this equation is big_number dollar_figurev t g g g t t t t t third proposition c dollar_figure it follows that so the value of property b after the tornado is dollar_figure or less consider whether the value of property b is less than dollar_figure we are satisfied that the coateses have proven their claim that the value is dollar_figure the coateses concede that they have the burden_of_proof regarding the decline in value of property b our finding that the decline in value is dollar_figure as they assert is supported by the preponderance_of_the_evidence they have therefore satisfied the burden_of_proof we have not relied on the appraisal to determine the value of property b after the tornado the appraisal stated that property b would be most valuable as hunting land that its value would be dollar_figure as hunting land and that the cost of restoring the land to hunting use would be dollar_figure this would suggest that the post-tornado value of property b would be dollar_figure the value after converting the tornado-damaged property b to hunting land minus dollar_figure the estimated cost of the conversion or dollar_figure however the coateses did not obtain an appraisal of property b until after the examination of their tax_return began and more than years after the date tornado it is questionable that the appraisal was timely under the applicable regulation which provides that the fair_market_value of the property immediately before and immediately after the casualty shall generally be ascertained by competent appraisal sec_1_165-7 income_tax regs emphasis added as a practical matter property b could have been further damaged by windstorms after the tornado any damage from these post-tornado events could have affected the appraisal’s estimate of the cost of reclaiming the property for hunting use in particular such damage would result in an overestimate of the cost of remedying the tornado damage thus even if the appraisal could satisfy the timeliness requirement in the regulation ie the immediately after requirement we would accord the appraisal no weight additionally even if the appraisal had been conducted soon enough after the tornado it would not be a competent appraisal within the meaning of sec_1_165-7 income_tax regs because it is not clear whether the appraised property includes only property b as opposed to other portions of the big_number acre ranch the preparer of the appraisal david barger included in the appraisal this statement i have assumed that a statement made by mr coates that there are acres with damage is correct even though the legals do not match exactly he also wrote the legal descriptions of the tracts affected by the tornado do not completely correspond to continued e the adjusted_basis of property b the relevant facts regarding the adjusted_basis of property b are the following property b consists of acres owned by the coateses that are within three sections of land in seminole county oklahoma a section is a square piece of land one mile on each side and consists of acres the coateses acquired property b from coates’s parents coates testified that he bought property b but the record does not contain any proof of the amount if any that he paid on their tax_return the coateses reported a casualty_loss to property a of dollar_figure and to property b of dollar_figure after these amounts were adjusted for the dollar_figure floor and the -of-adjusted- gross-income floor the total casualty_loss deduction they claimed was dollar_figure the coateses reported that their adjusted_basis in property a was dollar_figure and that their adjusted_basis in property b was dollar_figure continued the areas that are affected furthermore the legals that the county assessor is using also do not correspond exactly furthermore the appraisal indicates that the land it valued was owned by someone other than the coateses ie people other than the petitioners howard bruce coates and tandi a coates for example the appraisal lists the owners of record as brian coates cuba coates coates’s mother and and et al --meaning other unnamed owners attached to the appraisal are seminole county assessor records regarding the land appraised the owners listed on these records include harry e coates coates’s mother brian p coates properties llc brian coates rhonda coates and the coateses it is impossible on this record to determine whether the property appraised in the appraisal was in fact property b in the notice_of_deficiency the irs disallowed the amount that the coateses had deducted as a loss under sec_165 the notice explained it is determined that you are not entitled to a casualty_loss for taxable_year because your loss has been disallowed to the extent that reimbursements were received from your insurance_company in addition your loss is limited to the lesser_of cost or fair_market_value at the time of loss for each casualty and theft_loss you must reduce that loss by dollar_figure and by ten percent of your adjusted_gross_income accordingly taxable_income is increased dollar_figure for tax_year ended date a week before trial irs counsel explained to the coateses that the irs challenged their adjusted bases in property a and property b at trial irs counsel explained that the irs challenged their bases in property a and property b in its opening brief filed after trial the irs contended that p etitioners have failed to establish their adjusted_basis in property b a casualty-loss deduction is calculated as the difference between the fair_market_value of the property immediately before and after the casualty not to exceed the adjusted_basis for determining a loss from the sale_or_other_disposition of the property sec_1_165-7 income_tax regs the irs contends that the coateses have failed to establish their adjusted_basis in property b the coateses contend that they do not have the burden_of_proof with respect to their adjusted_basis in property b rule a sets forth the rule for determining which party has the burden_of_proof it states the burden_of_proof shall be upon the petitioner except as otherwise provided by statute or determined by the court and except that in respect of any new_matter increases in deficiency and affirmative defenses pleaded in the answer it shall be upon the respondent the coateses contend that the issue of their adjusted_basis in property b is a new_matter because it was not determined in the notice_of_deficiency we disagree the irs’s explanation of the adjustment in the notice_of_deficiency states that the coateses’ loss is limited to the lesser_of cost ie adjusted_basis or fair_market_value at the time of the loss therefore we conclude that the coateses have the burden of proving their adjusted_basis in property bdollar_figure adjusted_basis in property is equal to the basis of the property plus or minus the adjustments required by sec_1016 see sec_1011 one type of sec_7491 imposes the burden_of_proof on the irs for a fact if certain requirements are met see sec_7491 requiring taxpayer to introduce