internal_revenue_service number release date index numbers ------------------------------------ ------------------------------- ----------------- -------------------------------------------------------- ------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------- telephone number -------------------- refer reply to cc corp b03 plr-111905-08 date june legend taxpayer ------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------- taxpayer officer --------------------- -------------------------------------------------------------------- -------------------------------------------------------- ---------------------------------------------------------------------------------- parent official -------------------------------------------------------------------------------- ---------------------------------------------------------------- ------------------------------------------------------------------------ ---------------------------------------------- tax professionals ---------------------------------------------------------------------- ------------------------------------------------------------------ ---------------------------------------------------------------------------------- ------------------------------------------- ---------------------------------------------------------------------- ------------------------------------------------------------------ ---------------------------------------------------------------------------------- ------------------------------------ ---------------------------------------------------------------------- ------------------------------------------------------------------ ---------------------------------------------------------------------------------- -------------------------------------------- plr-111905-08 date -------------------------- dear ------------------ this responds to a letter dated date submitted on behalf of taxpayer requesting an extension of time under sec_301_9100-1 through of the procedure and administration regulations to file an election taxpayer as the common parent of an affiliated_group_of_corporations that file a consolidated federal_income_tax return is requesting an extension of time to file a closing-of-the-books election pursuant to sec_1_382-6 of the income_tax regulations the election with respect to a transaction the change_date transaction that occurred on date additional information was received in a letter dated date the material information is summarized below on date taxpayer underwent an ownership_change a closing-of-the-books election under sec_1_382-6 was required to be filed on or before the due_date of taxpayer group’s consolidated_income_tax_return for the year in which the ownership_change occurred but for various reasons an election was not timely filed subsequently this request was submitted under sec_301_9100-3 for an extension of time to file the election the period of limitations on assessment under sec_6501 has not expired for taxpayer’s consolidated group’s taxable_year in which the ownership_change occurred or for any taxable years that would have been affected by the election had it been timely filed the following representations have been made in connection with this request taxpayer’s failure to make the election under sec_1_382-6 on its timely filed tax_return has not been discovered by the irs the taxpayer group is a loss group within the meaning of sec_1_1502-91 with respect to certain net_operating_loss carryovers as a result of the change_date transaction on date taxpayer underwent an ownership_change as defined in sec_382 all necessary amended returns will be filed to reflect the election if relief is granted by this ruling_request taxpayer will determine its alternative_minimum_taxable_income and adjusted_current_earnings for the pre-change and post-change periods based on a closing- of-the-books election as of the ownership_change date on date and will elect out of ratable allocation plr-111905-08 sec_1_382-6 provides that except as provided in paragraphs b and d of the section a loss_corporation must allocate its net_operating_loss or taxable_income and its net_capital_loss or modified capital_gain_net_income for the change year between the pre-change period and the post-change period by ratably allocating an equal portion to each day in the year sec_1_382-6 provides that a loss_corporation may elect to allocate its net_operating_loss or taxable_income and its net_capital_loss or modified capital_gain_net_income for the change year between the pre-change period and the post-change period as if the loss corporation’s books were closed on the change_date sec_1_382-6 provides that a loss_corporation makes the closing-of-the- books election by including the following statement on the information statement required by sec_1_382-11 or sec_1_382-2t for taxable years beginning before date for the change year the closing-of-the-books election under sec_1_382-6 is hereby made with respect to the ownership_change occurring on insert date the election must be made on or before the due_date including extensions of the loss corporation’s income_tax return for the change year sec_1_1502-91 defines a loss group as a consolidated_group that i is entitled to use a net_operating_loss_carryover to the taxable_year that that did not arise and is not treated under sec_1_1502-21 as arising in a separate_return_limitation_year ii has a consolidated_net_operating_loss for the taxable_year in which a testing_date of the common parent occurs determined by treating the common parent as a loss_corporation or iii has a net_unrealized_built-in_loss under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish 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 in this case the time for filing the election is fixed by the regulations ie sec_1_382-6 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant an extension of time for taxpayer to file the election provide taxpayer shows it acted reasonably and in good_faith the requirements of sec_301 plr-111905-08 and are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by taxpayer officer parent official and tax professionals explain the circumstances that resulted in the failure to timely file a valid election the information establishes that the request for relief was filed before the failure to make the election was discovered by the internal_revenue_service see sec_301_9100-3 the information also establishes that taxpayer reasonably relied on qualified_tax professionals who failed to make or advise taxpayer to make the election see sec_301_9100-3 based on the facts and information submitted including the representations made we conclude that taxpayer has shown it acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly an extension of time is granted under sec_301_9100-1 until days from the date on this letter for taxpayer to file the election within days of the date on this letter taxpayer must file or amend as applicable the taxpayer’s consolidated income_tax returns for all open taxable years affected by the election and attach to the returns a copy of the election a copy of the information statement if one has not already been attached and a copy of this letter alternatively taxpayers filing their returns electronically may satisfy the requirement of attaching a copy of this letter by attaching a statement to their return that provides the date and control number of the letter_ruling the above extension of time is conditioned on the taxpayer consolidated group’s tax_liability if any being not lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money all members of the taxpayer’s consolidated_group closing their books as of the ownership_change date pursuant to sec_1 b i and income or loss being allocated to the pre-change period not exceeding the taxable_income or loss for the taxable_year that includes the change_date no opinion is expressed as to the taxpayer’s tax_liability for the years involved a determination thereof will be made by the applicable director’s office upon audit of the federal_income_tax returns involved further no opinion is expressed as to the federal_income_tax effect if any if it is determined that taxpayers’ tax_liability is lower sec_301_9100-3 we express no opinion as to whether taxpayer is a loss group as defined in sec_1_1502-91 whether an ownership_change as defined in sec_382 and sec_1_1502-92 occurred on date or any other tax consequences arising from the election except as expressly provided herein no opinion is expressed or implied plr-111905-08 concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in addition we express no opinion as to the tax consequences of filing the election late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or resulting from filing the election late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-1 we relied on certain statements and representations made by the taxpayers however the director should verify all essential facts in addition notwithstanding that an extension is granted under sec_301_9100-1 to file the election penalties and interest that would otherwise be applicable if any continue to apply this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may be used or cited as precedent in accordance with the power_of_attorney with this office a copy of this letter is being sent to your authorized representatives sincerely ken cohen senior technician reviewer branch office of associate chief_counsel corporate cc


internal_revenue_service index no number release date cc dom p si - plr-110744-99 date x ein a date year dear this is in reply to a letter dated date and subsequent correspondence submitted by you on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated on date a as x's president and sole shareholder represents that it was the intent of x's shareholder that x elect to be an s_corporation effective for year x's first taxable_year this intent is evidenced in x’s form ss-4 application_for employer_identification_number however a form_2553 election by a small_business_corporation was not timely filed for that year for x because the attorney upon whom the shareholder relied to file the s_corporation_election did not timely file the form x filed a form_1120s for year and x’s shareholder filed his individual return consistent with x’s having made a timely s election for year sec_1362 of the code provides that if -- a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation for x’s first taxable_year accordingly provided x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective for its year taxable_year within days following the date of this letter then such election will be treated as timely made for x’s year taxable_year a copy of this letter should be attached to the form_2553 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 code including whether x was or is a small_business_corporation under sec_1361 of the code 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 pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely yours j thomas hines senior technician reviewer branch office of the assistant chief_counsel passthroughs and industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi plr-102367-03 date date x a d1 d2 state dear we received your letter dated