t c memo united_states tax_court marc a trzeciak and miriam trzeciak petitioners v commissioner of internal revenue respondent docket no filed date vincent j nardone and m pilar puerto for petitioners terry serena for respondent memorandum opinion chiechi judge this matter is before us on petitioners’ motion that petitioners entitled motion for award of reasonable litigation and administrative costs and that we have recharacterized as petition- ers’ motion for an award under sec_7430 of reasonable_litigation_costs petition- ers’ motion we shall deny petitioners’ motion background the record establishes and or the parties do not dispute the following at all relevant times petitioners resided in centerville ohio centerville during at least and the years at issue petitioner miriam trzeciak ms trzeciak owned managed and rented single-family residences rental properties during those years of those rental properties were in or in the vicinity of columbus ohio columbus as part of her management responsibili- ties ms trzeciak inter alia performed administrative and bookkeeping tasks with respect to the rental properties showed the rental properties to prospective tenants handled tenant complaints and dealt with contractors regarding repairs ms trzeciak’s real_estate activities in order to carry out certain of those responsibili- ties ms trzeciak periodically traveled to the rental properties from petitioners’ home in centerville petitioners’ residence petitioners timely filed form_1040 u s individual_income_tax_return return for each of their taxable years return and return barnaby g reagan mr reagan a certified_public_accountant prepared those returns petitioners attached to each of their return and return schedule e supplemental income and loss schedule e in schedule e that petitioners attached to their return schedule e petitioners reported a total rental real_estate loss of dollar_figure attributable to ms trzeciak’s real_estate activities petitioners attached to their schedule e statements entitled other expenses regarding ms trzeciak’s respective rental properties with respect to which petitioners claimed that loss each of those statements included a claimed expense of dollar_figure for an item referred to as com- mon overhead in schedule e that petitioners attached to their return schedule e petitioners reported a total rental real_estate loss of dollar_figure attributable to ms trzeciak’s real_estate activities petitioners attached to their schedule e statements entitled other expenses regarding ms trzeciak’s respective rental properties with respect to which petitioners claimed that loss each of those statements included a claimed expense of dollar_figure for an item referred to as com- mon overhead around date respondent assigned a revenue_agent respondent’s revenue_agent to examine each of petitioners’ return and return respon- dent’s examination petitioners retained mr reagan to represent them in connec- tion with respondent’s examination during the course of respondent’s examination petitioners presented certain documents to respondent’s revenue_agent which established that ms trzeciak spent hours and hours during and respectively with respect to ms trzeciak’s real_estate activities and that ms trzeciak spent hours and hours of those total hours during and respectively traveling between petitioners’ residence and her rental properties respondent’s revenue_agent prepared a workpaper dated date revenue agent’s date workpaper in which he set forth the final_determination of the ra revenue_agent government’s position that final_determination was the loss from the rental activities is limited per sec_469 the revenue agent’s date workpaper stated the taxpayer ms trzeciak does not employ anyone to handle the management of the properties and handles bookkeeping advertising paying bills collecting and depositing rent scheduling major maintenance and performing minor maintenance and tenant relations mostly performed from her petitioners’ residence no mention was made of a space in petitioners’ residence that was used regularly and exclusively for the taxpayer’s rental activities the taxpayer also checked her vacant properties for damage and soundness about once a month in the taxpayer spent hours making the trip from dayton centerville where her residence is to columbus with each round trip taking a reported hours in the taxpayer spent over hours traveling between her residence and columbus the taxpayer did not transport anything other than signs paperwork and herself while in columbus the taxpayer would show properties to prospective tenants visit vacant properties to ensure the properties were secure and visit rented properties if the tenant had concerns in much of the travel time is in relation to searching for other properties and purchasing the properties in t c summary opinion truskowsky v commissioner the taxpayer’s travel from his home to his activity was considered a commute the taxpayer argued that the travel between his home and his ranch constituted ‘work’ the court disagreed while recognizing that some travel may constitute work eg hauling equipment trans- porting items integral to the operation and asserted that travel is analogous to a personal commute and therefore not ‘work’ as such travel time claimed by the taxpayer should not be considered in the hourly tests under sec_469 and reg and 5t ms trzeciak’s t ravel time is analogous to personal commute it is well established the expenses for commuting from home to work are personal and not deductible under sec_162 where one chooses to live is a matter of personal convenience similarly in comput- ing the hourly tests for participation ie work in an activity under sec_469 travel time from a personal_residence is inherently per- sonal hours that do not represent participation in a business 1we take judicial_notice that centerville is a suburb of dayton ohio dayton on date mr reagan sent respondent’s revenue_agent a letter on behalf of petitioners petitioners’ date letter with respect to the revenue agent’s date workpaper that letter stated i am responding to your stated position that the travel time spent by the taxpayer ms trzeciak does not constitute hours that count toward meeting the hour test under sec_469 my re- search indicates that the time is very clearly qualified to count toward the hours test my reading of the three u s tax_court cases you cite as support for your position does not convince me of their merit the following is a summary of each case osama a mowafi v commissioner tc memo the pri- mary issue in this case is the credibility of the records of the taxpayer this taxpayer claimed ridiculous hours of time spent working on his rentals activities there is no substantive discussion of travel time per se in this case the credibility of the hours claimed by mrs trzeciak is not an issue and therefore i see no case relevance robert p sweet et ux v commissioner tc summary opinion the travel issue in this case is focused upon the exceptional distance from the taxpayer’s home to the rental property the distance was big_number miles round-trip and the travel time wa sec_219 hours this time and distance is many multiples of that claimed by mrs trzeciak and appears to fail the ordinary and necessary test of travel the to hours of travel claimed by mrs trzeciak is not properly compa- rable to the facts of this case i also believe the court errs when it makes reference to the commuting standard of most trade_or_business activities i will expound on this point later thomas e truskowsky et ux v commissioner tc summary opin- ion this case focuses on a cattle activity passive_activity analysis the issue here is not that of a real_estate_professional for this reason the discussion of travel is not on point once again due to the unique nature of travel that is allowable in conjunction with managing rental real_estate travel away from home is an integral element of owning and managing one’s rental real_estate in seeking authority for this issue let’s start with the tax_return forms schedule e of form_1040 recognizes this necessary deduction with a separate line for auto and travel because the deduction is specifically allowable then it follows that the time associated with travel should count toward the hour test the schedule e instructions for this line item say you can deduct ordi- nary and necessary auto and travel_expenses related to your rental activities including of meal expenses_incurred while traveling away from home the key element here is while traveling away from home there is no mention of commuting which is a very important issue in general trade_or_business activity travel_expenses the instructions do not offer any more specific direction regarding what constitutes qualified travel if the issue of commuting was relevant to management of rental real_estate there would be some mention of it in the irs guidance absence of this implies that travel for rental property management is unique on date mr reagan sent to respondent’s appeals_office on behalf of petitioners a formal protest petitioners’ protest in which 2for convenience when discussing petitioners’ date letter and petitioners’ protest we shall sometimes refer to mr reagan’s arguments made on behalf of petitioners as mr reagan’s arguments petitioners protested the proposed determinations of the revenue_agent the protest stated in pertinent part the taxpayer ms trzeciak is very clearly directly involved in day- to-day management and operations of the rental properties manage- ment of the rental real_estate properties is where the majority of the taxpayer’s mrs trzeciak time is spent she has no other business involvement there is no management company utilization with the rental properties and every action and decision related to the operation of the rental properties is done by the taxpayer the entire investment is integrated as a business which happens to be ownership and management of rental real_estate do not overlook the fact that the ultimate sale of the properties is part of the ownership cycle and keeping the properties in very good condition has a strong correlation with value realized at the time of sale accomplishing this requires the taxpayer to frequently be physically present at the properties taking a hands on approach the taxpayer miriam has an advanced educa- tional background and she manages the real_estate activity with a high degree of sophistication this fact precludes any argument that ad- ministrative hours spent by the taxpayer should not count time spent creating and reviewing financial statements paying bills and manage- ment of finances are all hours spent directly managing the rental prop- erties that count toward the hour test the concept of commuting does not apply to managing rental real_estate or being a real_estate_professional this point was made in my letter dated date the irs guidance on travel for rental properties recognizes that real_estate is by nature not able to be prop- erly managed by staying at home_travel_expenses are allowed as soon as a taxpayer leaves their home and the time must follow the allowable deduction it is not a commute such as travel by an employee to a job the choice of an employee or business owner to live a certain distance from their place of work is a personal decision the purchase and management of rental real_estate is not done because of proximity to the home it is done because the property is in a suitable location for current rental income and future resale because