credible_evidence a requiring taxpayer to substantiate b requiring taxpayer to maintain records the coateses do not contend nor does the evidence show that these requirements have been met adjustment is to increase the basis by the cost incurred to develop the property see sec_1016 sec_1_263_a_-1 income_tax regs the rule for determining the basis_of_property before adjustments to basis depends on how the property was acquired whether by purchase by gift or by a combined gift and purchase whereby the buyer paid less than the value of the property if the property was acquired by purchase the basis is cost sec_1011 if the property was acquired by gift the basis is the donor’s basis except that if the donor’s basis is greater than the fair_market_value of the property at the time of the gift then for determining loss the basis is the fair_market_value sec_1015 sec_1_1015-4 income_tax regs governs sales in which the buyer pays less than fair_market_value for the property 326_fsupp_106 n d miss aff’d 455_f2d_502 5th cir under this regulation the basis for the transferee is the sum of the greater of a the amount_paid by the transferee for the property or b the transferor’s adjusted_basis in the property at the time of the transfer and the amount of increase if any in basis authorized by sec_1015 for gift_tax paid sec_1_1015-4 income_tax regs the record is unclear as to how the coateses acquired property b coates testified that he bought property b from his mother however he did not say how much he paid his mother or when the transaction took place the irs argues that coates acquired property b by gift in an effort to establish their basis in property b the coateses introduced deeds to various properties apparently the coateses contend that at least some of the deeds correspond to land in property b however the deeds which reflect the transfer of land in seminole county to coates or to the coateses jointly do not state the purchase prices and most of the deeds contain one of two notations either no documentary stamps required pursuant to o s a sec_3202 or no stamps required family transaction the state of oklahoma imposes a tax on each deed or other document by which any real_property is sold okla stat ann tit sec_3201 west each document subject_to the tax must bear a stamp showing the tax was paid id sec b however okla stat ann tit sec_3202 west provides that certain types of documents are exempt from the state tax including d eeds between parent and child without actual consideration therefor id sec_3202 thus the notations on the deeds suggest that the deeded land was transferred by gift we conclude that the coateses have failed to prove what they paid for property b if they paid anything thus it is impossible to determine what rule should be used to determine the coateses’ basis in property b and even if we knew how much the coateses paid for property b and therefore knew which rule should be used to compute their basis in property b the record does not contain the necessary information to determine basis if property b was acquired by purchase we would need to know how much the coateses paid for property b see sec_1011 if property b was acquired by gift we would need to know the donor’s basis and the fair_market_value of property b at the time of the gift see sec_1_1015-4 income_tax regs if property b was acquired through a combined gift and purchase we would need to know how much the coateses paid for property b the transferor’s adjusted_basis for the property at the time of transfer and the amount of increase in basis authorized by sec_1015 for gift_tax paid see id the record contains none of this information thus the coateses have not proven their basis in property b likewise they have not proven any positive adjustments to their basis in property b for example any costs incurred to improve the property the taxpayer bears the burden of proving such costs see 142_tc_279 a court may estimate the cost and the corresponding basis_adjustment but only if the taxpayer offers credible_evidence that provides a factual ground for the estimate id see also vanicek v commissioner t c there are insufficient factual grounds for us to estimate what the coateses paid to improve property b the coateses argue that they established their adjusted_basis in property b simply by reporting it on form_4684 of their tax_return they reported that they had an adjusted_basis of dollar_figure in property b however a tax_return is merely a statement of a taxpayer’s claim items reported on the return are not presumed to be correct 71_tc_633 therefore we are not bound by the information reported on their return the coateses did not satisfy their burden of proving their adjusted_basis in property b therefore they are not entitled to a casualty-loss deduction with respect to the tornado damage to property b see 79_tc_714 aff’d 731_f2d_1417 9th cir 46_tc_751 aff’d 387_f2d_420 8th cir 24_tc_199 aff’d 247_f2d_233 2d cir 8_tc_841 f the compensation the coateses received for the tornado damage to property b the irs does not contend that the coateses received compensation_for the tornado damage to property b the total casualty_loss to property b is zero in summary property a adjusted_basis fmv before casualty fmv after casualty lesser_of a decline in fmv and b adjusted_basis less insurance reimbursement loss before statutory limits property b adjusted_basis fmv before casualty fmv after casualty lesser_of a decline in fmv and b adjusted_basis less insurance reimbursement loss before statutory limits total loss before statutory limits less statutory limits dollar_figure deduction of agi casualty_loss after statutory limits dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number ii accuracy-related_penalty the irs determined an accuracy-related_penalty under sec_6662 the coateses deny that they are liable for the penalty and maintain that they had reasonable_cause and acted in good_faith in preparing their tax_return sec_6662 imposes a penalty on an underpayment_of_tax attributable to any of the causes listed in subsection b these causes include negligence or disregard of rules or regulations and any substantial_understatement_of_income_tax a substantial_understatement_of_income_tax is defined as any understatement exceeding the greater of i percent of the tax required to be shown on the return for the taxable_year or ii dollar_figure sec_6662 with respect to any penalty sec_7491 imposes the burden of production on the irs 116_tc_438 this requires the irs to come forward with evidence indicating that it is appropriate to impose the relevant penalty sec_7491 higbee v commissioner t c pincite once the irs has met this burden the taxpayer bears the burden of proving that the penalty is inappropriate because for example the taxpayer acted with reasonable_cause and in good_faith higbee v commissioner t c pincite the penalty under sec_6662 is not imposed with respect to any portion of an underpayment on a taxpayer who had reasonable_cause for that portion and acted in