date and subsequent correspondence submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code this letter responds to your request x was incorporated under state law on d1 and began doing business on d2 x’s sole shareholder a intended for x to be an s_corporation effective d2 x retained an accountant and an attorney to assist x in filing an election to be treated as an s_corporation however form_2553 election by a small_business_corporation was never filed sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides that an election may be made by a small_business_corporation for any taxable_year at anytime during the preceding_taxable_year or at any time during the taxable_year on or before the 15th day of the third month of the taxable_year sec_1362 provides that an election made after the 15th day of the third month of the taxable_year is treated as having been made for the following taxable_year plr-102367-03 sec_1362 provides that if an election under sec_1362 is made for any taxable_year determined without regard to sec_1362 after the date prescribed by this subsection for making such election for such taxable_year or no such election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to make such election the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply based on the facts submitted and representations made we conclude that x has established reasonable_cause for failing to make an s election and that x is eligible for relief under sec_1362 accordingly if x makes an election to be an s_corporation by filing with the appropriate service_center a completed form_2553 election by a small_business_corporation containing an effective date of d2 within days of the date of this letter then such election shall be treated as timely made for x’s taxable_year beginning d2 a copy of this letter should be attached to the form_2553 filed with the service_center except as specifically set forth herein we express or imply no opinion concerning the federal tax consequences of the transaction described above under other provisions of the code specifically we express or imply no opinion concerning whether x is an s_corporation for federal tax purposes 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 pursuant to a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative sincerely yours christine ellison chief branch office of the associate chief_counsel passthroughs and special industries enclosures a copy of this letter a copy for sec_6110 purposes


office_of_chief_counsel internal_revenue_service memorandum number release date cc fip b04 dremus plr-139162-12 uilc date date to mary coleman examination director central area small_business self-employed from donald j drees jr senior technician reviewer branch financial institutions products third party communication none date of communication not applicable subject notification of no-rule decision on letter_ruling request legend company foreign jurisdiction date address insured affiliate issues ------------------------------------------------------------- ------------------------------------------------------------- ------------ ------------ -------------------------- ------------------------------------------------------------- --- ------------------------------------------------------------- --------------------------------------------------------- pursuant to section a of revproc_2012_1 2012_1_irb_1 this is to notify you that we were unable to rule on a letter_ruling request submitted by company regarding sec_831 of the internal_revenue_code the code plr-139162-12 facts company was incorporated in foreign jurisdiction on date and is licensed as an insurance_company by the insurance regulators of foreign jurisdiction company made a permanent election under sec_953 of the code to be taxed as a domestic_corporation for federal tax purposes and it annually files a form 1120-pc tax_return company’s u s address is address company directly issued purported insurance contracts with a one year coverage period to insured affiliate company joined a reinsurance pool the pool consisting of several other unrelated purported insurance_companies under the reinsurance agreements company ceded to the pool a substantial portion of its direct written premiums and risks and assumed from the pool a roughly equal amount of premiums and risks the agreements contained language providing for experience refunds and experience loss carryforwards which were to be paid back with interest company sought two rulings that company would be treated as an insurance_company under sec_831 of the code for federal tax purposes that the purported insurance premiums_paid to company by insured affiliate would be deductible as insurance premiums under sec_162 of the code for federal tax purposes law and analysis sec_831 of the code provides that taxes computed as provided in sec_11 are imposed for each taxable_year on the taxable_income of each insurance_company other than a life_insurance_company sec_831 provides that for purposes of sec_831 the term_insurance company has the meaning given to such term by sec_816 under sec_816 the term_insurance company means any company more than half of the business of which during the taxable_year is the issuing of insurance or annuity_contracts or the reinsuring of risks underwritten by insurance_companies neither the code nor the income_tax regulations define the terms insurance or insurance_contract in the context of property and casualty insurance the supreme court of the united_states has explained that in order for an arrangement to constitute insurance for federal tax purposes both risk shifting and risk_distribution must be present 312_us_531 the risk transferred must be risk of economic loss 572_f2d_1190 7th cir the risk must contemplate the fortuitous occurrence of a stated contingency plr-139162-12 183_f2d_288 2d cir and must not be merely an investment or business risk revrul_2007_47 2007_2_cb_127 in addition the arrangement must constitute insurance in the commonly accepted sense see eg 988_f2d_1135 fed cir 979_f2d_162 9th cir our review of the materials that company submitted in connection with its letter_ruling request led us to identify three areas of concern whether the pooling arrangement actually provided risk shifting and risk_distribution in particular we were concerned that the reinsurance agreements between company and the pool contained provisions whose net effect might be to negate risk shifting and risk_distribution whether some or all of the purported insurance contracts were insurance for federal tax purposes as opposed to for example contracts covering investment or business risks whether the premiums_paid by insured affiliate to company reflected an arms- length transaction between the parties the company did not provide sufficient information for us to address these concerns accordingly we are unable to rule pursuant to sections dollar_figure and c of revproc_2012_1 had we been able to rule the letter_ruling would have been controlling for only the year specified in the letter_ruling because sec_831 imposes an annual test and the specific contracts involved covered risks for only a one year period this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call ---------------------- if you have any further questions cc


t c summary opinion united_states tax_court jose b magno and susan a o’connell petitioners v commissioner of internal revenue respondent docket no 4600-10s filed date john e ellsworth for petitioners brett a saltzman for respondent laro judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision 1subsequent section references are to the applicable versions of the internal_revenue_code and rule references are to the tax_court rules_of_practice and procedure some dollar amounts are rounded to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case respondent determined deficiencies in petitioners’ federal income taxes of dollar_figure dollar_figure and dollar_figure and accuracy- related penalties of dollar_figure dollar_figure and dollar_figure for and subject years respectively after concessions we must decide whether losses related to rental properties owned by petitioners and claimed on their federal_income_tax returns for the subject years are subject_to the passive_activity limitations of sec_469 and petitioners are liable for sec_6662 accuracy-related_penalties for the subject years we hold for respondent as to both issues background some of the facts have been stipulated and are so found the stipulated facts and the exhibits submitted therewith are incorporated by this reference 2in addition to the concessions explicitly agreed to by the parties we consider petitioners to have conceded respondent’s determination that for they may not deduct dollar_figure of mortgage interest claimed on schedule e supplemental income and loss by virtue of the fact that petitioners did not address that issue at trial or on brief we hold without further comment that petitioners may not deduct dollar_figure of schedule e mortgage interest for because they have failed to introduce any evidence with respect to the payment of that interest see 85_tc_731 masloff v commissioner tcmemo_1998_257 see also 121_tc_308 petitioners jose b magno mr magno and susan a o’connell ms o’connell resided in illinois when their petition was filed during the subject years mr magno worked as a financial planner from until date petitioners lived in michigan first residence in early petitioners began constructing a second house in michigan second residence and thereafter tried multiple times to sell the first residence but without success when their sales efforts failed petitioners often rented that property tenants occupied the first residence without interruption from date until the lease expired in date petitioners tried to sell the first residence from date until date during that time mr magno performed general maintenance on the property prepared it for sale and marketed it to prospective buyers despite mr magno’s efforts however the first residence did not sell and petitioners again rented that property in date petitioners leased the first residence to tenants who broke the lease after months petitioners commenced an action against those tenants for breach of contract and mr magno assisted the prosecution of that case the lawsuit settled and petitioners again sought to sell the first residence without success petitioners instead chose to lease the property from date until date in connection with that rental mr magno prepared the lease verified the tenant’s employment and showed the property in ms o’connell was offered a job promotion which would require petitioners to move from michigan to illinois ms o’connell accepted the promotion and petitioners tried to sell or lease the second residence petitioners secured tenants and they leased the second residence from date through the end of during that time mr magno performed maintenance on the second residence which required him to travel miles from illinois to michigan these trips typically required mr magno to spend days in michigan during which time he stayed with family or at a hotel mr magno paid for these hotel stays with cash or a credit card during each of these trips mr magno repaired or