office_of_chief_counsel internal_revenue_service memorandum number release date cc psi b03 mhbeker postn-127586-11 third party communication none date of communication not applicable uilc date date to lori j leonard air transportation technical advisor large_business_and_international_division from frank boland chief branch office of the associate chief_counsel passthroughs special industries subject sec_4261 - aircraft fractional ownership management fees this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent issue whether monthly management fees paid_by an aircraft fractional_owner participant to a management company that operates an aircraft fractional ownership program as described in the facts below are amounts paid for taxable_transportation under sec_4261 of the internal_revenue_code code conclusion monthly management fees paid_by a participant to a management company that operates an aircraft fractional ownership program are amounts paid for taxable_transportation under sec_4261 you did not ask us to address the taxability of occupied hourly fees under sec_4261 however it is well established that occupied hourly fees paid to an aircraft fractional ownership program management company are amounts paid for taxable_transportation and therefore are taxable under sec_4261 125_f3d_1463 fed cir postn-127586-11 facts you provided us with the following description of a typical aircraft fractional ownership program fractional ownership program manager program manager manages an aircraft fractional ownership program program for participants through the program each participant is guaranteed a set number of flight hours in a certain aircraft class measured by the aircraft’s passenger capacity and speed the number of flight hours allocated to each participant is based on the size of the participant’s ownership_interest and type of aircraft in which that interest is held to become a participant a person purchases an undivided_interest in an aircraft from the program manager or an entity related to program manager and enters into the following interlocking agreements collectively operative agreements purchase agreement management agreement master interchange agreement also called an interchange agreement joint_ownership agreement and exchange_agreement or dry lease of these agreements the terms of the management agreement are most relevant to the issue presented here management agreement the management agreement outlines the flight services that each participant is entitled to as a program participant the management agreement in conjunction with the master interchange agreement generally provides each participant with the use of the same class of aircraft but not the exact aircraft in which it owns an interest program aircraft for a set number of hours per year the number of hours allocated to a participant is proportional to the participant’s ownership_interest with additional flight time available for additional fees participants are generally permitted to use their flight hours simultaneously thereby using two or more program aircraft at the same time the management agreement gives program manager the right to use participants’ aircraft for flight training demonstration and other specified purposes the management agreement does not limit program manager’s use of the aircraft to a set number of hours and provides that it is entitled to keep for itself any reimbursement that it receives for those uses under the management agreement program manager assumes full responsibility for maintenance and operation of the aircraft for a monthly management fee program manager provides at its own cost the following services postn-127586-11 arrange for the aircraft to be inspected serviced repaired overhauled and tested in order to maintain the aircraft’s airworthiness certification from the federal aviation administration faa keep the interior and exterior of the aircraft in good cosmetic appearance maintain all records logs and other materials required by the faa with respect to the aircraft provide professionally trained and qualified pilots maintain hangar space tie-down as required weather and flight planning catering fueling and administrative communications and aeronautical radio services make all necessary takeoff flight and landing arrangements obtain and maintain aircraft hull and liability insurance in addition to the monthly management fee each participant pays program manager an hourly fee for each flight hour including taxiing that the participant actually uses the aircraft occupied hourly fee the occupied hourly fee is designed to compensate program manager for the direct variable costs of operating the aircraft these costs include but are not limited to fuel charges standard catering maintenance airport landing fees and average fleet repositioning expenses law and analysis sec_4261 of the code imposes a tax on the amount_paid for the taxable_transportation of any person taxable_transportation is defined in sec_4262 to generally include transportation by air that begins and ends in the united_states sec_4261 provides that the tax is paid_by the person making the payment subject_to tax and sec_4291 provides that the tax is collected by the person receiving the payment you asked whether monthly management fees paid_by participants to program manager are subject_to the taxes imposed by sec_4261 to determine whether these fees are taxable requires that we must first determine whether program manager provides taxable_transportation to participants if we determine that program manager provides taxable_transportation to participants we must then determine whether the monthly management fee is an amount_paid for that taxable_transportation taxable_transportation the longstanding position of the internal_revenue_service irs is that a person provides taxable_transportation if that person has possession command and control of the means of conveyance rather than mere legal_title to the means of conveyance revrul_60_311 1960_2_cb_341 in exec jet aviation the federal_circuit agreed with the irs finding that the aircraft fractional ownership program management postn-127586-11 company in that case provided taxable_transportation to their program participants 125_f3d_1463 pincite as a result the court found that the occupied hourly fees which were the only fees at issue in that case paid_by the participants in executive jet’s program to executive jet were taxable under sec_4261 the program is substantially_similar to the aircraft fractional ownership program at issue in exec jet aviation accordingly and without further analysis because you did not ask us to analyze in detail whether program manager provides taxable_transportation we conclude that program manager provides taxable_transportation to participants through the program amount_paid we must next determine whether the monthly management fees are amounts paid for taxable_transportation the concept of an amount_paid for taxable_transportation is addressed in guidance published by the irs revrul_2006_52 2006_2_cb_761 for example states that an airline's costs associated with selling tickets are generally necessary to the air transportation the airline provides therefore all amounts paid to an air transportation services provider that is necessary to receive air transportation services are generally part of the tax_base the regulations and other irs published guidance however specifically exclude or include amounts paid for certain types of services sec_49_4261-8 of the facilities and services excise_taxes regulations regulations provides examples of payments for services that are not subject_to the sec_4261 tax sec_49_4261-8 provides that the sec_4261 tax does not apply to charges for transportation of baggage including incidental charges such as excess value storage transfer parcel checking special delivery etc sec_49_4261-8 provides that the tax does not apply to charges for admissions guides meals hotel accommodations and other nontransportation services for example where such items are included in a lump sum payment for an all- expense tour however if a payment covers charges for both transportation and nontransportation services sec_49_4261-2 provides that the nontransportation charges must be separable and shown in the exact amounts thereof in the records pertaining to the transportation charge or the tax is computed upon the full amount of the payment although the regulations do not define nontransportation services the examples in sec_49_4261-8 generally relate to meals entertainment and hotel accommodations therefore an amount_paid for any service that falls into one of these categories is not included in the tax_base provided it meets the recordkeeping requirements of sec_49_4261-2 the court analyzed the issue of whether executive jet provided taxable_transportation through the sec_4041 aviation_fuel excise_tax rules that were in effect during the tax quarters at issue in that case at that time aviation_fuel taxes only applied to noncommercial_aviation and the sec_4261 taxes only applied to commercial_aviation the court found that executive jet was in the business of providing commercial_aviation and thus the amounts it received from program participants was for taxable_transportation postn-127586-11 sec_49_4261-7 on the other hand provides examples of payments for services that are subject_to the sec_4261 tax sec_49_4261-7 provides that amounts paid as additional charges for changing the class of accommodations destination or route extending the time limit of a ticket as extra fare or for exclusive occupancy of a section etc are subject_to tax thus any service that meets this provision is included in the tax_base for services that are not addressed by the regulations irs published guidance generally limits the tax_base to amounts paid for mandatory charges in essence amounts that must be paid to get on the aircraft for a certain type or level of service revrul_73_508 1973_2_cb_366 for example holds that a security charge is part of the amount_paid for taxable_transportation because it is required to be paid as a condition to receiving air transportation revrul_80_31 1980_1_cb_251 provides further guidance on whether an amount is paid for taxable_transportation the ruling considers the application of sec_4261 to a service charge added by an airline to the price of a ticket for the administrative costs involved in the use of that ticket by another person in another city the ticket in question could have been purchased without the service charge in the other city the ruling concludes that the service charge is not an amount_paid for taxable_transportation because the service is optional not reasonably necessary to the air transportation itself and bears a reasonable relation to the cost of providing the service therefore all amounts paid as a condition to receiving air transportation are subject_to tax unless the service is also optional and not reasonably necessary to the air transportation itself participants are required to pay program manager the monthly management fee in order to access program aircraft for air transportation services the monthly management fees stand in contrast to the nontransportation services described in irs published guidance because the fees are paid to cover expenses related to air transportation services such as pilot salaries and training insurance and hangering fees rather than mere incidental costs such as meals or entertainment costs covered by the monthly management fees are reasonably necessary to the air transportation itself because without licensed pilots insurance and administrative services like weather information and flight planning program manager could not provide air transportation services to participants further it is not relevant to this analysis that the monthly management fees cover indirect or overhead costs of program manager rather than direct costs of flight operations for example imbedded in the purchase_price of a passenger ticket on a commercial air carrier or chartered flight are essentially similar indirect_costs that make up the monthly management fees amounts paid for air transportation do not escape taxation merely because they are split from direct costs of the transportation and paid separately by the person purchasing the services postn-127586-11 also it is not relevant to this analysis that a participant may pay the monthly management fee but not use any of its allocated number of flight hours the tax is imposed on amounts paid for taxable_transportation and is not dependant on whether travel actually occurs thus for example a person must pay the sec_4261 tax when the person purchases a commercial airline ticket regardless of whether the person actually takes the flight payment of monthly management fees is a precondition to receiving air transportation services from program manager and thus is an amount_paid for taxable_transportation accordingly we conclude that monthly management fees paid_by a participant to a management company that operates an aircraft fractional ownership program are amounts paid for taxable_transportation and are therefore subject_to the taxes imposed by sec_4261 please call if you have any further questions