good_faith with respect to that portion sec_6664 the regulations provide that reasonable_cause and good_faith are determined on a case- by-case basis taking into account all pertinent facts and circumstances sec_1_6664-4 income_tax regs in the notice_of_deficiency the irs determined that the coateses were liable for an accuracy-related_penalty under sec_6662 of dollar_figure for the irs contends that the coateses’ underpayment_of_tax is attributable to either negligence or alternatively a substantial_understatement_of_income_tax the coateses assert a defense to the sec_6662 penalty based on reasonable_cause and good_faith coates arrived at the valuations he reported using his expertise and the valuations reflected his honest opinion of his losses for the year at issue we find that the coateses did not act negligently the coateses prepared their tax_return in good_faith and had reasonable_cause for claiming an excessive casualty- loss deduction the coateses are not liable for the sec_6662 accuracy- related penalty for the taxable_year we leave the parties to make computations under rule in accordance with the above holdings in reaching our holdings we 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 under rule


internal_revenue_service number release date index number ---------------------- ---------------------------------- ---------------------------------- re ----------------------- 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 plr-104738-17 date date legend date husband wife guardian guardian trust state state trustee power_of_appointment committee ------------------ ------------------------------------------------- --------------------------------------------- --------------------------- -------------------- -------------------------------------- ----------- -------------- -------------------------- ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- ---------------------------------------------------------------- dear ------------ this responds to a letter dated date and subsequent correspondence requesting rulings under the internal_revenue_code plr-104738-17 facts the facts submitted and representations made are as follows on date grantors husband and wife created an irrevocable_trust trust for the benefit of grantors and beneficiaries which means a class consisting of grantors’ issue and the fathers of grantors trust is a domestic_trust governed by the laws of state a corporate trustee trustee is the sole trustee of trust grantors are married and reside in state a community_property_state the terms of trust provide that until the death of the predeceased grantor at any time or times the trustee shall distribute to the beneficiaries and or either or both of the grantors such amounts of the net_income or principal of trust as the power_of_appointment committee committee appoints while the committee is in existence the trustee shall make no distributions except as the committee appoints from and after the death of the predeceased grantor and until the death of the surviving grantor at any time or times the trustee shall distribute to the beneficiaries and or the surviving grantor such amounts of the net_income or principal of trust as the committee appoints while the committee is in existence the trustee shall make no distributions except as the committee appoints any appointment direction determination or action by the committee requires either the unanimous written consent of the then serving members of the committee unanimous member power or the written consent of either or both of the grantors or the survivor of them and a majority of the then serving members of the committee grantor’s consent power the members of the committee serve and act in a non- fiduciary capacity the committee may direct that distributions be made equally or unequally to or for the benefit of any one of more of the beneficiaries to the exclusion of others trust provides that the members of the committee shall initially consist of the grantors’ fathers guardian and guardian or any other individual s who have legal authority to act on behalf of grantors’ issue guardian and guardian represent grantors’ two minor children if at any time the committee includes three or more members then all the members of the committee may by unanimous vote at any time and from time to time add one or more members to the committee provided that such members are beneficiaries and provided further that if any one or more of them is a minor then serving members of the committee shall by unanimous vote designate an individual who has legal authority under the trust to serve as guardian if at any time a committee member resigns or fails or ceases to so serve then the position of such committee member shall remain vacant the committee shall cease to exist upon the first to occur of the plr-104738-17 death of the surviving grantor or the date upon which the committee is reduced to one member if the committee ceases to exist prior to the distribution date the trustee may distribute to the beneficiaries such amounts of net_income or principal as the trustee determines if the committee ceases to exist then until the death of the predeceased grantor trustee may distribute to either or both grantors such amounts of net_income or principal as trustee determines if the committee ceases to exist then from and after the death of the predeceased grantor trustee may distribute to the surviving grantor such amounts of net_income or principal of trust as trustee determines trust provides that at all times the trustees of all trusts created under trust must be independent trustees who are not members of grantors’ family independent_trustee is defined as any bank or individual who is not either of the grantors and who is not within the meaning of sec_672 of the internal_revenue_code related or subordinate to either of the grantors grantors’ family is defined to include the issue of each of the grantor’s grandparents including the grantors and charities as defined in trust any net_income not distributed by trustee will be accumulated and added to principal each of the grantors has the power in a non-fiduciary capacity at any time and from time to time to appoint to any one or more of the grantors’ issue amounts of principal including the whole thereof as the grantor deems advisable to provide for the health maintenance support and education of grantors’ issue grantor’s sole power upon the death of the predeceased grantor trustee shall distribute the predeceased grantor’s entire_interest in the property of trust to or for the benefit of any person or persons or entity or entities other than the predeceased grantor’s estate the predeceased grantor’s creditors or the creditors of predeceased grantor’s estate as the predeceased grantor may appoint by will predeceased grantor’s testamentary power upon the death of the predeceased grantor any property remaining of the predeceased grantor’s entire one-half interest in trust that has not been effectively appointed by will