supervised the repair of the second residence the tasks which mr magno or his contractors performed included among others fixing a tub installing a sump pump fixing an icemaker removing a bone from a garbage disposal replacing heads on a sprinkler system winterizing that sprinkler system and removing lint from a clothes dryer and vent when the repairs required mr magno to purchase parts he paid with cash or a credit card and received receipts when he was unable to complete the repairs himself mr magno hired repairmen to do so though he could not recall the names of the individuals he hired petitioners timely filed their federal_income_tax return for each of the subject years and reported on schedules e total rental real_estate losses of dollar_figure dollar_figure and dollar_figure respectively on each of those returns petitioners reported mr magno’s occupation as a provider of financial planning services petitioners also reported on schedules c profit or loss from business that mr magno operated a financial services or planning business during the subject years respondent issued to petitioners a notice_of_deficiency dated date disallowing the schedule e losses because respondent had determined that sec_469 prohibited recognition of the losses petitioners petitioned the court and on date a trial was held in chicago illinois discussion i burden_of_proof the commissioner’s determinations in a notice_of_deficiency are presumed correct and the taxpayer bears the burden of proving that those determinations are incorrect rule a 290_us_111 under sec_7491 the burden_of_proof as to factual matters may shift to 3mr magno also modified mortgages on the first and second residences in the commissioner in certain circumstances petitioners have not alleged that sec_7491 applies nor have they established their compliance with the substantiation and recordkeeping requirements of the internal_revenue_code see sec_7491 and b accordingly petitioners bear the burden_of_proof ii real_estate activities petitioners argue mainly that mr magno is a qualifying real_estate_professional because he meets the requirements of sec_469 and that the rental portions of his real_estate activities are not passive because he materially participated in those activities respondent argues that mr magno’s rental_real_estate_activities are per se passive and that petitioners may not deduct losses associated with those activities because mr magno is not a qualifying real_estate_professional we agree with respondent a taxpayer is generally allowed a deduction for all the ordinary and necessary expenses paid_or_incurred in connection with a trade_or_business or for the production_of_income see 4petitioners do not contend that they are entitled to the offset under sec_469 nor are they 5respondent does not argue in the main that the claimed rental expenses should be disallowed on the grounds that the first and second residences were not converted from personal_use_property to property_held_for_the_production_of_income see eg saunders v commissioner tcmemo_2002_143 affd 75_fedappx_494 6th cir sec_162 sec_212 sec_469 however limits the deductibility of losses from these activities where those losses arise from passive activities a passive_activity is any activity which involves the conduct of any trade_or_business in which the taxpayer does not materially participate sec_469 the disallowed passive_activity_loss equals the excess of the aggregate losses from all passive activities for a taxable_year over the aggregate income from all passive activities for that year sec_469 sec_1_469-2t temporary income_tax regs fed reg date rental real_estate activity is generally treated as a per se passive_activity regardless of whether the taxpayer materially participates sec_469 however a taxpayer may avoid having his or her real_estate activity classified as a per se passive_activity if the taxpayer is a qualifying real_estate_professional a taxpayer may qualify as a real_estate_professional if i more than one-half of the personal services performed in trades_or_businesses by the taxpayer during such taxable_year are performed in real_property trades_or_businesses in which the taxpayer materially participates and ii such taxpayer performs more than hours_of_service during the taxable_year in real_property trades_or_businesses in which the taxpayer materially participates sec_469 where as here a joint_return has been made the foregoing requirements are satisfied if either spouse separately satisfies those requirements id thus if mr magno meets the foregoing requirements petitioners’ rental activities are not per se passive and the normal passive_activity_loss rules of sec_469 will apply we consider in turn petitioners’ ability to meet each of the requirements under sec_469 a other personal services mr magno performed petitioners argue that the hours mr magno spent on his rental_real_estate_activities accounted for more than one-half of the total hours of personal services he performed in trades_or_businesses during the subject years see sec_469 we are not persuaded petitioners did not elect to treat their interests in the first and second residences as a single rental_activity and they must therefore prove that mr magno meets the requirements of sec_469 as to each property see sec_469 sec_1_469-9 income_tax regs during the audit stage of this proceeding mr magno told respondent’s revenue_agent that he worked approximately to hours per week on his financial planning and services business that conversation was documented in the revenue agent’s notes and the revenue_agent testified credibly to its contents at trial at trial however mr magno testified that he worked principally as a financial consultant from january through date he also testified that he became a full-time manager of the first and second residences in and and that he reduced the number of hours which he devoted to his financial consulting services business to about hours per year we credit the testimony of respondent’s revenue_agent and therefore conclude that mr magno must have worked more than big_number hours during each subject year in real_property trades_or_businesses to qualify as a real_estate_professional under sec_469 mr magno was not able to corroborate with written documentation his assertions that more than one-half of the personal services he performed in trades_or_businesses during the subject years were performed in real_property trades_or_businesses accordingly we find that mr magno has not proven that he meets the requirements of sec_469 b 750-hour requirement assuming arguendo that we were persuaded by petitioners’ claim that more than one-half of mr magno’s personal services performed in trades_or_businesses during the subject years were performed in real_property trades_or_businesses petitioners are still unable to satisfy the 750-hour requirement of sec_469 petitioners argue that mr magno spent more than hours on each of petitioners’ rental_real_estate_activities during each of the subject years the extent of mr 6the product of hours per week for weeks per year is big_number hours magno’s participation in petitioners’ real_estate activities may be proven by any reasonable means see sec_1_469-5t temporary income_tax regs fed reg date reasonable means include the identification of services performed over a period of time and the approximate number of hours spent performing those services based on appointment books calendars or narrative summaries id it is well settled that although the phrase any reasonable means is broad a taxpayer may not use a postevent ballpark guesstimate of the time committed to the rental_activity see hill v commissioner tcmemo_2010_ lee v commissioner tcmemo_2006_193 goshorn v commissioner tcmemo_1993_578 cf 67_fedclaims_39 adopting same standard petitioners rely solely on the testimony of mr magno to prove that they devoted the requisite number of hours to qualify their rental activities under sec_469 in so doing they present no calendars narrative summaries mileage logs receipts or any other records which would support mr magno’s testimony even though by mr magno’s own admission they possessed such items the failure of petitioners to introduce such evidence creates a presumption that such information was not favorable to them see 6_tc_1158 affd 162_f2d_513 10th cir but here we are concerned with more than just the lack of corroborating evidence in certain material respects we found the testimony of mr magno to be vague and unpersuasive see mowafi v commissioner tcmemo_2001_111 for example mr magno testified that between date and date he devoted hours to repairing or supervising the repair of the first residence that testimony does not allow us to determine how much time mr magno personally spent making such repairs or whether such activity was material under sec_469 see d’avanzo v commissioner supra pincite cf trask v commissioner tcmemo_2010_78 crediting a taxpayer for time spent to repair or supervise the repair of rental properties where the taxpayer maintained detailed work logs which identified the properties repaired and the contractors used we are also troubled by the fact that mr magno is unable to recall basic details about those repairs such as the dates they were performed or the names of third parties whom he hired we also find mr magno’s estimates of the time he devoted to petitioners’ rental activities to be excessive in relation to the tasks performed see hill v commissioner supra mr magno testified that he spent between and hours per day for or days to complete such seemingly simple tasks as removing a bone from a garbage disposal removing lint from a clothes dryer and a dryer vent and winterizing a sprinkler system we do not credit mr magno’s assertion that he would drive approximately miles over the course of or hours to perform such simple and routine tasks see rapp v commissioner tcmemo_1999_249 such is especially so given that mr magno did not offer any records to substantiate these trips or the expenses_incurred during them given the lack of corroborating evidence we simply cannot accept as fact that mr magno worked the requisite number of hours to qualify as a real_estate_professional for each of his rental_real_estate_activities see scheiner v commissioner tcmemo_1996_554 we find that mr magno’s method for proving the time he devoted to his rental activities is not reasonable under sec_1_469-5t temporary income_tax regs supra cf trask v commissioner supra relying on a taxpayer’s testimony as proof that he spent more than hours to resolve over issues for pieces of property during a 1-year period c conclusion we hold that mr magno is not a qualifying real_estate_professional under sec_469 and that petitioners’ rental_real_estate_activities are treated as per se passive under sec_469 see fowler v commissioner t c memo 7mr magno testified that the record included copies of gas receipts but we find no such receipts in the record 8given that holding we need not consider whether mr magno materially participated in petitioners’ rental_real_estate_activities it follows that the losses petitioners sustained in connection with their real_estate activities may not be used to reduce their nonpassive_income see sec_469 iii accuracy-related_penalties