department of the treasury internal_revenue_service washington d c office_of_chief_counsel date number info release date uil conex-130784-02 cc ita dear this letter is in response to your inquiry dated date on behalf of your constituent mr commissioner t c m determination that mr and mrs takes offense to certain requests for findings_of_fact in the brief filed with the united_states tax_court by the irs counsel were liable for additional tax for a tax case which upheld the internal_revenue_service wants a review of apparently mr mr v have exercised their rights as taxpayers by contesting a tax_deficiency the which the court upheld the collection process is under way and the safeguards authorized by law have been extended to the issues the court has already decided below is a detailed explanation of the events surrounding their case they may not relitigate or raise filed formal complaints with a state_agency and the equal employment underlying facts after his employer proposed to terminate him for disciplinary reasons mr opportunity commission he alleged discrimination based on age and disability and sought damages for financial loss and pain and suffering prior to the hearing before an arbitrator the parties agreed to settle mr agreed to withdraw his complaints and to retire as consideration his employer made certain payments to mr including dollar_figure dispute arose between mr taxable the arbitrator issued an opinion agreeing with the employer that the settlement agreement did not support mr position that the parties intended the settlement proceeds to be tax free comprising one and one-half times his annual salary subsequently a and his employer over whether this amount was mr from the state retirement_system the system satisfied the loan by deducting the amount the outstanding balance of a loan received also failed to repay dollar_figure due from mr settlement proceeds or the outstanding balance of the loan in their gross_income for did not include either the retirement account the after the irs determined that both amounts were taxable the the tax_court filed a petition with attempted to exclude the settlement proceeds from gross_income the trial the as damages received on account of personal injuries under sec_104 of the internal_revenue_code in support of the irs’ determination that the employer intended the settlement payment to be wages irs counsel referred to the letter sent to mr advising him of the basis for the first notice of discipline against him and to the circumstances leading to that notice these requests were adequately supported by references to documentary and testimonial evidence mr authenticity of the documents admitted into evidence further mr courtroom when the witnesses testified about complaints filed with his employer at that time he had the opportunity to discredit the testimony of those witnesses but he did not do so after reviewing the pleadings trial transcript and brief filed by the irs in the never challenged the was in the case we believe any objective observer would find our counsel’s conduct beyond reproach the opinion after trial the court rendered its opinion by applying well-established legal principles to the facts and circumstances surrounding the receipt of the settlement proceeds and the failure to repay the loan the court sustained the irs’s determination on both issues when the taxability of settlement proceeds is at issue the resolution focuses largely on the intent of the payor in paying rather than on the recipient’s belief as to the purpose of the payment the court found the evidence of record did not support a conclusion that the payor intended any portion of the payment to compensate mr for personal injuries or sickness based on tort or tort-type rights in support of its determination the court cited the following language from the arbitrator’s opinion the consent award was the complete agreement of the parties the claim that the payments were to be tax free is without merit it flies in the face of the clear language of the stipulated settlement that led to the issuance of the consent award the court entered its decision the post-trial proceedings on neither filed a timely appeal from the decision nor a bond to stay assessment of the deficiency as permitted by sec_7483 and sec_7485 the court decision has become final under sec_7481 after the initiated collection proceedings the irs advised the their right to request a collection_due_process_hearing with irs appeals the exercised that right did not pay the assessed tax and statutory interest the irs of its intent to levy and of explanation of rights under sec_6330 and sec_6331 a taxpayer is entitled to notice before levy and notice of the right to a fair hearing before an impartial officer of the irs office of appeals if the taxpayer requests a hearing he or she may raise in that hearing any relevant issue relating to the unpaid tax or the proposed levy including challenges to the appropriateness of the collection action and offers of collection alternatives which may include posting a bond substituting other assets initiating an installment_agreement proposing an offer-in-compromise the appeals officer will consider these issues and the need to have an efficient collection_of_taxes that is no more intrusive for the taxpayer than necessary if the irs appeals rules in favor of the irs the taxpayer can request a judicial review in the united_states tax_court however a taxpayer who has had an opportunity to dispute a tax_liability determined by the irs may not raise any issue relating to the existence or amount of that liability because the appeals nor relitigate their tax_liability that was decided in the earlier opinion see behling v commissioner t c no date 114_tc_604 have already exercised their judicial rights they may neither raise before i hope this information is helpful please call mr keith a aqui identification_number at if you have any questions i have enclosed a copy of the opinion in v commissioner sincerely robert a berkovsky branch chief office of associate chief_counsel income_tax accounting enclosure


t c memo united_states tax_court a j concrete pumping inc petitioner v commissioner of internal revenue respondent docket no filed date james l mcdonald sr for petitioner larry d anderson for respondent memorandum opinion gerber judge respondent determined deficiencies in petitioner’s federal_income_tax and sec_6662' accuracy- related penalties as follows unless otherwise indicated all section references are to the internal_revenue_code in effect for the taxable periods under consideration and all rule references are to the tax_court rules_of_practice and procedure penalty tye deficiency sec_6662 a date dollar_figure dollar_figure date big_number big_number after concessions the issues remaining for our consideration are whether petitioner understated its and gross_receipts by dollar_figure and dollar_figure respectively whether petitioner had unreported equipment rental income from olympic concrete pumping inc olympic in of dollar_figure whether petitioner had installment_sale gains in and of dollar_figure and dollar_figure respectively from the disposition of equipment that purportedly had been leased whether petitioner had unreported income in of dollar_figure from an equipment sale arranged by olympic whether petitioner overstated its beginning_inventory for by dollar_figure the parties agree that for the date tax_year petitioner is entitled to an additional dollar_figure depreciation allowance petitioner is not entitled to deduct the dollar_figure interest disallowed and petitioner is not entitled to deduct the dollar_figure tax expense disallowed the parties agree that for the date tax_year petitioner is not entitled to deduct the dollar_figure bad_debt expense disallowed petitioner is not entitled to deduct the dollar_figure depreciation expense disallowed and petitioner is not entitled to deduct the dollar_figure interest_expense disallowed the parties agree that for the date tax_year petitioner is entitled to an additional dollar_figure depreciation allowance the tax_year in which a loss was reported was not the subject of a deficiency determination instead respondent adjusted various items that had the effect of reducing the net_operating_loss_carryover to the year one of those adjustments was based on the bank_deposits analysis resulting in the determination of the dollar_figure increase to gross_receipts - - whether petitioner expensed a dollar_figure capital_asset in that it also was depreciating whether petitioner is entitled toa miscellaneous deduction in of dollar_figure whether petitioner is entitled to auto and truck expense deductions in and of dollar_figure dollar_figure and dollar_figure respectively whether petitioner is entitled to depreciation_deductions connected with the personal_use of automobiles in and of dollar_figure dollar_figure and dollar_figure respectively whether petitioner is entitled to the following expenses in paid for the benefit of olympic purchases--dollar_figure fuel--dollar_figure legal fees---dollar_figure travel---dollar_figure whether petitioner overstated its insurance expenses for and by dollar_figure dollar_figure and dollar_figure respectively whether petitioner overstated its repair expenses by dollar_figure whether petitioner is entitled to a dollar_figure investment tax carryover from to whether petitioner is entitled to a dollar_figure jobs_credit carryover from to and whether petitioner is liable for the accuracy-related_penalty under sec_6662 for and in the amounts of dollar_figure and dollar_figure respectively background’ petitioner’s principal_place_of_business at the time of the filing of the petition in this case was mableton georgia petitioner a subchapter_c_corporation is a general contractor engaged in the business of pumping concrete during the and tax years alan bone bone and jeffrey guerrero guerrero owned percent and percent respectively of its common_stock understatement of gross_receipts findings_of_fact respondent conducted an examination of petitioner’s through tax years in connection with an analysis of petitioner’s reported receipts for the through tax years respondent’s agent ronald harkins agent harkins performed bank_deposits analyses of petitioner for agent harkins received the analysis that petitioner prepared for the purpose of assisting him during the examination petitioner’s analysis reflected the items that petitioner had included in gross_receipts on the basis of that analysis of petitioner’s bank_deposits for the tax_year agent harkins concluded that the parties’ stipulated facts and exhibits are incorporated herein by this reference because this case involves numerous adjustments and or issues for our consideration we have found general facts under the title background and facts specific to each issue are found separately within the separately captioned sections of the opinion considering each specific adjustment or issue - - petitioner had omitted