shall be distributed as follows five percent to each member of the committee other than the grantors’ issue if there are one or more grantors’ issue then living the balance is to be distributed per stirpes to the grantors’ issue who are then living or held in a_trust for their benefit as provided by trust the surviving grantor’s balance in trust continues to be held by trust and administered pursuant to the terms of trust until the surviving grantor’s death upon the death of the surviving grantor trustee shall distribute the surviving grantor’s balance of trust to or for the benefit of any person or persons or entity or entities other plr-104738-17 than the surviving grantor’s estate the surviving grantor’s creditors or the creditors of surviving grantor’s estate as the surviving grantor may appoint by will surviving grantor’s testamentary power upon the death of the surviving grantor any property remaining of the surviving grantor’s balance of trust that has not been effectively appointed by will shall be distributed as follows five percent to each member of the committee other than the grantors’ issue if there are one or more grantors’ issue then living the balance is to be distributed per stirpes to the grantors’ issue who are then living or held in a_trust for their benefit as provided by trust trust provides that all transferred property to trust is community_property and grantors may hereafter either singly or jointly transfer other_property to trust which either is community_property or is being transmuted into community_property moreover any and all property transferred to trust prior to the death of the first grantor to die predeceased grantor is and shall retain its character as community_property any distribution pursuant to the terms of trust to either grantor prior to the death of the predeceased grantor is and shall be a distribution of community_property all distributions of the net_income or principal prior to the death of the predeceased grantor whether made by the committee the trustee or a grantor’s exercise of the powers retained by such grantor to a beneficiary shall be a distribution out of community_property prior to the death of the predeceased grantor any exercise of either grantor’s sole power shall be funded equally from each grantor’s share of community_property held in trust each grantor consents to all such distributions by the other grantor with respect to each grantor’s testamentary powers any such appointment by the predeceased grantor shall be funded solely from the predeceased grantor’s one-half interest in property in trust each grantor affirmatively agrees and confirms that upon any distribution from trust other than to one of the grantors and other than the exercise of the predeceased grantor’s testamentary power such property shall be funded equally from each grantor’s share of community_property in trust it is represented that trustee grantors and members of committee are all united_states persons within the meaning of sec_7701 no distribution by trustee to a beneficiary and distributions to a beneficiary pursuant to the exercise of a power_of_appointment granted hereunder shall discharge any individual’s legal_obligation to support the beneficiary plr-104738-17 taxpayer has requested the following rulings as long as the committee is serving no portion of the items of income deductions and credits against tax of trust shall be included in computing the taxable_income deductions and credits of the grantors or any member of committee under sec_671 the contribution of property to trust by grantors will not be a completed_gift subject_to federal gift_tax any distribution_of_property by the committee from trust to either grantor will not be a completed_gift subject_to federal gift_tax by any member of the committee any distribution_of_property by the committee from trust to any beneficiary of trust other than the grantors will not be a completed_gift subject_to federal gift_tax by any member of the committee no member of the committee upon his or her death will include in his or her estate any property held in trust because such member is deemed to have a general_power_of_appointment within the meaning of sec_2041 over property held in trust the basis of all community_property in trust on the date of death of the predeceased grantor will receive an adjustment in basis to the fair_market_value of such property at the date of death of the predeceased grantor ruling sec_671 provides that where it is specified in subpart e of part i of subchapter_j that the grantor or another person shall be treated as the owner of any portion of a_trust there shall then be included in computing the taxable_income and credits of the grantor or the other person those items of income deductions and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account under chapter in computing taxable_income or credits against the tax of an individual sec_672 provides for purposes of subpart e the term adverse_party means any person having a substantial_beneficial_interest in the trust which would be adversely affected by the exercise or nonexercise of the power which he possesses respecting the trust sec_673 through specify the circumstances under which the grantor is treated as the owner of a portion of a_trust sec_673 provides that the grantor shall be treated as the owner of any portion of a_trust in which the grantor has a reversionary_interest in either the corpus or the income plr-104738-17 therefrom if as of the inception of that portion of the trust the value of such interest exceeds five percent of the value of such portion sec_674 provides in general that the grantor shall be treated as the owner of any portion of a_trust in respect of which the beneficial_enjoyment of the corpus or the income therefrom is subject_to a power of disposition exercisable by the grantor or a nonadverse_party or both without the approval or consent of any adverse_party sec_674 provides that sec_674 shall not apply to the powers described in sec_674 regardless of whom held sec_674 provides that sec_674 shall not apply to a power exercisable only by will other than a power in the grantor to appoint by will the income of the trust where the income is accumulated for such disposition by the grantor or may be so accumulated in the discretion of the grantor or a nonadverse_party or both without the approval or consent of any adverse_party sec_674 provides that sec_674 shall not apply to a power to distribute corpus to or for a beneficiary provided that the power is limited by a reasonably_definite_standard under sec_675 and applicable regulations the grantor is treated as the owner of any portion of a_trust if under the terms of the trust agreement or circumstances attendant on its operation administrative control is exercisable primarily for the benefit of the grantor rather than the beneficiary of the trust sec_676 provides that the grantor shall be treated as the owner of any portion of a_trust whether or not he is treated as such