respondent determined that petitioners are liable for accuracy-related_penalties under sec_6662 for the subject years sec_6662 and b imposes an accuracy-related_penalty equal to percent of any portion of an underpayment_of_tax required to be shown on the return that is attributable to negligence or disregard of rules or regulations the term negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws and any failure to keep adequate books_and_records or to substantiate items properly sec_6662 see also sec_1_6662-3 income_tax regs negligence may also be defined as lack of due care or the failure to do what a reasonable and ordinarily prudent person would do under similar circumstances 85_tc_934 respondent bears the burden of production with respect to petitioners’ liability for the accuracy-related_penalties included in the notice_of_deficiency and must therefore produce evidence that it is appropriate to impose those penalties see sec_7491 see also 116_tc_438 once respondent has met his burden of production petitioners must then adduce proof sufficient to persuade the court that they were not negligent and that they did not act carelessly recklessly or with an intentional disregard of rules or regulations higbee v commissioner supra pincite see also sec_6662 alternatively petitioners may avoid liability for the accuracy-related_penalties by showing that there was reasonable_cause for the underpayment and that they acted in good_faith see sec_6664 we find that respondent has met his burden of production because petitioners offered no documentation to support their claim that they performed the requisite number of hours to be engaged in a real_property_trade_or_business see smith v commissioner tcmemo_1998_33 petitioners did not address their liability for the accuracy-related_penalties at trial or on brief and on the basis of the record at hand we find that petitioners were negligent they maintained no books and made no apparent effort to substantiate the hours which mr magno purportedly spent on petitioners’ real_estate activities see stewart v commissioner tcmemo_2010_184 we believe that an ordinarily reasonable and prudent person with mr magno’s expertise in financial planning would have sought the advice of a tax expert before claiming more than dollar_figure in losses over a year period petitioners made no such effort and in failing to do so were negligent cf fowler v commissioner supra finding a taxpayer who relied on the advice of an accountant not liable for an accuracy-related_penalty even though the taxpayer did not meet the requirements of sec_469 nor does reasonable_cause exist to excuse petitioners from the accuracy-related_penalties we recognize that sec_469 and the regulations thereunder cover a highly complex area of the internal_revenue_code but complexity alone does not excuse a taxpayer from taking reasonable steps to determine the law and comply with it 99_tc_202 see also sec_1_6664-4 income_tax regs petitioners made no apparent effort to comply with the tax law or to seek out the advice of someone who could help them do so we therefore hold petitioners liable for accuracy-related_penalties for the subject years we have considered all arguments made by the parties and to the extent that we have not specifically addressed them we conclude that they are moot irrelevant or without merit to reflect the foregoing decision will be entered for respondent


t c memo united_states tax_court charles h butler and judith k butler petitioners v commissioner of internal revenue respondent docket no filed date sandra g scott and stephen m moskowitz for petitioners marion t robus for respondent memorandum findings_of_fact and opinion gerber judge respondent determined deficiencies in petitioners' federal_income_tax as follows year deficiency dollar_figure big_number big_number the principal issue presented for our consideration is whether petitioners' operation of a farm was an activity_not_engaged_in_for_profit within the meaning of sec_183 if we find the activity was not engaged in for profit then we must decide whether legal expenses_incurred by petitioners may be deducted under sec_162 or sec_212 as ordinary and necessary expenses_incurred with respect to property_held_for_investment findings of fact3 at the time of the filing of their petition petitioners charles h butler and judith k butler resided in pescadero california charles h butler hereinafter referred to as petitioner husband was an engineer who designed power plants petitioner husband possessed bachelor's and master's degrees in engineering judith k butler hereinafter referred to as petitioner wife graduated from high school unless otherwise indicated all section references are to the internal_revenue_code in effect for the taxable years in issue and all rule references are to the tax_court rules_of_practice and procedure petitioners conceded adjustments in the amounts of dollar_figure and dollar_figure with respect to their real properties at arnold way half moon bay cal and stage road pescadero cal and respondent has conceded that in the taxable_year petitioners are entitled to an additional deduction of dollar_figure which represents a portion of a passive_activity_loss adjustment the parties' stipulation of facts and exhibits are incorporated by this reference petitioners spent approximately year looking for real_property to acquire in northern california on date they purchased an 80-acre ranch in pescadero hereinafter pescadero property or ranch for dollar_figure an artificial 8-acre pond which also served as a reservoir was located on the ranch as part of a larger tract of land the pescadero property had formerly been operated as a dairy farm the ranch had two residences and several large barns and equipment sheds there also was a granary that had been used as a cheese house when petitioners acquired the pescadero property they had no prior experience as farmers petitioner husband at the time of trial owned a subchapter_s_corporation energy design engineering corp energy design which provided consulting services to the electric utility industry energy design was intermittently profitable petitioner husband also was part owner of cogeneration acquisition development corp cogeneration which furnished consulting services to the development of cogeneration projects as well as electric power projects in the united_states cogeneration was regularly profitable but eventually ceased business the pescadero property was in a severely neglected condition when petitioners purchased it over a period of several years petitioner husband made substantial improvements to at least one of the residences such as installing a heating system and electrical wiring and fixing the roof which leaked the plumbing system was also repaired petitioner husband also made structural repairs to the barns on the property the barns had plumbing systems installed and were electrically rewired petitioners also repaired and installed fences around the property the reservoir added value and was important to the pescadero property because the land was otherwise dry it was utilized for irrigation and livestock purposes other than the reservoir itself the pescadero property did not have access to water which would independently sustain livestock as part of a proposed aquaculture project petitioner husband seeded the reservoir with fish such as catfish petitioner husband intended to raise and sell fish from the reservoir however the project was never fully implemented because a neighbor siphoned off water causing an insufficient oxygen supply to support aquatic life petitioner husband intended to raise fish at a later time in there were floods which affected the pescadero property requiring repairs to the damage and cleanup of silt in the reservoir subsequently from through there was a drought in the area sometime in petitioner husband commenced installing an irrigation system on the pescadero property utilizing the reservoir water the irrigation system had been recommended by the san mateo farm bureau and the u s department of soil conservation as the best_method to maximize the productivity of the land or livestock subsequently for the next several years petitioner husband spent significant amounts of money to extend and maintain the irrigation system petitioner husband expected that the pescadero property would appreciate over time and he was prepared to invest additional capital toward that end petitioner husband believed that the ranch was worth dollar_figure million farming activity prior to the purchase of the pescadero property when petitioners resided in sonoma county california petitioner wife worked for years without pay for an individual who operated a ranch that raised game birds for hunting purposes early in petitioners’ ownership of the pescadero property petitioner wife with the intention of starting a similar operation transported a number of chukars and quail to the pescadero property the game bird activity however was ultimately unsuccessful subsequently petitioner wife ascertained that neighboring farms were raising goats and sheep in turn she purchased goats and sheep as livestock for the pescadero property during the taxable years at issue petitioners maintained approximately cattle and sheep at the time of trial petitioners maintained approximately cattle and sheep petitioners may also have raised some goats and horses on the pescadero property during the years at issue petitioner husband worked on the pescadero property after his regular work hours and on weekends he spent on average approximately to hours a day on weekends and about hours on weeknights he repaired the fence around the ranch and he maintained and extended as needed the irrigation system petitioner husband repaired the buildings an activity which he believed was necessary to increase or maintain the value of the property so it would continue to appreciate and be attractive petitioner wife spent approximately to hours per week on the ranch she handled daily operations on the pescadero property in the mornings she released the sheep locked up in the pens fed the sheep filled up the watering troughs and ensured that none of the livestock were ill or missing she also checked the structural integrity of the fences petitioner wife repaired and cleaned out the barns as necessary she performed worming operations on the sheep twice a year shearing in the spring was not done by petitioners at the time of the purchase of the pescadero property petitioners had two children they participated in the 4-h club program and helped raise the cattle and turkeys the animals were judged and eventually sold at auction the children did not reside on the ranch during the years at issue there were occasional sales only in through auctions of livestock cattle and sheep and a goat petitioners were members of the san mateo farm bureau this organization provided literature and advice on farming as well as farm-related supplies the bureau also provided insurance for buildings on the farm petitioners also obtained information on agriculture from local farmers as well as publications from the university of california at davis the u s soil conservation agency and the u s department of agriculture dell'oca suit petitioners