internal_revenue_service number release date index number ---------------------------- ------------------------------------- ---------------------------- ------------------------------ in re ----------------------------- ------------------------ department of the treasury washington dc person to contact ---------------- id no ------------- telephone number --------------------- refer reply to cc ita br05 - plr-162841-04 date date att’n -------------------------------------- ------------------ legend taxpayer ---------------------------- ein ---------------- realty ------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- project ------------------------------------------------------- company a -------------------------------------- ------------------------------------------------------------------- city z -------------------- states x ------------- ---------------------------------------------------- --------- ------------------- ------------------ ------------------ -------------------------- ------------------------ ------------------------ amount dollar_figuren ---------------------- dear ------------------ this is in response to your authorized representative's letter of date and other correspondence and submissions in which he requested on your behalf a ruling regarding the application of sec_1033 of the internal_revenue_code_of_1986 to a certain property transaction as more fully described below specifically a ruling was requested that a certain sale of property will be treated for federal_income_tax purposes as occurring under condemnation or threat or imminence thereof within the meaning of sec_1033 of the code we are pleased to address your concerns the taxpayer owns the realty which also is located in city z state y the city z has announced specific plans for the comprehensive development of the the taxpayer is a limited_liability_company organized under the laws of state x facts with its principal office located in city z state y the taxpayer employs an overall accrual_method of accounting and files its returns of tax on the basis of a calendar year-end taxable_year taxpayer currently rents the realty to company a for use in its business operations the lease will expire on date and the taxpayer contemplates not renewing the lease but developing the property area surrounding and including the realty the project the project will entail substantial construction of retail residential commercial park transportation and additional public uses of the area on date city z filed a preliminary application with the appropriate land use and development authority respecting approval of the project in the application the entire block of which realty is a component is slated for acquisition by city z and conversion to public park and utility uses including underground uses on date the appropriate public authority scheduled hearings on the project and advised at least two of the taxpayer’s neighboring property owners on the same block of the proposed action taxpayer was inadvertently not notified of the hearings but learned soon thereafter of the proposed adverse action and has filed objections with the authority on date city z’s public planning commission approved the project the last and final step in the administrative process before city z can proceed with condemnation proceedings occurred on date with the approval of the project by city z’s governing body public development and it is not unreasonable to assume that it will ultimately be acquired by city z in its approval on date the planning commission report specifically illustrates public works and utilities facilities as being located on the taxpayer’s realty is located within an area of project specifically designated for on date the taxpayer received a proposal from company b to purchase the taxpayer’s property together with notations indicating the need to adequately compensate existing property owners within the project site realty for dollar_figuren company b’s letter acknowledges city z’s proposal to condemn the realty as part of the project as an essential element of its consideration of company b’s offer however taxpayer needs to know whether it may avail itself of the non- recognition of gain provisions of sec_1033 of the code with respect to such sale law analysis sec_1033 of the code provides in part that if property as a result of its destruction in whole or in part theft seizure or requisition or condemnation or threat or imminence thereof is compulsorily or involuntarily converted into money and during the period specified in sec_1033 the taxpayer purchases property similar_or_related_in_service_or_use to the converted property at the election of the taxpayer gain will be recognized only to the extent that the amount_realized upon the conversion exceeds the cost of the replacement_property sec_1033 provides an alternative rule respecting replacement_property in the case of certain condemnations of real_property held for productive use in a trade_or_business or for investment_property of a like_kind to be held either for productive use in trade_or_business or for investment may be treated as property similar_or_related_in_service_or_use to the real_property so converted subparagraph a a is the period beginning with the date of the disposition_of_the_converted_property or the earliest date of the threat or imminence of requisition or condemnation of the converted property whichever is earlier and ending two years after the close of the first taxable_year in which any part of the gain upon the conversion is realized or such later date as the secretary may designate upon application of the taxpayer revrul_58_557 1958_2_cb_402 modified by revrul_63_221 1963_2_cb_332 and revrul_81_180 1981_2_cb_161 address the issue of what constitutes the threat of condemnation for purposes of sec_1033 of the code in general these rulings provide that a threat_or_imminence_of_condemnation exists at such time as a public body having the authority to condemn land or to institute condemnation proceedings indicates by public resolution or public act that specifically designated property located within a given geographical area will be condemned it is immaterial whether this knowledge is transmitted officially sec_1033 provides that the replacement_period referred to in the revenue_ruling first concludes that property that is the subject of an revrul_81_180 addresses a situation very similar to that presented here in the situation considered a taxpayer learned through newspaper reports that a city intended to acquire its property by condemnation for public use if a sale could not be negotiated and city officials confirmed the accuracy of the reports the taxpayer sold its property to a third party thereafter but before the city actually condemned the property involuntary_conversion or condemnation action need not be sold to or acquired by the condemning authority for the relief provisions of sec_1033 to apply additionally the ruling addresses the meaning of the statutory term threat_or_imminence_of_condemnation and concludes that the sale addressed in the case was made under the requisite threat since the property was sold under circumstances in which the taxpayer had reasonable grounds to believe that the necessary steps to condemn the subject property would eventually have been instituted provisions to apply but merely a reasonable belief on the part of the taxpayer taking into account all relevant facts at the time of sale that condemnation is likely to occur ie is a threat see johnson v commissioner t c memo 76_tcm_1035 where the court concluded that property was sold under threat of condemnation where the public authority had the power to condemn even if the authority had not taken formal action approving the condemnation of the taxpayer’s property see also 54_tc_863 opining the statute does not require an actual condemnation in order for its relief it is significant that the word threat was used in sec_1033 this is indicative of the fact that the statute does not require that the possibility of condemnation be reduced to a certainty any reasonable construction of the word must recognize the possibility that the impending undesirable consequence may never occur the crucial factor is that the petitioner was compelled by this impending consequence to take evasive action in the instant case it is reasonable to conclude that taxpayer’s realty is presently subject_to an actual and realistic threat_or_imminence_of_condemnation and has been so since at least date the next and last action of the public process governing project implementation may result in the certainty of condemnation the statute does not require taxpayer to await that event conclusion based on the facts and information submitted and the representations made we conclude that taxpayer’s sale of realty to company b or any other buyer occurring after date will be treated for federal_income_tax purposes as occurring as a result of condemnation or threat or imminence thereof within the meaning of sec_1033 of the code and that taxpayer is entitled to utilize the nonrecognition of gain provisions of sec_1033 for the involuntary_conversion of realty if it properly elects such treatment and acquires property similar_or_related_in_service_or_use to the converted property within the replacement_period including any authorized extension described in sec_1033 of the code this letter_ruling is based on facts and representations provided by the taxpayer and its authorized representatives and is limited to the matters specifically addressed no opinion is expressed as to the tax treatment of the transactions considered herein under the provisions of any other sections of the code or regulations which may be applicable thereto or the tax treatment of any conditions existing at the time of or effects resulting from such transactions which are not specifically addressed herein because it could help resolve federal tax issues a copy of this letter should be maintained with the taxpayer’s permanent records pursuant to a power_of_attorney on file with this office copies of this letter_ruling are being sent to your authorized representatives this ruling is directed only to the taxpayer that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent sincerely yours s william a jackson william a jackson chief branch associate chief_counsel income_tax accounting enclosures copy of this letter copy for sec_6110 purposes