owner under any other provision of part i subchapter_j chapter where at any time the power to revest in the grantor title to such portion is exercisable by the grantor or a nonadverse_party or both sec_677 provides in general that the grantor shall be treated as the owner of any portion of a_trust whether or not he is treated as such owner under sec_674 whose income without the approval or consent of any adverse_party is or in the discretion of the grantor or a nonadverse_party or both may be distributed to the grantor or the grantor’s spouse held or accumulated for future distribution to the grantor or the grantor’s spouse or applied to the payment of premiums on policies of insurance on the life of the grantor or the grantor’s spouse sec_678 provides that a person other than the grantor shall be treated as the owner of any portion of a_trust with respect to which such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself or such person has previously partially released or otherwise modified such a power plr-104738-17 and after the release or modification retains such control as would within the principles of inclusive subject a grantor of a_trust to treatment as the owner thereof sec_679 provides that a united_states_person who directly or indirectly transfers property to a foreign_trust shall be treated as the owner for his taxable_year of the portion of such trust attributable to such property if for such year there is a united_states_beneficiary of any portion of the trust based solely on the facts and representations submitted we conclude an examination of trust reveals none of the circumstances that would cause either grantor to be treated as the owner of any portion of trust under sec_673 sec_674 sec_676 sec_677 or sec_679 so long as trust remains a domestic_trust and committee remains in existence we further conclude that an examination of trust reveals none of the circumstances that would cause administrative controls to be considered exercisable primarily for the benefit of either grantor under sec_675 thus the circumstances attendant on the operation of trust will determine whether either grantor will be treated as the owner of any portion of trust under sec_675 this is a question of fact the determination of which must be deferred until the federal_income_tax returns of the parties involved have been examined by the office with responsibility for such examination also because none of the members of committee has a power exercisable by himself to vest trust income or corpus in himself none shall be treated as the owner of trust under sec_678 ruling sec_2 and sec_2501 provides for the imposition of a gift_tax for each calendar_year on the transfer of property by gift during such calendar_year by any individual sec_2511 provides that the gift_tax applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_25_2511-2 of the gift_tax regulations provides that a gift is complete as to any property or part thereof or interest therein with respect to which the donor has so parted with dominion and control as to leave the donor with no power to change the disposition of the property whether for the donor’s own benefit or for the benefit of another but if upon a transfer of property whether in trust or otherwise the donor reserves any power over its disposition the gift may be wholly incomplete or may be partially complete and partially incomplete depending upon all the facts in the particular case accordingly in every case of a transfer of property subject_to a reserved power the terms of the power must be examined and its scope determined sec_25_2511-2 provides an example where the donor transfers property in trust plr-104738-17 to pay the income to the donor or accumulate it in the discretion of the trustee and the donor retains a testamentary power to appoint the remainder among the donor’s descendants the regulation concludes that no portion of the transfer is a completed_gift however if the donor had not retained a testamentary_power_of_appointment but had instead provided that the remainder should go to x or his heirs the entire transfer would be a completed_gift sec_25_2511-2 provides that a gift is incomplete in every instance in which a donor reserves the power to revest the beneficial title to the property in himself or herself a gift is also incomplete if and to the extent that a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries as between themselves unless the power is a fiduciary power limited by a fixed_or_ascertainable_standard under sec_25_2511-2 a donor is considered as possessing a power if it is exercisable by the donor in conjunction with any person not having a substantial adverse_interest in the disposition of the transferred property or the income therefrom a trustee as such is not a person having an adverse_interest in the disposition of the trust property or its income sec_25_2511-2 provides that the relinquishment or termination of a power to change the beneficiaries of transferred property occurring otherwise than by death of the donor is regarded as the event which completes the gift and causes the gift_tax to apply sec_25_2511-2 provides that if a donor transfers property to himself as trustee or to himself and some other person not possessing a substantial adverse_interest as trustees and retains no beneficial_interest in the trust property and no power over it except fiduciary powers the exercise or nonexercise of which is limited by a fixed_or_ascertainable_standard to change the beneficiaries of the transferred property the donor has made a completed_gift sec_25_2511-2 does not define substantial adverse_interest sec_25_2514-3 provides in part that a taker in default of appointment under a power has an interest that is adverse to an exercise of the power sec_25_2514-3 also provides that a co-holder of a power is considered as having an adverse_interest where he may possess the power after the possessor’s death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate in 308_us_39 the taxpayer created a_trust for the benefit of named beneficiaries and reserved the power_to_revoke the trust in whole or in part and to designate new beneficiaries other than himself six years later in the taxpayer relinquished the power_to_revoke the trust but retained the right to change the beneficiaries in the taxpayer relinquished the right to change the plr-104738-17 beneficiaries the court stated that the taxpayer’s gift is not complete for purposes of the gift_tax when the donor has reserved the power to determine those others who would ultimately receive the property accordingly the court held that the taxpayer’s gift was complete in when he relinquished his right to change the beneficiaries of the trust a grantor’s retention of a power to change the beneficial interests in a_trust causes the transfer to the trust to be incomplete for gift_tax purposes even though the power may be defeated by the actions of third parties 37_tc_897 see also 51_tc_352 in this case each grantor retained the