executed a water use agreement agreement with the owner of an adjoining parcel of land conrad j dell'oca dell'oca in conjunction with the purchase of the pescadero property the agreement provided that petitioners and dell'oca would have exclusive dominion over the reservoir water additionally the agreement stated that there would be restrictions on withdrawals of water during times of shortage if such withdrawals would interfere with the intended use of the pond for protecting and sustaining livestock fish and wildlife on date petitioners applied to the california state water control board water control board for a permit to divert and store water from an outside stream into the reservoir on the pescadero property on date the water control board issued a permit granting petitioners the exclusive right to use the water contained in the reservoir on date petitioners initiated a lawsuit against dell'oca in the superior court of the state of california san mateo county state court petitioners alleged that they had suffered damages in the form of loss of agricultural income and damage to their livestock wildlife fish and recreational use in a second amended complaint petitioners alleged that dell'oca's alleged overconsumption of the reservoir water limited petitioners' ability to utilize the reservoir for fire protection fish and wildlife enhancement stock watering recreation domestic and irrigation purposes or to entice prospective lessees petitioners also alleged that the value of the pescadero property had been diminished petitioners sought relief among other things through a cause of action to quiet title to interest in water a cause of action to quiet title to interest in land a cause of action for declaratory relief regarding interest in land prescriptive easement on date the state court entered final judgment apportioning the parties' use of the water petitioners received the preponderance of the available water arising from the permit issued by the water control board the parties were limited in the amount of water they could procure although the legal restriction did not apply to the incidental_use of water by livestock directly at the reservoir site knauss suit on date a lawsuit was filed in the state court against petitioners by lee r knauss and joan f knauss the knausses and other associated parties to obtain an easement in a roadway bisecting the pescadero property the knauss suit alleged among other things that the knausses had been deprived of access to their adjoining property on date a judgment was filed in the knauss suit whereby the state court determined that petitioners had acquired by the doctrine_of adverse possession or prescriptive extinguishment all right title and interest in the pescadero ranch roadway in that regard the knausses were found to have no right-of-way or easement in petitioners' property expenses and other items petitioner husband kept a series of separate folders in a file cabinet for each line item on schedule f as each expense was incurred he obtained a receipt and placed it in the proper folder petitioner husband segregated receipts for expenses connected with the farm from those for expenses that were not farm related no separate checking account was maintained for farm-related expenses because checks relating to the property were infrequent petitioner husband believed that he was able to maintain and retrieve proper records when required to do so no records of the number of livestock were maintained petitioner husband intended to go into the farming_business so that he could leave the engineering profession he expected to make a profit once his herd doubled in size petitioners believed the main obstacle to profitability to be availability of water for the livestock petitioners believed that this factor prevented the number of livestock from expanding petitioners on their joint federal_income_tax returns reported the following items wages dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure interest_income big_number big_number big_number big_number big_number big_number farm gross_income n a n a big_number farm expenses big_number big_number big_number big_number big_number big_number net farm income or loss big_number big_number big_number big_number big_number big_number 1the record does not provide information regarding the taxable_year 2petitioners apparently added the loss of dollar_figure to the total expenses of dollar_figure for a net_loss of dollar_figure petitioners reported that the principal product of their farming activity was general livestock petitioners on their and schedules f profit or loss from farming claimed attorney’s fees as labor hired in the amounts of dollar_figure dollar_figure and dollar_figure respectively opinion we must decide whether petitioners' activities were not engaged in for profit within the meaning of sec_183 sec_183 provides that if an activity engaged in by an individual is not engaged in for profit no deduction attributable to that activity shall be allowed except as provided in sec_183 sec_183 defines an activity_not_engaged_in_for_profit as any activity other than one with respect to which deductions are allowable for the taxable_year under sec_162 or under paragraph or of sec_212 sec_183 sec_162 allows a deduction for all ordinary and necessary expenses paid_or_incurred in carrying on a business sec_212 allows a deduction for all the ordinary and necessary expenses paid_or_incurred for the production_or_collection_of_income or for the management_conservation_or_maintenance_of_property_held_for_the_production_of_income whether deductions are allowable under sec_162 or sec_212 depends on whether the taxpayer engaged in the activity with the objective of making a profit 90_tc_960 affd without published opinion 899_f2d_18 9th in the case of an activity_not_engaged_in_for_profit sec_183 allows a deduction for expenses that are otherwise deductible without regard to whether the activity is engaged in for profit sec_183 allows a deduction for expenses that would be deductible if the activity were engaged in for profit but only to the extent the total gross_income derived from the activity exceeds the deductions allowed by sec_183 cir 90_tc_74 78_tc_642 affd without published opinion 702_f2d_1205 d c cir while a reasonable expectation of profit is not required petitioners' profit objective must have been bona_fide 91_tc_371 88_tc_464 85_tc_557 70_tc_715 affd 615_f2d_578 2d cir whether petitioners possessed the necessary profit objective is a question of fact to be resolved on the basis of all the facts and circumstances of the particular case at hand 72_tc_411 affd without published opinion 647_f2d_170 9th cir dunn v commissioner supra pincite petitioners here bear the burden_of_proof on this issue rule a 290_us_111 greater weight is given to objective facts than a taxpayer's statement of intent 781_f2d_724 9th cir affg lahr v commissioner tcmemo_1984_ beck v commissioner supra pincite 84_tc_1244 affd 792_f2d_1256 4th cir dreicer v commissioner supra sec_1_183-2 income_tax regs provides a nonexclusive list of factors to consider in determining whether an activity is engaged in for profit these factors are the manner in which the taxpayers carry on the activity the expertise of the taxpayers or their advisers the time and effort expended by the taxpayers in carrying on the activity the expectation that assets used in the activity may appreciate in value the success of the taxpayers in carrying on other activities the taxpayers' history of income or losses with respect to the activity the amount of occasional profit if any which is earned the financial status of the taxpayers whether elements of personal pleasure or recreation are involved not all of these factors are necessarily applicable in every case 722_f2d_695 11th cir affg 78_tc_471 taube v commissioner supra 86_tc_360 72_tc_28 no one factor nor a majority of the factors is necessarily determinative nor do we reach our conclusion by simply counting the factors that support each party's position 94_tc_41 taube v commissioner supra pincite dunn v commissioner supra pincite the manner in which the taxpayers carry on the activity the fact that a taxpayer generally carries on an activity in a businesslike manner and maintains complete and accurate books_and_records may be indicative of a profit_motive similarly where an activity was conducted in a manner substantially_similar to comparable businesses that are profitable and where changes were attempted in order to improve profitability a profit_motive may be indicated 72_tc_659 sec_1_183-2 income_tax regs there is little evidence that petitioners operated their farm with the expectation of profitability petitioner husband argues that he has maintained records for his activities petitioner husband kept records consisting of receipts that were segregated in folders according to each schedule f line item petitioners did not maintain a separate checking account or a system of ledgers which would have provided a basis for ascertaining revenue and expenses significantly there is nothing in the record showing that petitioners conducted an analysis or investigation of the profitability of farming in their area finally and more significantly petitioners did not prepare an analysis of the revenues and expenses that their property could achieve with more livestock either cattle or sheep to determine whether it could then be operated in a profitable manner petitioners did not demonstrate that the manner in which they conducted the farming operation was reasonably calculated to produce a profitable return although petitioners reported their farming activity as general livestock there was no inventory of the livestock there were intermittent sales through auctions of livestock cattle and sheep but only during also there was a sale of a goat for dollar_figure petitioners did not engage in a sustained practice of purchasing culling or selling the livestock petitioners assert that they were limited in the amount of cash they could infuse into the pescadero property in order to make the farming activity profitable repairing the existing structures and building the irrigation system as well as attempting to manage and expand the livestock petitioners however did not attempt to obtain financing to expand the farming activity in that regard the irrigation system was not installed until years after the purchase of the pescadero property petitioner husband contended that he repaired farm buildings to add value and maintain the value of the property so it will continue to appreciate and be attractive petitioners also initiated a lawsuit against dell'oca to protect the value of the property from any diminution that would result from the alleged overuse of the water in the reservoir petitioners' major focus was on the possibility that the pescadero property might appreciate in value although petitioner husband contended that he wanted to raise fish in the reservoir as a business activity he also contended that he was unable to implement that project because of disputes concerning the water usage other than a drought in the litigation concerning the reservoir apparently was not an impediment to petitioners' use of the reservoir for raising fish petitioners