certain specific items of income in particular it appeared that a deposit of dollar_figure received from mcdevitt street and deposits totaling dollar_figure received from floyd lloyd rentals’ had not been included in gross_receipts in response to agent harkins’ findings petitioner advised that the amounts were included in rent and other income categories reported separately from the gross_receipts on petitioner’s corporate return agent harkins analyzed those specific return items compared them to petitioner’s financial records and found that the amounts reported in the rent and other income categories did not include the dollar_figure and dollar_figure amounts agent harkins did not check any other of petitioner’s accounts or records to determine whether the analysis received from petitioner was in other respects correct for purposes of trial petitioner prepared another analysis of the bank_deposits for the tax_year that purported to contain a reconciliation of the bank_deposits and the amounts reported on the corporate tax_return that analysis in an attempt to account for the dollar_figure and dollar_figure amounts contained numerous unexplained adjustments used to effect the reconciliation the analysis presented for purposes of trial did several exhibits contained in the record refer to this entity as ford and lloyd petitioner however refers to it as floyd and lloyd for consistency we refer to it as floyd and lloyd -- - not show that respondent’s analysis of petitioner’s accounts for rent and other income was in error on the basis of a bank_deposits analysis for the tax_year without the designation of any specific items of income respondent determined that petitioner had understated gross_receipts by dollar_figure likewise for the tax_year respondent used a generalized bank_deposits analysis to conclude that petitioner had overreported its income by dollar_figure petitioner does not dispute the adjustment reducing its gross_receipts with respect to respondent’s bank_deposits analysis petitioner provided its own analysis in an attempt to show that its gross_receipts were overreported for its taxable_year petitioner’s analysis contained a reconciliation of its deposits to the income amount reported on its corporate return petitioner’s reconciliation reflected reductions from total deposits of amounts that were not includable in gross_receipts such as proceeds of loans from merrill lynch and other similar items respondent did not present any evidence regarding the methodology used in conducting the bank_deposits analysis or contradicting the items petitioner explained were from nontaxable sources discussion taxpayers are required to maintain adequate_records of taxable_income see sec_6001 during the examination of - petitioner’s income_tax return agent harkins performed a bank_deposits analysis in which he determined that specific deposits reflected in petitioner’s financial records had not been reported in gross_receipts on the corporate return in addition respondent performed bank_deposits analyses for and generally reflecting that gross_receipts had been either underreported or overreported in cases where taxpayers have not maintained business records or where their business records are inadequate the commissioner is authorized to reconstruct income by any method that in the commissioner’s opinion clearly reflects income see sec_446 94_tc_654 the commissioner’s method need not be exact but must be reasonable see 348_us_121 the bank_deposits method for computing unreported income has long been sanctioned by the courts see 281_f2d_100 9th cir affg tcmemo_1958_94 96_tc_858 affd 959_f2d_16 2d cir bank_deposits are prima facie evidence of income see 87_tc_74 where the taxpayer has failed to maintain adequate_records as to the amount and source of his or her income and the commissioner has determined that the deposits are income the taxpayer must --- - show that the determination is incorrect see rule a 290_us_111 in calculating petitioner’s income using the bank_deposits method agent harkins found several items that were not reported on petitioner’s income_tax return in particular it was determined that deposits from mcdevitt street totaling dollar_figure and deposits from floyd lloyd totaling dollar_figure were not reported as income petitioner admits receiving the income and contends that the income from mcdevitt street was included in other income on its tax_return and the income from floyd lloyd was included in rental income on its tax_return respondent however reviewed petitioner’s other income and rental income accounts and determined that the income from mcdevitt street and floyd lloyd was not included in any of those accounts accordingly respondent has specifically identified items of income that were not included on petitioner’s corporate tax_return petitioner at trial introduced a new analysis of deposits in an attempt to show that the guestioned income items were reported and that petitioner’s reported income was overstated by a few thousand dollars the schedule presented by petitioner at trial was not the same schedule that had been presented to agent harkins during the audit examination and it did not reconcile to petitioner’s books of account petitioner’s analysis presented at trial - accordingly did not deal with agent harkins’ analysis of petitioner’s financial records to verify that the schedule provided by petitioner during the examination was correct finally petitioner did not explain the differences between the two schedules accordingly respondent’s determination was based on verified and uncontradicted specific items of income that were omitted from petitioner’s income and respondent’s determination of understatement of gross_receipts for is sustained respondent also determined that petitioner understated its gross_receipts by dollar_figure for the year the statutory_notice_of_deficiency contains a net reduction of dollar_figure to petitioner’s claimed net_operating_loss thereby reducing the amount of any carryover to the year from the dollar_figure claimed to dollar_figure the dollar_figure net_adjustment comprises items decreasing and one item increasing the net_operating_loss our trial record and the notice_of_deficiency contain no details or explanations of the dollar_figure proposed understatement of gross_receipts for and the amount is apparently the result of a general bank_deposits analysis by agent harkins unlike the specific adjustments for respondent’s adjustment for is based on generalized bank_deposits petitioner addresses respondent’s determination on that item by reconciling the total bank_deposits to the items on its return in -- - an attempt to show omissions and errors in respondent’s reconstruction for in that regard the commissioner’s income reconstructions are subject_to taxpayers’ showing computation errors and omissions and or errors in the commissioner’s methodology see 394_f2d_366 5th cir affg tcmemo_1966_81 petitioner’s reconciliation in great part depends upon nontaxable loan receipts in a total amount exceeding dollar_figure along with other nontaxable items that petitioner subtracted from total deposits to arrive at reportable income respondent has not countered petitioner’s showing of nontaxable items that would reduce the total bank_deposits to arrive at reportable income for the year accordingly petitioner has shown that respondent’s approach to reconstructing its gross_receipts is flawed we are unable to draw any conclusion as respondent apparently wishes us to do from the fact that we have found that petitioner understated income that is so because respondent’s approach for was to identify specific items of omitted income accordingly we find that petitioner did not understate its income by dollar_figure as determined by respondent understatement of equipment rental income findings_of_fact on date bone and guerrero formed a new s_corporation olympic to operate a business project in washington state in guerrero owned percent of olympic’s common_stock and bone owned the remaining percent bone and guerrero each contributed dollar_figure to olympic arranged for olympic to lease concrete pumping trucks and permitted olympic to borrow capital from petitioner during the period under consideration olympic made repayments to petitioner during its existence olympic leased trucks and concrete pumping equipment from petitioner for use in olympic’s business olympic discontinued business in olympic pursuant to the lease with petitioner was obligated to pay an dollar_figure monthly rental for use of the equipment olympic paid petitioner dollar_figure during the fiscal_year ending date of the dollar_figure petitioner reported dollar_figure as rental proceeds on its tax_return of the remaining dollar_figure in payments petitioner contends that they should be treated as nontaxable payments on a loan respondent however has allowed only one-half of the dollar_figure or dollar_figure to be treated as a loan repayment from olympic to petitioner and respondent treated the other one-half as additional lease -- payments or income to petitioner conversely respondent allowed olympic an additional dollar_figure deduction discussion rents are includable in gross_income see sec_61 respondent determined that during petitioner received more rental income than it reported an analysis of petitioner’s deposits reflected that various payments were made from olympic to petitioner these amounts represented both loan repayments and equipment rental payments petitioner admits that olympic rented petitioner’s pumping eguipment but alleges that all of the dollar_figure in deposits to its account from olympic represented loan repayments of principal which are not includable in income further the lease agreement between petitioner and olympic called for monthly rental payments of dollar_figure or dollar_figure annually the schedule of payments from olympic to petitioner reflects that the total monthly payments approximated the dollar_figure monthly amount called for in the lease combining the dollar_figure reported by petitioner and the dollar_figure determined by respondent would result in petitioner’s reporting dollar_figure or dollar_figure less than the dollar_figure called for by the terms of the lease petitioner contends that respondent’s determination is arbitrary but has offered no evidence that would show that it 1s in error - - the record indicates that olympic made dollar_figure in payments to petitioner during the fiscal_year ending date only dollar_figure however was reported as rental proceeds on petitioner’s income_tax return petitioner has failed to show that the deposits in question from olympic were loan repayments rather than rental payments accordingly respondent’s determination regarding the unreported rental income of dollar_figure for the tax_year is sustained sale vs lease findings_of_fact during the years at issue petitioner entered into lease arrangements under which various parties were permitted the use of petitioner’s concrete pumping equipment each of these arrangements reguired monthly payments to petitioner for a specific period of as little a sec_36 months to as long as months depending upon the arrangement under the agreements the lessee bore the burden of all expenses for necessary repairs maintenance operation and replacements required to be made to maintain the equipment in good condition the lessee was also required to maintain insurance on the equipment each at trial respondent asserted that a dollar_figure adjustment for a rental income understatement could have been determined respondent however determined that only percent of the dollar_figure difference would be rental income and the remaining percent loan repayment respondent’s determination was apparently based on some prior agreement or understanding with petitioner agreement contained the stipulation that upon the expiration of the lease the lessee had the option to purchase the equipment for dollar_figure discussion we must consider whether the lease arrangements executed during the years in issue constituted sales or whether they were leases with