grantor’s consent power over the income of trust under sec_25_2511-2 a donor is considered as himself having a power if it is exercisable by him in conjunction with any person not having a substantial adverse_interest in the disposition of the transferred property or the income therefrom the committee members are not takers in default for purposes of sec_25_2514-3 they are merely coholders of the power under sec_25_2514-3 a coholder of a power is only considered as having an adverse_interest where he may possess the power after the possessor’s death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate in this case the committee ceases to exist upon the death of the last grantor to die accordingly the committee members do not have interests adverse to either grantor under sec_25_2514-3 and for purposes of sec_25_2511-2 if the committee ceases to exist the trustee has the power to distribute net_income to a beneficiary however the trustee’s power is not a condition_precedent to each grantor’s consent power each grantor’s consent power over income is presently exercisable and not subject_to a condition_precedent thus the trustee’s power to distribute net_income does not cause the transfer of property to be complete with respect to the income_interest in trust for federal gift_tax purposes therefore each grantor is considered as possessing the power to distribute income to any beneficiary himself or herself because he or she retained the grantor’s consent power each grantor also retained the power to appoint such amounts of principal including the whole thereof to any one or more of the beneficiaries grantor’s sole power under sec_25_2511-2 a gift is incomplete if and to the extent that a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries as between themselves unless the power is a fiduciary power limited by a fixed_or_ascertainable_standard in this case the grantor’s sole power gives each grantor the power to change the interests of the beneficiaries finally each grantor consented to allow the other grantor to exercise the grantor’s sole power alone even though each grantor’s power is limited by an ascertainable_standard ie health education maintenance and support grantors’ powers are not fiduciary powers if the committee ceases to exist the trustee in its fiduciary capacity also has the power to distribute principal to one or more beneficiaries trustee is a corporate trustee and under the terms of the trust instrument cannot be related or subordinated within the plr-104738-17 meaning of sec_672 to the grantors the powers of the trustee are not conditions precedent to the grantors’ powers each grantor’s sole power over principal is presently exercisable and not subject_to a condition_precedent accordingly each grantor retains dominion and control_over the principal of trust until the trustee exercises his or her power to appoint principal see 37_tc_897 thus the trustee’s powers to distribute principal do not cause the transfer of property to be complete with respect to the remainder in trust for federal gift_tax purposes accordingly the retention of grantor’s consent power and grantor’s sole power causes the transfer of property to trust to be wholly incomplete for federal gift_tax purposes further each grantor retained either a predeceased grantor’s testamentary power or the surviving grantor’s testamentary power depending on the order of the deaths of the grantors to appoint property in trust to any person or persons or entity or entities other than his or her respective estate his or her respective creditors or the creditors of his or her respective estate under sec_25_2511-2 the retention of a testamentary power to appoint the remainder of a_trust is considered a retention of dominion and control_over the remainder accordingly the retention of this power causes the transfer of property to trust to be incomplete with respect to the remainder in trust for federal tax purposes accordingly based on the facts submitted and the representations made we conclude that the contribution of property to trust by the grantors will not be a completed_gift subject_to federal gift_tax however any distribution made from trust to a beneficiary is a completed_gift at the time of the distribution made one-half by each grantor further upon either grantor’s death the fair_market_value of his or her interest in the property in trust is includible in his or her respective gross_estate for federal estate_tax purposes trust provides that any distribution pursuant to the terms of trust to either grantor prior to the death of the predeceased grantor is and shall be a distribution of community_property accordingly any distribution from trust to either grantor is merely a return of each grantor’s property therefore we conclude that any distribution_of_property by the committee from trust to either grantor will not be a completed_gift subject_to federal gift_tax by any member of the committee further upon the predeceased grantor’s death the fair_market_value of the predeceased grantor’s interest in trust is includible in the predeceased grantor’s gross_estate for federal estate_tax purposes moreover upon the surviving grantor’s death the fair_market_value of the balance in trust is includible in the surviving grantor’s gross_estate for federal estate_tax purposes ruling sec_4 and sec_2514 provides that the exercise or release of a general_power_of_appointment created after date shall be deemed a transfer of property by the individual possessing such power plr-104738-17 sec_2514 provides that the term general_power_of_appointment means a power which is exercisable in favor of the individual possessing the power possessor the possessor’s estate the possessor’s creditors or the creditors of the individual’s estate sec_25_2514-1 provides in part that a power_of_appointment is not a general power if by its terms it is exercisable only in favor of one or more designated persons or classes other than the possessor or his creditors or the possessor’s estate or the creditors of the estate sec_2514 provides that in the case of a power_of_appointment created after date if the power is exercisable by the possessor only in conjunction with the creator of the power such power is not deemed a general_power_of_appointment sec_2514 provides that in the case of a power_of_appointment created after date if the power is not exercisable by the possessor except in conjunction with a person having a substantial interest in the property subject_to the power which is adverse to the exercise of the power in favor of the possessor such power shall not be deemed a general_power_of_appointment for purposes of sec_2514 a person who after the death of the possessor may be possessed of a power_of_appointment with respect to the property subject_to the possessor’s power which he may exercise in his own favor shall be deemed as having an interest in the property and such interest shall be deemed adverse to such exercise of the possessor’s power sec_25_2514-3 provides in part that