testified that significantly increasing the size of their livestock herd would result in profitability for their farming venture however their herd remained approximately the same during the years at issue cattle and sheep and at the time of trial cattle and sheep the expertise of the taxpayers or their advisers petitioners were not experienced farmers and although petitioner wife had some experience in raising game birds she did not demonstrate that she took steps to successfully operate a farm petitioners attempted to become knowledgeable about the market for cattle and sheep they sought advice from local farmers read farming materials from the san mateo farm bureau and consulted with various institutions such as the university of california at davis as well as the u s department of soil conservation time and effort expended by the taxpayers in carrying on the activity petitioners expended significant time in the farming activity petitioner husband worked full time as an engineer and he also worked approximately hours a week hours per day for days on the weekend and hours each weeknight on the pescadero property sec_1_183-2 income_tax regs the taxpayers’ history of income and losses with respect to the activity under sec_1_183-2 income_tax regs losses in the initial stages of an activity are not necessarily indicative of a lack of profit_motive however when unexplained losses have continued for an extended period of time they may be probative that an activity is not engaged in for profit allen v commissioner supra pincite specifically the presence of losses in the formative years of a business is not inconsistent with an intention to achieve a later profitable level of operation the goal must be to realize a profit on the entire operation which presupposes recouping past losses in addition to current expenses 45_tc_261 affd 379_f2d_252 2d cir petitioners did not take steps to address the continuous and substantial losses_incurred in connection with the pescadero property petitioners' main argument is that their farm could not be profitable due to ongoing legal disputes they assert that they were precluded from expanding their farming operations because of the uncertainty regarding the water supply petitioners did not however show that the herd size was maximized to comport with the amount of water available in the reservoir petitioners' claims are further undermined by the fact that for several years after the purchase of the ranch and prior to the water use dispute in they were not limited in utilizing the water in the reservoir other than by the agreement and the drought after the conclusion of the litigation with dell'oca petitioners did not augment or increase the size of their livestock herd even though they were legally guaranteed a significant portion of the reservoir water expectations that assets used in the activity may appreciate in value sec_1_183-2 income_tax regs provides that profit includes expected appreciation in assets such as land appreciation may explain a taxpayer's willingness to continue to sustain losses allen v commissioner t c pincite see also fields v commissioner tcmemo_1981_550 unrealized_appreciation is relevant to deciding whether the taxpayer has a profit objective 77_tc_1326 ndollar_figure sec_1_183-1 income_tax regs provides that in order to determine to what extent sec_183 and the regulations thereunder apply the activity or activities of the taxpayer must be ascertained from all the facts and circumstances d activity defined-- ascertainment of activity in order to determine whether and to what extent sec_183 and the continued petitioners assert that the sustained losses were offset by the appreciation in value of the pescadero property respondent counters that petitioners' farming activity and holding of the pescadero property were separate activities and the assets used in each activity must be separately considered with respect to this element petitioners estimated that from to the time of trial on the basis of the sale prices of neighboring parcels of land their farm appreciated at least dollar_figure dollar_figure million the estimated real_estate value less the dollar_figure purchase_price and that the appreciation indicates a profit objective in that regard petitioners made substantial improvements to the residence s the barns and other buildings as well as installing an irrigation system petitioners made these improvements with the intention of add ing value and maintain ing the value of the property so it will continue to appreciate and be attractive the circumstances are different with respect to their farming activity petitioners stated that once their livestock continued regulations thereunder apply the activity or activities of the taxpayer must be ascertained in ascertaining the activity or activities of the taxpayer all the facts and circumstances of the case must be taken into account sec_1 d income_tax regs had sufficiently increased in weight they would be sold at auction petitioners also asserted that their livestock would increase in size and value through breeding the record does not support petitioners' assertions sec_1_183-1 income_tax regs provides that where land is purchased or held primarily with the intent to profit from increase in its value and the taxpayer also engages in farming on such land the farming and the holding of the land will ordinarily be considered a single activity only if the farming activity reduces the net cost of carrying the land for its appreciation in value thus the farming and holding of the land will be considered a single activity only if the income derived from farming exceeds the deductions attributable to the farming activity which are not directly attributable to the holding of the land that is deductions other than those directly attributable to the holding of the land such as interest on a mortgage secured_by the land annual property taxes attributable to the land and improvements and depreciation of improvements to the land in that regard petitioners' gross_income derived from their farming activity for the taxable years and was dollar_figure dollar_figure and zero respectively petitioners' car and truck expenses for the taxable years and were dollar_figure dollar_figure and dollar_figure respectively the nominal income from the farming activity fell far short of the deductions attributable to the farming activity eg the car and truck expenses sec_1_183-1 income_tax regs accordingly petitioners entered a loss of dollar_figure for gross_income derived from their farming activity for the taxable_year the farming activity and the holding of the land cannot be construed to be a single activity petitioners may not utilize the appreciation of the land to support their argument that it should offset the farming losses see also hoyle v commissioner tcmemo_1994_592 in that regard we find that petitioners’ expenditures and primary intent were as evidenced by the nature of their activity and claimed losses attributable to farming rather than improvement of the realty the success of the taxpayers in carrying on other activities petitioners did not present any evidence that they had been previously engaged in farming activities or similar activities petitioner husband was successful in his professional activities but there is no showing that he employed his fiscal and financial experience from his professional activity in his farming activity amount of occasional profit petitioners have not earned any profit from the farming activity during any of the years about which there is evidence in the record the financial status of the taxpayers substantial income from sources other than the activity in question especially if the losses generate significant tax benefits may indicate that the activity is not engaged in for profit sec_1_183-2 income_tax regs petitioners had income from petitioner husband's primary profession as an engineer the losses with respect to the farming venture allowed petitioners to shelter their outside income elements of personal pleasure a taxpayer's enjoyment of an activity does not demonstrate a lack of profit objective if the activity is in fact conducted for profit as shown by other factors 59_tc_312 sec_1_183-2 income_tax regs respondent argues that there were elements of recreational and personal pleasure present in this case in particular respondent points out that petitioners' children participated in the 4-h club program petitioner wife performed the majority of the farming work on the pescadero property and did not enjoy working with the animals on the ranch ultimate conclusion we hold that petitioners’ farming activity was not engaged in for profit within the meaning of sec_183 for the taxable years and the regulation provides substantial income from sources other than the activity particularly if the losses from the activity generate substantial tax benefits may indicate that the activity is not engaged in for profit especially if there are personal or recreational elements involved sec_1_183-2 b income_tax regs legal expenses during the years under consideration petitioners paid legal fees in connection with two lawsuits petitioner husband argues that the litigation expenses_incurred in connection with the dell'oca and the knauss lawsuits respectively were deductible business_expenses in that regard petitioners state that the lawsuits were incurred to protect the income arising from the farm activity conversely respondent maintains that the origin of the claim asserted in both lawsuits was in the nature of defending or perfecting title to the pescadero property and hence was capital in nature specifically respondent contends that under sec_263 the legal expenses were not deductible as ordinary and necessary expenses within the meaning of sec_162 or sec_212 because these expenses were capital in nature sec_263 provides that no deduction is allowed for capital expenditures legal expenses_incurred to defend or protect title to property or to acquire or dispose_of a capital_asset are capital expenditures and are not deductible 397_us_572 86_tc_190 54_tc_1642 affd 457_f2d_369 9th cir 20_tc_587 the appropriate test for determining whether petitioners may deduct legal expenses is the origin of the claim rather than the predominant purpose in defending and settling the suit woodward v commissioner supra pincite in woodward the supreme court rejected the primary purpose test explaining that a test based upon the taxpayer's 'purpose' in undertaking or defending litigation would encourage resort to formalisms and artificial distinctions id pincite the test for determining deductibility of legal fees under sec_162 is ordinarily an objective one looking to the origin or character of the claim rather than the subjective purpose of the taxpayer in pursuing it woodward v commissioner supra pincite 372_us_39 the origin of the claim is ascertained by analyzing the facts of the situation at hand united_states v gilmore supra pincite we therefore consider the issues involved the nature of the litigation the defenses asserted the background of the litigation and all facts pertinent to the controversy id petitioners incurred the legal expenses in connection with the dell'oca and the knauss lawsuits petitioners