an option to buy respondent argues that petitioner mischaracterized the lease agreements by reporting the related items as though the agreements were leases instead of sales e reporting as income only the monthly payments rather than reporting all the sale proceeds at the front end of the transaction respondent determined that the arrangements were in substance installment_sales and that petitioner had unreported gains of dollar_figure and dollar_figure for and respectively petitioner contends that it properly characterized and reported the transactions as leases with an option to buy whether a sale is complete for federal tax purposes depends on all of the facts and circumstances see 77_tc_708 we consider the following factors in deciding whether a sale has occurred whether the seller transferred legal_title whether the benefits_and_burdens_of_ownership passed to the buyer whether the owner had a right under the agreement to reguire the other party to buy the property and how the parties treated the transaction see -- - 77_tc_1221 fach lessee entered into an agreement in which the lessee would make payments covering a period ranging from months to months depending on the agreement at trial however petitioner admitted that most of the payments for the leases were received in a single or lump-sum payment the agreements also provided that the lessee had the option of purchasing the equipment for dollar_figure by giving the lessor days’ notice before the expiration of the lease the agreements also required the lessee to pay the expense of all repairs on the equipment and maintain insurance for the equipment petitioner argues that the transaction was treated consistently as a lease for tax purposes the test however does not center on the labels given to a transaction but rather the intent of the parties should be examined from the viewpoint of what they intended to happen see 226_f2d_798 9th cir the fact that the purported lessees bore the burden of expenses for repairs insurance and maintenance and could acquire the property at the end of the lease_term for a dollar_figure option is a strong indication that regardless of the labels the parties intended these transactions to be a sale of the equipment see kwiat v -- - commissioner tcmemo_1989_382 van valkenburgh v commissioner tcmemo_1967_162 considering all the facts we conclude that it was unlikely that the dollar_figure option would remain unexercised at the end of the term furthermore while there is no indication that title actually passed to the lessees during the term of the lease the lessees bore the burdens and benefits of ownership therefore the lease agreements substantially shifted the benefits_and_burdens_of_ownership from petitioner to the lessees and constitute sales for tax purposes accordingly respondent’s position on this issue is sustained unreported gain on sale of assets findings_of_fact on date olympic sold property leased from petitioner to ralph’s concrete and vance gribble in exchange for the property olympic received cash proceeds of dollar_figure olympic remitted dollar_figure of the dollar_figure to petitioner and retained dollar_figure on its date tax_return petitioner reported a dollar_figure gain from the sale of these assets both parties agree that petitioner incorrectly computed the gain from the sale of these assets the correct gain is dollar_figure discussion on date olympic sold various pieces of pumping equipment that were owned by petitioner on its tax_return petitioner reported a dollar_figure gain from this sale the parties agree that petitioner miscalculated the gain from the disposition of the property and the amount in the notice_of_deficiency is correct petitioner however now contends that olympic was the true owner of this property and the gain from the sale of the equipment should be reported by olympic and not petitioner petitioner’s contention however is wholly unsupported in the record at trial mr bone petitioner’s 51-percent owner in response to the question of who owned the equipment replied that petitioner owned it petitioner also failed to present any evidence regarding the agreement between petitioner and olympic with respect to the equipment under consideration consistent with respondent’s determination and petitioner’s reporting of the transaction is the fact that olympic’s and tax returns included dollar_figure and dollar_figure respectively in equipment lease deductions olympic’s reporting of lease payments supports our holding here that the arrangement between petitioner and olympic was a lease accordingly respondent’s determination regarding the gain on the sale of equipment is sustained overstatement of inventory findings_of_fact petitioner listed its ending inventory as dollar_figure petitioner listed its beginning_inventory as dollar_figure the difference is attributable to olympic’s discontinuation of -- - its business and petitioner’s receipt of olympic’s repair parts worth approximately dollar_figure discussion respondent determined that petitioner overstated its beginning_inventory by dollar_figure in computing a taxpayer’s gross_income cost_of_goods_sold is an offset or reduction from gross_receipts in determining income see sec_1_61-3 income_tax regs cost_of_goods_sold is determined by adding purchases to the beginning_inventory and subtracting the ending inventory the method for computing cost_of_goods_sold is mechanical petitioner argued that the dollar_figure change in beginning_inventory was the result of its receiving additional available repair parts from olympic which discontinued business operations petitioner however failed to explain why it treated repair parts as inventory petitioner’s primary business was providing a service transporting concrete and leasing equipment the leases to third parties other than olympic were effectively sales where the lessees purchasers took care of their own repairs with respect to the lease to olympic the repair parts were not shown to have been purchased or maintained as inventory by petitioner substantially petitioner was ina service industry and it is unclear why petitioner would regard repair parts as inventory that is so regardless of whether those repair parts were given to petitioner without consideration or in the form of a loan repayment petitioner has not shown that the repair parts were merchandise held_for_sale to customers in the normal course of its business accordingly respondent’s determination that petitioner’s beginning_inventory was overstated is sustained khxpense items a findings_of_fact equipment purchase during petitioner purchased equipment from traylor brothers for dollar_figure and deducted the cost of the equipment on its tax_return respondent determined that petitioner was not entitled to expense the cost of equipment but that the cost should be capitalized and depreciated ’ miscellaneous expense for its tax_year petitioner claimed a deduction for miscellaneous expense items in the total amount of dollar_figure respondent determined that petitioner failed to establish that the entire amount was for ordinary and necessary business_expenses disallowing dollar_figure of the dollar_figure claimed deduction ’ petitioner claimed depreciation in the amount of dollar_figure respondent however determined that the correct depreciation deduction should have been dollar_figure and made the necessary upward adjustment - - automobile and truck expense petitioner also claimed automobile and truck expenses in and of dollar_figure dollar_figure and dollar_figure respectively respondent determined that petitioner is not entitled to automobile and truck expenses in and of dollar_figure dollar_figure and dollar_figure respectively and disallowed those amounts depreciation on personal_use automobiles petitioner claimed depreciation_deductions in connection with automobiles its shareholders personally used for and of dollar_figure dollar_figure and dollar_figure respectively on the basis of the nature of and facts surrounding petitioner’s business respondent allowed percent of the depreciation amounts claimed by petitioner on the automobiles olympic’s expenses paid_by petitioner petitioner claimed deductions in the tax_year for expenses paid on behalf of olympic these expenses included purchases of dollar_figure fuel expenses of dollar_figure legal fees of dollar_figure and travel_expenses of dollar_figure respondent determined that petitioner is not entitled to deduct these expenses insurance expenses petitioner deducted expenses for insurance in and in the amounts of dollar_figure and dollar_figure respectively respondent determined that petitioner is not entitled to deduct dollar_figure in and dollar_figure in both and and disallowed those amounts repair expenses petitioner deducted repair expenses for in the amount of dollar_figure respondent determined that petitioner is not entitled to deduct dollar_figure and disallowed that amount b discussion equipment expense petitioner deducted as equipment expenses dollar_figure that had been paid for equipment purchased in respondent disallowed the dollar_figure deduction after it was determined that the purchased equipment had been included on petitioner’s return as a fixed asset and depreciation expense claimed in addition to the dollar_figure deduction after examining the fixed asset schedule respondent’s agent concluded that the equipment should have been capitalized rather than expensed in the notice_of_deficiency respondent determined that petitioner deducted dollar_figure for insurance expenses in petitioner’s tax_return however reflects claimed insurance expense of dollar_figure -- - petitioner presented documentation regarding the purchase of the equipment but did not explain why the cost of the asset was deducted as an expense and also capitalized and depreciated petitioner’s sole statement in its brief regarding this issue is as follows a j concrete pumping inc purchased used inoperative equipment in the amount of dollar_figure from the bellamy brothers inc so as to ‘cannibalize’ it for spare parts not readily available in the open market we find this uncorroborated statement to be by itself unhelpful and unpersuasive accordingly respondent’s disallowance of the dollar_figure deduction is sustained miscellaneous deduction petitioner deducted dollar_figure for miscellaneous costs on its tax_return respondent disallowed dollar_figure of this amount and petitioner did not present any evidence supporting this deduction on brief petitioner’s sole argument regarding this issue is that respondent is taking a convenient position that this expense belongs to olympic and not petitioner and borders on being a whipsaw proposed_adjustment regardless of petitioner’s opinion about respondent’s proposed adjustments petitioner has failed to present any evidence substantiating its entitlement to the miscellaneous deduction accordingly respondent’s determination on this item is sustained automobile expenses respondent disallowed automobile and truck expenses for the and tax years of dollar_figure dollar_figure and dollar_figure respectively respondent disallowed the above-listed amounts because of petitioner’s failure to substantiate that the amounts were expended for business use of automobiles and trucks petitioner did not offer any evidence at trial or present any argument on brief regarding these amounts accordingly respondent’s determination on these items is sustained depreciation_deductions for the and tax years petitioner depreciated the full cost of vehicles used by shareholders bone and guerrero without taking into consideration their personal_use of the vehicles petitioner attempted to justify the full amount of depreciation it claimed on the grounds that the vehicles were required to be available on call hours a day sec_167 allows a deduction for the depreciation of business equipment used in the course of a business or trade sec_280f however reduces the amount of depreciation that can be claimed for passenger automobiles specifically sec_280f limits the allowable_amount of depreciation to a multiple equal to the percentage of actual