the rental real_estate location is based upon a business decision and not a personal one travel to and from the properties is inherently deductible as a business_expense and the time is not a commute the case of thomas e truskowski sic et ux v commissioner tc summary opinion is not on point this case does not address the unique nature of rental property as previously discussed in this appeal this case also dealt with a taxpayer who had a full-time job in addition to their cattle activity the cattle activity was not their primary business activity but was in fact an investment activity this case also raises the issue of commuting which has been previously discussed in the protest as not applicable to management of rental properties by letter dated date respondent’s appeals_office acknowl- edged receipt of petitioners’ protest on date an officer with respondent’s appeals_office who was assigned petitioners’ case respondent’s appeals officer made the following pertinent entries in his so-called case activity record print prepare for conference researched commuting and rental real_estate for case memo and to provide to taxpayer if i can prove that he is wrong or perhaps rethink my analysis if the rep is right brief conference the rep mr reagan is completely unwilling to even think the sic he has any hazards on this case he believes that he has a strong position that the tax_home is in her home and that all travel to columbus is deductible and qualifies as passive loss hours he believes that the agent’s cases which are the only thing we have are worthless cases because they did not involve rental real_estate the rep believes that real_estate businesses are different for purposes of applying the commuting rules i asked for authority of this position on this because it was a foreign concept to me he didn’t give me any- thing except for the instructions to schedule e we are at an impasse since this question is the question around which everything revolves we agreed to disagree on date respondent’s appeals officer made the following entry in his case activity record print research on tax_home nothing specifically on point since the taxpayer-wife’s ms trzeciak’s only trade_or_business is in columbus and since that is where the income is earned where she spends the majority of her time columbus would be her tax_home for tax pur- poses respondent’s appeals officer prepared a document entitled appeals transmittal and case memo dated date that memo stated in pertinent part taxpayers’ position the taxpayers believe that taxpayer-wife is a real_estate_professional for the following reasons c c taxpayer participates in the activity in a regular continu- ous and substantial basis travel from dayton centerville to columbus c there is no authority statutory or otherwise that specifically states that travel time doesn’t count toward the hour test the travel is an integral part of the taxpayer’s busi- ness c c c c c c all travel time is directly related to the man- agement of the properties there is no particular reason not to consider the travel time as work travel hours must count as hours worked because the expenses associated with the travel are deduct- ible under sec_162 the concept of commuting does not apply to managing rental real_estate or being a real_estate_professional the purchase and management of rental real_estate is unrelated to proximity to home recommendation i recommend that we fully sustain the revenue agent’s position the entire case comes down to the question of whether ms tzreciak’s travel from dayton centerville to columbus qualifies as hours worked if such hours do not qualify the hours worked are less than the hours necessary for the taxpayer to be a real_estate profes- sional i agree with the revenue agent’s determination that travel between dayton centerville and columbus is not work associated with the activity that qualifies for the hours it is clearly time spent travel- ing from home to a work site ie commuting the revenue agent’s determination is well supported by the case law cited by the agent and by case law that i found in my research the taxpayers’ representative was not even willing to discuss the possibility that any of the hours could be found to be non-working hours by a court or that the commuting rules apply to the taxpayers’ travel this made it impossible to even pursue a settlement with the taxpayers respondent’s appeals officer also proposed the imposition of the accuracy- related penalty under sec_6662 for each of petitioners’ taxable years and with respect to that penalty respondent’s appeals officer stated summary and recommendation does the accuracy penalty apply to the proposed passive_activity_loss adjustment yes the revenue_agent proposes the assertion of the accuracy penalty for both and because c c c there is a substantial_understatement there was no disclosure on the return regarding the hours that were spent or that a substantial portion of the hours were questionable there are no exceptions to the application of the penalty the revenue_agent is apparently un- aware of the reasonable_cause provisions of the penalty i believe that the government could have considerable hazards should the case be litigated the representative preparer mr reagan defi- nitely seems to have strong ideas regarding the qualification of personal commuting and acquisition activities as participation while i believe these ideas are not supportable the fact remains that the taxpayer may be able to establish reliance on a tax professional on the other hand the presence of so many questionable hours and the materiality of the loss deductions seems to give the government a reasonable chance of prevailing even though i would recommend a significant concession in the event of an agreed_case i believe that the penalty is strong enough that it should be included in the statutory notice on date respondent issued to petitioners a notice_of_deficiency with respect to their taxable years and notice in that notice respon- dent determined inter alia to disallow under sec_469 sec_469 determina- tion petitioners’ total rental real_estate losses of dollar_figure and dollar_figure that they claimed in their schedule e and schedule e respectively in support of that determination respondent determined in the notice t he losses of dollar_figure on and dollar_figure on claimed in connection with your rental activities are a passive_activity you have not established that you met the requirements of inter- nal revenue code sec_469 therefore your rental loss is determined to be passive passive losses can only be offset by passive_income passive losses are also allowed to the extent they qualify for the special allowance for rental_real_estate_activities since you have no passive_income that your rental losses can be offset by and do not qualify for the special allowance for rental_real_estate_activities your rental losses of dollar_figure for and dollar_figure for are not allowable respondent also determined in the notice that petitioners are liable for each of their taxable years and for the accuracy-related_penalty under sec_6662 sec_6662 determination after petitioners received the notice they retained as their attorneys the nardone law group llc petitioners’ attorneys vincent j nardone mr nardone and m pilar puerto ms puerto of that law group were primarily responsible for representing petitioners on date petitioners’ attorneys attempted unsuccessfully to speak with respondent’s appeals officer in order to discuss the determinations in the notice and had to leave a voicemail message thereafter on the same date mr nardone sent by facsimile to respondent’s appeals officer a memorandum in which he memorialized that voicemail message and to which he attached form_2848 power_of_attorney and declaration of representative authorizing mr nardone and ms puerto to represent petitioners with respect to their taxable years and on date petitioners’ attorneys mailed to the court the petition that they had prepared on behalf of petitioners in which they contested the determina- tions in the notice the court received and filed that petition on date 3petitioners’ motion seeks costs relating to their representation by petitioners’ attorneys not by mr reagan on date petitioners’ attorneys had a telephonic discussion with respondent’s appeals officer date discussion on date mr nardone sent by facsimile to respondent’s appeals officer a memorandum date memorandum in which he memorialized the date discussion that memorandum requested an additional meeting and appeals_conference on their petitioners’ and tax periods respondent’s appeals_office denied that request in the petition petitioners alleged in pertinent part the facts upon which the petitioners rely as the basis of their case are as follows a in and i the petitioners owned real_estate properties the properties and conducted rental operations on the properties ii miriam trzeciak mrs trzeciak was not em- ployed and did not work as an independent_contractor in or iii mrs trzeciak materially participated in the rental operations of the properties--as that phrase is used in i r c 469--including conducting the day-to-day management and operations of the properties showing the properties to prospective tenants placing tenants in and out of the properties tending to tenant complaints collecting and enforcing rent following up with contractors for repairs of the properties handling the administrative and record keeping matters for the properties and traveling to the properties to fulfill all of these duties the rental_real_estate_activities iv mrs trzeciak’s rental real_estate activitie sec_4mr nardone evidently made a typographical error in drafting the date memorandum in identifying the taxable years at issue in the notice as and the years at issue in the notice are and were regular continuous and substantial--as that phrase is used in sec_469 v more than half of mrs trzeciak’s personal services performed in all trade or businesses were in the rental_real_estate_activities vi mrs trzeciak spent more than hours in the rental_real_estate_activities vii mrs trzeciak was a real_estate profes- sional as that term is understood under sec_469 and vii sic in connection with the rental_real_estate_activities the petitioners incurred losses of dollar_figure in and dollar_figure in e in and i there was not a substantial_understatement_of_income_tax on the petitioners’ and returns ii there was no valuation misstatement on the petitioners’ and returns iii the petitioners were not negligent and did not disregard the rules or regulations and iv to the extent the court would find that a deficiency or liability exists the petitioners had reasonable_cause for such deficiency or liability including but not limited to the fact that the petitioners made good_faith efforts and took reasonable care in preparing the petitioners’ and returns and properly relied on the petitioners’ tax professional’s advice after providing such professionals with all the necessary facts petitioners did not allege in the petition that ms trzeciak maintained an area or an office in petitioners’ residence where she did work relating to her real_estate activities let alone an area or an office in that residence that qualified as her principal_place_of_business under sec_280a5 sec_280a principal place of 5all section references are to the internal_revenue_code code in effect at all relevant times all rule references are to the tax_court rules_of_practice and procedure business and