argue that the legal fees expended with respect to the dell'oca lawsuit served to protect the current income of the pescadero property respondent concedes that petitioners have verified the amounts claimed for legal expenses on schedule f for totaling dollar_figure it appears that petitioners substantiated legal fees of dollar_figure and dollar_figure respectively for the and taxable years in light of our ultimate disposition of this issue we do not apportion expenses between the dell'oca and the knauss lawsuits in other words petitioners posit that the origin of the claim involved their farm venture and not the acquisition or disposition of a capital_asset ie property rights respondent argues that the fundamental issue in the lawsuits involved property rights in support of that proposition respondent asserts that petitioners did not claim a loss of farm income in their lawsuit against dell'oca the record reflects that petitioners initially sought damages in the form of loss of agricultural income and damage to their livestock wildlife fish and recreational use in other words petitioners asserted a loss of farm-related income due to dell'oca's alleged overconsumption of the reservoir water however petitioners submitted a second complaint which enumerated among other things three causes of action in connection with property rights a cause of action to quiet title to interest in water a cause of action to quiet title to interest in land a cause of action for declaratory relief regarding interest in land prescriptive easement moreover the state court allocated and apportioned the riparian rights on the basis of the parties' respective real_property interests hence petitioners obtained a judgment which allowed them to enjoy and utilize a significant portion of the water in the reservoir thereby enhancing the real_property accordingly we find that the origin of the claim in the dell'oca lawsuit was the perfecting of title in the rights to the water in the reservoir on their property the knauss suit also involved property rights the record demonstrates that petitioners defended against the claim of an easement on the pescadero property petitioners contend that such an easement would have prevented the livestock from freely traversing the property for pasturage purposes and would have prevented petitioners from installing and maintaining the irrigation system consequently petitioners contend that the outcome of the knauss lawsuit would have affected the income arising from petitioners' farming activity the origin of the claim in the knauss lawsuit however also involved a defense of property rights knauss was denied a right-of-way or easement across the pescadero property and the expenses_incurred in connection with the knauss lawsuit are capital in nature and nondeductible to reflect the foregoing and due to concessions of the parties decision will be entered under rule


of f i c e of c h i ef c ou n sel department of the treasury i n t e r n al r e v e n u e s e r v i c e w ashington d c date number info release date conex-117488-09 uil the honorable john hall u s house of representatives washington dc dear mr hall thank you for your letter of date on behalf of your constituents and others who are victims of the investment fraud mr bernard l madoff perpetrated on date we issued guidance revrul_2009_9 and revproc_2009_20 on the tax treatment of losses from so-called ponzi schemes similar to that mr madoff operated i am enclosing copies for your information revrul_2009_9 explains the income_tax law that applies to an investor who loses money in a fraudulent investment arrangement it provides that an investor who was the victim of a fraudulent investment arrangement is entitled to a theft_loss deduction that is not limited by the rules that apply to capital losses investment theft losses are not subject_to limitations that apply to personal casualty and theft losses the theft_loss is deductible in the year the fraud is discovered except to the extent the investor has a reasonable_prospect_of_recovery the amount of the theft_loss includes not only the investor's unrecovered investment but also amounts reported as income from the investment in prior years and reinvested in the fraudulent investment arrangement a theft_loss deduction that creates a net_operating_loss for the investor can be carried back and forward according to the timeframes prescribed by law to generate a refund of taxes paid in other taxable years conex-117488-09 to claim a theft_loss deduction in any taxable_year an investor must prove that the loss was due to theft and that no reasonable prospect exists of recovering the investment investors often cannot make highly factual determinations with certainty in the year the loss is discovered for this reason we published revproc_2009_20 to provide a simplified_method for investors to compute and report their losses from fraudulent investment schemes this revenue_procedure generally allows an investor who was a victim of mr madoff’s fraud to claim a theft_loss in the amount the investor may deduct is up to percent of the loss less the amount of reimbursement he or she expects to receive as an advance for customer claims from the securities investor protection corporation sipc or from private insurance or other contractual arrangements that guarantee the investor against loss i hope this information is helpful if you have any questions please call me or ------------- ------------- office_of_chief_counsel income_tax and accounting division at ---------------- --------------------- sincerely john p moriarty chief branch income_tax and accounting enclosures


internal_revenue_service number release date ---------------------------------- ----------------------------- --------------------------------------------- ---------------------------------- in re --------------------------------------------- ----------------------------- -------------------------- ------------------------ - department of the treasury washington dc person to contact ---------------- id no ------------- cc ita telephone number --------------------- refer reply to plr-120550-05 date date legend a ----------------------------------------------------------------- ------------------------------------------------- dates -------------------------- -------------------------- ----------------------------- groups taxpayers and on attachment taxpayers and on attachment all other taxpayers on attachment dear -------------------- this letter responds to your letter and submissions of date supplementing a previous submission of march in which you requested on behalf of a above and forty other related parties the taxpayers - see attachment certain private letter rulings relating to the late-filing of forms election to have a tax_year other than a required tax_year specifically you requested that the taxpayers’ late-filed forms be considered timely filed under the authority contained in sec_301_9100-3 of the procedure and administration regulations we are pleased to address your concerns the information submitted indicates that each of the forty-one taxpayers on whose behalf rulings are requested is a partnership employing an overall accrual_method of accounting taxpayers are members of a tiered_structure as defined in sec_1_444-2t of the temporary income_tax regulations under sec_706 of the internal_revenue_code a partnership’s taxable_year must be its required_taxable_year unless among other exceptions not relevant here the partnership elects under sec_444 of the code to use a taxable_year other than its required_taxable_year sec_444 and permit an eligible_partnership to elect or change to a taxable_year only if the deferral_period of the taxable_year elected is not longer than the shorter of three months or the deferral_period of the taxable_year being changed the term deferral_period generally refers to the number of months between the beginning of the entity’s taxable_year and the close of the first required_taxable_year ending within such taxable_year in the instant circumstances taxpayers desired to elect a taxable_year ending november for their initial taxable_year which is a permitted taxable_year under sec_444 sec_444 of the code and sec_1_444-2t of the regulations provide in relevant part that entities that are part of a tiered_structure that consists only of partnerships all of which have the same taxable_year may make or continue an election under sec_444 of the code sec_1_444-3t of the regulations provides among other requirements that form_8716 must be filed by the earlier of i the 15th day of the fifth month following the month that includes the first day of the tax_year for which the election will first be effective or ii the due_date without regard to extensions of the income_tax return resulting from the sec_444 election sec_301_9100-1 of the regulations set forth rules respecting the granting of extensions of time for making certain elections under these rules the commissioner in his discretion may grant a reasonable extension of time to make a regulatory election under subtitle a provided the taxpayer acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government sec_301_9100-2 sets forth rules governing automatic extensions for regulatory elections including elections to use other than the required tax_year under sec_444 if the provisions of section' do not apply to the taxpayer's situation as in the instant case the provisions of sec_301_9100-3 other extensions may apply sec_301_9100-3 sets forth standards that the commissioner will employ in determining whether to grant discretionary relief in situations that do not meet the requirements of sec_301_9100-2 the standards applied are whether the taxpayer acted reasonably and in good_faith in the matter and whether the granting of relief will prejudice the interests of the government generally a taxpayer will be deemed to have acted reasonably and in good_faith where for example the taxpayer reasonably relied on a qualified_tax professional and that professional failed to make or advise the taxpayer to make the election at issue in the instant circumstances group taxpayers’ forms electing to use a taxable_year ending november were due on or before date group taxpayers’ forms electing to use a taxable_year ending november were due on or before date and group taxpayers’ forms electing to use a taxable_year ending november were due on or before date due to an error or misunderstanding none of the forms was timely filed however the error was not due to any lack of due diligence or prompt action on the part of any taxpayer the information submitted and representations furnished by the taxpayers and their tax professionals establish that taxpayers acted reasonably and in good_faith in respect of this matter furthermore we have determined that the granting of relief in this case will not prejudice the interests of the government within the intendment of sec_301_9100-3 accordingly the requirements of sec_301_9100-3 for the granting of relief have been satisfied within days of the date of this ruling each taxpayer should file with the irs cincinnati service_center attn entity control a form_8716 electing to use a tax_year ending november effective for its first taxable_year ending