business use see sec_1 280f- 2t i temporary income_tax regs fed reg date -- - additionally sec_274 requires in the case of claimed deductions for business use of passenger automobiles that taxpayers substantiate the amount of business use in order to substantiate a deduction attributable to listed_property a taxpayer must maintain adequate_records to show the amount of the expense the time and place of use and the business_purpose for the use see eg whalley v commissioner tcmemo_1996_ to substantiate a deduction by means of adequate_records a taxpayer must maintain an account book a log a statement of expense or trip sheets to establish the element of use see sec_1_274-5t temporary income_tax regs fed reg date petitioner did not produce any records concerning personal versus business use of the vehicles respondent allowed petitioner percent of the claimed depreciation on the basis of oral testimony during the audit examination and the nature of and facts surrounding petitioner’s business at trial petitioner presented no evidence other than uncorroborated and undocumented oral testimony accordingly respondent’s determination on this issue is sustained olympic’s expenses paid_by petitioner petitioner claimed several deductions in its tax_year for expenses that were paid on behalf of olympic these deductions included dollar_figure for legal expenses dollar_figure for - - machine parts dollar_figure for fuel costs and dollar_figure for traveling expenses petitioner claimed that the amounts paid on behalf of olympic were petitioner’s ordinary and necessary business deductions whether a corporation may deduct the expenses it pays for the benefit of another corporation turns in large part upon the relationship of the corporations in oxford dev corp v commissioner tcmemo_1964_182 the court held that a corporation paying the expenses of another could not deduct those expenses because they were the expenses of another corporation and not its own however in coulter elecs inc v commissioner tcmemo_1990_186 affd 943_f2d_1318 11th cir the court allowed a parent to deduct the expenses of a subsidiary_corporation in 71_tc_955 the court stated expenses_incurred for the benefit of another taxpayer are clearly not deductible under sec_162 but if the taxpayer pays the expense of another for its own proximate and direct benefit a deduction may be allowable petitioner claims that amounts paid on behalf of olympic were ordinary and necessary business deductions respondent argues that petitioner had no equity ownership in olympic and the only relationship between petitioner and olympic was that stock in both companies was owned by bone and guerrero - - it appears that petitioner paid these expenses on behalf of olympic in order to protect bone and guerrero’s investment in olympic they were olympic’s sole shareholders and any benefit from the payments would have inured to them not to petitioner bone testified that he made regular trips to washington state to motivate olympic employees and get things rolling bone stated that he had a substantial personal investment in olympic and that the trips he took to washington state helped him to protect his investment petitioner did not have an equity_interest in olympic and the evidence does not establish that petitioner paid the expenses of olympic to protect petitioner’s business interests accordingly respondent’s determination regarding this adjustment is sustained insurance expenses respondent determined that petitioner did not fully substantiate its insurance expenses at trial petitioner did not address this issue in any detail while bone testified that petitioner was required by banking institutions to maintain insurance on the lives of the shareholders no corroborating documentary or other evidence was offered on this point under these circumstances petitioner has not shown that the insurance deduction was an ordinary and necessary business_expense of petitioner accordingly respondent’s determination on this issue is sustained repair expenses respondent determined that petitioner made an adjusting entry in of dollar_figure for repair costs for which no support was provided consequently respondent disallowed this amount petitioner did not attempt to substantiate this amount and presented no evidence at trial accordingly petitioner is not entitled to the dollar_figure repair expenses disallowed by respondent investment_tax_credit findings_of_fact during the period between and petitioner purchased numerous pieces of equipment on which it claimed the investment_tax_credit itc during the period between and petitioner recaptured the itc from the disposition of an automobile that was sold on date petitioner’s tax returns for the through tax years however reflect the disposition of various pieces of equipment discussion a taxpayer who claims an itc must maintain various records establishing certain important facts pertaining to each item of sec_38 property for which an itc has been claimed chief among these records are those required to keep track of specific details identifying itc assets and their acquisition and disposal these records are required not only to verify the amount of the credit taken but also to determine whether any itc - - property is disposed of prematurely thereby triggering the recapture provisions sec_1_47-1 income_tax regs requires that a taxpayer’s records show the date on which the sec_38 property is disposed of or otherwise ceases to be sec_38 property the estimated_useful_life of the sec_38 property as determined by reference to sec_1_46-3 income_tax regs the month and taxable_year that the sec_38 property was placed_in_service and the basis of the sec_38 property a taxpayer who fails to keep these records reguired for identification of itc property becomes subject_to a series of special rules under these special rules a taxpayer is treated as having disposed of in the taxable_year any itc property which he is unable to establish was still on hand at the end of that taxable_year if that deemed disposition occurs within the recapture_period of the estimated_useful_life of the property recapture results if the taxpayer fails to establish when the itc property being retired during the taxable_year was actually placed_in_service the taxpayer is treated as having placed it in service in the most recent prior year in which similar_property was so placed_in_service this result shall govern unless and until the taxpayer can prove that the property placed_in_service in that most recent year is currently on hand in that event the taxpayer will be treated as having placed the retired - - property in service in the next most recent year see sec_1 e and income_tax regs the regulations under sec_47 raise rebuttable presumptions that the facts are adverse to the taxpayer who fails to maintain the required records these presumptions arise not only when the taxpayer fails to maintain records at all but where the records fail to establish the requisite facts petitioner reported an itc carryover of dollar_figure for the taxable_year the itc carryover was generated in the taxable years petitioner had substantial asset dispositions between and but with the exception of one automobile sale in reported no itc recapture during respondent’s examination petitioner did not present adequate_records or schedules to support each of the assets sold and the basis of the assets remaining which relate to the unused itc because petitioner did not present adequate_records or schedules to support the itc carryover respondent determined that no itc was available for carryover to or later years in support of its itc claim petitioner produced copies of its through tax returns and a collection of schedules photographs and invoices petitioner however made no attempt to explain the schedules and invoices except to ask one of its witnesses if a lot of work went into their preparation respondent’s agent testified that an audit of an itc issue - - involves reviewing invoices to document the acquisition of assets and the sale documents which relate to the assets acquired the agent further testified that he was unable to reconcile the assets listed on the schedule with the assets listed on the returns likewise we have examined the schedules but are unable to ascertain which assets have been sold petitioner’s records are inadequate for purposes of the itc and accordingly we sustain respondent’s determination that petitioner is not entitled to a dollar_figure itc carryover from its to its taxable_year jobs_credit findings_of_fact petitioner claimed a jobs_credit carryover in of dollar_figure respondent determined that the jobs_credit carryover from to was dollar_figure rather than dollar_figure discussion petitioner claimed a jobs_credit carryover in of dollar_figure respondent determined that jobs credits were previously used in the and taxable years leaving only dollar_figure available for accordingly respondent disallowed dollar_figure of the jobs_credit carryover claimed by petitioner in on brief petitioner conceded this issue thus respondent’s determination on this issue is sustained accuracy-related_penalty respondent determined that petitioner is liable for an accuracy-related_penalty for its and taxable years under sec_6662 that section imposes a penalty in the amount of percent of any portion of the underpayment attributable to negligence or disregard of rules or regulations negligence is the lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances see 85_tc_934 the negligence_penalty will apply if among other things the taxpayer fails to maintain adequate books_and_records with regard to the items in question see 92_tc_899 respondent determined that petitioner was liable for the penalty on the entire underpayment in each of the years under consideration petitioner failed to address the accuracy-related_penalty in its brief and presented no evidence at trial as to why its actions were reasonable accordingly petitioner has failed to show that its actions were reasonable and not careless and not made with intentional disregard of rules or regulations and - - is liable for the sec_6662 penalty for the and tax years to reflect the foregoing and to account for concessions of the parties decision will be entered under rule


internal_revenue_service number release date index number ------------------------ ----------------------------- --------------------------- ----------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no -------------- telephone number ---------------------- refer reply to cc intl b02 plr-104432-13 date date ty ------- legend taxpayer fc country a year year ------------------------ ----------------- ---------------------------------------------- ------------ ------- ------- tax firm c ------------------------- tax firm d ------------------------------------ dear -------------------------- this is in response to a letter dated date and supplemental documentation submitted by taxpayer’s authorized representative that requested the consent of the commissioner of the internal_revenue_service commissioner for taxpayer to make a retroactive qualified_electing_fund qef election under sec_1295 of the internal_revenue_code code and sec_1_1295-3 with respect to taxpayer’s investment in fc the ruling contained in this letter is based upon information and representations submitted on behalf of taxpayer by his authorized representatives and accompanied by a penalties of perjury statement executed by an appropriate party while this office plr-104432-13 has not verified any of the material submitted in support of this request_for_ruling such material is subject_to verification on examination the information submitted in the request is substantially as set forth below facts taxpayer is a domestic limited_liability_company that owns an interest in fc a publicly- traded foreign_corporation incorporated in country a that constitutes a pfic within the meaning of sec_1297 of the code taxpayer initially acquired its interest in fc in year since year taxpayer engaged tax firm c for the preparation of taxpayer’s u s tax_return tax firm c is qualified to