thus a home_office for federal_income_tax tax purposes tax_home office with respect to ms trzeciak’s real_estate activities on date respondent filed an answer in the instant case in the answer respondent denied that respondent erred with respect to the determinations in the notice and denied each of the allegations set forth in the petition quoted above except the allegation in paragraph a i in the answer respondent re- quested that the relief sought in the petition be denied and that respondent’s determination as set forth in the notice_of_deficiency be in all respects approved on date mr nardone sent respondent’s counsel a letter on behalf of petitioners petitioners’ date letter in which he asserted this offer constitutes a ‘qualified offer’ pursuant to sec_7430 and how that term is defined in sec_7430 respondent did not respond to petitioners’ date letter within the time prescribed by sec_7430 sec_280a provides in pertinent part that in the case of a taxpayer who is an individual or an s_corporation no deduction otherwise allowable under this chapter shall be allowed with respect to the use of a dwelling_unit which is used by the taxpayer during the taxable_year as a residence sec_280a sec_280a provides the following exception for certain business or rental use subsection a shall not apply to any item to the extent such item is allocable to a portion of the dwelling_unit which is exclusively used on a regular basis as the principal_place_of_business for any trade_or_business of the taxpayer on date the court served on the parties a notice setting case for trial at the court’s trial session in columbus that was to begin on date and the court’s standing_pretrial_order on date ms puerto sent an email to respondent’s counsel in which she set forth petitioners’ position with respect to the determinations in the notice in that email ms puerto stated the main issue is whether mrs trzeciak’s time spent traveling from her home_office to the rental properties and back counts for purposes of satisfying the requirements under sec_469 on date ms puerto at the request of respondent’s counsel sent another email to respondent’s counsel date email in which she maintained that the home_office qualifies as ms trzeciak’s principal_place_of_business for the and tax years for ms trzeciak’s real_estate activities in that email ms puerto discussed the facts and the law that petitioners’ attorneys believed established that during the years at issue ms trzeciak maintained a home_office in petitioners’ residence and that that so-called home_office qualified as the sec_280a principal_place_of_business of ms trzeciak included in the discussion of the facts asserted in the date email were that ms trzeciak designated a room as the office for ms trzeciak’s real_estate activities and that ms trzeciak was the only individual that used that office in petitioners’ residence included in the discussion of the law in the date email was the following the term principal_place_of_business includes a place of business used by the taxpayer to perform administrative or management activi- ties related to the taxpayer’s trade_or_business if there is no other fixed location of the taxpayers’ trade_or_business where substantial adminis- trative or management activities are undertaken see code sec_280a on date petitioners’ attorneys had a telephonic discussion with respondent’s counsel during which they described ms trzeciak’s so-called home_office as a fully functional workplace respondent’s counsel asked petitioners’ attorneys to provide him with substantiation establishing that ms trzeciak’s so- called home_office qualified as her sec_280a principal_place_of_business and thus her tax_home office on date ms puerto sent an email to respondent’s counsel date email in which she provided the substantiation that he had requested on the same day on which respondent’s counsel received the date email he prepared a so-called counsel settlement memorandum settlement memorandum the settlement memorandum indicated that petitioner ms trzeciak maintained a fully functional office within her home petitioners’ resi- dence for the sole purpose of managing the rental properties the settlement memorandum also stated because the petitioner’s ms trzeciak’s maintenance of an office in petitioners’ residence was not previously developed this case was initially viewed by our office as involving the issue of whether the petitioner’s trips between dayton centerville and colum- bus were a form of commuting the fact that the petitioner maintained a legitimate business office in dayton centerville had not been clearly advanced much less established at the time of our earlier analysis once it became clear that this was the case and that the travel time was not commuting but was travel between business locations we concluded based on established authority that the travel hours could be included for the purposes of determining the petitioner’s material_participation in the activity the parties did not file pretrial memoranda on date because the court’s standing_pretrial_order did not require them to do so if they had reached a basis of settlement which they had on date the parties filed a stipulation of settlement stipulation of settlement that stipulation provided in pertinent part the parties pursuant to t c rule c and in resolution of all issues in this case except those relating to the petitioners’ claim for litigation and administrative costs under sec_7430 hereby submit and stipulate to the following 7because the parties filed a stipulation of settlement they did not execute a stipulation of facts for trial the petitioners are not liable for any deficiencies in income_tax and are not due any overpayments of income_tax for taxable years and the petitioners are not liable for penalties under the provisions of sec_6662 for taxable years and on date petitioners filed petitioners’ motion respondent filed a response to petitioners’ motion respondent’s response and petitioners filed a reply to respondent’s response petitioners’ reply we shall refer collectively to petitioners’ motion and petitioners’ reply as petitioners’ filings petitioners attached as exhibits to petitioners’ reply inter alia an affidavit of mr reagan mr reagan’s affidavit and an affidavit of ms trzeciak ms trzeciak’s affidavit mr reagan’s affidavit stated in pertinent part during the examination petitioner miriam trzeciak miriam provided the revenue_agent a detailed log of the work relating to the rental properties that miriam performed during the and tax years i mr reagan informed the revenue_agent that--as reflected in miriam’s and logs--miriam spent a substantial amount of hours performing administrative duties for the rental properties out of an office located in her home further i informed the revenue_agent that petitioners incurred certain expenses in operat- ing this office out of their home and petitioners reported and deducted these expenses on their returns petitioners provided the revenue_agent a copy of petitioners’ and rental property expense report expense spreadsheets the first column of the expense spreadsheets lists the common overhead expenses for petitioners’ rental prop- erties during the and tax years during the examination the revenue_agent briefly asked me what was included under the common overhead expenses listed on the expense spreadsheets i informed the revenue_agent that the common overhead expenses included--among other things--the expenses relating to petitioners’ home_office that were incurred during the and tax years i directed the revenue_agent to the areas on petitioners’ returns where petitioners reported and deducted their home_office expenses the revenue_agent did not ask me any further questions regarding the common overhead expenses or home_office expenses or any details regarding peti- tioners’ home_office the revenue_agent spent very little time on and did not question the expenses that petitioners’ reported on their returns the revenue agent’s main focus during the examination was in finding out how many hours miriam spent performing work relating to the rental properties petitioners provided the revenue_agent all of the information that respondent requested respondent never asked for any informa- tion regarding petitioners’ home_office or related expenses petitioners disagreed with the revenue agent’s position that mir- iam’s travel to and from her residence and the rental properties should not count towards petitioners satisfying the hourly re- quirements under sec_469 because miriam’s travel was commuting during the initial appeals_conference i argued on behalf of petitioners that miriam’s travel to and from the rental properties and petitioners’ residence should count towards petitioners’ satisfying the hourly requirements of sec_469 further i argued that miriam’s travel was not a form of commuting i informed appeals that miriam performed all of the administra- tive functions relating to the rental properties from petitioners’ home_office and petitioners reported the expenses relating to their home_office on petitioners’ returns like the revenue_agent the appeals officer focused on the commuting argument and never challenged or questioned the home_office expenses ms trzeciak’s affidavit stated in pertinent part during the and tax years i ms trzeciak had an office in my home that was designated for my rental property business in that office i performed all of the management and administrative matters for the rental properties during the irs’s examination of petitioners’ form_1040 u s individual tax_return for tax years and the and returns the revenue_agent interviewed me regarding my activities in connection with my rental properties i told the revenue_agent that i was the only person that managed the rental properties and i performed most of the management and administrative work at my home_office the revenue_agent never asked me during the interview whether my home_office was used regularly and exclusively for the rental property business or any other questions about the home_office during the interview the revenue agent’s questions were focused primarily on the reasons dates and length of the travel from my home_office to the rental properties the revenue_agent did not inquire about my home_office during the and tax years i kept a journal of all of the work that i performed for my rental properties i had various entries regarding the management and administrative work that i performed at my home_office i went over one month’s worth of journal entries with the revenue_agent that included entries for work performed at the home_office respondent filed a reply to petitioners’ reply respondent’s reply thereafter the court had a telephonic conference court’s telephonic conference with respec- tive counsel for the parties collectively counsel during that conference the court advised counsel that the court read mr reagan’s affidavit to be in conflict in at least one material respect with certain of the documents petitioners’ documents that petitioners had attached to certain of petitioners’ filings regarding what petitioners had argued during the administrative proceedings before the internal_revenue_service administrative proceedings as a result the court informed counsel that the court was unwilling to rely on that affidavit to establish certain alleged facts therein during the court’s telephonic conference the court asked counsel whether they believed it appropriate for the court to hold an evidentiary hearing in order