either date date or date as appropriate a copy of this letter_ruling should accompany such submission and each taxpayer should type or print at the top of the form filed under sec_301_9100-3 of the regulations this ruling is further conditioned on taxpayers complying with sec_1 1t a which provides in relevant part that for each taxable_year that a partnership has an election under sec_444 in effect the partnership must i file a return as provided in sec_1_7519-2t and ii make any required_payment as provided in sec_1_7519-2t except for the specific ruling above which is restricted to the filing of forms we express or imply no opinion concerning the federal_income_tax consequences of the facts of this case under any other provision of the code or regulations that may be applicable thereto this letter_ruling is based on facts and representations provided by the taxpayers and their authorized representatives and is limited to the matters specifically addressed no opinion is expressed as to the tax treatment of the transactions considered herein under the provisions of any other sections of the code or regulations which may be applicable thereto or the tax treatment of any conditions existing at the time of or effects resulting from such transactions which are not specifically addressed herein because it could help resolve federal tax issues a copy of this letter should be maintained with the taxpayers’ permanent records pursuant to a power_of_attorney currently on file with this office the original of this letter_ruling is being sent to the taxpayers’ authorized representative and copies are being furnished to the taxpayers and their second-designated authorized representatives a copy of this letter is also being sent to the taxpayers’ appropriate irs industry director this ruling is directed only to the taxpayers who requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent associate chief_counsel income_tax accounting s william a jackson by _________________________ william a jackson chief branch attachment enclosures copy of this letter copy for sec_6110 purposes attachment plr-119941-05 -------------------------------------------------------------------- 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plr-120512-05 ---------------------------- plr-120517-05 ----------------------------------------------------- plr-120519-05 --------------------------------------------- plr-120526-05 ------------------------------------ plr-120527-05 -------------------------------------------------------------- plr-120566-05 ----------------------------------------------------- plr-120528-05 --------------------------------------------------- plr-120548-05 ----------------------------------------------------- plr-120550-05 ----------------------------------------- -------------------------------------------- plr-120552-05


internal_revenue_service number release date index number --------------------------------- --------------------------- ------------------------------ ------------------------------------ -------------------------------------- legend 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-137761-08 date date x ---------------------------- -------------------------------------------------------------------- date country ------------------- ------------- dear -------------- this letter responds to a request dated date written on behalf of x requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to file an election to be treated as a partnership for federal tax purposes under sec_301_7701-3 facts according to the information submitted on date x was formed under the laws of country however x inadvertently failed to file a timely election to be treated as a partnership for federal tax purposes effective date x represents that the granting of relief will not prejudice the interest of the government x also represents that its failure_to_file a form_8832 entity classification election was reasonable and that it has acted in good_faith law and analysis plr-137761-08 sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible party can elect its classification for federal tax purposes as provided in this section an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership sec_301_7701-3 provides that unless the entity elects otherwise a foreign eligible_entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides in part that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 by filing form_8832 entity classification election with the applicable service_center sec_301_7701-3 provides in part that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i if the taxpayer demonstrates to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting the relief will not prejudice the interests of the government sec_301_9100-2 and sec_301_9100-3 provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government conclusion based solely on the facts and representations submitted we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly x is granted an plr-137761-08 extension of time of days from the date of this written_determination to file form_8832 effective on date with the appropriate service_center a copy of this letter should be attached to the election a copy is enclosed for such a purpose except as specifically ruled upon this letter expresses no opinion concerning the federal tax consequences of the facts described under any other provision of the code or regulations this letter is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this letter will be provided to x’s authorized representative sincerely curt g wilson curt g wilson associate chief_counsel passthrough special industries enclosures copy of this letter copy of this letter for sec_6110 purposes


of f i c e of c h i ef c ou n sel number info release date genin-116873-09 department of the treasury i n t e r n al r e v e n u e s e r v i c e w ashington d c date ---------------------- ------------------------ -------------------------------- uil dear ---------------- thank you for your letter written in march of to commissioner shulman regarding the tax consequences to victims of the investment fraud mr bernard l madoff perpetrated on date we issued guidance revrul_2009_9 and revproc_2009_20 on the tax treatment of losses from so-called ponzi schemes similar to that mr madoff operated i am enclosing copies for your information revrul_2009_9 explains the income_tax law that applies to an investor who loses money in a fraudulent investment arrangement it provides that an investor who was the victim of a fraudulent investment arrangement is entitled to a theft_loss deduction that is not limited by the rules that apply to capital losses investment theft losses are not subject_to limitations that apply to personal casualty and theft losses the theft_loss is deductible in the year the fraud is discovered except to the extent the investor has a reasonable_prospect_of_recovery the amount of the theft_loss includes not only the investor's unrecovered investment but also amounts reported as income from the investment in prior years and reinvested in the fraudulent investment arrangement a theft_loss deduction that creates a net_operating_loss for the investor can be carried back and forward according to the timeframes prescribed by law to generate a refund of taxes paid in other taxable years genin-116873-09 to claim a theft_loss deduction in any taxable_year an investor must prove that the loss was due to theft and that no reasonable prospect exists of recovering the investment investors often cannot make highly factual determinations with certainty in the year the loss is discovered for this reason we published revproc_2009_20 to provide a simplified_method for investors to compute and report their losses from fraudulent investment schemes this revenue_procedure generally allows an investor who was a victim of mr madoff’s fraud to claim a theft_loss in the amount the investor may deduct is up to percent of the loss less the amount of reimbursement he or she expects to receive as an advance for customer claims from the securities investor protection corporation sipc or from private insurance or other contractual arrangements that guarantee the investor against loss i hope this information is helpful please call me at --------------------- if i can further assist you sincerely john p moriarty chief branch office of associate chief_counsel income_tax and accounting enclosures


number release date internal_revenue_service index numbers - ---------------------------------------- -------------------------------------------------- ------------------------- ------------------------- --------------------- department of the treasury washington dc person to contact ----------------------------------------------------- -------- telephone number -------------------- refer reply to cc psi - plr-100372-06 date date legend x -------------------------------------------------- --------- ------------- --- ---------- ------------------ d1 country dear -------------------- this letter 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 file an election to be treated as a disregarded_entity under the laws of country was acquired by a single owner with limited_liability on d1 x intended to be treated as a disregarded_entity for federal tax purposes effective d1 however x did not timely file a form_8832 entity classification election according to the information submitted all of the interest in x an entity formed sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes under sec_301_7701-3 except as provided in sec_301 b unless it elects otherwise a foreign eligible_entity is classified as an association if all members have limited_liability sec_301_7701-3 provides that for purposes of sec_301_7701-3 a sec_301_7701-3 provides that an election under sec_301_7701-3 member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member will be effective on the date specified on form_8832 or on the date filed if no such date is specified on the form the effective date specified on form_8832 cannot be more than days prior to the date the form is filed and cannot be more than months after the date on which the form is filed 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 six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 sets forth the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 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 requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file form_8832 and elect to be treated as a disregarded_entity for federal tax purposes effective d1 a copy of this letter should be attached to the form_8832 based on the facts submitted and representations made we conclude that the except as specifically set forth above no opinion is expressed or implied as to the federal tax consequences of the transaction described above under any other provision of the code sec_6110 provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer on whose behalf it was requested in accordance with the power_of_attorney on file with this office a copy of this sincerely letter is being sent to x’s authorized representative enclosures copy of this letter copy for sec_6110 purposes heather c maloy associate chief_counsel passthroughs and special industries