t c no united_states tax_court estate of wayne-chi young deceased tsai-hsiu hsu yang executrix petitioner v commissioner of internal revenue respondent docket no filed date decedent and his wife yang owned real_property in california a community_property_state decedent's federal estate_tax_return reported percent of the date of death value of the property as decedent's interest therein under sec_2033 i r c and then claimed a 15-percent fractional_interest_discount under 680_f2d_1248 9th cir after filing the estate_tax_return p obtained a state trial_court decree which adjudicated decedent's interest in certain property r was not a party to the state court_proceeding r determined that decedent and yang held the property as joint_tenants with right_of_survivorship as stated in the deeds therefore r determined that decedent's gross_estate included half the value of the property under sec_2040 i r c and disallowed the 15-percent fractional_interest_discount held the state trial court's decree does not bind this court for federal estate_tax purposes further p has failed to overcome the presumption of joint_tenancy with right_of_survivorship created by the deeds under california law held further to deal with the inherent characteristics of joint_tenancy with right_of_survivorship sec_2031 i r c and sec_2040 i r c provide an explicit approach to valuing joint_tenancy fractional interest discounts and lack of marketability discounts are inapplicable to the valuation of joint_tenancy under sec_2040 i r c held further p is liable for the addition_to_tax for late filing under sec_6651 i r c lance m weagant and randall d fowler for petitioner dwight m montgomery for respondent wright judge respondent determined a deficiency of dollar_figure in petitioner's federal estate_tax and an addition_to_tax under sec_6651 a in the amount of dollar_figure after concessions by the parties the issues remaining are whether decedent's property interest in the young property was an interest in joint_tenancy or in community_property we hold that decedent held the property in joint_tenancy whether a fractional_interest_discount or a lack of marketability discount is applicable to the young property we hold that a discount is inapplicable all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated whether petitioner is liable for an addition_to_tax for late filing under sec_6651 we hold that petitioner is liable findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated by this reference tsai-hsiu hsu yang yang also known as tsai-hsiu hsu young is executrix of the estate petitioner of wayne-chi young deceased decedent yang was decedent's wife collectively the youngs at all material times yang and decedent were residents of the state of california a community_property_state at all times relevant to this case neither decedent nor yang was a citizen_of_the_united_states but they were residents of the united_states decedent died on date at the time of decedent's death the executrix yang knew that the assets of the estate exceeded dollar_figure on date petitioner filed form_4768 application_for extension of time to file a return and or pay u s estate and generation-skipping_transfer taxes requesting an extension of time to file the return and to pay the estate_tax to date on date respondent approved petitioner's application_for extension of time to file and pay before date petitioner filed a second form_4768 requesting an additional extension to file the return and to pay the estate_tax to date on date respondent denied petitioner's application_for extension of time to file but approved the application_for extension to pay on date petitioner filed the estate's form_706 united_states estate and generation-skipping_transfer_tax return wang a certified_public_accountant helped in petitioner's filing of the return at the time of decedent's death decedent and yang owned the following five real properties collectively the young property each of which they had acquired by deed as husband and wife as joint_tenants the bixby knolls motel located pincite long beach boulevard in long beach california which was purchased by decedent and yang on date a condominium located pincite north moore avenue a in monterey park california which was purchased by decedent and yang on date the oak tree inn located pincite west huntington drive in monrovia california which was purchased by decedent and yang on date a condominium located pincite birkdale in el monte california which was purchased by decedent and yang on date and a house located pincite vallecito drive in hacienda heights california which was purchased by decedent and yang on date at no time prior to decedent's death did decedent or yang execute a writing to change their legal_title as husband and wife as joint_tenants in the properties on decedent's_estate tax_return petitioner excluded one- half of the value of the young property claiming decedent's property interest in the young property was in the nature of community_property petitioner also claimed a fractional_interest_discount of percent on the young property citing 680_f2d_1248 9th cir respondent determined that petitioner was not entitled to the fractional_interest_discount the following table shows the value of each young property less the proportion of value excluded from the gross_estate as stated by petitioner and as determined by respondent property petitioner's calculations respondent's determination bixby knolls hotel condo- monterey park oak tree inn condo- el monte house in hacienda heights less less value of property value of property dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number community interest interest propstra discount of none petitioner filed a spousal property petition in the superior court of california county of los angeles alleging that the young property was community_property after a hearing the superior court of california county of los angeles in a spousal property order dated date found that the young property was community_property or quasi-community_property belonging one-half to each spouse and passing one hundred percent to tsai-hsiu hsu young the surviving_spouse issue joint_tenancy or community_property opinion it has been established that what constitutes an interest in property held by a person within a state is a matter of state law 326_us_340 282_us_101 in 387_us_456 the supreme court held that state law as announced by the highest court of the state is to be followed if there is no decision by that court then federal authorities must apply what they find to be the state law after giving 'proper regard' to relevant rulings of other courts of the state in this respect it may be said to be in effect sitting as a state court id pincite citing 350_us_198 on the other hand once property rights are determined under state law federal_law is utilized to decide the tax consequences 363_us_509 309_us_78 in this case with the young property being situated in california california property law determines the nature of decedent's interest in the young property under california law a husband and wife may hold property as joint_tenants tenants in common or as community_property cal civ code sec west however property cannot be both joint_tenancy and community_property as these two types of interests are mutually exclusive sandrini v ambrosetti p 2d cal dist ct app schindler v schindler p 2d cal dist ct app joint_tenancy is defined as a joint interest owned by two or more persons in equal shares by a title created by a single will or transfer when expressly declared in the will or transfer to be a joint_tenancy or by transfer from a sole owner to himself or herself and others or from tenants in common or joint_tenants to themselves or some of them or to themselves or any of them and others or from a husband and wife when holding title as community_property or otherwise to themselves or to themselves and others or to one of them and to another or others when expressly declared in the transfer to be a joint_tenancy or when granted or devised to executors or trustees as joint_tenants cal civ code sec_683 west community_property is defined as property acquired by husband and wife or either during marriage when not acquired as the separate_property of either cal civ code sec west under california law property acquired by spouses during wedlock is statutorily presumed to be community_property cal civ code sec west however where a husband and wife take property by deed as joint_tenants the presumption of community_property is rebutted schindler v schindler supra pincite siberell v siberell p 2d cal property held by husband and wife in joint_tenancy form is subject_to a rebuttable_presumption that the character of the property is as set forth in the deed schindler v schindler supra pincite the presumption created by the deed may be rebutted by evidence that the character of the property was changed or affected by an agreement or common understanding or inferred from the conduct and declarations of the spouses estate of herzog v commissioner tcmemo_1992_193 citing estate of blair v blair cal app 3d cal rptr estate of levine v levine cal app 3d cal rptr estate of wilson cal app 3d cal rptr parol evidence may be admitted to establish that the real_property was intended to be community_property though title was taken by husband and wife as joint_tenants 154_f2d_758 9th cir however there must be a mutual intent of the spouses to transmute their interests in the land into community_property 35_tc_962 when evidence is introduced indicating an intent to hold the property as community_property we must decide whether petitioner's evidence overcomes the presumption created by the form in which title was taken id in this case each deed of the young property stated that decedent and yang took title as husband and wife as joint_tenants according to california law this creates a rebuttable_presumption that the young property was joint_tenancy as stated in the deeds to rebut this presumption petitioner relies on the superior court of california's determination that the young property was community_property and on the surviving spouse's testimony regarding the intent of the parties superior court decree following decedent's death petitioner filed a spousal property petition in the superior court of california county of los angeles in the spousal order the court found that the young property was community_property or quasi-community_property belonging one-half to each spouse and passing one hundred percent to tsai-hsiu hsu young the surviving_spouse petitioner argues that the spousal property order entered by the superior court of the state of california precludes respondent from arguing that the young property was joint_tenancy under california law in determining the binding or persuasive effect of state court decrees on federal courts interpreting the application of state law the supreme court has acknowledged that where state law governs the ownership of property as here the state's highest court is the best authority on its own law 387_us_456 citing 304_us_64 a federal court in a federal estate_tax controversy is not conclusively bound by a state trial court's adjudication id the ruling of an intermediate appellate state court is not to be disregarded by a federal court unless it is considered that the state's highest court would decide otherwise id if there is no decision by the state's highest court the federal court must do the best it can to discern what such state's highest court would decide id 54_tc_633 while a hearing occurred in regard to the petition only the final order was submitted into evidence in regard to the california superior court's basis for its determination without other evidence we cannot rule out that respondent if present at the california court would have prevailed in opposing petitioner's petition that the property was community_property see estate of rowan v commissioner supra pincite the evidence before us does not show that the proceeding in the superior court was a bona_fide adversarial litigation therefore we conclude that we are not bound by the superior court of california's determination intent of parties evidence is admissible to show that a husband and wife who took property as joint_tenants actually intended it to be community_property sears v rule p 2d cal tomaier v tomaier p 2d cal separate_property may be converted to community_property by oral agreement proven by the acts and conduct of the parties in dealing with the property however the evidence must be sufficient to support a finding adverse to record title bernatas v honnert in re bernatas' estate p 2d cal dist ct app a mistaken belief about the nature of the property or intent communicated to the other spouse about converting the property from one form to another without more will not rebut the presumption raised by the form of deed by which such property was acquired by husband and wife edwards v dietrich p 2d cal dist ct app petitioner primarily relies upon yang's testimony in her written_statement yang stated that she and decedent always viewed the marital accumulations as community_property according to yang the youngs thought the property was community_property at trial yang stated that her understanding was that the ownership of the property was such that each one gets half upon divorce each one gets a half if yang predeceased decedent then he will become the executrix or or i could will to him or to the children in regard to managing the oak tree inn yang and decedent would hire a manager the youngs