to resolve the conflict that the court believed existed in at least one material respect between mr reagan’s affidavit and certain of petitioners’ documents and directed counsel to file respective supplements to their respective replies in which they set forth their respective views as to the relevancy and or materiality of that apparent conflict in deciding whether to grant petitioners’motion respondent filed a supplement to respondent’s reply in that supplement respondent stated the respondent submits that whether or not petitioners’ poa mr reagan mentioned petitioners’ home_office during the examination of their and returns is neither material nor relevant for the court’s present consid- erations 8according to respondent the record in the instant proceeding does not establish that mr reagan argued to respondent’s representatives during the admin- istrative proceedings that a work area or an office in petitioners’ residence where ms trzeciak did work relating to her real_estate activities qualified as a sec_280a principal_place_of_business and thus a tax_home respondent also points out that petitioners did not even allege in the petition that ms trzeciak did work relating to ms trzeciak’s real_estate activities in petitioners’ residence let alone that she had a tax_home office in that residence consequently respondent contends that as a result of reviewing the record established during the administrative proceedings and the petition that petitioners filed commencing this case respondent could not have been and was not aware before or when respondent filed the answer of any arguments that petitioners might have made during those administrative proceedings that a work area or an office in petitioners’ residence where ms trzeciak did work relating to her real_estate activities was a sec_280a principal_place_of_business and thus a tax_home therefore according to respondent whether mr reagan made any such argument to respondent’s representatives during the administrative proceedings is not relevant and or material to the court’s consideration of petition- ers’ motion petitioners filed a supplement to petitioners’ reply petitioners’ supplement we shall sometimes refer collectively to petitioners’ motion petitioners’ reply and petitioners’ supplement as petitioners’ complete filings in that supplement petitioners stated while mr reagan’s statements in his affidavit are relevant to this case by supporting the fact that petitioner communicated to respon- dent early on in the examination phase that the petitioners had a home_office the determination of whether these statements actually occurred is not material there is sufficient evidence on the record and objec- tively not in disagreement showing that respondent has not met its burden of proving that its position was substantially justified in none of the respective filings that the parties made with respect to petition- ers’ motion did they ask for a hearing evidentiary or nonevidentiary with respect to that motion we conclude that a hearing is not necessary see rule a discussion we explain initially why we recharacterized the motion that petitioners filed entitled motion for award of reasonable litigation and administrative costs the costs that petitioners are claiming which are shown in certain of petitioners’ complete filings are expenses or costs relating to the preparation of the petition the filing of the petition and certain activities that petition- ers’ attorneys conducted thereafter see supra note as a result we recharacterized the motion that petitioners filed as a motion for an award of reason- able litigation costs sec_7430 authorizes an award to the prevailing_party of reasonable_litigation_costs incurred in connection with a case brought in the court against the commissioner of internal revenue commissioner involving the determination of any_tax interest or penalty under the code provided that certain requirements are satisfied we consider here only whether petitioners qualify as the prevailing_party for purposes of sec_7430 in considering that question we shall address only whether respondent’s position in the instant case was substantially justified see sec_7430 and whether the so-called qualified_offer_rule applies see sec_7430 that is because resolution of those questions resolves the issue of whether petitioners are entitled to an award under sec_7430 9on date the day before petitioners’ attorneys mailed to the court the petition that they had prepared on behalf of petitioners petitioners’ attorneys attempted to contact respondent’s appeals officer by telephone and facsimile and on date the day after petitioners’ attorneys mailed the petition to the court petitioners’ attorneys had a telephonic discussion with respondent’s appeals officer in addition on date mr nardone sent by facsimile to respon- dent’s appeals officer a memorandum the record does not establish how much time petitioners’ attorneys spent on those days in attempting to contact or in contacting respondent’s appeals officer the term prevailing_party generally means any party who has substan- tially prevailed with respect to a the amount in controversy sec_7430 or b the most significant issue or set of issues presented sec_7430 and meets the net_worth requirements of u s c sec d b sec_7430dollar_figure in order to qualify for an award under sec_7430 the prevailing_party must have exhausted the available adminis- trative remedies sec_7430 and not have unreasonably protracted the court_proceeding sec_7430dollar_figure the party seeking an award under sec_7430 has the burden of establishing that all of the foregoing criteria have been satisfied and that the costs claimed are reasonable_litigation_costs incurred in connection with the court_proceeding as defined in c dollar_figure rule e see also 123_tc_202 sec_7430 provides an exception to the definition of the term prevailing_party in sec_7430 sec_7430 provides a 10respondent acknowledges that petitioners have complied with sec_7430 and sec_7430 11respondent acknowledges that petitioners have complied with sec_7430 respondent maintains however that petitioners have not established that they complied with sec_7430 12respondent maintains that petitioners have not established that they complied with sec_7430 and rule d party shall not be treated as the prevailing_party in a proceeding if the united_states establishes that the position_of_the_united_states in the proceeding was substantially justified respondent argues that respondent’s position in this proceeding respondent’s litigating position was substantially justified see sec_7430 and that therefore petitioners are not the prevailing_party as defined in sec_7430 respondent has the burden in the instant proceeding of establishing that respondent’s litigating position was substantially justified see sec_7430 the position_of_the_united_states is substantially justified if it is one that is ‘justified to a degree that could satisfy a reasonable person’ or that has a ‘reasonable basis both in law and fact ’ 106_tc_76 quoting 487_us_552 a position has a reasonable basis in fact if there is relevant evidence that a reasonable mind might accept as adequate to support a conclusion 115_tc_366 citing pierce u s pincite in determining whether the position of the commissioner was substantially justified we must consider the basis for the commissioner’s legal position and the manner in which the position was maintained 86_tc_962 whether the commissioner acted reasonably will turn upon those available facts which formed the basis for the position taken during the litigation as well as upon any legal precedents related to the case 108_tc_430 the commissioner’s position may be incorrect but substantially justified ‘if a reasonable person could think it correct’ id quoting pierce u s pincite n a significant factor in determining whether the commissioner’s position is substantially justified as of a given date is whether on or before that date the taxpayer has presented all relevant information under the taxpayer’s control and relevant legal arguments supporting the taxpayer’s position corson v commis- sioner t c pincite sec_301_7430-5 proced admin regs the commissioner’s concession of an issue is not conclusive as to whether the commissioner’s position with respect to that issue was substantially justified see corkrey v commissioner t c pincite 92_tc_760 wasie v commissioner t c pincite in order to determine whether the position_of_the_united_states is substan- tially justified courts must identify the point at which the united_states is first considered to have taken a position and then decide whether the position taken from that point forward was or was not substantially justified maggie mgmt co v commissioner t c pincite for purposes of a court_proceeding the position_of_the_united_states means the position taken by the united_states in a judicial proceeding to which subsection a applies sec_7430 respondent’s position in the instant proceeding is that taken in the answer see eg maggie mgmt co v commissioner t c pincite the court has held that the government’s litigating position is formed only after the government’s attorney becomes involved in the case ie after the initiation of litigation elder v commissioner tcmemo_2007_281 citing huffman v commissioner 978_f2d_1139 9th cir aff’g in part rev’g in part on other grounds and remanding t c memo however the court may review the government’s position in litigation against the backdrop of the adminis- trative actions that have gone before that backdrop is relevant to a determination whether the government’s position in litigation is substantially justified 975_f2d_1150 n 5th cir we now consider whether respondent’s litigating position was substantially justified with respect to the sec_469 determination a brief summary of the pertinent provisions of sec_469 will be helpful to our consideration of that question sec_469 generally disallows for the taxable_year any passive_activity_loss sec_469 the term passive_activity_loss is defined as the excess of the aggregate losses from all passive activities for the taxable_year over the aggregate income from all passive activities for that year sec_469 a passive_activity is any trade_or_business in which the taxpayer does not materially participate sec_469 rental real_estate activity is generally treated as a per se passive_activity regardless of whether the taxpayer materially participates in that activity sec_469 sec_469 provides an exception to that general_rule for so- called real_estate professionals under that section the rental activities of real_estate professionals are not treated as per se passive activities if inter alia such taxpayer performs more than hours of services during the taxable_year in real_property trades_or_businesses in which the taxpayer materially participates 750-hour requirement sec_469 respondent’s position throughout the administrative proceedings and when respondent filed the answer in the instant proceeding was that ms trzeciak’s travel time between petitioners’ residence in centerville and the rental properties in and around columbus ms trzeciak’s travel time constituted commuting that therefore that time may not be included as hours spent in the conduct of ms trzeciak’s real_estate activities for purposes of meeting the 750-hour requirement for each of petitioners’ taxable years and and consequently petitioners’ claimed respective real_estate losses for their taxable years and consti- tuted passive losses under section