internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc ebeo br4-plr-103668-99 date date distributing controlled controlled business a business b business c option plan a option plan b d dear this is in response to your letters of october and date requesting rulings concerning the application of sec_83 and sec_162 of the internal_revenue_code to the transaction described below other aspects of the transaction are the subject of a separate ruling from the office of the assistant chief_counsel corporate plr-103668-99 distributing is a publicly traded corporation engaged directly and through various subsidiaries in business a business b and business c in order to separate businesses a b and c distributing has proposed the following transactions i distributing will form controlled and will contribute the assets of business b to controlled in exchange for all of the controlled stock and the assumption by controlled of liabilities associated with the contributed_property ii distributing will form controlled and will contribute the assets of business c to controlled in exchange for all of the controlled stock and the assumption by controlled of liabilities associated with the contributed_property iii following approval by its shareholders distributing will distribute the stock of controlled and controlled pro_rata to its shareholders the distributions business a will remain with distributing distributing currently has in place option plan a and option plan b collectively distributing option plans pursuant to which nonstatutory stock_options incentive stock_options and awards of restricted_stock distributing options have been granted to directors executives and other key employees of distributing and its subsidiaries the exercise price of the options equal the fair_market_value of distributing’s common_stock on the date of grant it has been represented that no incentive stock_options as described in sec_422 of the code remain outstanding as of the date of this ruling_request in addition it has been represented that the outstanding distributing options did not have a readily_ascertainable_fair_market_value within the meaning of sec_1_83-7 of the income_tax regulations when granted option plan a provides that grants of options shall be made by a committee of two or more outside directors within the meaning of sec_162 of the code prior to the distributions the board_of directors of controlled and controlled will adopt the controlled stock_option plan and the controlled stock_option plan collectively controlled stock_option plans the distributing shareholders will be asked to approve the controlled stock_option plans when they approve the distributions the organization and compensation committee of distributing’s board_of directors will approve each of the controlled stock_option plans prior to the distributions under the controlled stock_option plans nonstatutory and incentive stock_options stock appreciation rights and other stock-based award may be granted to key employees of controlled and controlled respectively and their subsidiaries it is anticipated that nonstatutory stock_options granted under the controlled stock_option plans will not have a readily_ascertainable_fair_market_value within the meaning of sec_1_83-7 of the regulations each of the controlled stock_option plans will plr-103668-99 be administered by a compensation committee of the board_of directors of controlled or controlled respectively the following steps will be taken will respect to the distributing options i all outstanding distributing options held by each person remaining employed by distributing or any of its subsidiaries immediately after the distribution retained employees will be replaced with adjusted options in distributing the adjusted options will continue to be exercisable on the same terms and conditions as before the distribution except that a the number of shares of distributing common_stock and b the option_price per share of such options will be adjusted to reflect the post- distribution value of distributing while preserving the spread between such options’ exercise price and the fair_market_value of the underlying stock ii all outstanding distributing options held by employees who become employed by either controlled or controlled or a subsidiary thereof transferred employees will terminate in connection with the termination of the transferred employee’s employment with distributing transferred employees may choose to exercise their distributing options alternatively transferred employees will be able to elect prior to the distributions to receive either controlled or controlled options depending on their post-distribution employer in exchange for their distributing options the controlled and controlled options will be subject_to the same terms and conditions as the exchanged distributing options except that a the number of shares of controlled or controlled stock for which the options may be exercised and b the option exercise price per share of such options will be adjusted to reflect the value of controlled or controlled as the case may be iii all outstanding distributing options held by a employees whose employment terminates in connection with the distributions and who are not transferred employees b employees who retire under a severance agreement in connection with the distributions and c non-employee directors of distributing eligible optionees may be exchanged pursuant to an election each eligible optionee will be able to elect prior to the distributions to have one third of the distributing options exchanged for options in each of distributing controlled and controlled one third of each eligible optionee’s distributing options will be exchanged for adjusted options as described in step i above one third will be exchanged for controlled options as described in step ii above and one third will be exchanged for controlled options as described in step ii above the options described in this paragraph iii are collectively referred to as divided options divided options may be exercised by paying the exercise price directly to the company whose stock is subject_to the option at the time of exercise of a divided option the company issuing the shares covered by the divided option will withhold all federal state local or other taxes required to be withheld in addition the company plr-103668-99 issuing the shares covered by the divided options will provide a statement to the optionee showing the compensation income recognized under sec_83 of the code during the applicable_year d the present chief_executive_officer of distributing will retire at the time of the distributions and become a non-employee director of controlled sec_83 of the code provides that if in_connection_with_the_performance_of_services property is transferred to any person other than the person for whom the services are performed the excess of the fair_market_value of the property determined without regard to any restriction other than a restriction which by its terms will never lapse at the first time the rights of the person having a beneficial_interest in the property are transferable or are not subject_to a substantial_risk_of_forfeiture whichever occurs earlier over the amount if any paid for the property will be included in the gross_income of the person who performed the services in the first taxable_year in which the rights of the person having the beneficial_interest in the property are transferable or are not subject_to a substantial_risk_of_forfeiture whichever is applicable under sec_83 of the code sec_83 does not apply to the transfer of an option without a readily_ascertainable_fair_market_value sec_1_83-7 of the regulations provides in part that if there is granted to an employee or beneficiary thereof in_connection_with_the_performance_of_services an option to which sec_421 relating generally to certain qualified and other options does not apply sec_83 shall apply to the grant if the option has a readily_ascertainable_fair_market_value at the time the option is granted if sec_83 does not apply to the grant of the option because it does not have a readily_ascertainable_fair_market_value at the time of the grant sec_83 will apply at the time the option is exercised or otherwise_disposed_of even though the fair_market_value of the option may have become readily ascertainable before such time if the option is exercised sec_83 applies to the transfer of property pursuant to the exercise and the employee recognizes compensation upon the transfer at the time and in the amount determined under sec_83 if the option is sold or otherwise_disposed_of in an arm’s length transaction sec_83 applies to the transfer of money or other_property received in the same manner as sec_83 would apply to the transfer of property pursuant to the exercise of an option see sec_1_83-7 of the regulations for the test to be applied in determining whether an option has a readily_ascertainable_fair_market_value pursuant to sec_83 of the code the person for whom the services were performed is allowed as a deduction under sec_162 an amount equal to the amount included under sec_83 in gross_income of the person who performed the services the deduction is allowed for the taxable_year of the person for whom the services were performed in which or with which ends the taxable_year the service provider includes the amount in gross_income sec_1_83-6 of the regulations provides an plr-103668-99 exception to the rule_of sec_83 concerning the taxable_year the service_recipient is allowed the deduction under sec_1_83-6 of the regulations if the property is substantially_vested upon transfer the deduction will be allowed in accordance with the service recipient’s