a co-holder of a power_of_appointment has no adverse_interest merely because of his joint possession of the power nor merely because he is a permissible appointee under a power however a co-holder of a power is considered as having an adverse_interest where he may possess the power after the possessor’s death and may exercise it at that time in favor of himself his estate his creditor or the creditors of his estate thus for example if x y and z held a power jointly to appoint among a group of persons which includes themselves and if on the death of x the power will pass to y and z jointly then y and z are considered to have interests adverse to the exercise of the power in favor of x similarly if on y’s death the power will pass to z z is considered to have an interest adverse to the exercise of the power in favor of y sec_2041 provides that the value of the gross_estate shall include the value of all property to the extent of any property with respect to which the decedent has at the time of death a general_power_of_appointment created after date or with respect to which the decedent has at any time exercised or released such a power by a disposition which is of such nature that if it were a transfer or property owned by the decedent such property would be includible in the decedent’s gross_estate under sec_2035 to inclusive plr-104738-17 under sec_2041 the term general_power_of_appointment is defined in relevant part to mean a power which is exercisable in favor of the decedent his estate his creditors or the creditors of his estate sec_2041 provides however that in the case of a power_of_appointment created after date which is exercisable by the decedent only in conjunction with another person if the power is not exercisable by the decedent except in conjunction with a person having a substantial interest in the property subject_to the power which is adverse to the exercise of the power in favor of the decedent - such power shall not be deemed a general_power_of_appointment for purposes of sec_2041 a person who after the death of the decedent may be possessed of a power_of_appointment with respect to the property subject_to the decedent’s power which he may exercise in his own favor shall be deemed as having an interest in the property and such interest shall be deemed adverse to such exercise of the decedent’s power sec_20_2041-3 of the estate_tax regulations provides in part that a co-holder of a power_of_appointment has no adverse_interest merely because of his joint possession of the power nor merely because he is a permissible appointee under a power however a co-holder of a power is considered as having an adverse_interest where he may possess the power after the decedent’s death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate thus for example if x y and z held a power jointly to appoint among a group of persons which includes themselves and if on the death of x the power will pass to y and z jointly then y and z are considered to have interests adverse to the exercise of the power in favor of x similarly if on y’s death the power will pass to z z is considered to have an interest adverse to the exercise of the power in favor of y the powers held by the committee members under the grantor’s consent power are powers that are exercisable only in conjunction with the creators the grantors accordingly under sec_2514 and sec_2041 the committee members do not possess general powers of appointment by virtue of possessing this power further the powers held by the committee members under the unanimous member powers are not general powers of appointment for purposes of sec_2514 and sec_2041 as in the examples in sec_25_2514-3 and sec_20_2041-3 the committee members have substantial adverse interests in the property subject_to this power accordingly any distribution made from trust to a beneficiary other than grantors pursuant to the exercise of these powers the grantor’s consent power and the unanimous member powers are not gifts by the committee members instead such distributions are gifts by the grantors based upon the facts submitted and representations made we conclude that any distribution_of_property by the committee from trust to any beneficiary of trust other than the grantors will not be a completed_gift subject_to federal gift_tax by any member of the committee further we conclude that any distribution_of_property from trust to a plr-104738-17 beneficiary other than grantors will be a completed_gift by the grantors trust provides that all distributions of the net_income or principal prior to the death of the predeceased grantor whether made by the committee the trustee or a grantor’s exercise of the powers retained by such grantor to a beneficiary is and shall be a distribution out of community_property accordingly distributions to beneficiaries other than grantors will be gifts made one-half by each grantor finally we conclude that the powers held by the committee members are not general powers of appointment for purposes of sec_2041 and accordingly the possession of these powers by the committee members will not cause trust property to be includible in any committee member’s gross_estate under sec_2041 ruling sec_1014 provides in part that except as otherwise provided in this section the basis_of_property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent will if not sold exchanged or otherwise_disposed_of before the decedent’s death by such person be the fair_market_value of the property at the date of the decedent’s death sec_1014 provides that in the case of decedents dying after date property which represents the surviving spouse’s one-half share of community_property held by the decedent and the surviving_spouse under the community_property_laws of any state is considered for purposes of sec_1014 to have been acquired from or to have passed_from_the_decedent if at least one-half of the whole of the community interest in such property was includible in determining the value of the decedent’s gross_estate sec_2036 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for adequate_and_full_consideration in money or money’s worth by trust or otherwise under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death the possession or enjoyment of or the right to the income from the property or the right either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income therefrom sec_2038 provides that the value of the decedent’s gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for adequate_and_full_consideration in money or money’s worth by trust or otherwise where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power in whatever capacity exercisable by the decedent alone or by the decedent in conjunction with any other person without regard to when or from what source the plr-104738-17 decedent acquired such power to alter amend revoke or terminate or where any such power is relinquished during the three-year period on the date of the decedent’s death grantors reside in state a