dollar_figure it is respondent’s position in the instant proceeding that respondent’s litigating position was substantially justified because as of date the date on which respondent filed the answer through at least date petitioners had not claimed let alone established that ms trzeciak’s travel to her rental properties was from her business home to the sites of her business’ assets as we understand it petitioners’ position at its core is that respondent’s litigating position was not substantially justified because petitioners presented information to respondent during the administrative proceedings that ms trzeciak did work relating to her rental properties in petitioners’ residence respondent thus had an obligation during those administrative proceedings which respondent 13petitioners do not dispute that if ms trzeciak’s travel time were not included for purposes of determining whether she met the 750-hour requirement for each of petitioners’ taxable years and petitioners’ claimed respective real_estate losses for their taxable years and would constitute passive losses under sec_469 failed to satisfy to ask petitioners to provide respondent with documentation or other substantiation establishing that ms trzeciak maintained a work area or an office in petitioners’ residence that qualified as ms trzeciak’s sec_280a principal_place_of_business and thus her tax_home office and therefore respondent had that same obligation before respondent filed the answer in the instant proceeding which respondent failed to satisfy before addressing each of petitioners’ contentions in support of their position we shall set forth our evaluation of mr reagan’s affidavit on which petitioners rely in reading that affidavit we understood mr reagan to be claiming that he argued during the administrative proceedings that ms trzeciak’s travel time was between her tax_home office14 and her rental properties mr reagan did not make any such 14in neither of the two documents that mr reagan submitted on petitioners’ behalf to respondent during the administrative proceedings which are the only such documents that are part of the record ie petitioners’ date letter and petitioners’ protest did mr reagan indicate to respondent’s representatives that ms trzeciak maintained a home_office or an office in her home let alone a tax_home office we thus are unwilling to rely on the allegations in paragraphs and of mr reagan’s affidavit that he informed respondent’s representatives during the administrative proceedings that ms trzeciak had a so-called home_office for the same reasons we are unwilling to rely on similar allegations in paragraph sec_4 and of ms trzeciak’s affidavit even if mr reagan’s affidavit and ms trzeciak’s affidavit were correct in stating that they informed respondent’s representatives during the administrative proceedings that ms trzeciak maintained a home_office or an office in petitioners’ residence in which she did work relating to her real_estate activities nothing in the record establishes that continued argument to respondent’s representatives during the administrative proceedings as evidenced for example by certain others of petitioners’ documents such as petition- ers’ date letter and petitioners’ protest during the court’s telephonic conference with counsel the court informed them that we were unwilling to rely on that affidavit to establish certain alleged facts therein and gave them the opportunity to ask the court to hold an evidentiary hearing which each of them declined to do with respect to petitioners’ contention that they presented information to respondent during the administrative proceedings that ms trzeciak did work relating to her rental properties in petitioners’ residence we agree that that fact is established by the record with respect to petitioners’ contention that because petitioners presented information to respondent during the administrative proceedings that ms trzeciak did work relating to her rental properties in petitioners’ residence respondent had an obligation during those proceedings which respondent failed to satisfy to ask petitioners to provide respondent with documentation or other substantiation continued petitioners attempted to or did show those representatives that any such office qualified as a sec_280a principal_place_of_business and thus a tax_home office establishing that ms trzeciak maintained a work area or an office in petitioners’ residence that qualified as ms trzeciak’s sec_280a principal_place_of_business and thus her tax_home office we disagree we do not believe that respondent’s knowledge during the administrative proceedings that ms trzeciak did work relating to her rental properties in petitioners’ residence imposed an obligation on respondent to ask petitioners to provide respondent with documentation or other substantiation establishing that ms trzeciak maintained a work area or an office in that residence that qualified under sec_280a as her principal_place_of_business and thus her tax_home officedollar_figure it was petitioners’ obligation and not respondent’s obligation to provide documentation or other substantiation establishing that ms trzeciak maintained a work area or an office in that residence that qualified under sec_280a as her principal_place_of_business and thus her tax_home office to respondent respondent’s revenue_agent even reminded petitioners about their obligation when 15petitioners rely on pizza indus inc v commissioner tcmemo_1999_ for the proposition that the commissioner’s position is not substantially justified where the commissioner fails to adequately examine the information presented by a taxpayer in pizza indus inc the court held that the commis- sioner’s position was not substantially justified where the commissioner did not accept the taxpayer’s position as to why income was not taxable in so holding the court found that the commissioner had failed to interpret properly the taxpayer’s rights and obligations under two agreements we find that case to be materially distinguishable from the instant case and petitioners’ reliance on that case to be misplaced he alerted them in the revenue agent’s date workpaper that they had made n o mention of a space in petitioners’ residence that was used regularly and exclusively for the taxpayer’s rental activities in reminding petition- ers that they had made no mention of a space in petitioners’ residence that was used regularly and exclusively for the taxpayer’s rental activities respondent’s revenue_agent paraphrased the requirements of sec_280a that in order for any area in petitioners’ residence where ms trzeciak did work relating to her rental properties to qualify as her sec_280a principal_place_of_business and thus her tax_home petitioners had to show that that area was used exclusively on a regular basis as the principal_place_of_business for any trade_or_business of the tax- payer see sec_280a c a see also supra note the reminder that respondent’s revenue_agent gave to petitioners and mr reagan in the revenue agent’s date workpaper apparently fell on deaf ears petitioners and mr reagan ignored it completely in petitioners’ date letter and in petitioners’ protest instead in petitioners’ date letter to respondent’s revenue_agent in which petitioners responded to the revenue agent’s date workpaper mr reagan argued if the issue of commuting was relevant to management of rental real_estate there would be some mention of it in the irs guidance absence of this implies that travel for rental property management is unique similarly in petitioners’ protest to respondent’s appeals_office in which petitioners protested the proposed determinations of respondent’s revenue_agent mr reagan argued the concept of ‘commuting’ does not apply to managing rental real_estate or being a real_estate_professional on the record before us we find that during the administrative proceedings respondent did not have the obligation that petitioners would impose on respondent 16both respondent’s revenue_agent and respondent’s appeals officer dis- agreed with petitioners’ contention that the concept of commuting in the tax law was not relevant and did not apply to a real_estate_professional or to managing rental property according to respondent’s representatives during the administrative proceedings ms trzeciak’s travel time constituted commuting in the tax law implicit in that position of respondent’s representatives was that any expenses associated with that travel ms trzeciak’s travel_expenses are not deductible under sec_162 see eg 326_us_465 in fact respondent’s revenue_agent explicitly pointed that out in his date workpaper in that workpaper he stated ms trzeciak’s t ravel time is analogous to personal commute it is well established the expenses for commuting from home to work are personal and not deductible under sec_162 during the administrative proceedings although respondent’s representatives considered whether ms trzeciak’s travel time constituted commuting in the tax law and thus whether ms trzeciak’s travel_expenses are deductible under sec_162 the record in the instant proceeding does not establish that they specifically considered whether the so-called common overhead expenses that petitioners claimed in their respective schedule e and schedule e are deductible under that section if they did not we presume that was because respondent was focused on whether petitioners’ claimed respective real_estate losses for their taxable years and which were calculated by taking into account inter alia those claimed common overhead expenses were passive losses under sec_469 if those claimed losses were passive losses under sec_469 they would be disallowed for petitioners’ taxable years and to ask petitioners to provide respondent with documentation or other substantiation establishing that ms trzeciak maintained a work area or an office in petitioners’ residence that qualified as ms trzeciak’s sec_280a principal_place_of_business and thus her tax_home office on that record we further find that respondent did not have an obligation to do so before respondent filed the answer in the instant proceed- ing at the time respondent filed the answer respondent knew that petitioners’ position during the administrative proceedings had been that the concept of commut- ing in the tax law was not relevant and did not apply to a real_estate_professional or to managing rental property moreover although respondent’s counsel was aware at that time that ms trzeciak did work relating to ms trzeciak’s real_estate activities in petitioners’ residence petitioners did not even allege that fact in the petition indicating to respondent and demonstrating to us that petitioners did not believe that to be a material fact in support of their position in the petition that the court should not sustain the determinations in the notice we find that in the light of the facts available to respondent at the time the answer was filed and existing legal precedent respondent’s position in this case had a reasonable basis in both fact and law we further find that respondent has met respondent’s burden under sec_7430 of establishing that respondent’s litigating position was substantially justified with respect to the sec_469 determi- nationdollar_figure petitioners argue that even if we were to find which we have that respon- dent’s litigating position was substantially justified they should be treated as the prevailing_party for purposes of sec_7430 because of the so-called qualified_offer_rule of sec_7430 a