method_of_accounting sec_162 of the code generally provides a limit of dollar_figure million on the deduction for compensation paid during any taxable_year for the chief_executive_officer and the other four highest compensated officers of any publicly_held_corporation sec_162 of the code excepts from that limit performance-based compensation that in relevant part is payable solely on account of attaining one or more performance goals determined by a compensation committee of the board_of directors which is comprised solely of two or more outside directors sec_1_162-27 of the regulations provides rules for determining what constitutes performance-based compensation sec_1_162-27 provides in part that compensation attributable to a stock_option stock_appreciation_right or other stock-based compensation does not fail to satisfy the requirements of regulation sec_1_162-27 to the extent that a change in the grant or award is made to reflect a change in corporate capitalization such as any separation of a corporation including a spinoff or other distribution of stock or property by a corporation sec_1_162-27 of the regulations provides that a director is an outside director if the director a is not a current employee of the publicly_held_corporation b is not a former employee of the publicly_held_corporation who receives compensation_for prior services other than benefits under a tax-qualified retirement_plan during the taxable_year c has not been an officer of the publicly_held_corporation and d does not receive remuneration from the publicly_held_corporation either directly or indirectly in any capacity other than as a director for this purpose remuneration includes any payment in exchange for goods or services sec_1_162-27 of the regulations provides that whether a director is an employee or a former officer is determined on the basis of the facts at the time the individual is serving as a director on the compensation committee thus a director is not precluded from being an outside director solely because the director is a former officer of a corporation that previously was an affiliated_corporation of the publicly_held_corporation sec_1_162-27 of the regulations provides in relevant part that for purposes of sec_1_162-27 remuneration is received directly or indirectly by a director if remuneration is paid directly or indirectly to the director personally plr-103668-99 distributing prior to its reorganization issued the distributing options to its employees in_connection_with_the_performance_of_services when pursuant to the proposed transaction the assets of business b and business c are transferred to controlled and controlled respectively and controlled options are substituted for the distributing options the controlled or controlled options issued by controlled or controlled to distributing’s employees will be issued in_connection_with_the_performance_of_services to controlled or controlled compare r j nicoll co v commissione59_tc_37 acq 1973_2_cb_3 where a parent_corporation is divided into three corporations and options in the new corporations are issued to pre-distribution parent employees in order to provide them with the same value the new corporations are entitled to a deduction under sec_83 of the code because the new corporations were service recipients when they were part of the parent prior to the change in accordance with revrul_80_76 1980_1_cb_15 however neither the parent_corporation nor the new corporations are entitled to a sec_83 deduction if the services were performed for a subsidiary of the parent instead the subsidiary would be entitled to the sec_83 deduction accordingly based on the information submitted and distributing’s representations set forth above we rule as follows provided the distributing options controlled options and divided options have no readily_ascertainable_fair_market_value no income gain_or_loss will be realized by the holders of distributing options upon their exchange of distributing options for adjusted options controlled options or divided options sec_83 and sec_1_83-7 because sec_83 applies no gain_or_loss will be recognized by distributing controlled or controlled upon the exercise of a divided option upon the exercise or disposition of either an adjusted option controlled option or divided option the optionee will recognize compensation income equal to the excess of the fair_market_value of the shares covered by the option over the amount_paid for such options sec_83 amounts includible in the gross_income of each holder of a distributing option or a controlled option who is a current or former employee upon the exercise of the option will be deducible by the company issuing shares in satisfaction of the 1in revrul_80_76 an individual owning stock in corporation p transferred stock to an employee of corporation s which was controlled by p within the meaning of sec_368 of the code revrul_80_76 holds in part that s is allowed the sec_83 deduction plr-103668-99 distributing option or the controlled option provided the deduction meets the requirements of sec_162 sec_83 amounts includible in the gross_income of each holder of a divided option who is an eligible_employee will be deducible by the company issuing the shares in satisfaction of such divided option provided the deduction meets the requirements of sec_162 sec_83 assuming the other conditions of sec_1_162-27 of the regulations are met with respect to the controlled options divided options and adjusted options the spread upon the exercise of controlled options divided options and adjusted options will constitute performance-based compensation within the meaning of sec_162 of the code the fact that b was an officer of distributing will not cause him to be treated as a former officer of controlled for purposes of sec_1_162-27 of the regulations and therefore will not preclude b from qualifying as an outside director of controlled within the meaning of sec_162 of he code and sec_1 e i c of the regulations the exercise of a divided controlled option by an individual who ceases to be a distributing non-employee director and becomes a non-employee director of controlled or controlled will not constitute remuneration for services other than as a director from controlled or controlled as the case may be to such individual for purposes of sec_1_162-27 of the regulations such exercise will not preclude such individual from qualifying as as outside director of controlled or controlled within the meaning of sec_162 of he code and sec_1_162-27 of the regulations except as expressly provided herein no opinion is expressed or implied concerning the federal tax consequences of the transaction described above under any provision of the internal_revenue_code this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent a copy of this letter must be attached to any federal_income_tax return to which it is relevant plr-103668-99 in accordance with the power_of_attorney on file in this office a copy of this letter is bring sent to your authorized representative sincerely robert b misner assistant chief branch office of the associate chief_counsel employee_benefits and exempt_organizations enclosure copy for sec_6110 purpose


t c memo united_states tax_court c michael and gwendolyn e willock petitioners v commissioner of internal revenue respondent docket no filed date c michael and gwendolyn e willock pro_se jeanne gramling for respondent memorandum findings_of_fact and opinion paris judge on date respondent mailed to petitioners a notice_of_deficiency notice that determined deficiencies in their federal_income_tax of dollar_figure and dollar_figure for tax_year sec_2002 and respectively and penalties under section of dollar_figure and dollar_figure for and respectively petitioners then residing in the state of north carolina timely petitioned this court for redetermination of the deficiencies and penalties the issues for decision as framed by the parties are whether petitioners’ car and truck expenses were ordinary and necessary business_expenses and whether petitioners adequately substantiated those expenses whether petitioners’ vehicle was placed_in_service during taxable_year whether petitioners adequately substantiated as dental practice expenses their travel and entertainment_expenses for their trip to hawaii professional fees paid to an individual for marketing and networking training and fees for janitorial services whether petitioners’ losses from their dental equipment_leasing business are properly deductible from the income they received from their condominium rental whether petitioners’ participation in a multi-level marketing company and an organic farming_business was for profit whether certain deposits made to petitioners’ joint 1section references are to the internal_revenue_code_of_1986 code as amended rule references are to the tax_court rules_of_practice and procedure bank account are properly includable as income or whether those deposits repaid a loan made to their son and whether petitioners are liable for accuracy-related_penalties findings_of_fact some of the facts have been stipulated and are found accordingly the stipulation of facts and the attached exhibits are incorporated herein by this reference i the dental practice items petitioner husband is a dentist in and he operated his dental practice through an s_corporation known as c michael willock dds pa for tax_year sec_2002 and respondent determined increases in the dental practice’s gross_receipts by reference to bank_deposits and disallowed or reduced deductions for some of the expenses claimed by the practice the parties agree that the amounts reported as the dental practice’s gross_receipts for and should be increased