were informed by real_estate brokers that title should be taken as joint_tenancy in order to avoid probate however at trial yang testified that she believed she relied on the broker's advice but in regard to the bixby knolls hotel yang could not remember whether the real_estate broker told the youngs to hold title in joint_tenancy yang testified that they did not consult an attorney regarding title to the young property in regard to title she figured it's -- belong to both of us petitioner asserts that yang's testimony at trial is consistent with her written statements regarding the mutual understanding and further asserts that no contrary evidence was presented by respondent first we note it is petitioner's burden to show that the young property was held other than as stated in the deed we are presented with yang's statement that each one gets half petitioner did not present any other testimony to support yang's statements in evaluating her statements which were translated we understand the language barrier created because yang cannot read write or speak english however we are not satisfied that yang understood the distinctions between community_property and joint_tenancy considering the record we do not find a mutual understanding that decedent and yang took title other than as stated in the deed transmutation into community_property in california the law is settled that a husband and wife may agree with respect to the character of the property which they hold and may transmute their property from one status to another by agreement 18_tc_488 citing in re watkins 219_f2d_400 9th cir tompkins v bishop p 2d cal dist ct app see cal civ code sec west to be valid any such transmutation of real_property occurring after date must be made in writing by an express declaration and satisfy the other requirements in california civil code section west see orr v petersen estate of petersen cal california civil code sec west was later repealed in but it was continued in california family code sec b west california civil code sec was repealed and continued without substantive change in california family code sec_852 west california family code secs and were operative date because decedent died in continued rptr 2d cal ct app an express declaration requires language which expressly states that the characterization or ownership of the property is being changed bolton v macdonald in re estate of macdonald p 2d cal on the other hand transmutations occurring before date do not need to be written prior to date there was little in the way of requisite formalities all that was required was substantial credible and relevant evidence weaver v weaver in re marriage of weaver cal rptr cal ct app citations omitted out of the five properties constituting the young property only the bixby knolls motel was purchased prior to date therefore in regard to the other four properties in order for a transmutation to be valid it must be made in a writing by an express declaration petitioner admitted that at no time prior to decedent's death in june of did decedent or yang execute a writing to change their legal_title as husband and wife as joint_tenants in the properties further petitioner did not present any other writing which would satisfy the express declaration requirement we find that there was no valid transmutation for the following parcels of the young property which were acquired after date condo continued california civil code secs and are the applicable sections at monterrey park oak tree inn condo in el monte and house in hacienda heights we reject petitioner's argument that the language in decedent's will transmuted the property from joint_tenancy into community_property petitioner points to the fact that decedent's will makes no mention of joint_tenancy property but refers to community_property decedent's will was executed on date as of that date only one of the five properties making up the young property was owned by decedent and his wife further the language in the will does not meet the standard of an express declaration to change characterization or ownership of property the will merely provides that all of decedent's properties both real and personal be devised to yang this provision and the provision referring to decedent's one-half interest in the community_property have no impact on decedent's interest held in joint_tenancy property we find decedent's failure to mention joint_tenancy in his will to be of little significance because under the law joint_tenancy cannot be devised we note that decedent provided that inheritance estate or other death taxes attributable to the probate_estate and to any property or transfer of property outside my probate_estate be paid the language property outside my probate_estate implies that decedent's property might pass outside the probate_estate which would cover joint_tenancy with right_of_survivorship in regard to the bixby knolls motel which was purchased on date there was no evidence presented to establish that decedent and yang transmuted the bixby knolls motel into community_property by an agreement oral or written prior to date there was no evidence presented to support a finding that decedent and or yang intended to transmute the bixby knolls motel into community_property therefore we find that the youngs did not effectively transmute the young property from joint_tenancy into community_property conclusion from the record we conclude that the evidence presented by petitioner has not overcome the presumption of joint_tenancy therefore decedent and yang held the young property as joint_tenants with the right_of_survivorship issue discount issue having determined that the young property was held in joint_tenancy under state law we now turn to the federal estate_tax aspects of the case in determining an estate's tax_liability the gross_estate must be defined sec_2031 provides that the value of the gross_estate of the decedent shall be determined by including to the extent provided for in this part sections the value at the time of his death of all property real or personal tangible or intangible wherever situated it provides that the time of valuation is at the date of decedent's death or the alternate_valuation_date as provided by sec_2032 value is the price at which the property would change hands between a willing buyer and a willing seller neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts 411_us_546 92_tc_312 63_tc_485 sec_20_2031-1 estate_tax regs the willing seller and the willing buyer are hypothetical rather than specific individuals or entities 658_f2d_999 5th cir the determination of value is to be made as of the valuation_date and knowledge of unforeseeable future events that may have affected the value cannot be attributed to the hypothetical buyer or seller sec_20_2031-1 estate_tax regs real_estate_valuation is a question of fact to be resolved on the basis of the entire record 674_f2d_761 9th cir 64_tc_889 after determining the gross value of the property there may be adjustments upward or downward for such factors affecting value as minority discounts discounts for lack of marketability control premiums and fractional interest discounts see 79_tc_938 discussing a minority discount 72_tc_1062 discussing a discount for lack of marketability for stock estate of o'keeffe v commissioner tcmemo_1992_210 discussing blockage discounts for works_of_art estate of salsbury v commissioner tcmemo_1975_333 discussing control premiums petitioner bears the burden to show that respondent was incorrect in disallowing the fractional_interest_discount for the young property rule a sec_2031 directs attention to other sections to determine what property and to what extent is included in the gross_estate sec_2033 provides that there shall be included in the value of the gross_estate the value of all property to the extent of the decedent's interest therein at the time of his death because at death the decedent does not own an interest in joint_tenancy sec_2033 is inapplicable to joint_tenancy sec_2040 provides in relevant part that the value of the gross_estate shall include the value of all property to the extent of the interest therein held as joint_tenants with the minority discount normally applies with respect to the ownership of stock comprising less than percent of the voting_stock of a closely_held_corporation so the owner does not have significant control_over the operations on the other hand a control premium may be applicable when the block of stock represents control of the corporation right_of_survivorship by the decedent and any other person except such part of the value that is attributable to the amount of consideration in money_or_money's_worth furnished by the surviving joint tenant sec_2040 sec_20_2040-1 estate_tax regs in applying that exception the entire value of jointly held property is included in a decedent's gross_estate unless the executor submits facts sufficient to show that property was not acquired entirely with consideration furnished by the decedent or was acquired by the decedent and the other joint owner or owners by gift bequest devise or inheritance 56_tc_579 sec_20_2040-1 estate_tax regs if part of the consideration is found to have been contributed by the surviving joint tenant then the part of the value of the property as is proportionate to such consideration is excluded from the decedent's gross_estate sec_20_2040-1 estate_tax regs notwithstanding sec_2040 sec_2040 provides that in the case of any qualified_joint_interest the value included in the gross_estate is one-half of the value of the qualified_joint_interest sec_2040 defines qualified_joint_interest to include property held by the decedent and the decedent's spouse as joint_tenants with right_of_survivorship but only if the decedent and the spouse of the decedent are the only joint_tenants however sec_2056 provides that if the surviving_spouse of the decedent is not a citizen_of_the_united_states sec_2040 shall not apply having determined that the young property was held in joint_tenancy sec_2040 along with sec_2031 is applicable yang the surviving_spouse of decedent held the young property in joint_tenancy with decedent because yang is not a citizen_of_the_united_states sec_2056 applies making sec_2040 inapplicable instead sec_2040 is applicable during trial and respondent's opening brief respondent relied on the application of sec_2040 in the reply brief respondent noted the mistake of relying on sec_2040 and stated that sec_2040 is applicable in order to avoid prejudice to petitioner respondent concedes the value of the joint_tenancy included in the gross_estate to be one-half of the entire value of the young property not the full value normally sec_2040 starts with the full inclusion of the value of the joint_tenancy in the gross_estate of the first joint tenant to die in order to reduce this inclusion there is a strict tracing of contributions by the surviving joint tenant because petitioner and respondent were relying at trial upon the application of sec_2040 the record that they presented while respondent noted the mistake on reply brief during opening statement at trial petitioner's counsel acknowledged the interplay of sec_2040 and sec_2056 does not enable us to determine the contributions of the spouses as contemplated under sec_2040 in light of respondent's concession that the valuation of the joint_tenancy in decedent's gross_estate is to be one-half we shall assume that yang the surviving_spouse traced one-half of the contributions for the young property both parties have agreed on the value of each entire parcel included in the young property bixby knolls hotel dollar_figure condo - monterey park dollar_figure oak tree inn dollar_figure condo - el monte dollar_figure and house - hacienda heights dollar_figure the dispute between the parties that we must resolve is whether and to what extent a fractional_interest_discount or a lack of marketability discount which has been allowed in regard to