party is to be treated under that latter section as the prevailing_party for purposes of sec_7430 if the liability of the taxpayer pursuant to the judgment in the proceeding determined without regard to interest is equal to or less than the liability of the taxpayer which would have been so determined if the united_states had accepted a qualified_offer of the party sec_7430 the qualified_offer provision of sec_7430 applies without regard to whether the commissioner’s position in the matter is substantially justified see 117_tc_48 aff’d 55_fedappx_476 9th cir respondent argues that petitioners are not the prevailing_party for purposes of sec_7430 under the qualified_offer_rule of sec_7430 in support 17the record does not establish what if any litigation costs petitioners’ attorneys incurred with respect to the sec_6662 determination in the notice we find that petitioners are not entitled to an award under sec_7430 with respect to that determination of that argument respondent relies on the fact that the parties resolved the issues in this case by settling them in the stipulation of settlement that they filed with the court sec_7430 provides that the qualified_offer_rule shall not apply to any judgment issued pursuant to a settlement respondent conceded all the determinations in the notice immediately after receiving the date email and the parties filed a stipulation of settlement on date because the parties filed a stipulation of settlement the parties did not file pretrial memoranda by the date required in the court’s standing_pretrial_order and they did not execute a stipulation of facts for trial we find that respondent’s concessions in the stipulation of settlement constitute a settlement for purposes of sec_7430dollar_figure we find that petitioners are not the prevailing_party for purposes of sec_7430 we further find that petitioners have failed to carry their burden of estab- 18petitioners rely on estate of lippitz v commissioner tcmemo_2007_ in support of their argument that respondent’s concessions in the stipulation of settlement should not be treated as a settlement for purposes of sec_7430 in estate of lippitz the court held that a concession by the commissioner did not constitute a settlement where the taxpayer had made multi- ple settlement offers and was forced to actively litigate the case by filing a motion for partial summary_judgment we find that case to be materially distin- guishable from the instant case and petitioners’ reliance on that case to be mis- placed see 120_tc_446 lishing that they are entitled to an award of reasonable_litigation_costs under that section we have considered all of the parties’ contentions and arguments that are not discussed herein and we find them to be without merit irrelevant and or moot to reflect the foregoing an order denying petitioners’ motion and decision for petitioners will be entered


internal_revenue_service number release date index number -------------------------- ------------------------ ----------------------------------------------------------- ------------------------------ ---------------------------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact --------------------- id no ------------ telephone number -------------------- refer reply to cc ita b04 plr-102194-14 date date legend t1 t2 program state x y z ----------------------------------------------------------- ----------------------- ------------------------------------------ ---------------------------------------------------------------- -------- ---------- ---------- ------- dear ------------------- this responds to your request for rulings under sec_6041 of the internal_revenue_code the issue is whether t1 must file an information_return reporting a payment to t2 of dollar_figurez t1 is a state not-for-profit entity t2 are homeowners living in state t1 administers the program created under state law the program is funded by a real_estate property_tax levy the program is designed to protect homeowners who register their homes in the program from price declines due to local distress and not to compensate them for declines in value due to national economic conditions accidents or failure to maintain the property t2 registered their property with a value of dollar_figurex in t2 sold their plr-102194-14 property with the approval of t1 for a net price of dollar_figurey t2 received dollar_figurez from t1 under the program t1 was not advised of t2’s adjusted_basis in the property sec_61 provides that gross_income includes gain derived from dealings in property sec_1001 provides that the gain from the sale_or_other_disposition of property is the excess of the amount_realized over the adjusted_basis provided in sec_1011 for determining gain and the loss is the excess of the adjusted_basis provided in sec_1011 for determining loss over the amount_realized under sec_1001 the entire amount of gain_or_loss must be recognized except as otherwise provided sec_6041 and sec_1_6041-1 of the income_tax regulations provide with exceptions not applicable here that all persons engaged in a trade_or_business and making payment in the course of such trade_or_business to another person of rent salaries wages premiums annuities compensations remunerations emoluments or other fixed or determinable gains profits and income aggregating dollar_figure or more in the taxable_year must file an information_return with the internal_revenue_service by sec_6041 the payor is required to furnish an information statement to the payee the sec_6041 information reporting requirement applies to payments made during the calendar_year to another person of fixed or determinable income sec_1_6041-1 sec_1_6041-1 provides that income is fixed when it is to be paid in amounts definitely predetermined income is determinable whenever there is a basis of calculation by which the amount to be paid may be ascertained sec_1_6041-1 provides that the amount to be reported as paid to a payee is the amount includible in the gross_income of the payee t1’s payment to t2 is included in t2’s amount_realized on the sale of the property the amount includible in t2’s gross_income on the sale of the property is excess of the amount_realized over t2’s adjusted_basis t1 however represents that it does not know t2’s adjusted_basis in the property therefore t2 cannot know the amount if any of the dollar_figurez payment that is included in t2’s gross_income see revrul_80_22 1980_1_cb_286 accordingly based strictly on the information submitted and the representations made we conclude that t1’s payment of dollar_figurez to t2 is not of fixed or determinable income and t1 is not required by sec_6041 to file an information_return with the service nor required to furnish an information statement to t2 for that payment we do not express or imply an opinion on the federal tax consequences of any aspect of these transactions other than set forth in the preceding paragraph plr-102194-14 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 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 returns that provides the date and control number of this letter_ruling the rulings contained in this letter are based upon information and representations that the taxpayer submitted accompanied by a penalty of perjury statement executed by the taxpayer while this office has not verified any of the material submitted in support of the requests for rulings it is subject_to verification on examination we decline to rule on t1’s request concerning its information reporting obligations for payments it makes in the future under the program because the service ordinarily does not rule on the tax effect of any transaction to be consummated at some indefinite future time see sec_4 of revproc_2014_3 2014_1_irb_111 pursuant to a power_of_attorney and declaration of representative filed with this office we are sending a copy of this letter to the taxpayer’s authorized representative sincerely michael j montemurro chief branch office of associate chief_counsel income_tax accounting cc


internal_revenue_service number release date index number ------------------------------------------------ ---------------------------------------- -------------------------------- -------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------------- --------------------------------------------------- telephone number ---------------------- refer reply to cc psi b01 plr-122994-14 date date legend ---------------------------------------- -------------------------------- -------------- ---------------------------- ------------------- ------- x state date decedent year dear ---------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations for x to make an election under sec_754 of the internal_revenue_code the information submitted states that x was formed as a partnership in state on date decedent was a partner in x decedent died in year however at that time x's tax advisors did not advise x of the availability of an election under sec_754 accordingly x inadvertently failed to timely file a sec_754 election for year sec_754 provides that if a partnership files an election in accordance with the regulations prescribed by the secretary the basis of the partnership property is adjusted in the case of a transfer of a partnership_interest in the manner provided in sec_743 such an election shall apply with respect to all distributions of property by the plr-122994-14 partnership and to all transfers of interests in the partnership during the taxable_year with respect to which the election was filed and all subsequent taxable years sec_1_754-1 b of the income_tax regulations provides that an election under sec_754 to adjust the basis of partnership property under sec_734 and sec_743 with respect to a distribution_of_property to a partner or a transfer of an interest in a partnership shall be made in a written_statement filed with the partnership return for the taxable_year during which the distribution or transfer occurs for the election to be valid the return must be filed not later than the time prescribed by sec_1 e including extensions therefore for filing the return for the taxable_year sec_301_9100-1 c provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 b defines the item regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant and extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-3 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to make an election under sec_754 effective for the year taxable_year and thereafter x must calculate the adjustments under sec_734 and c and sec_1_755-1 as if x had timely made the sec_754 election and allocated the increase in basis among the properties held by x at that time the election should be made in a written_statement filed with the appropriate service_center for association with x's year return a copy of this letter should be attached to the election plr-122994-14 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the internal_revenue_code and the regulations thereunder 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 copy of this letter is being sent to x's authorized representative sincerely associate chief_counsel passthroughs special industries by _______________________________ david r haglund branch chief branch office of the associate chief_counsel passthroughs special industries