provide tax_advice on international tax matters including issues related to pfics tax firm c advised taxpayer with regard to u s federal_income_tax matters including with respect to taxpayer’s ownership of fc taxpayer relied on tax firm c to provide advice with respect to filing and reporting requirements in general as well as any elections or statements that would be necessary to elect specific tax treatment tax firm c did not identify fc as a pfic and as such did not advise taxpayer regarding any potential pfic reporting requirements or available elections in year another shareholder in fc contacted taxpayer about the potential pfic status of fc which led taxpayer to consult further with tax firm c after discussing the issue with tax firm c taxpayer retained tax firm d to help taxpayer come into compliance based on the determination that fc had likely been a pfic since before year taxpayer requested tax firm d to submit a private_letter_ruling request on taxpayer’s behalf to make a retroactive qef election with respect to fc under sec_1_1295-3 retroactive to year taxpayer has submitted an affidavit under penalties of perjury describing the events that led to the failure to make the qef election by the election due_date including the role of tax firm c taxpayer provided information regarding taxpayer’s ownership of fc to tax firm c and tax firm c had access to all relevant information with respect to fc taxpayer represents that in the relevant years fc was not identified as a pfic and taxpayer did not receive any advice regarding the availability of a qef election with respect to fc taxpayer has also submitted an affidavit from tax firm c corroborating the representations made by taxpayer with respect to the discovery of fc’s pfic status taxpayer represents that as of the date of this request_for_ruling the pfic status of fc has not been raised by the irs on audit for any of the taxable years at issue ruling requested plr-104432-13 taxpayer requests the consent of the commissioner to make a retroactive qef election with respect to fc under sec_1_1295-3 retroactive to year law sec_1295 of the code provides that a pfic will be treated as a qef with respect to a taxpayer if an election by the taxpayer under sec_1295 applies to such pfic for the taxable_year and the pfic complies with such requirements as the secretary may prescribe for purposes of determining the ordinary_earnings and net capital_gains of such company under sec_1295 a qef election may be made for any taxable_year at any time on or before the due_date determined with regard to extensions for filing the return for such taxable_year to the extent provided in regulations such an election may be made after such due_date if the taxpayer failed to make an election by the due_date because the taxpayer reasonably believed the company was not a pfic under sec_1_1295-3 a shareholder may request the consent of the commissioner to make a retroactive qef election for a taxable_year if the shareholder reasonably relied on a qualified_tax professional within the meaning of sec_1_1295-3 granting consent will not prejudice the interests of the united state sec_3 government as provided in sec_1_1295-3 the request is made before a representative of the internal_revenue_service raises upon audit the pfic status of the corporation for any taxable_year of the shareholder and the shareholder satisfies the procedural requirements of sec_1 f the procedural requirements include filing a request for consent to make a retroactive election with and submitting a user_fee to the office of the associate chief_counsel international sec_1_1295-3 additionally affidavits signed under penalties of perjury must be submitted that describe the events that led to the failure to make a qef election by the election due_date the discovery of such failure the engagement and responsibilities of the qualified_tax professional and the extent to which the shareholder relied on such professional sec_1_1295-3 and iii conclusion plr-104432-13 based on the information submitted and representations made with taxpayer’s ruling_request we conclude that taxpayer has satisfied sec_1_1295-3 accordingly consent is granted to taxpayer to make a retroactive qef election with respect to fc for year provided that taxpayer complies with the rules under sec_1_1295-3 regarding the time and manner for making the retroactive qef election except as specifically set forth above no opinion is expressed or implied concerning the u s federal tax consequences of the facts described above under any other provision of the code this private_letter_ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent a copy of this letter_ruling must be attached to any federal_income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to taxpayer’s authorized representative sincerely jeffery g mitchell branch chief branch international


number release date id office uilc cca_2012030514235337 --------- from -------------------- sent monday march pm to -------------------- cc ------------ subject re tefra proceedings sec_6223 specifies who must be notified of the tefra proceedings notice is generally limited to the partners for the year in issue since a tefra proceeding is analogous to a class action tax proceeding for only the partners for that year see 95_tc_388 thus neither the tefra entity itself nor its successor entity is generally a party to the tefra proceeding see sec_6226 and d so only the partners for the year in issue and the tmp for that year should be sent notice of the beginning of the partnership proceeding


office_of_chief_counsel internal_revenue_service memorandum number release date cc psi b07 postf-126103-05 uilc date date ----------------------------- ------------------------------------ ------------------------------------------- ---------------------------------------------- ---------------------------------------------- --------------------------------------------- to from subject this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent legend taxpayer a b b field c c d -------------------------------------------------- ------------------- -------------------------------- ------------------------------------------- --------------------------------- ------- --------------------------- -------- postf-126103-05 e d e f f g g h i j k l m n o p q r s t --------------------- ------------------------ -------------------- -------------- ------------------------------------- --------------------- ---- ---- ------ --------- -------- ------- ------- -------------------------- ------------- ----------- ------- -------------- ------- -------- issue sec_1 for purposes of valuing land pursuant to sec_21 of the alaska native claims settlement act ancsa as amended by of the alaska national interest lands postf-126103-05 conservation act anilca is the time of first commercial development the first day of the taxable_year in which commercial development begins or the date when commercial development actually begins is the interest to be valued at the time of first commercial development the fee interest conveyed to taxpayer pursuant to ansca or the royalty interest taxpayer held on the date of first commercial development conclusion sec_1 under anilca the taxpayer is permitted to value the interest in the lands received pursuant to ancsa at either the time of receipt or the time of first commercial development for purposes of valuation the time of first commercial development is the date when commercial development actually begins the interest to be valued at the time of first commercial development is the fee interest conveyed to taxpayer pursuant to ansca subject_to the leases that burdened the field when it was conveyed to taxpayer facts on a taxpayer was incorporated to manage funds and land granted to b under the alaska native claims settlement act publaw_92_203 85_stat_713 date ancsa as amended by the alaska national interest lands conservation act publaw_96_487 94_stat_2371 date anilca taxpayer is one of twelve regional corporations established under ansca the purpose of ancsa was to settle and extinguish alaska natives’ aboriginal land claims by conveying to regional corporations and village corporations over a number of years land and other consideration in b taxpayer completed its land selection process and received the bulk of its land the final conveyance of the field to taxpayer was not completed until c however because of competing claims between taxpayer c and the ----------------------- ------------------------------------------------------------------------------------------------------------------ taxpayer received a d percent fee interest in the field unburdened with a few limited exceptions by oil_and_gas leases a small portion of the field was already subject_to oil_and_gas leases when it was conveyed to taxpayer taxpayer agrees that this burden should be reflected in the tax basis of the field in e following the conveyance of the field taxpayer c and the --------------------- lessors jointly leased the field to d succeeded by e in f f and g lessees the lessors granted the lessees a g percent working_interest d held an h percent interest the lessors jointly retained shared royalty interests varying from i percent to j percent depending upon the lease taxpayer holds a k percent royalty interest in the field postf-126103-05 between l and m the lessees engaged in an exploration program that led to the discovery and commercial development of oil_and_gas first commercial development occurred on n the taxpayer valued its interest in the field based on the d percent fee interest that it held in c when the interest was conveyed this valuation resulted in a net present_value of dollar_figureo based on that valuation taxpayer claimed cost_depletion deductions of dollar_figurep in tax_year q and dollar_figurer in tax_year s background there are several types of ownership interests of mineral properties these interests are distinguished by their terms of creation rights responsibilities and duration sec_614 and sec_1_614-2 define the term operating_interest to include any interest that must take the cost of production into account in computing the taxable_income limitation for percentage_depletion under sec_613 or would be so required if the mine well or other natural_deposit were in production_stage an operating_mineral_interest bears the costs and responsibilities of operating the property the owner of an operating_interest usually has the right to conduct exploration activities control drilling operations and share in production conversely the term non-operating mineral_interest includes only interests that are not operating interests sec_614 sec_1_614-5 there are several types of nonoperating interests for example royalty interests and overriding_royalty interests a royalty interest is usually retained by the landowner when the operating rights to the property are leased an overriding_royalty on the other hand generally either is retained on the transfer of the operating_interest or it is carved out of the operating_interest the owner of a royalty interest bears none of the costs or responsibilities of operating the property but simply receives a specified part of the gross production or income from the property the owner of an overriding_royalty usually is responsible for his or her share of production or severance taxes but does not bear the costs of exploration development or operation a royalty results in ordinary_income subject_to the depletion_allowance to the lessor the lessee excludes from its gross_income_from_the_property an amount equal to royalties paid to the royalty_owner sec_1_613-2 whether the conveyance of an interest in a mineral_property is classified as a lease or as a sale_or_exchange depends upon whether the transferor retains an interest in the mineral_property and the nature of the interest if any retained by the transferor when the transferor assigns all of his or her interest in a mineral_property or a fractional interest that is identical to the interest retained or when a transferor assigns a continuing nonoperating_interest and retains a working_interest the conveyance is classified as a sale on the other hand when the transferor assigns the operating rights and retains a continuing nonoperating_interest the conveyance is classified as a lease or sublease postf-126103-05 it is the service’s longstanding position that in a leasing transaction the lessor merely grants to the lessee exclusive exploitation privileges the lessor retains a share of the oil_and_gas in place free of the burdens of development and operating costs and that retained share has a value equivalent to the value of the entire_interest subject_to such burdens the lessor is not regarded as having disposed of a capital_asset revrul_69_352 1969_1_cb_34 furthermore a lessor's basis in the mineral reserves on its leased property becomes the basis of the non-operating interest or retained royalty sec_1_612-1 in this case taxpayer received a fee interest in the field upon its conveyance under ancsa in c while taxpayer entered into oil_and_gas leases with unrelated parties it merely leased the rights to exploit the mineral reserves taxpayer has not disposed of its fee interest in the field in return for the taxpayer leasing these rights to the working_interest owners it currently receives a royalty interest in the production stream created by the efforts of the working_interest owners furthermore while it is not clear how the ----------- received an overriding_royalty in the working_interest it is clear that the -- value derived from this interest is measured by in the production stream created by the working_interest owner not the value of the royalty held by the taxpayer most importantly the value of the fee interest held by the taxpayer cannot be derived from the values of the working_interest or the overriding_royalty but only from the estimated mineral reserves of the field law and analysis sec_21 of ancsa provides that the receipt of land or any interest therein pursuant to this act or of cash in order to equalize the values of properties exchanged pursuant to sub sec_22 shall not be subject_to any form of federal state or local taxation the basis for computing gain_or_loss on subsequent sale_or_other_disposition of such land or interest in land for purposes of any federal state_or_local_tax imposed on or measured by income shall be the fair value of such land or interest in land at the time of receipt the provisions of ancsa were clarified by congress in when anilca was enacted section of anilca amended sec_21 of ansca to provide that c the receipt of land or any interest therein pursuant to this act or of cash in order to equalize the values of properties exchanged pursuant to sub sec_22 usc shall not be subject_to any form of federal state or local taxation the basis for determining gain_or_loss postf-126103-05 from the sale_or_other_disposition of such land or interest in land for purposes of any federal state_or_local_tax imposed on or measured by income shall be the fair value of such land or interest in land at the time of receipt adjusted as provided in sec_1016 of the internal_revenue_code of sec_1016 as amended provided however that the basis of any such land or interest therein attributable to an interest in a mine well other natural_deposit or block_of_timber shall be not less than the fair value of such mine well natural_deposit or block_of_timber or such interest therein as the secretary shall convey at the time of the first commercial development thereof adjusted as provided in sec_1016 of such code for purposes of this subsection the time of receipt of land or any interest therein shall be the time of the conveyance by the secretary of such land or interest whether by interim conveyance or patent emphasis added by enacting ancsa congress expressed its intent that in exchange for the surrender of land claims by alaska natives the u s would transfer land to alaska natives under ansca tax-free furthermore under this provision lands were conveyed to alaska natives with the highest possible tax basis or a fresh_start basis to prevent income_tax_liability from arising if the lands were later converted into cash or other_property anilca clarified ancsa sec_21 by creating a modified fresh_start basis rule to allow alaska natives to receive lands with mineral reserves with a basis that is not less than the fair_market_value of the land when the true commercial value of the mineral reserves is ascertained that being the time of first commercial development 96th cong 1st sess which provides congress’ intent in enacting anilca is further explained by s rep no the purpose of the provision is to eliminate an ambiguity in the language of sec_21 of the alaska native claims settlement act as to precisely which date is intended by the term 'time of receipt' and also to eliminate a potential inequity in the tax treatment accorded different native corporations the effect of the amendment is to require the basis of land received under the act to be determined on one of two dates the general_rule is that the basis of land received shall be the fair_market_value fmv at the time of receipt the amendment provides that the time of receipt shall be defined as 'the time of the conveyance' by the secretary of the interior regardless of whether the title document is a patent or an interim conveyance the amendment also provides that the basis of mineral deposits and timber shall be the fmv at the time of first commercial development postf-126103-05 the determination of the basis of mineral deposits and timber is postponed until first commercial development because the existence or the extent and quality of a mineral deposit may not be known at the time of receipt the uncertainty as to the existence of a mineral deposit or as to extent and quality of a deposit would be a significant effect on value the legislative_history of ansca and anilca indicates that congress clearly intended that alaska natives be able to value land conveyed under ancsa at either the time of conveyance or the time of first commercial development furthermore the senate report clarifies that the basis of mineral deposits must be valued at the time of first commercial development once any mineral reserves are ascertained thus the intention of congress in enacting ancsa and anilca is to grant alaska natives the highest possible basis in the land and attached mineral reserves that they receive under ancsa meaning of first commercial development however the senate report does contain the following language regarding the for these purposes the time of first commercial development shall be the first day of the taxable_year in which a deduction for depletion is allowed_or_allowable gain_or_loss is realized from a disposal of minerals or timber with a retained economic_interest or minerals in place or standing timber are sold or exchanged the service has taken the position that this language is not to be interpreted as defining the time of first commercial development as the first day of the taxable_year but rather as the date that first commercial development actually begins plr in the instant case the language of ancsa sec_21 makes it is clear that taxpayer may value the field on either the date of conveyance c or at the time of first commercial development n taxpayer has selected the time of first commercial development as the date of valuation for the field it is also clear under ancsa that taxpayer’s basis in the field is the higher of the value of the field on either the date of conveyance or the time of first commercial development tam addressed the issue of determining a taxpayer’s basis in standing treatment of ansca by the service timber on land received under ancsa the taxpayer entered into contracts with unrelated parties to dispose_of the standing timber the service found that under ancsa t he basis for computing gain_or_loss on subsequent disposal of the property for purposes of federal tax imposed on income was to be the fair value of this land or interest in the land at the time of receipt furthermore the service interpreted the amendments made to ancsa by postf-126103-05 anilca as allowing alaska natives to value lands received under ancsa at the fair_market_value at either the time of receipt or the time of first commercial development the service interpreted anilca as allowing alaska natives to choose the greater of these two values as the unadjusted_basis of the land received the tam also commented that one reason for providing an alternative valuation_date for establishing unadjusted_basis in a block_of_timber is because of difficulties in determining the fmv of the timber at the time of receipt importantly the service ruled in the taxpayer’s favor and concluded that the unadjusted_basis in timber received by x and z under ancsa is to be determined as though it were in their hands at the time of first commercial development tam addressed the issue of the determination of a taxpayer’s basis in standing timber on lands received under ancsa similarly the taxpayer had disposed of timber rights in the lands it received under ancsa the service observed that at the time of receipt ancsa provided that the receipt of this property was not to be subject_to any form of federal taxation furthermore ancsa states that the basis for computing gain_or_loss on subsequent disposal of the property for purposes of federal tax imposed on income was to be the fair value of this land or interest in the land at the time of receipt however the tam also notes that the amendment of ancsa sec_21 by anilca provides that the basis of any such land or interest therein attributable to an interest in a block_of_timber must not be less than the fair value of the block_of_timber or interest therein as the secretary of the interior conveys at the time of first commercial development thereof adjusted as provided in sec_1016 of the code hence the amended statute provides in effect that the unadjusted_basis in timber received by a village corporation is the fair value of the timber at the time of receipt unless the fair value of a block_of_timber at the time of first commercial development of the block is greater in which case the fair value of the block at the time of first commercial development would constitute the unadjusted_basis of the block_of_timber thus the greater of the two values would be the unadjusted_basis in a block_of_timber that the unadjusted_basis in timber received by x and z under ancsa is to be determined as though it were in their hands at the time of first commercial development mineral received pursuant to a conveyance of land under ancsa the more specific issue raised in the tam is the interaction between sec_612 and its associated regulations and the basis provisions of ancsa sec_21 the tam asserted that because the lands received by the taxpayer were conveyed under ancsa that provision governs the determination of the taxpayer’s basis in those lands in ruling for the taxpayer the service echoed the conclusion of tam finally tam addressed the issue of computing cost_depletion on postf-126103-05 amending ancsa furthermore the service opined on congress’ intent in enacting and later this special basis treatment was accorded to mineral and timber rights because congress felt that it was inequitable to require the native corporations to value these rights on the date of conveyance as their value might not be ascertainable on that date it was reasoned that mineral rights valuation should be postponed until the date of first commercial development because the existence or the extent and quality of a mineral deposit may not be known at the time of receipt the uncertainty as to the existence of a mineral deposit or as to extent and quality of a deposit has a significant effect on value s rep no 96th cong 2nd sess pincite ultimately the holding of tam turned on the valuation_date of the the tams discussed above reflect the service’s interpretation of ancsa mineral rights attached to the taxpayer’s lands the service held that the taxpayer was entitled to a cost_depletion deduction but directed the taxpayer to compute the deduction based upon an estimate of the mineral reserves and to amend its returns at the time of first commercial development when its basis could be finalized specifically the tams illustrate the service’s position that a taxpayer receiving land under ancsa may choose to value the land at either the time of receipt or the time of first commercial development whichever date will yield the higher valuation however it is important to remember that the asset to be valued remains the same judicial interpretation of ansca in klukwan inc and subs v c i r the tax_court considered the issues of determining the fair_market_value of standing timber on land received by a taxpayer under ancsa and determining the allowable depletion deductions resulting therefrom t c memo 68_tcm_446 the service determined that under the terms of ancsa sec_21 the taxpayer’s basis in the land and timber that it received was either the fair_market_value on the date of conveyance or at the time of first commercial development the taxpayer chose to value its interests on the date of conveyance the taxpayer submitted a valuation report to the service valuing the standing timber as of the date of conveyance the service disputed the taxpayer’s method of valuing the standing timber on this date in ruling for the taxpayer the tax_court determined that the interest to be valued was the fee ownership timber interest acquired by the taxpayer on date service agree that the taxpayer’s land may be valued at the time of first commercial klukwan reflects the issues of the present case both the taxpayer and the in old harbor native corp v c i r the tax_court interpreted ancsa sec_21 to postf-126103-05 development -------------------------- however the service disputes the taxpayer’s assertion that the interest to be valued on ---------------------------is the same interest that was conveyed to the taxpayer under ancsa in the holding of klukwan and the plain meaning of ancsa as amended by anilca confirm the taxpayer’s position determine the tax treatment of payments received by the native_corporation from unrelated parties interested in developing mineral reserves on lands received under ancsa 104_tc_191 the court observed that ancsa legislation generally exempted from taxation the regional and village corporations’ initial receipt of rights in the government-owned land t c pincite citing u s c the tax_court reasoned that because congress did not specify the exact manner of taxing the revenues subsequently generated from these rights such determination must be made by first interpreting ancsa as the statute that extinguished the aboriginal land claims of the alaskan natives t c pincite citing u s c in old harbor the tax_court noted that it does not read ancsa as narrowly as the service in fact the court stated we read ancsa broadly and in the light most favorable to alaskan natives the intended beneficiaries of ancsa t c pincite citing 426_us_373 351_us_1 248_us_78 34_f3d_1462 9th cir ultimately the tax_court found that the payments received by the taxpayer are subject_to federal income_taxation t c pincite while case law interpreting ancsa is hardly voluminous each court that has interpreted this statute has applied an indian canon of statutory interpretation to rule in the light most favorable to alaskan natives klukwan inc and subs v c i r t c memo 68_tcm_446 77_tc_755 214_f3d_1309 the service’s position and the judicial interpretation of ancsa agree case development hazards and other considerations --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- postf-126103-05 --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -------------------- 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


t c memo united_states tax_court thomas glen presley petitioner v commissioner of internal revenue respondent docket no filed date thomas glen presley pro_se michael d zima for respondent memorandum findings_of_fact and opinion dean special_trial_judge this case was assigned pursuant to the provisions of sec_7443a and rule sec_180 sec_181 and sec_182 1unless otherwise indicated all section references are to the internal_revenue_code in effect for the year at issue and all rule references are to the tax_court rules_of_practice and procedure respondent determined a deficiency in petitioner's federal_income_tax in the amount of dollar_figure and an accuracy- related penalty under sec_6662 in the amount of dollar_figure the issues for decision are whether petitioner is entitled to deductions for dependency_exemptions whether petitioner is entitled to head_of_household filing_status whether petitioner is entitled to an earned_income_credit and whether petitioner is liable for the accuracy-related_penalty under sec_6662 some of the facts have been stipulated and are so found the stipulation of facts and the exhibits received into evidence are incorporated herein by reference petitioner resided in tampa florida at the time he filed his petition findings_of_fact during petitioner resided in tampa florida petitioner lived apart from his wife dorothy presley at all times in on his federal_income_tax return petitioner used head_of_household filing_status and claimed three dependency_exemptions one each for himself his son thomas howard presley and his daughter leah marie presley he also claimed an earned_income_credit in the amount of dollar_figure opinion respondent's determinations are presumed correct and petitioner bears the burden of proving otherwise rule a 290_us_111 moreover deductions are a matter of legislative grace and petitioner bears the burden of proving that he is entitled to any deduction claimed rule a 292_us_435 welch v helvering supra pincite dependency_exemptions respondent determined that petitioner is not entitled to claim any dependency_exemptions other than for himself sec_151 allows a taxpayer to claim an exemption for each dependent as defined by sec_152 whose gross_income is less than the exemption_amount or who is a child of the taxpayer and meets certain age requirements sec_152 provides that the term dependent includes a taxpayer's child over half of whose support for the calendar_year in which the taxable_year of the taxpayer begins was received from the taxpayer or is treated under subsection c or e as received from the taxpayer in the case of a child whose parents live apart at all times during the last months of the calendar_year generally the custodial_parent ie the parent having custody of the child for the greater portion of the calendar_year is treated as providing over one-half of the support of the child sec_152 an exception to this general_rule exists however where the custodial_parent signs a written declaration that such custodial_parent will not claim such child as a dependent and the noncustodial_parent attaches such written declaration to the noncustodial parent's return for the taxable_year sec_152 although petitioner provided inconsistent testimony as to where the children resided during he did admit that they were with him on and off and that they attended elementary_school for the entire year in zephyr hills the town where his wife was living petitioner estimated that zephyr hills is approximately miles away from tampa based on the record petitioner has not proven that he had custody of the children for the greater portion of the calendar_year consequently petitioner's wife as the custodial_parent is deemed to have provided more than half the support of the children pursuant to the general_rule of sec_152 petitioner has further not established that an exception to the general_rule of sec_152 whereby the custodial_parent is treated as providing over one-half of the support of the child is applicable at trial petitioner submitted a form_8332 release of claim to exemption for child of divorced or separated parents wherein dorothy presley ostensibly released her claim to exemptions for the children for the tax_year however this form is dated date and it was not attached to petitioner's form 1040a which is dated date consequently petitioner has not established that the exception provided for in sec_152 is applicable to this case sec_152 see also sec_1_152-4t q a-3 temporary income_tax regs fed reg date petitioner has not shown that he was the custodial_parent of his children under sec_152 or that he timely filed a form_8332 it follows therefore that petitioner is not entitled to claim dependency_exemption deductions for his children for the year because they are not his dependents as that term is defined in sec_152 head_of_household filing_status respondent determined that petitioner is not entitled to head_of_household filing_status because he did not satisfy the requirements necessary for a married taxpayer to claim such status one of the requirements to qualify for head_of_household filing_status is that an individual must not be married at the close of the taxable_year sec_2 however a married taxpayer can meet the not married requirement if he is treated as not married under sec_7703 sec_2 sec_7703 provides that a married taxpayer living apart from his spouse with a dependent_child will not be considered as married if he files a separate tax_return he pays more than half the cost of maintaining his household for the tax_year his spouse is not a member_of_the_household during the last six months of the tax_year and the household is for more than one-half of the taxable_year the principal_place_of_abode of the taxpayer's child for whom the taxpayer can claim a dependency_exemption as discussed above petitioner has failed to establish that his household was for more than one-half of the taxable_year the principal_place_of_abode of either of his children and that he is entitled to claim a dependency_exemption for either of the children accordingly we hold that petitioner is not entitled to head_of_household filing_status for earned_income_credit respondent determined that petitioner is not entitled to an earned_income_credit because he did not file a joint_return with his wife sec_32 provides for an earned_income_credit for certain eligible individuals sec_32 provides however that a married individual within the meaning of sec_7703 is only eligible for the earned_income_credit if a joint_return is filed for the taxable_year petitioner a married individual within the meaning of sec_7703 did not file a joint_return for it follows therefore that petitioner is not entitled to an earned_income_credit for sec_32 2additionally petitioner has failed to establish that he is an eligible_individual for purposes of the earned_income_credit sec_32 defines an eligible_individual as any individual who has a qualifying_child for the taxable_year sec_32 defines a qualifying_child as an individual continued accuracy-related_penalty finally respondent determined that petitioner is liable for the accuracy-related_penalty under sec_6662 the accuracy-related_penalty is equal to percent of any portion of underpayment attributable to a taxpayer's negligence or disregard of rules or regulations sec_6662 and b the term negligence includes any failure to do what a reasonable and ordinarily prudent person would do under the same circumstances 85_tc_934 the term disregard includes any careless reckless or intentional disregard sec_6662 the penalty does not apply to any portion of an underpayment for which there was reasonable_cause and with respect to which the taxpayer acted in good_faith sec_6664 respondent's determination imposing the accuracy- related penalty is presumed correct and taxpayers bear the burden of proving that they are not liable for the accuracy- related penalty imposed by sec_6662 rule a 92_tc_501 petitioner offered no evidence to meet his burden_of_proof with respect to the accuracy-related_penalty and accordingly we sustain respondent on this issue continued who among other things has the same principal_place_of_abode as the taxpayer for more than one-half of the taxable_year as discussed above petitioner has failed to establish that either of his children had the same principal_place_of_abode as he did for more than one-half of the taxable_year to reflect the foregoing decision will be entered for respondent