tenancy_in_common and community_property should be applied to decedent's property held in joint_tenancy with right_of_survivorship petitioner argues that sec_2040 is an includability section determining the interest in the gross_estate not a valuation section petitioner notes that sec_2040 like sec_2033 contains the language to the extent of the interest therein after determining the inclusion of property under sec_2033 or sec_2040 petitioner argues that sec_2031 sec_2032 and sec_2032a determine the value therefore with the same goal in sec_2033 and sec_2040 petitioner argues that the language of sec_2040 cannot be construed to prohibit fractional interest discounts and lack of marketability discounts while such valuation discounts have been allowed under sec_2033 in cases dealing with sec_2033 the rationale for a fractional_interest_discount is based on the rights of the tenants in common under local law arising from the unity of interest and unity of possession a fractional_interest_discount may be appropriate when a partial interest in property would sell for less than its proportionate share estate of iacono v commissioner tcmemo_1980_520 for example decedent owns real_property a with x as tenants in common while decedent has an undivided one-half interest in the property a willing buyer may discount the value of decedent's interest in property a due to the fact that a buyer of such interest would own the property concurrently with the other tenant in common and as such there is the inconvenience of dealing with several owners partition suits and potential disagreements among the owners see estate of barclay v commissioner 2_bta_696 estate of youle v commissioner tcmemo_1989_138 discounts for lack of marketability arise from the inherent difficulty in the sale of the asset in arguing for the application of fractional interest discounts and or lack of marketability discounts in the context of sec_2040 petitioner primarily relies on the court_of_appeals for the ninth circuit's decision in 680_f2d_1248 9th cir where a fractional_interest_discount was allowed for community_property under sec_2033 in propstra the ninth circuit upheld a 15-percent discount in the value of the decedent's undivided one-half interest_in_real_property held as community_property id pincite the court noted that the federal estate_tax is an excise_tax levied on the privilege of transferring property at death id pincite citing 658_f2d_999 5th cir the amount to be taxed is valued by the property actually transferred rather than what is owned by the decedent before death or the interest held by the legatee after death id the government argued that under a unity of ownership theory a fractional_interest_discount was inapplicable because one can reasonably assume that the interest held by the estate will ultimately be sold with the other undivided_interest and that interest's proportionate share of the market_value of the whole will thereby be realized id pincite after considering the language of sec_2031 and sec_2033 the court was unwilling to impute unity of ownership principles for valuation purposes id further the court looked at the willing seller as a hypothetical seller rather the estate or any of decedent's beneficiaries id pincite2 in propstra the court allowed a fractional_interest_discount for community_property contrary to petitioner's arguments we find the situation presented in propstra is not analogous to the current situation involving joint_tenancy first propstra dealt with sec_2033 which provides that the value of the gross_estate shall include the value of all property to the extent of the interest therein held by the decedent at the time of his death and not sec_2040 the relevant provision in our case sec_2033 looks to the interest held by the decedent at his death with community_property each spouse owns a present vested one-half interest in the community_property their respective interests in such property are individually wholly owned that is separate_property so that the decedent has no interest title or ownership marital or otherwise in the other's interest in the community_property as a result under sec_2033 one-half of the value of property held as community_property that being the decedent's interest in the property is includable in a decedent's gross_estate and the surviving spouse's one-half of the value is excluded from decedent's gross_estate in light of this propstra v united_states supra looked at the undivided one-half interest held by the decedent at his death on the other hand joint_tenancy is a distinct property interest from tenancy_in_common and community_property the right_of_survivorship is the chief characteristic that distinguishes a joint_tenancy from other interests in property 306_us_363 zeigler v bonnell p 2d cal dist ct app while a joint_tenancy may be severed by mutual agreement or by a conveyance by one of the joint_tenants during the lives of the joint_tenants the decedent cannot devise property held by the decedent and another in joint_tenancy estate of 175_f2d_657 9th cir revg 10_tc_961 joint_tenancy has been characterized as a specialized form of a life_estate with what amounts to a contingent_remainder in the fee the contingency being dependent upon which joint tenant survives id the surviving joint tenant does not secure that right from the deceased joint tenant but from the devise or conveyance by which the joint_tenancy was first created at the time of decedent's death decedent's interest in the property is extinguished with the joint_tenancy automatically passing to the surviving joint tenant by the operation of law avoiding the need for probate for example tenants in common own an undivided fraction of the whole property held as tenancy_in_common on the other hand joint_tenants own the whole property subject_to the rights of the others in order to include property held by a decedent in joint_tenancy in the decedent's gross_estate congress enacted section c in the revenue act of ch 39_stat_756 the predecessor of the current section dollar_figure the enactment of the sec c of the revenue act of ch 39_stat_756 provided that the gross_estate included sec c to the extent of the interest therein held jointly or as tenants in the entirety by the decedent and any other person or deposited in banks or other institutions in their joint names and payable to either or the survivor except such part thereof as may be shown to have originally belonged to such other person and never to have belonged to the decedent for the purpose of this title stock in a domestic_corporation owned and held by a nonresident decedent shall be deemed property within the united_states and any property of which the decedent has made a transfer or with respect to which he has created a_trust within the meaning of subdivision b of this section shall be deemed to be situated in the united_states if so situated either at the time of the transfer or the creation of the trust or at the time of the decedent's death sec_2040 reads as follows sec_2040 general_rule --the value of the gross_estate shall include the value of all property to the extent of the interest therein held as joint_tenants with right_of_survivorship by the decedent and any other person or as tenants_by_the_entirety by the decedent and spouse or deposited with any person carrying on the banking business in their joint names and payable to either or the survivor except such part thereof as may be shown to have originally belonged to such other person and never to have been received or acquired by the latter from the decedent for less than an adequate_and_full_consideration in money_or_money's_worth provided that where such property or any part thereof or part of the consideration with which such property was acquired is shown to have been at any time acquired by such other person from the decedent for less continued federal estate_tax was part of the revenue act of ch 39_stat_756 the act's main purpose was to raise revenue since its origin in the provision including joint_tenancy in the gross_estate now incorporated in sec_2040 has remained substantially unchangeddollar_figure continued than an adequate_and_full_consideration in money_or_money's_worth there shall be excepted only such part of the value of such property as is proportionate to the consideration furnished by such other person provided further that where any property has been acquired by gift bequest devise or inheritance as a tenancy_by_the_entirety by the decedent and spouse then to the extent of one-half of the value thereof or where so acquired by the decedent and any other person as joint_tenants with right_of_survivorship and their interests are not otherwise specified or fixed by law then to the extent of the value of a fractional part to be determined by dividing the value of the property by the number of joints tenants with right_of_survivorship in sec c was renumbered sec_402 and the second paragraph dealing with stock in a domestic_corporation was deleted in the revenue act of ch sec_402 42_stat_227 sec_402 read as follows sec_402 to the extent of the interest therein held jointly or as tenants in the entirety by the decedent and any other person or deposited in banks or other institutions in their joint names and payable to either or the survivor except such part thereof as may be shown to have originally belonged to such other person and never to have been received or acquired by the latter from the decedent for less than a fair consideration in money_or_money's_worth provided that where such property or any part thereof or part of the consideration with which such property was acquired is shown to have been at any time acquired by such other person from the decedent for less than a fair consideration in money_or_money's_worth there shall be excepted only such part of the value of such property as is proportionate to the consideration furnished by such other person provided further that where any continued the constitutionality of the inclusion of the full value of a joint_tenancy in decedent's gross_estate has been addressed by the supreme court in holding that the full value of a joint_tenancy and a tenancy in the entirety may constitutionally be included in decedent's gross_estate the supreme court said the question is not whether there has been in the strict sense of that word a transfer of the property by the death of the decedent or a receipt of it by right of succession but whether the death has brought into being or ripened for the survivor property rights of such character as to make appropriate the imposition of a tax upon that result which congress may call a transfer_tax a death duty or anything else it sees fit to be measured in whole or in part by the value of such rights at the joint tenant's death however and because of it the survivor for the first time became entitled to exclusive possession use and enjoyment she ceased to hold the property subject_to qualifications imposed by the law thus the death of one of the parties to the tenancy became the generating source of important and definite accession to the property rights of the other continued property has been acquired by gift bequest devise or inheritance as a tenancy in the entirety by the decedent and spouse or where so acquired by the decedent and any other person as joint_tenants and their interests are not otherwise specified or fixed by law then to the extent of one-half of the value thereof emphasis added to show the added language by the revenue act of the purpose of the added language was to remove uncertainties in the existing law relating to the interests held jointly or as tenants in the entirety s rept 67th cong 1st sess c b part in the provision was renumbered sec_302 and it was reworded to secure greater clarity s rept 68th cong 1st sess c b part in the code the provision became sec_811 then in the provision became sec_2040 281_us_497 the possession by the decedent of the right_of_survivorship justifies the inclusion in the decedent's