internal_revenue_service number release date index number ----------------- --------------------------------------------------- ------------- --------------------- ---------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------- id no ------------ telephone number -------------------- refer reply to cc psi b01 plr-138063-08 date date legend x ---------------------- ------------------------------------------------- d1 state d2 d3 ------------------------- -------- ------------------- ----------------------- a -------------------------------------------------- ----------------------------------------- trust ------------------------------------------------- ---------------------------------------------------------------------- d4 n ------------------ ----------- plr-138063-08 dear ------------- this responds to the letter dated date and related correspondence submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code acode facts the information submitted states that on d1 x was incorporated under the laws of state on d2 x elected to be treated as an s_corporation for federal tax purposes on d3 a shareholder of x transferred a portion of x stock to trust an ineligible shareholder of an s_corporation therefore terminating x’s s election on d4 x was sold to an unrelated corporate buyer shortly before the sale x and its shareholders discovered the terminating event on d3 x and its shareholders prior to d4 represent that they had been unaware of the terminating event and did not intend for x’s s election to terminate prior to the sale further x and its shareholders prior to d4 have filed federal_income_tax returns consistent with x’s s_corporation_election until d4 x and its shareholders prior to d4 agree to make such adjustments that the secretary may require consistent with the treatment of x as an s_corporation until d4 law and analysis sec_1361 defines an s_corporation as a small_business_corporation for which an election under sec_1362 is in effect for the taxable_year sec_1361 provides that a small_business_corporation cannot have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 states that an electing_small_business_trust esbt is a permissible shareholder of an s_corporation sec_1361 defines an esbt in part as a_trust if such trust does not have a beneficiary any person other than i an individual ii an estate iii an organization described in paragraph or of sec_170 or iv an organization described in sec_170 which holds a contingent_interest in such trust and is not a potential_current_beneficiary no interest in such trust was acquired by purchase and an election under this subsection applies to such trust plr-138063-08 sec_1361 provides that an election to be an esbt shall be made by the trustee any such election shall be applied to the taxable_year of the trust for which made and all subsequent taxable years of such trust unless revoked with the consent of the secretary sec_1362 provides that an election under sec_1362 shall be terminated whenever at any time on or after the first day of the taxable_year for which the corporation is an s_corporation the corporation ceases to be a small_business_corporation sec_1362 provides that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consent or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the termination steps were taken - a so that the corporation is a small_business_corporation or b to acquire the required shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to this subsection agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such termination such corporation shall be treated as an s_corporation during the period specified by the secretary conclusion based solely upon the representations made and the information submitted we conclude that x’s s election terminated on d3 when a portion of x stock was transferred to trust we further conclude that the termination was an inadvertent termination within the meaning of sec_1362 pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation on and after d3 until d4 unless x’s s election is otherwise terminated under sec_1362 and provided that the following conditions are met within days of the date of this letter the trustee of trust must file an esbt election effective d3 with the appropriate service_center a copy of this letter should be attached to the esbt election further within days of the date of this letter trust and its beneficiary must file amended returns as appropriate for the tax years that are open prior to d4 consistent with the esbt election in addition as an adjustment under sec_1362 with days from the date of this letter a payment of dollar_figuren and a copy of this letter must be sent to the following address plr-138063-08 internal_revenue_service cincinnati service_center stop terri lackey manual deposit west rivercenter blvd covington ky if all of the above conditions are not met then this ruling is null and void further if these conditions are not met x must notify cincinnati service_center that its s election terminated on d3 except as specifically set forth above no opinion is expressed or implied concerning the federal tax consequences of the above-described facts under any other provision of the code including whether x was otherwise eligible to be an s_corporation prior to d4 or whether trust was otherwise eligible to be an esbt this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office copies of this letter_ruling will be sent to your authorized representatives sincerely dianna k miosi dianna k miosi chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for ' purposes


department of the treasury internal_revenue_service washington d c date cc intl br tl-n-2229-93 uilc number release date internal_revenue_service national_office field_service_advice memorandum for from jeffrey dorfman chief branch cc intl br subject this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend p s b z fc a b c d e f year issue s whether the taxpayer should recognize a taxable gain as a result of a debt for equity_swap conclusion yes the taxpayer should recognize a taxable gain from the debt for equity_swap facts p the taxpayer is a u s_corporation that uses the u s dollar as its functional_currency s is a country z subsidiary of p that uses the fc country z’s currency as its functional_currency country z had issued u s dollar-denominated debt that was trading on the secondary markets at steep discounts country z implemented a debt for equity_swap program that allowed it to retire this dollar- denominated debt in exchange for fcs that would be invested in country z p which was planning on investing in a plant in country z participated in the program in an effort to obtain fcs at the lowest cost possible in year pursuant to the terms of its debt-equity_swap agreement with country z p purchased a participation in country z u s dollar-denominated debt the sovereign debt with a face_amount of dollar_figurea from b a u s commercial bank for dollar_figureb the secondary market price of the sovereign debt p then surrendered the sovereign debt to country z from the information submitted we do not have the ability to determine whether p transferred the sovereign debt to country z directly or whether p contributed the debt to s which then surrendered the sovereign debt to country z in exchange for the surrender of its dollar-denominated debt country z credited s’s account with fc in the amount of c these fcs could be used only for the purposes specified under the agreement between p and country z the c fc had a fair_market_value had there been no restrictions on their use equal to the face value of the sovereign debt discounted by approximately f ie the fc proceeds which s received had a fair_market_value far greater than p’s basis in the sovereign debt it purchased s then issued all its capital stock to p it is not clear whether there were any restrictions placed on the s capital stock or on the repatriation of s’s earnings typically such restrictions are imposed by country z in its year tax_return as originally filed p recognized gain on the debt- equity_swap in the amount of dollar_figuree ie the difference between the amount_realized on the exchange of the country z sovereign debt dollar_figured and its basis in the sovereign debt dollar_figureb p subsequently filed a claim_for_refund arguing that it should not have recognized any gains as a result of the debt-equity_swap you have requested guidance for purposes of considering the appropriate response to p’s refund claim the appellate venue for this taxpayer would be other than the fifth circuit we respond first assuming that p surrendered the sovereign debt to country z directly and then assuming that p contributed the sovereign debt to its subsidiary s which surrendered it to country z law and analysis i p directly exchanged the sovereign debt with country z under sec_1001 we believe p must recognize gain in the amount of the excess of the fair_market_value of the fc which was credited to s’s account over p’s basis in the sovereign debt in this event p did not receive the consideration for the sovereign debt directly nevertheless since s received the fc payments as a result of p’s transfer of the sovereign debt to country z p is deemed to have constructively received the fc and contributed them to s see revrul_87_124 87_2_cb_205 a valuation at issue is the amount of gain which p realized on the debt-equity_swap taxpayers seeking to avoid the recognition of gains on this type of debt-equity_swap argue that the restrictions imposed on the local currency and those imposed on the repatriation of earnings lower the value of the local currency received in the exchange these arguments were rejected by the tax_court in 106_tc_257 supplemental opinion rev’d 121_f3d_977 5th cir the tax_court concluded that the local currency received by the taxpayer should not be reduced by the restrictions imposed on their use which were similar to restrictions placed on loan disbursements by financial institutions when lending with respect to construction projects we note however that in reversing the tax_court on another issue the fifth circuit in dicta expressed some skepticism about the tax court’s findin121_f3d_977 pincite n 5th cir in a subsequent case the tax_court granted a taxpayer a discount from the fair_market_value of the foreign_currency due to some restrictions on the repatriation of the taxpayer’s investment for twelve years 108_tc_265 in that case however the service’s expert had conceded that based on the facts of that case a discount might have been appropriate with respect to p’s debt-equity_swap we have not been made aware of restrictions imposed on the local currency received or on the repatriation of earnings that would warrant a reduction in the amount of the taxable gain originally reported by the taxpayer b gain recognition the taxpayer’s claim_for_refund however is based in large part on the fifth circuit’s decision in g m trading which held that the foreign_currency the taxpayer received in excess of its basis in the sovereign debt was in part a sec_118 tax- free capital_contribution by a non-shareholder in g m trading the service argued and the tax_court held that the foreign_currency received in excess of the taxpayer’s basis in the sovereign debt did not fall under sec_118 because the mexican government received direct specific and significant economic benefits that related to its foreign exchange position namely the surrender of dollar-denominated debt in exchange for local currency and the specific contractual promise to employ mexican workers and use mexican contractors g m trading t c pincite the fifth circuit in g m trading however reversed the