by dollar_figure and dollar_figure respectively however what remains in dispute are petitioners’ claimed deductions for car and truck expenses sec_179 expenses travel_expenses professional fees and cost of janitorial services these expenses are flow-through items incurred by the s_corporation a car and truck expenses respondent denied petitioners’ claimed deductions for car and truck expenses of dollar_figure and dollar_figure for tax_year sec_2002 and respectively in petitioners drove an audi and a land rover both of which were claimed by petitioners to have been driven solely for business purposes petitioner wife had veneers cosmetic dental applications applied to her teeth by petitioner husband petitioners claim that any time petitioner wife drove anywhere in one of the vehicles she was a walking talking billboard for the dental office because of the veneer work petitioner husband had performed additionally each vehicle had a license plate holder that displayed the name of the dental practice petitioner husband used the vehicles to perform various tasks for the dental practice such as purchasing office supplies during and petitioners owned four vehicles a gmc envoy an audi a land rover and a chevy tahoe petitioner wife testified that she drove the audi until the lease expired after which she drove the land rover petitioners started leasing the land rover on date and the dental practice claimed deductions for lease payments with respect to both the land rover and the audi during petitioners leased the audi until date during 2petitioners leased the audi and the land rover and owned the gmc envoy and the chevy tahoe and petitioners also reported a dollar_figure monthly expense for gmac which is reflected in their car and truck expenses for and it is unclear which vehicle these payments were for the vehicles were owned or leased by petitioners individually not by the dental practice however the dental practice claimed the deductions b sec_179 expense deduction the dental practice claimed sec_179 expense deductions for tax_year sec_2002 and in the respective amounts of dollar_figure and dollar_figure respondent concedes the deduction of dollar_figure for tax_year respondent partially disallowed the sec_179 expense deduction for claimed in regard to the gmc envoy on the dental practice’s return petitioners reported that the gmc envoy was placed_in_service on date and that it was used solely for business purposes petitioners purchased the gmc envoy after the lease for the land rover expired petitioners’ lease on the land rover ended sometime after ie in it therefore appears that petitioners retained the land rover lease through and purchased the gmc envoy after the gmc envoy bore a license plate holder with the name of the dental practice the gmc envoy was titled in petitioners’ names rather than in the name of the dental practice which claimed the deductions c travel_expenses respondent disallowed travel_expenses of dollar_figure for which petitioners claim they incurred during a business trip to hawaii for a dental conference petitioners were in hawaii from may through petitioners testified that the dental conference was held from may through petitioners presented the court an invoice for the purchase of dental equipment which they claim they purchased in hawaii during the dental conference the invoice however states only when the equipment was purchased not where it was purchased d professional fees petitioners deducted professional fees of dollar_figure for tax_year which amount they claimed was paid to ron lewis the pastor of petitioners’ church petitioners hired ron lewis to instruct petitioner wife in the areas of networking and marketing so that she could be a more effective salesperson and marketer for the dental practice these instructional sessions purportedly occurred in petitioners’ home and for a brief period of time over the telephone petitioners presented copies of forms annual summary and transmittal of u s information returns and 1099-misc miscellaneous income in support of these claimed expenses for consulting no social_security_number is listed for ron lewis on either form and no evidence was offered to confirm that the tax forms were actually delivered to ron lewis ron lewis did not testify at trial e janitorial expenses respondent disallowed some of the dental practice’s claimed janitorial expenses for both and and a portion of these expenses remains in dispute with respect to the dental practice claimed janitorial expenses of dollar_figure the only expenses remaining in dispute are certain expenses in connection with payments claimed to have been made to the sotelos a landscaping service in the amount of dollar_figure petitioners testified that these expenses were reported on their income_tax return and represent expenses_incurred for landscaping services provided for the dental practice all of the invoices from the sotelos are addressed to petitioners at their home address and were not addressed to the dental practice or sent to the dental practice address in tax_year petitioners deducted janitorial expenses of dollar_figure of which amount respondent allowed dollar_figure of the disallowed amount dollar_figure represents an amount petitioners claim to have paid to their son ryan willock on behalf of the condominium association where the dental office is located petitioners testified that they paid their son to provide landscaping upgrades to the dental practice petitioners claim that the landscaping had not been updated in several years and that such work was necessary to present a professional appearance to new and existing dental practice patients however petitioners presented no documentation supporting this claimed expense the remaining dollar_figure reflects a payment to ryan willock as evidenced by a form_w-2 wage and tax statement that petitioners generated petitioners provided no evidence of the services which their son purportedly provided for this amount nor any evidence that the form_w-2 was delivered to him ii dental practice leases petitioners owned a condominium which they leased to petitioner husband’s dental practice which was operated as an s_corporation in both and a profit was reported with respect to this rental property petitioners also owned a company known as dental equipment_leasing l l c del which leased a cerec milling machine4 to the dental practice del did not lease any other equipment to the dental practice or lease any equipment to any other individual or entity during the years at issue in and del reported a loss on their 3the amount claimed dollar_figure less the amount allowed dollar_figure leaves dollar_figure disallowed by respondent respondent however disallowed individual amounts of dollar_figure and dollar_figure which total dollar_figure this amount is dollar_figure more than the total amount claimed by petitioners it is unclear what created this discrepancy however respondent does not seek to disallow the dollar_figure difference between the total amount reported on the s corporation’s return and the total amount disallowed by respondent 4this machine is used to make dental implants and federal_income_tax returns petitioners deducted losses from the lease of the dental equipment of dollar_figure for and dollar_figure for from the income received from the rental of the condominium respondent disallowed these claimed loss deductions iii nu-e world lexxus international during tax_year sec_2002 and petitioners worked part-time as salespersons and marketers with a company known as nu-e world lexxus international nu-e world petitioners reported expenses from their work with nu-e world on schedule c profit or loss from business on their and income_tax returns on their income_tax return petitioners reported that their work for nu-e world caused them to incur expenses for travel meals and entertainment sales aides dues and purchases on their income_tax return petitioners reported that their work for nu-e world caused them to incur expenses for depreciation and dues in the notice respondent disallowed the expense deductions claimed for both years on grounds that petitioners failed to substantiate the amounts claimed and failed to establish that the amounts were ordinary and necessary business_expenses after the notice was issued petitioners provided some receipts for meals as well as copies of credit card statements in light of these disclosures respondent conceded that petitioners may claim expenses to the extent of income reported petitioners reported sales income of dollar_figure for and zero income for there are no records indicating which items were sold or the volume or dates of sale on their income_tax return petitioners reported that they incurred expenses in connection with their work for nu-e world for meals and travel including hotel rooms for themselves and their son and daughter-in-law and meals for individuals who in the nu-e world structure ranked both above and below petitioners according to their list of expenses petitioners also purchased two computers to be used in their work for nu-e world one from dell in the amount of dollar_figure on date and the other from gateway in the amount of dollar_figure in january of petitioners claimed depreciation on their and returns for one of these computers though it is impossible to tell which computer from the evidence available to the court petitioners also purchased window blinds costing dollar_figure for the meeting room in their home petitioners claim that it was necessary to purchase the blinds to make the meeting room look more professional to potential nu-e world clients petitioners’ records consist of summaries of expenses and receipts for meals with handwritten notes with respect to the individuals whose meals they paid for petitioners thought that nu-e world would be a good source_of_income based upon their research of the history of the individuals running the company according to petitioners these individuals had a proven record of success in very similar industries and thus petitioners believed that nu-e world would also be very successful petitioners networked with people and attempted to sell them products that nu-e world marketed or produced such as a product called noni juice petitioners often gave out free samples of products provided by nu-e world in the hope that the free samples would generate purchases from customers petitioner wife performed the role of salesperson for nu-e world’s products she found individuals she believed might be interested in these products brought the individuals to her home’s meeting room and gave these individuals a sales-pitch on the benefits of various nu-e world products iv laurel valley properties l l c in petitioners purchased acres of land near stuart virginia for the purpose of starting an organic farm the property was titled in petitioners’ names however the farming operation was operated as a limited_liability_company called laurel valley properties l l c laurel valley laurel valley filed a form_1065 u s return of partnership income for petitioners were each issued a schedule_k-1 partner’s share of income credits deductions etc from laurel valley for petitioners reported on their individual income_tax return a flowthrough loss from laurel valley of dollar_figure of that amount dollar_figure was for depreciation on two all-terrain vehicles petitioners purchased and dollar_figure was for mortgage interest on the farm respondent disallowed the claimed loss on the ground that this endeavor was not entered into as a business activity engaged in for profit laurel valley had no bank account in and some of the expenditures_for which petitioners claimed deductions were made with checks from petitioner husband’s dental practice while others were made with petitioners’ personal checks in petitioners purchased chickens that were to be used for egg production and sale but the chickens were eaten by predators petitioners have since built a chicken coop to house the chickens petitioners determined that they would be able to sell the chicken eggs to a nearby restaurant as well as to local individuals petitioners devoted all of their weekends holidays and vacation time to working on the farm petitioners made improvements to the farm such as building a storage shed petitioner wife was born on a farm and lived on a farm until she wa sec_38 years old she had owned a farm with her father and had owned cows tractors and milking equipment in the past petitioner wife’s father was a dairy farmer petitioner husband worked on petitioner wife’s father’s farm after petitioners married petitioner husband worked continuously on the farm until the farm was sold at which point petitioner husband went to dental school petitioner wife has been a member of the north carolina farm bureau an independent farming trade group since v banks deposits loan to ryan willock respondent analyzed petitioners’ bank_deposits and determined that petitioners had understated their and income of dollar_figure and dollar_figure respectively after respondent issued the notice petitioners presented respondent with certain documentation in an attempt to justify the understatement based upon these documents respondent conceded all but dollar_figure for and the entire amount for petitioners claim that the bank_deposits of dollar_figure remaining in dispute for were received in repayment of a loan they made to their son ryan willock so that he could purchase a used pickup truck from michael hickman a used car salesman petitioners therefore claim that the bank_deposits of dollar_figure which respondent included in their income had a nontaxable source ie loan repayments from their son petitioners’ documentary_evidence supporting this claim consists of a carbon copy of a check for dollar_figure from the bank account of m ryan willock dated date a copy of a deposit slip for petitioners’ bank account which 5the court is not privy to the reason petitioners did not present this information to respondent before the notice was issued reflects a dollar_figure deposit on date and copies of two checks one for dollar_figure and the other for dollar_figure both dated date and both made payable to michael hickman petitioners did not present any documentation to support their claim that the additional deposit of dollar_figure into their bank account was from their son in satisfaction of his loan debt petitioners lent dollar_figure to their son ryan willock so that he could purchase a used pickup truck the truck was offered for sale by michael hickman for dollar_figure petitioner wife happened upon the sale of the vehicle and asked her son whether he was interested in purchasing it for the sale price her son informed her that he was interested but could not come to the vehicle’s location at that time because of his work schedule petitioner wife asked hickman to hold the vehicle for her son hickman agreed to do so only after receiving a dollar_figure deposit check from petitioner wife petitioner wife paid the remaining dollar_figure to hickman by check upon sale opinion i dental practice items respondent determined that the returns underreported the dental practice’s gross_receipts by reference to bank_deposits and disallowed or reduced some of the deductions claimed by the practice for tax_year sec_2002 and the parties agree that the dental practice’s gross_receipts for and should be increased by dollar_figure and dollar_figure respectively however remaining in dispute are petitioners claimed deductions for car and truck expenses sec_179 expenses travel_expenses professional fees and fees for janitorial services a car and truck expenses sec_162 allows deductions for all ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business including operating_expenses of automobiles used_in_the_trade_or_business sec_1_162-1 income_tax regs a taxpayer is entitled to deduct transportation_expenses incurred in carrying_on_a_trade_or_business commuting expenses however incurred in going from a taxpayer’s residence to his or her place of business and returning are nondeductible personal expenses see eg 413_us_838 when a taxpayer uses a car for personal as well as for business purposes he or she must allocate expenses between personal and business use see sec_1_274-5t temporary income_tax regs fed reg date petitioners did not allocate their expenses the code and the regulations thereunder require that sufficient records be maintained to establish the amount of any deduction claimed see sec_6001 sec_1_6001-1 income_tax regs any taxpayer seeking to deduct expenses related to the business use of a car must provide the commissioner with certain information a taxpayer must indicate mileage including total business commuting and other personal mileage percentage of business use date placed_in_service use of other vehicles after-work use whether the taxpayer has evidence supporting claimed business use and whether or not the evidence is written sec_1_274-5t temporary income_tax regs supra petitioners have not provided this information to respondent or the court sec_274 provides that no deduction is allowed for listed_property as defined by sec_280f unless the taxpayer substantiates by adequate_records or corroborative evidence the amount of such expense the time and place of use the business_purpose of the expense and the business relationship of the taxpayer to the persons using the property pursuant to sec_280f listed_property includes with certain exceptions any passenger_automobile or other_property used as a means of transportation sec_280f and ii petitioners deducted car and truck expenses dollar_figure and dollar_figure for and respectively respondent denied these deductions claiming that petitioners failed to adequately substantiate the expenses or provide information that the amounts were incurred as ordinary and necessary business_expenses in order to substantiate the expenses petitioners offered cancelled checks and credit card bills for various items such as repairs and gas additionally petitioners offered a series of handwritten calendars that detail their daily work schedules but not the particular use of the vehicles for which expenses were claimed petitioners used their cars for personal as well as business purposes however petitioners claim all use was business related because each vehicle had a license plate holder that displayed the name of the dental practice petitioners contend that even when the vehicles were being used for personal reasons they provided a valuable advertising service to the dental practice petitioners did not maintain records allocating personal and business use of their cars petitioners also commuted to the dental practice from their home daily but did not make an allocation for any commuting to and from the dental practice petitioners failed to prove that the vehicles were used in the conduct_of_a_trade_or_business as defined under sec_162 further petitioners failed to maintain adequate_records to substantiate the use of their vehicles under sec_274 respondent’s determination is sustained b sec_179 expense deductions a taxpayer may elect to deduct as a current_expense the cost of any sec_179 property with certain dollar limitations that is acquired by purchase in the active_conduct_of_a_trade_or_business and placed_in_service during the taxable_year sec_179 b d sec_1_179-4 income_tax regs placed_in_service is defined to mean the time that property is first placed by the taxpayer in a condition or state of readiness and availability for a specifically assigned function whether for use in a trade_or_business for the production_of_income in a tax-exempt activity or in a personal activity sec_1 e income_tax regs the dental practice claimed sec_179 deductions for tax_year sec_2002 and of dollar_figure and dollar_figure respectively respondent concedes petitioners may deduct dollar_figure for tax_year however respondent disallowed the sec_179 deduction claimed in for the gmc envoy petitioners claim was used solely for business purposes for the dental practice on the dental practice’s return petitioners reported that the gmc envoy was placed_in_service on date and that it was used solely for business purposes petitioner wife testified that petitioners purchased the gmc envoy after the lease for the land rover expired however petitioner wife also testified that petitioners’ lease on the land rover ended sometime after it therefore appears that petitioners retained the land rover lease through and thus purchased the gmc envoy after it is unclear whether petitioners placed the item in service in or in after the lease on the land rover expired petitioners have not offered any other evidence to corroborate their claimed placed-in-service date under sec_179 and the regulations thereunder the court must sustain respondent’s determination as to the gmc envoy c travel and entertainment_expenses a taxpayer may claim a deduction for travel and entertainment_expenses if the taxpayer establishes among other things that the expenditure was directly related to the active_conduct of the taxpayer’s trade_or_business or in the case of an expenditure directly preceding or following a substantial_and_bona_fide_business_discussion that the expenditure was associated with the active_conduct of the taxpayer’s trade_or_business sec_1_274-2 income_tax regs petitioners claimed travel_expenses of dollar_figure for tax_year of which dollar_figure remains in dispute after respondent’s partial concession petitioners claim they incurred these expenses for a trip to hawaii for a dental seminar petitioners have not offered any probative evidence to substantiate their attendance at the seminar nor have they offered any probative evidence to support the business_purpose of the trip petitioners presented the court an invoice for the purchase of dental equipment which they claim was made in hawaii during the dental conference the invoice however states only when the equipment was purchased not where it was purchased petitioners produced no evidence supporting any of the expenses claimed which include meals first-class airline tickets and taxi fees petitioners have failed to substantiate that their claimed expenses were in any way related to their dental practice respondent’s determination is sustained as to the amount of the travel_expenses remaining in dispute and not conceded by respondent d professional fees expense petitioners claimed a deduction for professional fees for tax_year of dollar_figure which they claimed was paid to ron lewis for consulting services in the form of networking and marketing instruction to petitioner wife petitioners presented to the court copies of forms and 1099-misc which petitioners prepared in support of these claimed expenses for consulting no social_security_number is listed for ron lewis on either form nor is there any proof that these forms were ever delivered to him petitioner wife initially testified that she borrowed the money used to pay ron lewis by issuing to him checks written against a chase line of credit thus incurring finance_charges she later testified that she paid ron lewis with mostly cash it is unclear from the evidence whether ron lewis was ever paid any amount by petitioners because petitioners have not met their burden of substantiating these expenditures respondent’s determination must be sustained e janitorial services expense respondent reduced the dental practice’s claimed janitorial expenses for both and and a portion of these expenses remains in dispute with respect to the dental practice claimed janitorial expenses of dollar_figure the only expenses remaining in dispute are certain expenses of dollar_figure in connection with payments claimed to have been made to the sotelos a landscaping service petitioners testified that these expenses were reported on their income_tax return and represented expenses_incurred for landscaping services provided to the dental practice all of the invoices from the sotelos were addressed to petitioners at their home address and were not addressed to the dental practice or sent to the dental practice address with respect to tax_year petitioners claimed janitorial expenses of dollar_figure of which respondent allowed dollar_figure of the disallowed amount dollar_figure represents an amount petitioners claim to have paid to their son ryan willock on behalf of the condominium association where the dental office is located petitioners testified that they paid their son to provide landscaping upgrades to the dental practice petitioners claim that the landscaping had not been updated in several years and that such work was necessary to present a professional appearance to new and existing dental practice patients however petitioners presented no documentation supporting this claimed expense the remaining dollar_figure reflects a payment to ryan willock as evidenced by a form_w-2 petitioners generated petitioners provided no evidence of the services which their son purportedly provided for this amount petitioners have failed to substantiate that these claimed expenses had a business_purpose or that the services were even provided to their business rather than to them personally respondent’s determination is sustained ii dental practice leases del leased one cerec milling machine to the dental practice but did not lease any other equipment to any other individual or entity during the years at issue del reported losses for and petitioners on their and income_tax returns attempted to deduct the passive losses of del from the income derived from their rental of the condominium to the dental practice claiming both were passive activities respondent disallowed the deduction on the grounds that the rental_activity was not passive because petitioner husband actively participated in the dental practice petitioners argued during the trial that the equipment_leasing and condominium leasing were both nonpassive activities thus allowing for the loss of one to offset the income of the other generally under sec_469 an individual closely_held_c_corporation or personal services corporation may not deduct losses from passive activities against nonpassive_income passive_activity is defined to include a trade_or_business in which the taxpayer is not a material participant or any rental_activity see sec_469 though sec_469 generally includes rental activities in the definition of passive_activity the self-rental_rule provides that a taxpayer’s net_income from a rental of property to a trade_or_business activity in which the taxpayer materially participates is treated as nonpassive_income whereas a loss from such rental is treated as a passive loss see sec_1_469-2 income_tax regs see also 114_tc_366 holding that the secretary was authorized to prescribe sec_1_469-2 income_tax regs and that the regulation is valid law affd 279_f3d_547 7th cir therefore if petitioner husband’s dental practice constitutes a trade_or_business activity in which he materially participates under the self-rental_rule any income from the condominium rental or equipment rental would be nonpassive and any losses from these activities would be treated as passive if this is the case then respondent’s determination would be sustained because losses from one passive_activity can be deducted against income from other passive activities but passive losses may not be deducted from nonpassive_income see sec_469 an individual participates materially in a trade_or_business if his or her involvement in the operations of the activity is regular continuous and substantial sec_469 in an effort to make the material_participation test objective the regulations identify seven situations in which an individual’s participation in a trade_or_business is material see sec_1_469-5t temporary income_tax regs fed reg date fulfilling the criteria in any of the seven will cause the participation to be deemed active id petitioner husband may meet the criteria for several of the situations but most notably meets the hour test under this test an individual who participates in an activity for more than hours during a taxable_year is a material participant in the activity for the year id participation generally means any work done in an activity by an individual who owns an interest in the activity sec_1_469-5 income_tax regs generally all hours of work in connection with the activity are counted as participation id petitioner husband worked full-time at the dental practice during and by petitioner husband’s own admission he worked more than hours at the dental practice each year the dental practice was clearly materially participated in by petitioner husband during and under the self-rental property rule the income petitioners received from the rental of the condominium is nonpassive_income moreover under this rule the losses petitioners may have incurred from the rental of the cerec machine to the dental practice are passive under sec_469 petitioners are prohibited from deducting the passive losses of del from the nonpassive_income of the condominium rental the court sustains respondent’s determination iii sec_183 and activities engaged in for profit the court must determine whether petitioners’ nu-e world sales and marketing activities and laurel valley farming activities were engaged in for profit within the meaning of sec_183 sec_183 provides that if an activity engaged in by an individual is not engaged in for profit no deduction attributable to that activity shall be allowed except as provided in sec_183 sec_183 allows in the case of activities not engaged in for profit deductions which would be allowable under the code without regard to whether such activity was engaged in for profit and a deduction equal to the amount of the deductions which would be allowable under the code only if such activity were engaged in for profit but only to the extent that the gross_income derived from such activity for the taxable_year exceeds the deductions allowable by reason of the first exception sec_183 defines an activity_not_engaged_in_for_profit as any activity other than one with respect to which deductions are allowable for the taxable_year under sec_162 or under paragraph or of sec_212 sec_162 allows a deduction for all ordinary and necessary expenses paid_or_incurred in carrying on any trade_or_business sec_212 allows a deduction for all ordinary and necessary expenses paid_or_incurred for the production_or_collection_of_income or for the management_conservation_or_maintenance_of_property_held_for_the_production_of_income whether deductions are allowable under sec_162 or sec_212 depends inter alia on whether the taxpayer engaged in the activity with the objective of making a profit see sec_183 the regulations under sec_183 establish an objective test for determining whether a taxpayer is engaging in an activity for profit the regulations state the determination whether an activity is engaged in for profit is to be made by reference to objective standards taking into account all of the facts and circumstances of each case although a reasonable expectation of profit is not required the facts and circumstances must indicate that the taxpayer entered into the activity or continued the activity with the objective of making a profit in determining whether an activity is engaged in for profit greater weight is given to objective facts than to the taxpayer’s mere statement of his intent sec_1_183-2 income_tax regs the regulations provide a nonexclusive list of nine factors that should normally be taken into account when making the determination whether the activity was engaged in for profit sec_1_183-2 income_tax regs the nine factors are the manner in which the taxpayer carried on the activity the expertise of the taxpayer or his advisors the time and effort spent by the taxpayer on the activity the expectation that assets used in the activity might appreciate in value the taxpayer’s success in carrying on similar or dissimilar activities the taxpayer’s record of income or losses attributable to the activity the amount of profits earned the taxpayer’s financial status and the personal pleasure or recreation derived from the activity by the taxpayer id as explained by the regulations no single factor is controlling sec_1_183-2 income_tax regs to simplify the analysis several factors can be grouped together for purposes of analyzing the facts and circumstances applicable to this case the first factor involving whether the taxpayer acted in a businesslike manner in connection with the undertaking is defined under sec_1_183-2 income_tax regs as follows the fact that the taxpayer carries on the activity in a businesslike manner and maintains complete and accurate books_and_records may indicate that the activity is engaged in for profit similarly where an activity is carried on in a manner substantially_similar to other activities of the same nature which are profitable a profit_motive may be indicated a change_of operating methods adoption of new techniques or abandonment of unprofitable methods in a manner consistent with an intent to improve profitability may also indicate a profit_motive sec_1_183-2 income_tax regs explains the second factor regarding the expertise of the taxpayer and his advisors preparation for the activity by extensive study of its accepted business economic and scientific practices or consultation with those who are expert therein may indicate that the taxpayer has a profit_motive where the taxpayer carries on the activity in accordance with such practices where a taxpayer has such preparation or procures such expert advice but does not carry on the activity in accordance with such practices a lack of intent to derive profit may be indicated unless it appears that the taxpayer is attempting to develop new or superior techniques which may result in profits from the activity the time and effort expended by the taxpayer in carrying on the activity which is the third factor is defined by sec_1_183-2 income_tax regs as follows the fact that the taxpayer devotes much of his personal time and effort to carrying on an activity particularly if the activity does not have substantial personal or recreational aspects may indicate an intention to derive a profit a taxpayer’s withdrawal from another occupation to devote most of his energies to the activity may also be evidence that the activity is engaged in for profit the fact that the taxpayer devotes a limited amount of time to an activity does not necessarily indicate a lack of profit_motive where the taxpayer employs competent and qualified persons to carry on such activity with respect to the fifth factor dealing with the success of the taxpayer in carrying on other similar or dissimilar activities sec_1_183-2 income_tax regs provides the fact that the taxpayer has engaged in similar activities in the past and converted them from unprofitable to profitable enterprises may indicate that he is engaged in the present activity for profit even though the activity is presently unprofitable a nu-e world the court is not convinced that petitioners conducted this activity in a businesslike manner see sec_1_183-2 income_tax regs petitioners purchased two computers supposedly for use in this activity however there is no evidence before the court of what purpose these computers served additionally petitioners’ records consist of summaries of expenses and receipts for meals with handwritten notes with respect to the individuals whose meals they paid petitioners claim that they served as salespersons for nu-e world nu-e world sells consumer products such as noni juice petitioners claim that they did in fact sell some nu-e world products petitioners however did not maintain any records indicating which if any items they sold on behalf of nu-e world or the volume or dates of such sales petitioners similarly did not use certain fundamental business practices that would be expected of individuals undertaking an activity for profit such as keeping detailed records of business telephone charges commercial bank account records detailed invoices of products received from nu-e world and postage expenses records see ogden v commissioner tcmemo_1999_397 affd 244_f3d_970 5th cir to the court’s knowledge petitioners did not maintain a written business plan or a projected profit and loss statement petitioners have no prior experience in selling or maintaining an inventory of retail products the court determines that petitioners are not entitled to deduct the losses from their nu-e world activity for the years at issue b laurel valley petitioners purchased a parcel of land in virginia with the goal of transforming it into an organic farm petitioners operated the farm in a businesslike manner consistent with that of farms being operated for profit see sec_1_183-2 income_tax regs to this end petitioners made improvements to the land such as building a storage shed purchasing farming machinery to clear and work the land and building a chicken coop petitioners purchased chickens that were to be used for egg production and sale through research petitioners determined that the eggs could be sold to a nearby winery and restaurant as well as to other local consumers these are activities conducted in any successful farming activity petitioners devoted all of their weekends holidays and vacation time to working on the farm see sec_1_183-2 income_tax regs petitioner wife was born on a farm and lived on a farm until she wa sec_38 years old she had at one time owned a profitable farm with her father and had also owned livestock and farming equipment petitioner husband worked on petitioner wife’s father’s farm after petitioners were married petitioner husband worked continuously on that farm until the farm was sold petitioner wife has been a member of the north carolina farm bureau since see sec_1_183-2 income_tax regs it is important to note that the year at issue was the very first year petitioners engaged in this activity this fact makes the determination whether the activity was engaged in for profit more difficult though petitioners’ recordkeeping certainly could be improved and no profit was made by all indications petitioners were working hard to make this a successful farm from which goods could be sold to local restaurants and individuals the court determines that petitioners engaged in the farming activity with the motivation of making a profit and are entitled to the claimed deductions iv loan to ryan willock sec_61 specifies that except as otherwise provided gross_income includes all income from whatever source derived respondent used the bank_deposits method of proof to reconstruct petitioners’ income and determined that unexplained deposits totaling dollar_figure should be included as income deposits in a taxpayer’s bank account are prima facie evidence of income and the taxpayer bears the burden of showing that the deposits were not taxable_income but were derived from a nontaxable source 204_f3d_1228 9th cir affg tcmemo_1998_121 the bank_deposits method assumes that all money deposited in a taxpayer’s bank account during a given period constitutes taxable_income but the government must take into account any nontaxable source or deductible expense of which it has knowledge 102_tc_632 citing 96_tc_858 affd 959_f2d_16 2d cir petitioners claim that the dollar_figure deposited in their bank account for is not income but instead the repayment of a loan made to their son ryan willock so that he could purchase a used pickup truck petitioners further claim that the dollar_figure comprises two deposits one of dollar_figure and the other of dollar_figure in support of their claim that the deposited amounts were loan repayments and not income petitioners submitted to the court a carbon copy of a check for dollar_figure from the bank account of m ryan willock dated date a copy of a deposit slip for petitioners’ bank account which reflects a dollar_figure deposit on date and copies of two checks one for dollar_figure and the other for dollar_figure both dated date and both made payable to michael hickman a used car salesman petitioners did not present any documentation to support their claim that the additional deposit of dollar_figure into their bank account was from their son in satisfaction of his loan debt instead petitioners presented copies of two statements from a charles schwab custodial_account for michael r willock which do not seem to address this deposit at all petitioner wife testified that she lent dollar_figure to her son ryan willock so that he could purchase a used pickup truck the truck was offered for sale by michael hickman for dollar_figure petitioner wife testified that she happened upon the sale of the vehicle and asked her son whether he was interested in purchasing it for the sale price her son informed her that he was interested but could not come to the vehicle’s location at that time because of his work schedule petitioner wife asked hickman to hold the vehicle for her son hickman agreed to do so only after receiving a check for dollar_figure as a deposit from petitioner wife petitioner wife testified that the remaining dollar_figure was paid to michael hickman by check upon sale petitioners claim that the deposits of dollar_figure and dollar_figure were from their son in repayment of the loan petitioners claim that ryan willock asked to repay the loan in two separate installments because he could not afford to immediately pay the loan principal in its entirety the court finds petitioners’ explanation of this matter to be credible petitioners offered to the court a carbon copy of a check for dollar_figure from the bank account of m ryan willock dated date this amount appears to be contemporaneous with petitioners’ date deposit slip in the amount of dollar_figure petitioners argue that their son paid the balance of the loan on date petitioners’ banking records reflect a deposit to their account made on date in the amount of dollar_figure the court determines that the two deposits at issue were loan repayments made by petitioners’ son and are not includable as income v accuracy-related_penalty respondent determined that petitioners are liable for each of their taxable years for the accuracy-related_penalty under sec_6662 because of negligence or disregard of rules or regulations under sec_6662 or a substantial_understatement of tax under sec_6662 sec_6662 imposes an accuracy-related_penalty equal to percent of the underpayment to which sec_6662 applies sec_6662 applies to the portion of any underpayment which is attributable to inter alia negligence or disregard of rules or regulations sec_6662 or a substantial_understatement_of_income_tax sec_6662 the term negligence in sec_6662 includes any failure to make a reasonable attempt to comply with the code see sec_6662 negligence has also been defined as a failure to do what a reasonable and prudent person would do under the circumstances see 963_f2d_907 6th cir affg tcmemo_1991_179 91_tc_686 affd 893_f2d_656 4th cir the regulations further state that negligence is strongly indicated where there is a tax treatment of an item that a reasonable and prudent person would find too good to be true under the circumstances sec_1_6662-3 income_tax regs ‘negligence’ also includes any failure by the taxpayer to keep adequate books_and_records or to substantiate items properly sec_1_6662-3 income_tax regs the term disregard includes any careless reckless or intentional disregard sec_6662 an understatement of income_tax exists if the actual tax exceeds the tax reported on the return sec_6662 and an understatement will be treated as substantial in the case of an individual if it exceeds the greater of dollar_figure or percent of the tax required to be shown on the return sec_6662 the accuracy-related_penalty under sec_6662 does not apply to any portion of an underpayment if it is shown that there was reasonable_cause for and that the taxpayer acted in good_faith with respect to such portion sec_6664 the determination of whether the taxpayer acted with reasonable_cause and in good_faith depends on the pertinent facts and circumstances including the taxpayer’s effort to assess the proper tax_liability the knowledge and experience of the taxpayer and the reliance on the advice of a professional such as an accountant sec_1_6664-4 income_tax regs respondent has the burden of production under sec_7491 with respect to the accuracy-related_penalty under sec_6662 to meet that burden respondent must come forward with sufficient evidence showing that it is appropriate to impose the accuracy-related_penalty see 116_tc_438 although respondent bears the burden of production with respect to the accuracy-related_penalty that respondent determined for each of petitioners’ taxable years respondent need not introduce evidence regarding reasonable_cause substantial_authority or similar provisions because the taxpayer bears the burden_of_proof with regard to those issues id the parties made substantial concessions prior to the start of trial and the court did not sustain some of the items in the notice_of_deficiency the court finds that in the event the computations under rule establish that there is an understatement of income_tax as a result of the court’s holding and the parties’ concessions that is greater than percent of the tax required to be shown in petitioners’ joint returns or dollar_figure see sec_6662 then petitioners have substantially understated their income_tax and are liable for such penalty under sec_6662 petitioners were negligent in their treatment of the remaining items in the notice_of_deficiency that the court sustained as described below generally the court finds that petitioners failed to show that they made a reasonable attempt to comply with and did not intentionally disregard the code and the regulations thereunder and acted with due care and did what reasonable people would do under the circumstances 6for example petitioners’ claimed deductions for the dental practice items ie the license plate advertisements are reminiscent of those claimed by the taxpayer in 36_tc_879 which treatment was similarly too good to be true see sec_1_6662-3 income_tax regs in henry the taxpayer a tax lawyer and accountant allocated percent of expenses_incurred in maintaining his yacht as a business deduction on his federal_income_tax return continued car and truck expenses the crux of petitioners’ argument is that all use of their vehicles whether otherwise personal or not may be claimed as business use because of the license plate holders on each vehicle that advertise the dental practice petitioners have offered no authority to support this position nor could the court find any supportive law the idea that a license plate holder somehow transforms all personal_use into business use is clearly too good to be true sec_179 expense petitioners failed to substantiate that the gmc envoy was purchased and placed_in_service in the year for which the expense deduction was claimed under sec_179 petitioners are negligent in failing to keep adequate books_and_records to substantiate this deduction see sec_1_6662-3 income_tax regs travel_expenses petitioners failed to provide any probative evidence to the court that their trip to hawaii related to petitioner husband’s dental practice or otherwise served a business_purpose continued the taxpayer purchased a yacht on which he flew a pennant with the numerals on it purportedly to provoke inquiries and thus promote his business by giving him contacts with people in yachting circles who might become clients the commissioner disallowed the deduction and the court upheld the commissioner’s determination professional fees expenses petitioners failed to substantiate that the amount claimed as an expense was a legitimate business_expense or was ever paid janitorial services petitioners failed to substantiate that these claimed expenses had a business_purpose or that the services were even provided to their business rather than to them personally nu-e world petitioners failed to substantiate that the amounts deducted as expenses were legitimate business_expenses petitioners maintain that they are not liable for any penalties under sec_6662 and b because they had reasonable_cause for and acted in good_faith in taking their reported positions because they relied on the advice of their tax preparer the decision as to whether the taxpayer acted with reasonable_cause and in good_faith depends upon all the pertinent facts and circumstances see sec_1_6664-4 income_tax regs relevant factors include the taxpayer’s efforts to assess his proper tax_liability including the taxpayer’s reasonable and good-faith reliance on the advice of a professional such as an accountant see id a n honest misunderstanding of fact or law that is reasonable in light of all of the facts and circumstances including the experience knowledge and education of the taxpayer may indicate reasonable_cause and good_faith see id the court sustained respondent’s determination regarding the dental leasing equipment largely because of the self-rental_rule see sec_1_469-2 income_tax regs this rule is complex and could very easily perplex even a sophisticated taxpayer the court does not find petitioners’ treatment of both leasing activities as passive for income and loss to be too good to be true the court finds that under sec_6662 petitioners did make a reasonable attempt to comply with the provisions of the code petitioners were not negligent in their reporting of this item and have met the reasonable_cause exception for the portion of the underpayment relating to this item see sec_6664 petitioners have failed to carry their burden of establishing that they acted with reasonable_cause and in good_faith on all the other items sustained by the court petitioners have failed to provide the court with any evidence that they received advice from a tax preparer or that they followed such advice petitioners have fallen short of convincing the court that they are entitled to relief under sec_6664 accordingly with the exception of the dental equipment_leasing item petitioners are liable for a 20-percent accuracy-related_penalty on underpayments relating to the notice_of_deficiency items that the court sustained conclusion in reaching the conclusions stated herein the court has considered all arguments made and to the extent not mentioned above finds them to be moot irrelevant or without merit to reflect the foregoing decision will be entered under rule


id office uilc cca_2009082110320537 -------------- number release date from ------------------- sent friday date am to -------------------- cc --------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------- subject re k-1 discrepancies a timely assessment of a directly assessable computational adjustment in the appropriate amount will be valid even if predated by an invalid stat_notice so it should not be abated and reassessed


department of the treasury washington dc person to contact --------------------- id no ------------- telephone number --------------------- refer reply to cc psi b04 - plr-112601-10 date august internal_revenue_service number release date index number ----------------------------- ------------------ ----------------------------------- ----------------------------------------- -------------------- legend ---------------------- ------------------------------------------------------------- --------------------------- ------------------ ------------------------------------------------------- donor estate date date trust accountant --------------------------------- x ----------- dear -------------- this letter responds to the letter dated date and subsequent correspondence submitted by your authorized representative requesting an extension of time under sec_2642 of the internal_revenue_code and sec_301_9100-3 of the procedure and administration regulations to allocate donor’s generation-skipping_transfer gst_exemption to a transfer to trust the facts and representations submitted are summarized as follows on date prior to date donor created trust an irrevocable_trust for the benefit of donor’s descendants and funded trust with dollar_figurex donor filed a form_709 united_states gift and generation-skipping_transfer_tax return to report the transfer to trust in preparing the form_709 accountant failed to allocate donor's available gst_exemption to the date transfer to trust donor died on date law and analysis sec_2601 imposes a tax on every generation-skipping_transfer gst made by a transferor to a skip_person a generation-skipping_transfer is defined under plr-112601-10 sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2602 provides that the amount of the gst tax is determined by multiplying the taxable_amount by the applicable_rate sec_2641 provides that the term applicable_rate means with respect to any gst the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer under sec_2642 the inclusion_ratio with respect to any property transferred in a generation-skipping_transfer is generally defined as the excess of over the applicable_fraction the applicable_fraction as defined in sec_2642 is a fraction the numerator of which is the amount of gst_exemption under sec_2631 allocated to the trust or to property transferred in a direct_skip and the denominator of which is the value of the property transferred to the trust or involved in the direct_skip sec_2631 as in effect for the tax_year at issue provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable sec_2632 provides that any allocation by an individual of his or her gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual's estate determined with regard to extensions regardless of whether such a return is required to be filed sec_26_2632-1 of the generation-skipping_transfer_tax regulations provides that an allocation of gst_exemption to property transferred during the transferor's lifetime is made on form_709 sec_2642 provides that except as provided in sec_2642 if the allocation of the gst_exemption to any transfers of property is made on a gift_tax_return filed on or before the date prescribed by sec_6075 for such transfer the value of such property for purposes of determining the inclusion_ratio under sec_2642 shall be its value as finally determined for purposes of chapter within the meaning of sec_2001 sec_2642 provides that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 or and an election under sec_2632 or c such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of this paragraph sec_2642 provides that in determining whether to grant relief under sec_2642 the secretary shall take into account all relevant circumstances including plr-112601-10 evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief the time for making the allocation or election shall be treated as if not expressly prescribed by statute notice_2001_50 2001_2_cb_189 provides that under sec_2642 the time for allocating the gst_exemption to lifetime transfers and transfers at death the time for electing out of the automatic allocation rules and the time for electing to treat any trust as a generation-skipping_trust are to be treated as if not expressly prescribed by statute the notice further provides that taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute in accordance with sec_2642 and notice_2001_50 taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government under sec_301_9100-3 a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election based on the facts submitted and representations made we conclude that the requirements of sec_301_9100-3 are satisfied therefore estate is granted an extension of time of days from the date of this letter to allocate donor's available gst_exemption to the date transfer to trust the allocation will be effective as of the date of the transfer to the trust and the allocation will be based on the sum transferred to the trust as of the date of the transfer to the trust plr-112601-10 the allocation should be made on supplemental form_709 for the appropriate calendar_year and filed with the internal_revenue_service cincinnati service center- stop cincinnati ohio a copy of this letter should be attached to the supplemental form_709 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code specifically we are not ruling on whether trust will have a zero inclusion_ratio as a result of the allocation of donor’s gst_exemption to the date transfer to the trust the rulings in this letter pertaining to the federal estate and or generation-skipping_transfer_tax apply only to the extent that the relevant sections of the internal_revenue_code are in effect during the period at issue this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely associate chief_counsel passthroughs and special industries by ____________________________ lorraine e gardner senior counsel branch office of associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter


significant index number department of the treasury internal_revenue_service washington d c q q tax exemptand government entities jan tep ra az re taxpayer dear 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 date for the above-named plan which are described in sec_431 and sec_431 of the internal_revenue_code code and sec_304 and sec_304 of the employee_retirement_income_security_act_of_1974 erisa this extension is effective with the plan_year beginning date this extension applies to the eligible amortization charge bases as identified in your application submission established as of date 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 the plan has submitted the required information to meet the criteria in sec_431 including a certification from the plan’s actuary that i absent the extension under subparagraph a the plan would have an accumulated_funding_deficiency in the current plan_year or any of the succeeding plan years ii the plan_sponsor has adopted a plan to improve the plan's funding status 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 to the and to your authorized representative pursuant to a power_of_attorney on file in this office 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 by others as precedent _ if you require further assistance in this matter please contact sincerely yours ha david m ziegler manager ep actuarial group