gross_estate due to its generating source congress has the power to levy a tax upon the occasion of a joint tenant's acquiring the status of survivor at the death of the other joint tenant 306_us_363 the termination of a joint_tenancy marked by a change in the nature of ownership of property was designated by congress as an appropriate occasion for the imposition of a tax it is immaterial that congress chose to measure the amount of the tax by a percentage of the total value of the property rather than by a part or by a set sum for each such change the wisdom both of the tax and of its measurement was for congress to determine id pincite in arguing that sec_2040 is a mere includability section petitioner focuses on the language in to the extent of the interest therein according to petitioner sec_2040 merely determines the interest to be included in decedent's gross_estate in light of similar language in sec_2033 petitioner argues that discounts should be available to joint_tenancy under the valuation provision of sec_2031 we think petitioner's focus is incomplete in addition to the cited language sec_2040 also provides the following introductory language the value of the gross_estate shall include the value of all property to the extent of the interest therein held as joint_tenants with right_of_survivorship by the decedent and any other person emphasis added while petitioner categorizes sec_2031 as the only section to determine value and sec_2040 as a mere inclusion section we conclude that determining value is dependent on examining both sec_2031 and sec_2040 sec_2031 provides the starting point but it is very broad in sec_2031's accompanying regulations we learn that value is determined by looking at the willing buyer and the willing seller which then needs to be considered in conjunction with sec_2033 through sec_20_2031-1 estate_tax regs in light of this definition of value ie the willing buyer and the willing seller we go to sec_2040 in sec_2040 congress provided an explicit approach to valuing joint_tenancy to be included in the decedent's gross_estate unlike sec_2033 which looks to the actual interest held by the decedent alone ie one-half one-third or one-fourth interest sec_2040 starts with the inclusion of the entire value of the joint_tenancy property held by the decedent and any other person in the gross_estate of the first joint tenant to die and the amount to be excluded from the decedent's gross_estate is proportionate to the consideration furnished by the surviving joint tenant if part of the value of the property is shown to be attributable to consideration furnished by the survivor the amount to be excluded from the gross_estate is that portion of the entire date-of-death value of the property which the consideration furnished by the survivor bears to the total cost of acquisition and capital additions sec_2040 sec_20_2040-1 estate_tax regs stating for sec_2040 purposes it makes no difference that the survivor takes the entire_interest in the property by right_of_survivorship and that no interest therein forms a part of the decedent's_estate for purposes of administration the section has no application to property held by the decedent and any other person or persons as tenants in common the exclusion for the consideration furnished by the other joint tenant can be expressed mathematically as follows entire value of property on the date of death or alternate_valuation_date times survivor's consideration entire consideration paid amount excluded 70_tc_1077 affd without published opinion 673_f2d_1310 4th cir under the scheme of sec_2040 the amount includable in a decedent's gross_estate does not depend on a valuation of property rights actually transferred at death or on a valuation of the actual interest held by the decedent legal_title instead decedent's gross_estate includes the entire value of property held in a joint_tenancy by him and any other person except to the extent the consideration for the property was furnished by such other person see 386_f2d_404 4th cir affg 46_tc_407 contrary to petitioner's argument the statute does not inquire how much a willing buyer would pay to purchase the decedent's interest in the joint_tenancy at the date of his death because at the moment of death decedent no longer holds any interest in the property the property passes by right_of_survivorship unlike property governed by sec_2033 which passes under a decedent's will or by intestate_succession even if prior to death decedent sold his interest in the joint_tenancy and by doing so severed the joint_tenancy with right_of_survivorship the value that a willing buyer would pay does not necessarily compare to the approach taken by congress in section dollar_figure sec_2040 provides an artificial inclusion of the joint_tenancy property the entire value of the property less any contribution by the surviving joint tenant except for the statutory exclusions in sec_2040 there is no further for example a and b held property x as joint_tenants the property was purchased with funds provided solely by a during a's life a could sell his interest for roughly one-half of the entire value however if a predeceases b the inclusion in a's gross_estate would be percent allowance to account for the fact that less than the entire_interest is being includeddollar_figure as a result of this artificial inclusion we conclude that sec_2040 is not concerned with quantifying the value of the fractional interest held by the decedent as would be the case under sec_2033 the fractional_interest_discount as applied in sec_2033 is based on the notion that the interest is worth less than its proportionate share due in part to the problems of concurrent ownership these problems are created by the unity of interest and unity of possession however at the moment of death the co-ownership in joint_tenancy is severed thus alleviating the problems associated with co-ownership we similarly sec_2040 also provides its own rules it provides that the value included in the gross_estate is one-half of the value of such qualified_joint_interest once the parties have determined the value of the qualified_joint_interest then this is merely divided in half to determine the amount included in decedent's gross_estate under sec_2040 an estate would not argue that a market_discount applied due to the interplay of the marital_deduction and the step-up_in_basis while one-half of the value of the joint_tenancy is included in the gross_estate there is an accompanying marital_deduction in the same amount the marital_deduction sec_2056 provides that in determining the value of decedent's gross_estate there is allowed a deduction for the value of any interest that is included in gross_estate and that passes from the decedent to the surviving_spouse under sec_1014 the surviving_spouse has a step-up_in_basis for the portion of the joint_tenancy included in decedent's gross_estate on the other hand the marital_deduction is inapplicable when the surviving_spouse is not a citizen_of_the_united_states at the same time sec_2040 is inapplicable in that situation conclude that the young property is not entitled to a fractional_interest_discount similarly a lack of marketability discount arises from an inherent difficulty in the sale of the asset it has been applied in determining the value of works_of_art and the value of restricted securities see eg estate of o'keeffe v commissioner tcmemo_1992_210 in regard to the young property there is no inherent difficulty in its sale we conclude that a lack of marketability discount is not applicable to the young property petitioner argues that respondent's position is based on the unity of ownership theory ie the theory that because the surviving joint tenant succeeds to the interest of the deceased joint tenant there can be nothing to apply a fractional_interest_discount against we note that the unity of ownership theory has been rejected by the courts as in 680_f2d_1248 9th cir but we do not characterize respondent's position as relying on the unity of ownership theory instead we are looking at the inherent property characteristics of joint_tenancy and the approach taken by congress to value the property under sec_2040 and sec_2031 we conclude that a fractional_interest_discount and a lack of marketability discount are inapplicable to the young property issue sec_6651 sec_6651 imposes an addition_to_tax for the failure_to_file an estate_tax_return within the time prescribed by law including any approved extension the rate of the addition_to_tax i sec_5 percent of the amount of tax required to be shown on the return for each month or fraction thereof that the return is late not to exceed percent in the aggregate however if the delinquency is due to reasonable_cause and not due to willful neglect the addition_to_tax is not imposed as the legal standard for reasonable_cause the regulations call on taxpayers to show that they used ordinary business care and prudence sec_301_6651-1 and proced admin regs willful neglect is defined to mean a conscious intentional failure or reckless indifference 469_us_241 whether petitioner acted with reasonable_cause and not due to willful neglect is a question of fact 100_tc_407 affd in part and revd in part 51_f3d_597 5th cir petitioner bears the burden of showing that that the failure did not result from willful neglect and that the failure was due to reasonable_cause rule a united_states v boyle supra pincite sec_6018 provides that an estate_tax_return shall be made if the gross_estate at the death of a citizen or resident exceeds dollar_figure sec_6075 provides that the estate_tax_return shall be filed within months after the date of the decedent's death generally an extension to file cannot exceed months sec_6081 decedent died on date petitioner was granted an extension to file the estate_tax_return until date however petitioner did not file the return until date as a result of filing the estate_tax_return more than months late petitioner is subject_to a 25-percent addition_to_tax unless the delinquency was due to reasonable_cause and not due to willful neglect in order to avoid the penalty petitioner's argument is based on yang's claim that she relied on the accountant wang's advice according to yang wang stated that the estate_tax_return might be required depending on the value of the oak tree inn with litigation pending in regard to the oak tree inn wang in suggested that an extension to file be submitted which was ultimately granted extending the filing_date until date later in the summer of wang told yang that no estate_tax_return would be due then according to yang b ased upon mr wang's advice that the estate_tax_return would probably not be required i did not ask him again about the matter i felt that i could rely on mr wang's advice because of his education apparent competency and our longstanding and mutually productive relationship petitioner contends that respondent did not present any evidence to contradict that she reasonably relied upon her accountant's advice however as we have noted the burden_of_proof is on petitioner to establish that the failure did not result from willful neglect and that the failure was due to reasonable_cause in light of this burden we note that petitioner did not call the accountant to testify to corroborate yang's testimony see 6_tc_1158 affd 162_f2d_513 10th cir in light of yang's uncorroborated testimony we consider the following facts to evaluate whether petitioner has met the burden of proving that yang reasonably relied upon the accountant's advice the executrix yang admitted that she knew that decedent's assets totaled more than dollar_figure at his death this clearly meets the filing threshold as required_by_law petitioner contends that the executrix relied upon the accountant's statement that the estate_tax_return would probably not be required to support its position petitioner relies on united_states v boyle supra pincite in boyle the executor argued that the failure_to_file the return was due to reasonable_cause reliance on his attorney id pincite the supreme court noted that engaging an attorney to assist in the probate proceedings is plainly an exercise of the ordinary business care and prudence as described by the regulations id pincite the court continued to say when an accountant or attorney advises a taxpayer on a matter of tax law such as whether a liability exists it is reasonable for the taxpayer to rely on that advice most taxpayers are not competent to discern error in the substantive advice of an accountant or attorney by contrast one does not have to be a tax expert to know that tax returns have fixed filing dates and that taxes must be paid when they are due in short tax returns imply deadlines reliance by a lay person on a lawyer is of course common but that reliance cannot function as a substitute for compliance with an unambiguous statute id pincite the court held that reliance on an agent was not reasonable_cause for failing to perform a nondelegable duty_of filing the return id pincite when a taxpayer shows that he reasonably relied on the advice of an accountant or attorney even when such advice turned out to be mistaken courts have frequently held that such reliance constitutes reasonable_cause if the executor did not merely assign the nondelegable duty to file to the attorney or accountant 98_tc_294 to support its position of reliance on wang's erroneous advice petitioner cites the following cases estate of la meres v commissioner supra housden v commissioner tcmemo_1992_ and 71_tc_324 in all three cases the court found that the taxpayer's good_faith reliance on the attorney's erroneous advice constituted reasonable_cause these cases were distinguishable from boyle and other cases in which the taxpayer simply delegated all responsibility for filing to an agent estate of la meres supra pincite in estate of dipalma the attorney for the estate led the executrix to believe that pending litigation justified delaying the filing of the estate_tax_return petitioner compares this to the present situation where wang advised petitioner that no estate_tax_return would be due because of the oak tree inn litigation the inquiry is whether petitioner relied in good_faith on the accountant's advice with respect to the filing requirement the principal difficulty which we have with petitioner's arguments is that the objective evidence does not necessarily lead us to the conclusion that yang was unaware that the return was due see estate of la meres supra pincite examining the chronology of events we note that decedent died on date on date petitioner filed for an extension of time to file and to pay the estate_tax to date on date respondent approved the estate's application_for extension of time to file and pay according to yang in the summer of wang told yang that a return would not be due and as a result of this statement yang did not ask wang about the matter again however this contradicts the events that transpired in prior to the lapse of the first extension before date yang as the executrix filed an application_for a second extension of time to file the return to date but respondent denied the extension of time to file on date as a result the executrix knew that the second request was denied resulting in the return being due by date this is distinct from the facts presented in estate of la meres where the respondent did not notify petitioner about the denial of the second extension until the audit id pincite we think a prudent taxpayer upon notification that the second extension was denied would have inquired further and would not have relied upon wang's statement that a return would not be due further while in yang's affidavit she stated that she relied on wang's advice because of his education apparent competency and our longstanding and mutually productive relationship her testimony at trial was less persuasive during trial yang testified that wang had performed tax services for the youngs but she was unaware of wang's educational background such as where he attended school and whether he had a master's degree in taxation while yang was aware that wang was a certified_public_accountant her testimony was unclear whether she based her reliance on that fact see 21_tc_1012 affd 225_f2d_629 10th cir accordingly we hold on this record that petitioner has not carried its burden_of_proof that the delinquent filing of the estate_tax_return was due to reasonable_cause and not to willful neglect therefore petitioner is liable for the addition_to_tax under sec_6651 to reflect the foregoing 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 psi b02 plr-115993-07 date date legend x ----------------------------------------------------- ------------------------------ y ------------------------------------ a ------------------- b ------------------------- n --------- state1 ------------- state2 ------------- date1 --------------------------- date2 ------------------- date3 ------------------------- dear ------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x by its authorized representative requesting relief pursuant to sec_1362 of the internal_revenue_code plr-115993-07 the information submitted states that x was incorporated under the laws of state1 on date1 and elected to be treated as an s_corporation effective date1 at the time of this election the stock of x was held equally by two individuals a and b on date2 b purchased all of the n shares held by a also on date2 b sold n shares of x to y a limited_liability_company formed under the laws of state2 and classified as a partnership for federal tax purposes at the time of transfer y was an ineligible s_corporation shareholder thereby terminating x’s election as an s_corporation on date2 at the time of transfer x and b did not realize that y was an ineligible s_corporation shareholder and that the transfer of x stock to y would terminate x’s s_corporation_election under sec_1362 upon discovery of the terminating event y agreed to transfer all of the x stock that it held to its members in the same proportion as their ownership interests in y this transfer of stock from y to its members was completed on date3 x represents that all of the members of y that received transfers of x stock from y on date3 are eligible s_corporation shareholders x represents that the circumstances resulting in the termination of x’s s_corporation_election were inadvertent and were not motivated by tax_avoidance or retroactive tax planning x and its shareholders have agreed to make such adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1362 provides that an election under sec_1362 will be terminated whenever at any time on or after the first day of the first taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 provides that the termination shall be effective on and after the date of cessation sec_1362 provides that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consent or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in such ineffectiveness or termination were plr-115993-07 inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the required shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to this subsection agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such termination such corporation shall be treated as an s_corporation during the period specified by the secretary based solely upon the information submitted and the representations made we conclude that x’s s_corporation_election terminated on date2 when shares of stock of x were transferred to y we further conclude that the termination was an inadvertent termination within the meaning of sec_1362 pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation on date2 and thereafter provided that x’s s_corporation_election was not otherwise terminated under sec_1362 for other reasons all of x’s shareholders in determining their respective income_tax liabilities during the termination period and thereafter must include their pro_rata share of the separately_stated items of income loss deduction or credit and nonseparately stated computed items of income or loss of x as provided in sec_1366 make any adjustments to stock basis as provided in sec_1367 and take into account any distributions made by x to its shareholders as provided in sec_1368 for this purpose the members of y shall be treated as if they directly purchased from b on date2 the n shares of x that had been sold to y on date2 in the same proportion as each member’s ownership_interest in y x and its shareholders including the members of y during the termination period shall make any adjustments as may be necessary for federal tax purposes consistent with this treatment if x or its shareholders fail to treat themselves as described above this ruling is null and void except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed regarding whether x otherwise qualifies as a small_business_corporation under sec_1361 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent plr-115993-07 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely j thomas hines branch chief branch passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number info release date index number ---------------------------- ----------------------- ----------------------- ---------------------------- department of the treasury washington dc person to contact ------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 -genin-144166-04 date january this letter is in response to your written request dated date seeking dear ----------- relief for the failure_to_file a timely form_2253 sec_1362 of the internal_revenue_code provides that a small_business_corporation can elect to be treated as an s_corporation sec_1362 of the code provides guidance on when the s election becomes effective if an s election is made within the first two and one-half months of a corporation’s taxable_year then that corporation will be treated as an s_corporation for the year in which the election was made if the corporation makes an election after the first two and one-half months of a corporation’s taxable_year then the corporation will generally not be treated as an s_corporation until the following taxable_year sec_1362 of the code provides that if no election is made pursuant to sec_1362 or if the election is made after the date prescribed for making such an election and the secretary determined reasonable_cause existed for the failure to timely make the election then the secretary can treat such an election as being timely made for that taxable_year and effective as of the first day of that taxable_year the secretary will grant relief under sec_1362 only upon receipt and evaluation of a private_letter_ruling request as stated above in order to receive relief to file a late s_corporation_election form the taxpayer must submit a valid and complete request for private_letter_ruling the procedure for submitting such a request is outlined in revproc_2004_01 for your convenience we have included a copy of the revenue_procedure with this letter_ruling see appendix a of revproc_2004_01 which is tabbed for your convenience appendix b provides a sample letter_ruling format which should be followed it contains please note that there is a filing fee required if you decide to seek a private letter genin-144166-04 a complete ruling_request with descriptions of what is required finally appendix c is a required checklist that should be filled out a nd submitted with your private_letter_ruling request to ensure its completeness copy of this letter for your records if you have further questions please contact us at -- --------------------- not a toll free number we appreciate this opportunity to provide you with assistance please keep a s dianna k miosi sincerely dianna k miosi chief branch office of the associate chief_counsel passthroughs and special industries encl revproc_2004_01 cc ------------------------------ -------------------------------- --------------------------------------- -----------------------------


t c memo united_states tax_court marcos eliseo and teodora c escobar de paz et al petitioners v commissioner of internal revenue respondent docket nos filed date marcos eliseo escobar de paz pro_se in docket no jose a batres pro_se in docket no agustin perez pro_se in docket no ric hulshoff gary slavett and jean song for respondent ' cases of the following petitioners are consolidated herewith jose a and dina batres docket no and agustin perez and isabel sanchez docket no memorandum opinion nameroff special_trial_judge respondent determined that petitioners in these consolidated cases are liable for deficiencies in federal_income_tax as follows docket no year amount dollar_figure big_number big_number respondent also determined that petitioners in docket nos and were liable for the accuracy-related_penalty under sec_6662 but has now conceded that issue after other concessions which will be detailed hereinafter the issue to be resolved in these consolidated cases is whether part of the income earned by petitioner husbands from their trucking activity can be allocated to a leasing activity if we hold for petitioners on this issue we must then decide whether petitioners’ method of allocation or some other method is correct some of the facts have been stipulated and are so found the several stipulations of fact and attached exhibits are incorporated herein by reference at the time of the filing of the petitions herein all petitioners resided in the state of california unless otherwise indicated section references are to the internal_revenue_code in effect for the years at issue marcos eliseo escobar de paz mr escobar and teodora c escobar de paz filed a joint federal_income_tax return for on which they reported wages of dollar_figure the escobars’ return did not include a schedule c profit or loss from business or schedule e supplemental income or loss nor did it contain any schedule listing expenses in the notice_of_deficiency respondent determined that the escobars had received unreported self-employment_income of dollar_figure resulting in the aforesaid deficiency of dollar_figure included therein was self- employment_tax of dollar_figure one-half of which was allowed as a deduction during mr escobar received compensation of dollar_figure from shipper’s transport express shipper’s transport for transporting shipping containers with his own truck the_amount_of_wages reported on line of the escobar return reflects a reduction of the income from shipper’s transport of dollar_figure the parties have agreed that mr escobar incurred business_expenses of dollar_figure in for the operation of his truck respondent is no longer contesting the identification of the income from shipper’s transport as wage income and agrees that the imposition of the self-employment_tax and corresponding deduction is erroneous however respondent contends that the entire amount of compensation received from shipper’s transport is reportable as gross wages and that the escobars are entitled to a deduction on schedule a itemized_deductions for unreimbursed employee business_expenses of dollar_figure subject_to the limitations set forth in sec_67 jose a batres mr batres and dina batres filed their joint federal_income_tax return and reported wage income of dollar_figure included in the return is a schedule e for a commercial tractor on which the batreses reported rents of dollar_figure and expenses totaling dollar_figure resulting in zero income or loss in the notice_of_deficiency respondent determined that the batreses had unreported schedule c income of dollar_figure and allowable schedule c expenses of dollar_figure wage income was reduced by dollar_figure respondent further determined that petitioners were liable for self-employment_tax of dollar_figure and dollar_figure was allowed as a deduction for self-employment taxes mr and mrs batres have not contested the amount of income determined by respondent to have been received by mr batres from his trucking operation respondent now does not contest that mr batres’ income was received as an employee subject_to the resolution of the lease activity issue and the batreses are entitled to a deduction on schedule a for unreimbursed business this amount includes additional unreported income that was not reported as either wages or schedule e rents on the return expenses of dollar_figure subject_to the limitations set forth in sec_67 agustin perez mr perez and isabel sanchez ms sanchez filed their federal_income_tax return and reported wage income of dollar_figure the perez-sanchez return includes a schedule ek which reports rents received lease value of dollar_figure offset by an equivalent amount of expenses in the notice_of_deficiency respondent determined that they had gross_receipts for schedule c of dollar_figure allowed schedule c business_expenses of dollar_figure determined further that mr perez was liable for self-employment_tax of dollar_figure and allowed a self-employment_tax deduction of dollar_figure again respondent no longer contests the classification of employee concedes the self-employment_tax issues and agrees that a deduction of dollar_figure is allowable on schedule a as a miscellaneous itemized_deduction subject_to the sec_67 limitation rach of petitioner husbands herein entered into an agreement with a trucking company regarding his working relationship mr escobar and shipper’s transport entered into an agreement entitled owner-operator equipment agreement on date in mr batres entered into a contract with calko transport co inc calko mr perez on date entered into an agreement entitled lease and subhaul agreement with independent_contractor with interstate consolidation inc interstate as carrier shipper’s transport calko and interstate are hereinafter referred to collectively as the carriers messrs escobar batres and perez are collectively referred to as the owner-operators while the specific terms of the three documents vary the general tenor is the same their purpose is to enable the carriers to obtain transportation services through the lease of tractor equipment owned by an independent_contractor said tractor to be furnished with a qualified driver each owner- operator purports to lease his tractor-truck to the carrier company each owner-operator warrants that the equipment will be in good condition that he will place placards on the vehicle showing that it is operated by the carrier that he agrees to operate the vehicle as an independent_contractor and that he will be responsible for all expenses necessary for the operation of the equipment compensation_for the agreements will be paid_by carriers in accordance with a schedule not included in the record but apparently reflecting an industrywide schedule of tariffs the court understands that the compensation_for transporting the cargo is generally divided between the carrier and the owner-operator for standard size and distance hauls under these agreements the carrier assumes liability for bodily injuries to or the death of any person resulting from negligent operation maintenance or use of the equipment but the cost of this insurance is to be deducted from the compensation due to the owner-operator moreover the owner- operator agrees to furnish insurance known as bob-tail insurance pertaining to the operation of the tractor without a trailer the terms of the agreements may be terminated by either party upon short notice interstate is a trucking company or a freight forwarding company which transports goods from one point of origin to another point of origin the company owns no trucks and contracts with independent contractors to perform the services the operations of shipper’s transport are similar an owner-operator is a service provider who either owns and drives his own truck or owns more than one truck and hires other drivers to drive one or more of them in order to provide services to a carrier an owner-operator must enter into a written_agreement and qualify under various safety provisions dictated by the carrier its insurance carrier and government regulations for example interstate offers insurance coverage to owner-operators that it uses the insurance coverage offered by interstate is effective only while the owner-operator is driving for the company if an owner-operator is driving his tractor providing services to another company without the authorization of interstate the insurance provided by the carrier will not be effective the trucks belonging to the owner-operators are represented to interstate’s insurance carrier as leased trucks petitioners contend that the owner-operators were engaged in two separate activities leasing of their trucks to the carrier companies for a rental which is the equivalent of their expenses and providing the service of driving the trucks for wages respondent contends that petitioners engaged in a single activity namely providing transportation of cargo for the carriers by use of their own vehicle in this context we must determine whether the leases had independent significance so as to give rise to a separate business activity labels used in formal written documents do not necessarily control the tax consequences of a given transaction see 435_us_561 this court may look to the substance of the transaction in order to determine the correct_tax consequences it is well established that the economic_substance of a transaction rather than its form controls for federal tax purposes see 293_us_465 thus the fact that the documents state that the transactions are leases does not govern and this court must consider the substance of the transactions between the owner-operators and the carriers after a careful review of this record we conclude that petitioners did not engage in two separate activities and that the lease activity had no independent significance for tax purposes a lease is defined as a contract by which the rightful possessor of personal_property conveys the right to use that property in exchange for consideration black’s law dictionary 7th ed in the instant cases the carriers did not contract solely to use the owner-operators’ trucks for a stipulated period of time for consideration the carriers and owner-operators agreed to enter into a business relationship for the purpose of transferring cargo from one point to another using the latter’s vehicles the payments for the services provided were to be based upon published schedules relating to the weight of the cargo and the distance transferred petitioners were not paid for_the_use_of their vehicles if they did not drive and petitioners did not receive wages for driving if they did provide their own vehicles as a practical matter petitioners retained control of the use of their vehicles at all times and were responsible for all operating_expenses the carriers never acquired possession of the vehicles it is true that each owner- operator was required to display the carrier’s placard on the side of his truck while it was being used for that carrier but the placard could be removed if the truck was to be used for other purposes moreover there was no definite lease_term petitioners were always free to use their trucks how and for whom -- - they wished provided they removed the placards of any other company they could accept or reject loads as they wished they could earn as much or as little as wanted because they were free to use the equipment as much or as little as they wanted it is clear from this record that the leases only served the carriers’ needs to comply with governmental regulations this regulatory scheme was put into place to protect the public by preventing common carriers from evading liability for accidents caused by the independent drivers see 31_f3d_911 9th cir 868_f2d_357 10th cir see also 99_f3d_1340 6th cir i c c regulations that require every lease entered into by an i c c licensed carrier contain a clause stating that the authorized carrier maintains exclusive possession control and use of the equipment for the duration of the lease promulgated to curb the abuse of carriers using leased vehicles to avoid safety regulations and to address public confusion as to who was financially responsible for the vehicles c f_r secs dollar_figure and dollar_figure it is also understandable that the leases served the practical purpose of ensuring adequate insurance coverage a carrier which engages the services of many owner-operators would have an administrative headache monitoring the adequacy and current existence of the various insurance policies of the owner-operators therefore it makes sense to try to cover as many as possible by blanket policies under which insurance_companies require that the insured have an ownership_interest in the vehicle which in turn is satisfied by the lease arrangement however in most if not all cases the owner-operators pay for this insurance by having its cost deducted from their hauling proceeds accordingly we conclude that for income_tax purposes the lease arrangements with the carriers had no independent economic significance all the income the owner-operators received from the carriers was wage income and the expenses pertaining to the operation of the trucks are deductible as itemized_deductions on schedule a subject_to the limitations of sec_67 to reflect the foregoing decisions will be entered under rule


department of the treasury internal_revenue_service washington d c may tep ra ad ‘ coven tax exempt and re i taxpayer dear this extension applies to the eligible amortization charge bases as the extension of the amortization periods of the unfunded liabilities of the plan was granted in accordance with sec_431 of the code sec_431 of the code requires the secretary to extend the period of time required to amortize any unfunded_liability of a plan for a period of time not in excess of years if the plan submits an application meeting the criteria stated in sec_431 d b the plan has submitted the required information to meet this letter constitutes notice that approval has been granted for your request for a 5-year automatic_extension for amortizing the unfunded liabilities as of july for the above-named plan which are described in sec_431b and b of the internal_revenue_code code and sec_304 b b and b of the employee_retirement_income_security_act_of_1974 erisa this extension is effective with the plan_year beginning july identified in your application submission established as of july1 absent the extension under subparagraph a the pian would have an accumulated_funding_deficiency in the current plan_year or any of the succeeding plan years the criteria in sec_431 b including a certification from the plan’s actuary ii the plan_sponsor has adopted a plan to improve the plan's funding status i t oo a iii the plan is projected to have sufficient assets to timely pay expected benefits and anticipated expenditures over the amortization period as extended and iv the notice required under paragraph a has been provided we have sent a copy of this letter to the tothe and to your authorized representative pursuant to a power of attomey on file in this office this ruling is directed only to the taxpayer that requested it sec_6110 kx3 of the internal_revenue_code provides that it may not be used or cited by others as precedent if you require further assistance in this matter please contact sincerely yours david m ziegler manager ep actuarial group


t c summary opinion united_states tax_court jimmie l clemons petitioner v commissioner of internal revenue respondent docket no 20040-03s filed date jimmie l clemons pro_se jeanne gramling and blake w ferguson for respondent goldberg special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year in 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 of dollar_figure for the taxable_year after concessions the issue for decision is whether petitioner must include in his gross_income gambling winnings of dollar_figure for taxable_year the amount of petitioner’s social_security_benefits received during taxable_year that must be included in hi sec_2001 gross_income is a computational matter and will be resolved by our decision on the unreported gambling income issue background some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference petitioner resided in flat rock north carolina on the date the petition was filed in this case 1at trial respondent conceded that the amount of the deficiency for taxable_year set forth in the notice_of_deficiency was not correct instead respondent claims that the correct deficiency is dollar_figure 2at trial respondent conceded that petitioner was entitled to schedule a deductions for taxable_year of dollar_figure and dollar_figure for gambling_losses and charitable_contributions respectively 3if the dollar_figure gambling winnings are included in petitioner’s gross_income he must also include social_security_benefits received of dollar_figure in his gross_income for taxable_year pursuant to sec_86 petitioner timely filed his federal_income_tax return for the taxable_year on form_1040 u s individual_income_tax_return for taxable_year petitioner reported capital_gain income of dollar_figure petitioner did not report any other income petitioner also claimed a personal_exemption and the standard_deduction petitioner did not attach a schedule a itemized_deductions to his form_1040 during taxable_year petitioner was retired petitioner gambled at harrah’s cherokee smokey mountain casino cherokee casino and during taxable_year petitioner received gambling winnings of dollar_figure from cherokee casino both petitioner and respondent received seven forms w-2g certain gambling winnings for taxable_year all seven of which were from cherokee casino in the amounts of dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure for a total of dollar_figure petitioner attached these forms w-2g to hi sec_2001 form_1040 but as previously stated he did not report the amounts as gross_income from these forms w-2g respondent determined that petitioner had unreported gambling income of dollar_figure for taxable_year accordingly in the notice_of_deficiency for taxable_year dated date respondent determined that petitioner must include gambling winnings in the amount of dollar_figure in his gross_income respondent also determined that petitioner was entitled to schedule a itemized miscellaneous deductions in the amount of dollar_figure rather than the standard_deduction and respondent further determined that petitioner must include taxable social_security_benefits of dollar_figure in his gross_income for taxable_year the taxable social_security income was computed pincite percent of the total amount of dollar_figure which petitioner received as social_security_benefits during taxable_year after the issuance of the notice_of_deficiency but before trial respondent conceded that he failed to allow petitioner a personal_exemption and understated the allowable itemized miscellaneous deductions in his computation of the deficiency reflected in the notice_of_deficiency as previously noted at trial respondent conceded that petitioner was entitled to schedule a itemized miscellaneous deductions of dollar_figure consisting of dollar_figure for gambling_losses incurred by petitioner during taxable_year and dollar_figure for charitable_contributions made by petitioner during taxable_year respondent also conceded at trial that the correct amount of the deficiency for taxable_year was dollar_figure discussion as a general_rule the determinations of the commissioner in a notice_of_deficiency are presumed correct and the taxpayer bears the burden of proving the commissioner’s determinations to be in error rule a 290_us_111 as one exception to this rule sec_7491 places upon the commissioner the burden_of_proof with respect to any factual issue relating to liability for tax if the taxpayer maintained adequate_records satisfied the substantiation requirements cooperated with the commissioner and introduced during the court_proceeding credible_evidence with respect to the factual issue we decide the issue in this case without regard to the burden_of_proof accordingly we need not decide whether the general_rule of sec_7491 is applicable in this case see 116_tc_438 petitioner contends that his dollar_figure gambling winnings need not be included in his gross_income because he had gambling_losses to offset these winnings respondent however contends that petitioner must include his gambling winnings in his gross_income and is then entitled to a schedule a miscellaneous itemized_deduction for his gambling_losses the present problem seems to be that petitioner steadfastly rejects or ignores certain basic principles of the federal_income_tax laws petitioner wishes to net his winnings and losses and on his tax_return report in gross_income only the amount of any net gambling winnings petitioner considers as actual income only his capital_gain proceeds and any net gambling winnings petitioner is in error sec_61 defines gross_income as all income from whatever source derived including gambling unless otherwise provided 292_f2d_630 5th cir the supreme court has consistently given this definition of gross_income a liberal construction in recognition of the intention of congress to tax all gains except those specifically exempted 348_us_426 see also 716_f2d_693 9th cir all realized accessions to wealth are presumed taxable_income unless the taxpayer can demonstrate that an acquisition is specifically exempted from taxation revg 79_tc_398 sec_62 defines adjusted_gross_income and allows expenses of a trade_or_business and certain employee business_expenses to be deducted from gross_income these deductions are sometimes referred to as deductions above_the_line meaning simply that they are deducted from gross_income to arrive at adjusted_gross_income gamblers who are engaged in a trade_or_business of gambling may be able to deduct their gambling_losses above_the_line indeed courts have based their decisions in some cases on the proposition that such a professional gambler may net losses against winnings for purposes of determining what is includable in gross_income see 230_f2d_766 1st cir 66_tc_538 this is not the present case in the case of a taxpayer not engaged in the trade_or_business of gambling gambling_losses are allowable as a miscellaneous itemized_deduction but only to the extent of gains from such transactions see sec_165 mcclanahan v united_states supra winkler v united_states supra 84_tc_980 lutz v commissioner tcmemo_2002_89 see also stein v commissioner tcmemo_1984_ umstead v commissioner tcmemo_1982_573 the parties agree that during taxable_year petitioner received gambling winnings of dollar_figure at the cherokee casino the parties further agree that petitioner incurred gambling_losses during taxable_year in excess of dollar_figure petitioner did not report the aforesaid gambling winnings as gross_income on hi sec_2001 federal_income_tax return instead petitioner merely offset his gambling income with his sustained gambling_losses and did not report either of these amounts on hi sec_2001 federal_income_tax return petitioner presented no evidence to show that he was a professional gambler nor did he contend that he was a professional gambler on the basis of the evidence in the record we conclude that petitioner was a recreational gambler and not a professional gambler therefore the gambling_losses incurred by petitioner during taxable_year are allowable only as an miscellaneous itemized_deduction on schedule a to the extent of gains from gambling see sec_165 sec_1_165-10 income_tax regs thus petitioner must include his gambling winnings in his adjusted_gross_income and is entitled only then to a schedule a miscellaneous itemized_deduction to the extent of his gains from gambling for his gambling_losses see sec_165 sec_1_165-10 income_tax regs reviewed and adopted as the report of the small_tax_case division to reflect respondent’s concessions and our resolution of the disputed matters decision will be entered under rule