community_property_state trust provides that all transferred property to trust is community_property or is being transmuted into community_property moreover any and all property transferred to trust prior to the death of the predeceased grantor is and shall retain its character as community_property as concluded above upon the death of each grantor his or her respective interest in trust as either the predeceased grantor or the surviving grantor will be includible in his or her respective gross_estate for federal estate_tax purposes accordingly based upon the facts submitted and representations made we conclude that the basis of all community_property in trust on the date of death of the predeceased grantor will receive an adjustment in basis to the fair_market_value of such property at the date of death of the predeceased grantor except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code specifically we express no opinion on the trust provisions permitting trustee to distribute income or principal to trustees of other trusts decanting or any other trust provisions not referenced in this private_letter_ruling 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 a copy of this letter is being sent to your authorized representative 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 sincerely lorraine e gardner lorraine e gardner senior counsel branch office of associate chief_counsel passthroughs special industries enclosures copy for sec_6110 purposes copy of this letter


internal_revenue_service department of the treasury index number washington dc person to contact telephone number refer reply to cc dom p si br 7-plr-108159-98 ate date re legend taxpayer trust country x date tin we received a request_for_ruling and subsequent correspondence submitted on your behalf by your authorized representative this letter is in reply to that request taxpayer is a citizen and resident_of_the_united_states taxpayer proposes to settle trust under the laws of country x trustee of trust will be an unrelated corporate trustee trustee will have no beneficial_interest in trust during the term of trust trustees are to pay to and among the beneficiaries such amounts of income and principal as trustee in its sole discretion determines trustees are to divide trust into separate funds for separate groups of beneficiaries all of the beneficiaries are citizens and residents of the united_states on termination of trust trustees are to distribute trust assets to the then living beneficiaries of the separate funds plr-108159-98 article of trust instrument provides that prior to date taxpayer may alter amend modify or revoke trust on date trust will be irrevocable article of trust instrument provides that trustees are to distribute from trust property any amount that is necessary to satisfy any federal or state_income_tax liability incurred by taxpayer pursuant to the laws of the united_states of america as a result of the establishment of trust under article of trust instrument trustees are to distribute directly to the internal_revenue_service of the united_states of america or similar state_agency an amount sufficient to satisfy the income_tax_liability of taxpayer attributable to the income of trust or any corporations or entities comprised within trust the amount distributed under this provision shall be equal to the amount that taxpayer's personal income_tax_liability payable to the internal_revenue_service or similar state_agency exceeds taxpayer's personal income_tax_liability computed as if he were not the owner or the settlor of any portion of trust amounts distributed to the internal_revenue_service of the united_states of america or similar state_agency to satisfy the income_tax_liability of taxpayer attributable to trust are to be distributed from trust's separate funds in proportion to the funds respective values immediately following the establishment of trust further trustees are obligated to make such distributions only to the extent that there are sufficient funds available in trust for that purpose article of trust instrument provides that except as provided in article and of trust instrument no power conferred in trust instrument is exercisable for the benefit of taxpayer or taxpayer's spouse further no provision of trust instrument shall operate to cause any part of the capital or income of trust to become payable to or applicable for the benefit of taxpayer or taxpayer’s spouse taxpayer requests a ruling that the tax distributions described in article of the governing instrument if made will represent tax_payments allocable to the trust and will not constitute the retention of the right to income under sec_2036 sec_2036 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in the case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise under which he has retained for his life or for any period not ascertainable without reference to his death or for any period that does not in fact end before his death 2g plr-108159-98 the possession or enjoyment of or the right to the income from the property or the right either alone or in conjunction with any person to designate the persons who shall enjoy the property or the income from the property in the present case trustee is required to distribute to the internal_revenue_service or any similar state_agency income or principal to satisfy taxpayer's income_tax_liability attributable to trust the amount of the distribution is equal to the excess of taxpayer's personal income_tax_liability over taxpayer's personal income_tax_liability computed as if taxpayer was not the owner of any portion of trust because the distributions on taxpayer's behalf represent tax_payments allocable to trust the distributions do not constitute the retention of the right to income as described in sec_2036 therefore we conclude that the requirement that trustees make the specified distributions will not cause trust corpus to be included in taxpayer's gross_estate under sec_2036 we note however that taxpayer would have retained an income_interest for purposes of sec_2036 if trustee were required to make distributions to reimburse taxpayer for any_tax liability not attributable to trust eg income_tax on his personal salary or capital_gains on personal investments the ruling contained in this letter is based upon information and representations submitted by taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request_for_ruling it is subject_to verification on examination except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in addition we express no opinion concerning any other rights or interests of taxpayer in trust income or principal that would make property includible in taxpayer's gross_estate under sec_2036 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 plr-108159-98 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely signea vossph h makurath joseph h makurath senior technician reviewer assistant chief_counsel p s _ saya sf ttm snp a ieee tmmsdatbiirasenemmmmpenganenpanntenimrcener- see a