tax_court on this issue the fifth circuit did not find that the total amount of foreign_currency received in excess of the basis of the sovereign debt surrendered was necessarily a sec_118 nontaxable capital_contribution rather the fifth circuit held that it could not determine the amount of foreign_currency which constituted the capital_contribution and the amount of foreign_currency if any which constituted gain and therefore concluded that the values of both the debt and the mexican pesos paid for its surrender were fixed by what the taxpayer had paid for the sovereign debt on the secondary market the court concluded that any payment in excess of that amount constituted a tax-free capital_contribution by a non-shareholder under sec_118 we do not agree with the fifth circuit’s analysis as the tax_court had found the taxpayer in g m trading received specific bargained-for benefits that rendered sec_118 inapplicable similarly in this case country z was able to retire dollar-denominated debt without using any of its hard currency reserves this and other bargained-for benefits take p’s debt-equity_swap outside the intended scope of sec_118 furthermore even if the excess payment over p’s basis were held to be a sec_118 contribution_to_capital p would still have to recognize gains under sec_367 this argument was not made by the parties in g m trading and was not considered by either the tax_court or the fifth circuit sec_367 subject_to various exceptions not relevant here requires the taxpayer to recognize gain when it transfers appreciated_property to a foreign_subsidiary in exchange for that subsidiary’s capital stock if tax free under sec_118 the excess fc payment over p’s basis in the country z debt would be treated as appreciated_property for purposes of sec_367 since p uses the u s dollar as its functional_currency the fc constitutes property to p accordingly the excess fc payment that would qualify as tax free under sec_118 would have a zero basis under sec_362 therefore p’s deemed contribution of the fc to s in return for s’s capital stock constituted a contribution of appreciated_property ie with a market_value in excess of basis to a foreign_subsidiary and is taxable under sec_367 ii p contributed the sovereign debt to s which s then surrendered to country z if the facts show that rather than surrendering the country z debt directly p contributed the country z debt to s which in turn surrendered it to country z then p cannot be said to have received fcs in exchange for the debt and therefore cannot be taxable on the gains from that exchange under sec_1001 however p would still be taxable on the contribution of the sovereign debt to its foreign_subsidiary under sec_367 as discussed above sec_367 subject_to various exceptions not relevant here requires the taxpayer to recognize gain when it transfers appreciated_property to its foreign_subsidiary in exchange for its subsidiary’s capital stock the sovereign debt it contributed to s had appreciated in value because p negotiated the debt-equity exchange_agreement with country z prior to contributing it to s the fair_market_value of the s capital stock which p received which is a function of the fair_market_value of the fc paid to s exceeded p’s basis in the sovereign debt therefore under this fact pattern p should have recognized gain under sec_367 case development hazards and other considerations if you have any further questions please call jeffrey dorfman chief branch office of associate chief_counsel international


internal_revenue_service department of the treasury number release date index number washington dc re person to contact telephone number refer reply to cc psi b09 - plr-128066-02 date date legend date grantor_trust trust trust dollar_figurex a b c attorney date cpa year dear this is in response to your letter dated date requesting an extension of time under sec_301 and sec_301_9100-3 of the procedure and administration regulations to make an allocation of the generation-skipping_transfer gst_exemption this letter responds to your request the facts and representations submitted are summarized as follows on date grantor established three irrevocable trusts trust trust and trust one trust for the benefit of each of grantor’s three children and their respective descendants grantor transferred dollar_figurex to each trust plr-128066-02 article ii paragraph a of trust provides that during the lifetime of a the trustee may pay to or for the benefit of a or any of a’s descendants as much net_income and principal of the trust as the trustee deems necessary for support maintenance health and education article ii paragraph b directs the trustee to distribute one half of the principal and any undistributed_income of the trust as specifically appointed by a’s will and one- half and any assets not appointed to a’s living descendant’s per stirpes or if none to grantor’s then living descendant’s per stirpes provided that any share passing to b be added to trust if no such trust is then in existence then retained in a separate trust for b’s benefit and any share passing to c be added to trust if no such trust is then in existence then retained in a separate trust for c’s benefit article iii paragraph a provides that whenever any distribution is directed to a beneficiary who is a grandchild or more remote descendant beneficiary of grantor with a reference to the trust provisions of this article the trustee is to hold the assets in trust on the terms of this article article iii paragraph b provides that during the lifetime of beneficiary the trustee may pay to or for the benefit of the beneficiary or beneficiary’s descendants as much net_income and principal of the trust as the trustee deems necessary for support maintenance health and education article iii paragraph c directs the trustee to distribute one half of the principal and any undistributed_income of the trust as specifically appointed by beneficiary’s will and one-half and any assets not appointed to beneficiary’s living descendant’s per stirpes or if none to grantor’s then living descendant’s per stirpes provided that any share passing to b be added to trust if no such trust is then in existence then retained in a separate trust for b’s benefit and any share passing to c be added to trust if no such trust is then in existence then retained in a separate trust for c’s benefit the terms of trust and trust are the same as trust except that the primary beneficiaries of trust are b and b’s lineal_descendants and the primary beneficiaries of trust are c and c’s lineal_descendants grantor relied upon a team of professionals to handle her estate_planning project as a member of that team attorney wrote a letter on date to grantor cpa and others in which attorney stated he assumed cpa would prepare grantor’s gift_tax_return cpa has signed an affidavit acknowledging the receipt of attorney’s letter and an inadvertent failure to prepare a form_709 united_states gift and generation- skipping transfer_tax return for year which also resulted in a failure to timely allocate grantor’s gst_exemption plr-128066-02 grantor requests an extension of time under sec_2642 of the internal_revenue_code and sec_301_9100-1 and sec_301_9100-3 to make allocations of grantor’s gst_exemption to trust trust and trust sec_2601 imposes a tax on every generation-skipping_transfer gst a gst is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2631 provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure adjusted for inflation under sec_2631 which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable sec_2632 provides that any allocation by an individual of his or her gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual’s estate determined with regard to extensions regardless of whether such a return is required to be filed sec_26_2632-1 of the estate_tax regulations provides that an allocation of gst_exemption to property transferred during the transferor’s lifetime other than in a direct_skip is made on form_709 sec_2642 provides that except as provided in sec_2642 if the allocation of the gst_exemption to any transfers of property is made on a gift_tax_return filed on or before the date prescribed by sec_6075 for such transfer or is deemed to be made under sec_2632 or c the value of such property for purposes of sec_2642 shall be its value as finally determined for purposes of chapter within the meaning of sec_2001 or in the case of an allocation deemed to have been made at the close of an estate_tax_inclusion_period its value at the time of the close of the estate_tax_inclusion_period and such allocation shall be effective on and after the date of such transfer or in the case of an allocation deemed to have been made at the close of an estate_tax_inclusion_period on and after the close of such estate_tax_inclusion_period sec_2642 provides generally that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 or and an election under sec_2632 or c such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of this paragraph sec_2642 provides that in determining whether to grant relief under this paragraph the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer plr-128066-02 and such other factors as the secretary deems relevant for purposes of determining whether to grant relief under this paragraph the time for making the allocation or election shall be treated as if not expressly prescribed by statute notice_2001_50 2001_34_irb_189 provides that under sec_2642 the time for allocating the gst_exemption to lifetime transfers and transfers at death the time for electing out of the automatic allocation rules and the time for electing to treat any trust as a generation-skipping_trust are to be treated as if not expressly prescribed by statute the notice further provides that taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute under sec_301_9100-1 a regulatory election includes an election whose due_date is prescribed by a notice published in the internal_revenue_bulletin in accordance with sec_2642 the time for allocating the gst_exemption to lifetime transfers and transfers at death the time for electing out of the automatic allocation rules and the time for electing to treat any trust as a gst_trust are to be treated as if not expressly prescribed by statute accordingly taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 see notice_2001_50 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore grantor is granted an extension of time of days from the date of this letter to make allocations of her available gst_exemption with respect to the date transfers of dollar_figurex to trust trust and trust the allocations will be effective as of date the date of the transfers to plr-128066-02 the trusts and the gift_tax value of the transfers will be used in determining the amount of gst_exemption to be allocated to each trust 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 except as specifically ruled herein we express or imply no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code this ruling is directed only to the taxpayers requesting it sec_6110 provides that it may not be used or cited as precedent the allocation should be made on a form_709 united_states gift and generation-skipping_transfer_tax return and filed with the internal_revenue_service center cincinnati oh a copy of this letter should be attached to the form_709 a copy is enclosed for this purpose sincerely william p o’shea acting associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter