t c memo united_states tax_court edward m reisner and manda k weintraub petitioners v commissioner of internal revenue respondent docket no filed date in ps granted to a qualified_organization a facade easement on a townhouse they owned with respect to that donation they claimed a charitable_contribution_deduction for and carryover charitable_contribution deductions for and r disallowed the deductions because he determined the easement was valueless r also determined that ps were liable for a gross_valuation_misstatement penalty pursuant to sec_6662 on the underpayment attributable to the easement overvaluation for each year ps and r now agree that the easement ps contributed to the qualified_organization was valueless they further agree that ps had underpayments attributable to gross_valuation_misstatements on their and returns attributable to the easement overvaluation but that ps are not liable for penalties under sec_6662 for and because ps had reasonable_cause for those underpayments r claims that amendments to sec_6664 preclude ps from raising a reasonable_cause defense to the penalty for their underpayment attributable to the carryover of the charitable contribution deduction ps argue that the reasonable_cause exception is available to them because congress did not intend to eliminate it for underpayments resulting from carryover deductions arising in years before the statute was amended held because their return was filed after the effective date of amendments to sec_6664 ps are precluded under that section from raising a reasonable_cause defense to imposition of the gross_valuation_misstatement penalty for the underpayment on their return attributable to the carryover of their charitable_contribution_deduction edward m reisner and manda k weintraub pro sese james p a caligure and marc l caine for respondent memorandum opinion gale judge the sole issue for decision in this case is whether petitioners are liable for a gross_valuation_misstatement penalty of dollar_figure for taxable_year see sec_6662 as explained below we hold that petitioners are liable for the penalty unless otherwise indicated section references are to the internal_revenue_code_of_1986 as in effect for the years at issue rule references are to the tax_court rules_of_practice and procedure background this case was submitted fully stipulated under rule the stipulated facts are incorporated herein by this reference petitioners resided in new york when the petition was filed in petitioners entered into a preservation restriction agreement with the national architectural trust nat pursuant to which they granted to nat a facade easement on their townhouse in brooklyn new york on their joint federal_income_tax return petitioners reported a dollar_figure noncash charitable_contribution for their donation of the facade easement see sec_170 because of the limitations imposed by sec_170 petitioners claimed with respect to the donation a charitable_contribution_deduction of dollar_figure for and carryover charitable_contribution deductions of dollar_figure and dollar_figure on their joint returns for and respectively petitioners’ return was filed on date respondent issued a notice_of_deficiency to petitioners which disallowed the foregoing charitable_contribution deductions and determined gross valuation nat is tax exempt under sec_501 and a qualified_organization under sec_170 see east llc v commissioner tcmemo_2011_84 misstatement penalties for and of dollar_figure dollar_figure and dollar_figure respectively see sec_6662 petitioners timely petitioned for redetermination the parties have stipulated that the facade easement petitioners donated to nat in taxable_year had zero value and that the notice_of_deficiency properly disallowed the charitable_contribution deductions petitioners claimed with respect thereto they have further stipulated that petitioners made gross_valuation_misstatements on their and returns as a result of overvaluing the facade easement see sec_6662 the parties agree that petitioners are not liable for the gross_valuation_misstatement penalty for either or because they satisfied the reasonable_cause exception of sec_6664 and as in effect before the enactment of the pension_protection_act of ppa pub_l_no 120_stat_780 the parties dispute only whether petitioners are liable for the gross_valuation_misstatement penalty for alternatively the notice_of_deficiency determined a penalty under sec_6662 for each year the parties also stipulated that petitioners are not liable for penalties under sec_6662 for any of the years at issue because they had reasonable_cause with respect to the underpayments attributable to the deductions for the facade easement donation see sec_6664 discussion sec_6662 imposes a penalty on the portion of an underpayment_of_tax that is attributable to a gross_valuation_misstatement for returns filed after date a gross_valuation_misstatement exists if the value of any property claimed on the return is or more of the amount determined to be the correct value sec_6662 ppa sec a a e stat pincite the penalty applies to any portion of an underpayment for a year to which a deduction is carried that is attributable to a gross_valuation_misstatement for the year in which the carryback or carryover of the deduction arises sec_1_6662-5 income_tax regs sec_6664 provides that generally no penalty shall be imposed under sec_6662 with respect to any portion of an underpayment if it is shown that there was a reasonable_cause for such portion and that the taxpayer acted in good_faith with respect to such portion hereafter reasonable_cause exception sec_6664 has also both before and after its amendment by the ppa limited the availability of the reasonable_cause exception in the case of any underpayment attributable to a substantial or gross_valuation_overstatement with respect to for returns filed on or before date a gross_valuation_misstatement existed if the claimed value was or more of the correct value charitable_deduction_property before its amendment by the ppa then- sec_6664 limited the availability of the reasonable_cause exception for such underpayments to circumstances where the claimed value of the property was based on a qualified_appraisal by a qualified_appraiser and the taxpayer had made a good-faith investigation of the value of the contributed_property however ppa sec a stat pincite amended sec_6664 --now designated sec_6664 --by eliminating the reasonable_cause exception entirely for underpayments attributable to gross valuation overstatements of charitable_deduction_property the statute as amended provides that i n the case of any underpayment attributable to a gross_valuation_overstatement under chapter with respect to charitable_deduction_property paragraph sec_6664 shall not apply sec_6664 in the case of facade easement contributions c haritable deduction property is defined for this purpose generally as any property contributed by the taxpayer in a contribution for which a deduction was claimed under sec_170 sec_6664 before amendment by the health care and education reconciliation act of pub_l_no sec c a stat pincite the foregoing definition was codified as sec_6664 sec_6664 was redesignated sec_6664 by the health care and education reconciliation act of sec c a the qualified_appraisal and good-faith investigation requirements of prior_law continue to apply to underpayments attributable to substantial valuation overstatements see sec_6664 and b the elimination by ppa sec a of the reasonable_cause exception for underpayments attributable to gross valuation overstatements applies to returns filed after date ppa sec e stat pincite respondent contends that the statute as amended eliminates the reasonable_cause exception to the gross_valuation_misstatement penalty for the portion of any underpayment that is attributable to a gross_valuation_overstatement of charitable_deduction_property therefore respondent argues because petitioners filed their return after date and it has been stipulated that a portion of their underpayment for that year was attributable to a gross_valuation_misstatement of charitable_deduction_property petitioners may not assert reasonable_cause to prevent imposition of the penalty see id sec_1_6662-5 income_tax regs the pension_protection_act of ppa pub_l_no sec e stat pincite provides in the case of a contribution of a qualified_real_property_interest which is a restriction with respect to the exterior of a building described in sec_170 of the internal_revenue_code_of_1986 and an appraisal with respect to the contribution the amendments made by subsections a modifying the thresholds for substantial and gross_valuation_misstatements and eliminating the reasonable_cause exception for underpayments attributable to gross valuation overstatements of charitable_deduction_property and b imposing the sec_6695a penalty on substantial and gross_valuation_misstatements attributable to incorrect appraisals shall apply to returns filed after date petitioners argue that imposing such strict_liability on taxpayers for claiming a charitable_contribution_deduction for a facade easement donation that is a carryover from a year before the reasonable_cause exception was eliminated is not a required construction of the statute constitutes a retroactive imposition of a penalty on conduct that occurred before enactment of the ppa and is contrary to congressional intent as for the latter claim petitioners urge that we look at what was a comprehensive set of changes in the ppa directed at charitable_contribution deductions for donations of facade easements petitioners note that in addition to the revisions to the penalty regime under sec_6662 and sec_6664 for taxpayers making substantial or gross_valuation_misstatements including both a reduction in the overvaluation percentages triggering the substantial and gross_valuation_misstatement labels and the elimination of the reasonable_cause exception at issue here the ppa also made amendments to sec_170 requiring inter alia that a contributed easement include a restriction which preserves the entire exterior of a building rather than merely its facade that the donor and donee enter into a written_agreement certifying the donee’s satisfaction of certain requirements and that a qualified_appraisal photographs of the building and a description of the restrictions on the building’s development be included with the taxpayer’s return for the taxable_year of the contribution see ppa sec a stat pincite6 petitioners note that congress provided that the amendments to sec_170 were to apply to contributions made after date ppa sec e stat pincite emphasis added in petitioners’ view since the amendments to sec_170 were part of congress’ comprehensive scheme and were targeted at the timing of the contribution rather than the filing of a return claiming a resulting deduction congress intended the focus of the antiabuse measures to be on the conduct associated with making the contribution and not on the terms under which carryovers of those deductions were to be allowed petitioners buttress the point by citing this court’s analysis of the penalty issues in pollard v commissioner tcmemo_2013_38 petitioners point out that in pollard which like the instant case involved an easement donation made and charitable_contribution deductions first claimed before enactment of the ppa but carried over into post-ppa taxable years the tax_court focused its reasonable_cause analysis on the taxpayer’s actions in the year the contribution was made without once alluding to the elimination of the reasonable_cause exception for returns filed after date petitioners also find support for their position in the original and remand continued petitioners’ argument cannot be reconciled with the statute’s clear terms while petitioners are correct that the ppa amendments to sec_170 were made effective for contributions made after date the provision eliminating the reasonable_cause exception for underpayments attributable to gross valuation overstatements of easement donations in ppa sec a codified as sec_6664 was made effective for returns filed after date ppa sec e thus congress clearly intended a distinction in the effective dates for the amendments to sec_170 and sec_6664 --the former applicable to contributions made after date and the latter to returns filed after that date continued opinions in scheidelman v commissioner tcmemo_2010_151 vacated 682_f3d_189 2d cir remanded to tcmemo_2013_18 aff’d 755_f3d_148 2d cir however that case did not involve the penalty for gross_valuation_misstatements or the repeal of the reasonable_cause exception for underpayments attributable to gross valuation overstatements of charitable_deduction_property consequently it is not relevant to the issue at hand specifically ppa sec e stat pincite provides the amendments made by subsection a amending paragraph of code sec_170 shall apply to contributions made after date for completeness we note that the new requirement in sec_170 that an appraisal photographs and a description of restrictions on development be attached to the return includes a codified effective date making it applicable in the case of any contribution made in a taxable_year beginning after the date of the enactment_date of this subparagraph the import of eliminating the reasonable_cause exception for returns filed after a given date rather than for contributions made after that date lies in the operation of sec_1_6662-5 income_tax regs which governs the application of the gross_valuation_misstatement penalty in the case of carryovers or carrybacks of deductions attributable to gross_valuation_misstatements as noted that regulation provides that the gross_valuation_misstatement penalty applies to any portion of an underpayment for a year to which a deduction is carried that is attributable to a gross_valuation_misstatement for the year in which the carryback or carryover of the deduction arises thus by its terms the regulation characterizes the penalty-bearing portion of the underpayment in the carryover or carryback_year as attributable to the gross_valuation_misstatement in the originating year this terminology matters because the ppa’s elimination of the reasonable_cause exception for gross valuation overstatements of charitable_deduction_property in sec_6664 applies i n the case of any underpayment attributable to a gross_valuation_overstatement since under the regulation an underpayment arising from a carried over deduction is attributable to the valuation misstatement in the originating year it follows that we note that valuation overstatements are a subset of valuation misstatements and arise where the value of property has been overstated rather than understated the sec_6664 elimination of the reasonable_cause exception applies to the underpayment in the carryover or carryback_year because sec_6664 eliminates the exception in the case of any underpayment attributable to a gross_valuation_overstatement in crafting the effective date of sec_6664 congress is presumed to be aware of and to adopt any longstanding administrative interpretation of the penalty statutes when it takes no step to modify that interpretation see 478_us_833 434_us_575 when congress amended sec_6664 in the ppa to eliminate the reasonable_cause exception sec_1 c income_tax regs had been in place for nearly years the regulation was promulgated shortly after congress enacted a wholescale revision and reorganization of the accuracy-related_penalty regime of subchapter_a of chapter of the internal_revenue_code in see omnibus budget reconciliation act of pub_l_no sec stat pincite and represented a deliberate policy determination that elements of the new penalty regime enacted in should apply to carryover years even when the original valuation misstatements had occurred in years before see t d 1992_1_cb_374 given congress’ presumed awareness and adoption of the position in section c income_tax regs when it enacted the ppa the drafting of the effective date for the elimination of the reasonable_cause exception on the basis of returns filed after date is readily interpreted as intended to cut off the exception for carryovers attributable to gross valuation overstatements first made in years before enactment of the ppa as to petitioners’ contention that the impact is retroactive we answered that argument in chandler v commissioner t c slip op pincite date as was the case with the taxpayer in chandler the ppa amendment eliminating the reasonable_cause exception was in effect when petitioners filed their return for petitioners thus reaffirmed their gross_valuation_overstatement when they filed the return after enactment of the ppa amendment see id at slip op pincite petitioners could have chosen not to claim the carryover for in view of the change in the statute but did not do so our decision in pollard v commissioner tcmemo_2013_38 does not contradict the conclusion we reach here or our conclusion in chandler on brief in pollard the commissioner stated he would concede the gross_valuation_misstatement penalties for and if the taxpayer established that he satisfied the reasonable_cause exception of sec_6664 for and which he did because the parties’ concessions on other issues give rise to computational adjustments decision will be entered under rule


internal_revenue_service p o box cincinnati oh release number release date date date department of the treasury employer_identification_number contact person - id number contact telephone number legend uil dear you asked for advance approval of your employer-related scholarship grant procedures under internal_revenue_code sec_4945 this approval is required because you are a private_foundation that is exempt from federal_income_tax you requested approval of your scholarship program to fund the education of certain qualifying students our determination we approved your procedures for awarding employer-related scholarships based on the information you submitted and assuming you will conduct your program as proposed we determined that your procedures for awarding employer-related scholarships meet the requirements of code sec_4945 as a result expenditures you make under these procedures will not be taxable also awards made under these procedures are scholarship or fellowship grants and are not taxable to the recipients if they use them for qualified_tuition_and_related_expenses subject_to the limitations provided in code sec_117 description of your request your letter indicates you will operate an employer-related scholarship program for the children of x consultants you will use scholarship grants for undergraduate or graduate study at an educational_institution that normally maintains a regular faculty and curriculum described in code sec_170 a ii you will pay grants directly to the educational_institution you will award scholarship grants in an objective and nondiscriminatory manner any child of a consultant holding a pin level of y or above and in good standing with an x letter catalog number 58264e member company will be eligible to apply however relatives of your board members or officers will not be eligible for grants applicants may obtain an application through the x website you will base the amount of a grant on your available_resources and the financial needs of the applicant criteria that will be used to select recipients will include prior academic performance financial need recommendations from instructors and or colleagues entrance exam scores community involvement and extracurricular activities and educational awards honors and achievements you will give preference to applicants raised by a single parent whose spouse suffered a premature death for every grant made by you you will require an annual report verified by the educational_institution attended by the grantee of courses taken and the grantee's grades in those courses a grant recipient may apply to renew a grant however a grantee who does not submit the annual report mentioned above along with a current federal student aid report would not be eligible for grant renewal if an applicant fails to fulfill the terms of a grant the remaining grant funds if any shall be subject_to immediate return you will arrange to receive and review grantee reports annually and upon completion of the scholarship investigate diversions and or suspected diversions of funds from their intended purposes if such diversions occur you will take all reasonable and appropriate steps to recover diverted funds ensuring the use of your funds by the grantee for their intended purposes you will withhold further payments to a grantee suspected of diversion until you obtain assurance that future diversions will not occur and that the grantee will take extraordinary precautions to prevent future diversions from occurring you will maintain records identifying recipients of the grants including names addresses purposes of awards amount of each grant manner of selection its records for each and relationship if any to your officers directors or donors individual grant will include information obtained to evaluate the grantee identify whether the grantee is an eligible applicant establish the amount and purpose of each grant and establish that it undertook the supervision and investigation of grants described above the number of grants that you will make annually will depend on the number of qualified applicants and your available financial resources in addition to the procedures outlined above taxpayer will comply with the requirements of revproc_76_47 your selection committee consists of three retired academicians who are independent from x amounts of grants you may reduce but may not increase the number of scholarships recommended by the committee the committee will have exclusive rights to select recipients and establish letter catalog number 58264e courses of study for which scholarship grants are available will not be limited to those that would be of particular benefit to x be consistent with the disinterested purpose of enabling a grantee to obtain an education for his or her personal benefit the terms of a scholarship grant will a scholarship will not terminate because the recipient's parents end their relationship with x base renewal solely on criteria unrelated to the relationship of the recipient's parents with x for scholarships awarded for more than one academic year you will the number of scholarship grants awarded every year will satisfy the percentage_test described above revrul_76_47 you and x verify applicant eligibility for the selection committee which consists wholly of individuals independent from you its organizer and x the selection committee will send their recommendations to you and you will make awards in the order recommended by your selection committee you and your selection committee will ensure that the number of awards to children of x employees does not exceed the percent threshold basis for our determination the law imposes certain excise_taxes on the taxable_expenditures of private_foundations code sec_4945 a taxable_expenditure is any amount a private_foundation pays as a grant to an individual for travel study or other similar purposes however a grant that meets all of the following requirements of code sec_4945 is not a taxable_expenditure the foundation awards the grant on an objective and nondiscriminatory basis the irs approves in advance the procedure for awarding the grant the grant is a scholarship or fellowship subject_to code sec_117 the recipient may use the scholarship for study at an educational_organization described in code sec_170 a ii revproc_76_47 1976_2_cb_670 provides guidelines to determine whether grants a private_foundation makes under an employer-related program to employees or children of employees are scholarship or fellowship grants subject_to the provisions of code sec_117 if the program satisfies the seven conditions in sections dollar_figure through dollar_figure of revproc_76_47 and meets the applicable_percentage tests described in section dollar_figure of revproc_76_47 we will assume the grants are subject_to the provisions of code sec_117 you represented that your grant program will meet the requirements of either the percent or percent percentage_test in revproc_76_47 these tests require that letter catalog number 58264e the number of grants awarded to employees’ children in any year won't exceed percent of the number of employees’ children who were eligible for grants were applicants for grants and were considered by the selection committee for grants or the number of grants awarded to employees’ children in any year won't exceed percent of the number of employees’ children who were eligible for grants whether or not they submitted an application or the number of grants awarded to employees in any year will not exceed percent of the number of employees who were eligible for grants were applicants for grants and considered by the selection committee for grants you further represented that you will include only children who meet the eligibility standards described in revproc_85_51 1985_2_cb_717 when applying the percent test applicable to employees’ children in determining how many employee children are eligible for a scholarship under the percent test a private_foundation may include only those children who submit a written_statement or who meet the foundation's eligibility requirements they must also satisfy certain enrollment conditions you represented that your procedures for awarding grants under this program will meet the requirements of revproc_76_47 in particular an independent selection committee whose members are separate from you your creator and the employer will select individual grant recipients you will not use grants to recruit employees nor will you end a grant if the employee leaves the employer you will not limit the recipient to a course of study that would particularly benefit you or the employer other conditions that apply to this determination this determination only covers the grant program described above this approval will apply to succeeding grant programs only if their standards and procedures do not differ significantly from those described in your original request this determination is in effect as long as your procedures comply with sections dollar_figure through dollar_figure of revproc_76_47 and with either of the percentage tests of sec_4 if you establish another program covering the same individuals that program must also meet the percentage_test this determination applies only to you it may not be cited as a precedent you cannot rely on the conclusions in this letter if the facts you provided have changed substantially you must report any significant changes to your program to the cincinnati office of exempt_organizations at letter catalog number 58264e internal_revenue_service exempt_organizations determinations p o box cincinnati oh e e e you cannot award grants to your creators officers directors trustees foundation managers or members of selection committees or their relatives all funds distributed to individuals will be made on a charitable basis and further the purposes of your organization you cannot award grants f for a purpose that is inconsistent with code sec_170 b you should keep adequate_records and case histories so that you can substantiate your grant distributions with the irs if necessary we have sent a copy of this letter to your representative as indicated in your power_of_attorney please keep a copy of this letter in your records if you have questions please contact the person listed at the top of this letter sincerely director exempt_organizations letter catalog number 58264e


t c memo united_states tax_court john g parker and janice e parker petitioners v commissioner of internal revenue respondent docket no filed date jerome l blut and elliot s blut for petitioners rollin g thorley for respondent memorandum findings_of_fact and opinion swift judge respondent determined deficiencies and accuracy-related_penalties against petitioners for and as follows accuracy-related_penalty year deficiency sec_6662 a dollar_figure dollar_figure big_number big_number big_number big_number unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure references to petitioner in the singular are to john g parker the primary issue for decision is whether significant expenses that petitioner incurred in purchasing building improving and flying airplanes were incurred by petitioner in an activity engaged in for profit findings_of_fact some of the facts have been stipulated and are so found at the time the petition was filed petitioners resided in reno nevada since the age of petitioner has been a licensed airplane pilot while in the u s air force petitioner earned a degree in aeronautical engineering from the air force institute of technology upon leaving the air force in petitioner became a full-time pilot for american airlines american where he worked for the next years petitioner also became a licensed airplane mechanic beginning in petitioner also became engaged in an activity that over the course of the next years involved the building improving and flying of four small airplanes that petitioner owned airplane activity three of which petitioner built from kits when not flying for american petitioner personally would spend many hours each week working on his airplanes seeking to improve their mechanical operation and flight speed over the years including and petitioner entered his airplanes in a number of air shows and air races flight logs relating to petitioner’s airplanes for and reflect that petitioner won either first or second place in five air races in petitioner won a national championship race for the class relating to one of his airplanes only petitioner flew his airplanes in the above air shows and air races in petitioner installed in one of his airplanes a direct ignition system that he had developed petitioner hoped that his direct ignition system could replace standard magnetos typically used in airplanes petitioner thought that such a direct ignition system might improve the speed of airplanes q4e- during and petitioner sold six or seven of his direct ignition systems for use in experimental aircraft for approximately dollar_figure to dollar_figure each in december of petitioner obtained from the city of reno nevada a general business license relating to his airplane activity also in petitioner leased property in reno nevada on which petitioner constructed a big_number ssquare foot hangar to be used as a place to build and work on his airplanes in petitioner retired from american on a schedule c profit or loss from business filed with petitioners’ joint federal_income_tax returns for through that were prepared by an accountant petitioners reported gross_income ordinary business_expenses and net losses relating to petitioner’s airplane activity and unrelated wage and taxable pension and annuity income as follows unrelated airplane activity wages pensions year gross_income expenses net_loss annuities s big_number s big_number s big_number s big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number total dollar_figure dollar_figure dollar_figure dollar_figure as a result of an audit examination on date respondent issued a notice_of_deficiency to petitioners in which respondent determined that for and petitioner’s airplane activity was not engaged in for profit under sec_183 and respondent disallowed the claimed losses for each of those years also respondent determined accuracy- related penalties under sec_6662 respondent has conceded that the claimed expenses relating to petitioner’s airplane activity have been substantiated for the years at issue and that during the years through petitioner spent approximately dollar_figure million of his own funds on his airplane activity during a prior audit of petitioners’ and federal_income_tax returns respondent did not raise an issue as to petitioner’s profit objective relating to petitioner’s airplane activity opinion activity_not_engaged_in_for_profit generally under sec_183 if an activity is not engaged in for profit deductions for expenses relating to such activity are allowable only to the extent of gross_income derived from the activity - - an activity is not regarded as engaged in for profit unless it is conducted by the taxpayer with an actual and honest expectation of making a profit 78_tc_642 affd without published opinion 702_f2d_1205 d c cir 72_tc_411 affd without published opinion 647_f2d_170 9th cir an expectation of profit need not be reasonable id petitioners have the burden_of_proof on this issue ’ rule a golanty v commissioner supra pincite in considering whether a taxpayer engaged in an activity for profit greater weight is given to objective factors taking into account all of the facts and circumstances than to a taxpayer’s mere statement of intent 85_tc_557 sec_1_183-2 income_tax regs in sec_1_183-2 income_tax regs a nonexclusive list of factors is provided for use in analyzing whether an activity is engaged in for profit such factors include the manner in which the taxpayer carried on the activity the expertise of the taxpayer or his advisers the time and effort expended because the examination in this case commenced before date sec_7491 which places the burden_of_proof with respect to any fact issue on respondent where the taxpayer maintains adequate_records satisfied applicable substantiation requirements cooperated with respondent and produced credible_evidence with regard to the fact issue does not apply see internal_revenue_service restructuring and reform act of p l sec 112_stat_685 - by the taxpayer in carrying on the activity the expectation by the taxpayer that the assets used in the activity may appreciate in value the success of the taxpayer in carrying on other similar or dissimilar activities the taxpayer’s history of income or losses with respect to the activity the amount of occasional profits earned by the taxpayer if any the financial status of the taxpayer and elements of recreation or personal pleasure in the taxpayer’s carrying on the activity although no single factor is conclusive a record of substantial losses over many years and the unlikelihood of achieving a profit are important factors bearing on whether the taxpayer had a profit objective in carrying on the activity golanty v commissioner supra pincite sec_1_183-2 income_tax regs generally the profit-objective test looks for a profit on the entire activity including profits to recoup losses from prior years golanty v commissioner supra pincite citing 45_tc_261 affd 379_f2d_252 2d cir substantial income from sources other than the activity particularly where the activity generates large losses that result in substantial tax benefits may indicate that the activity 1s not engaged in for profit especially if the activity --- - has personal or recreational elements sec_1_183-2 income_tax regs petitioner contends that he engaged in the airplane activity for profit we disagree the evidence does not establish that petitioner carried on his airplane activity in a businesslike manner petitioner has consistently reported substantial net losses from his airplane activity and used the losses to offset significant wages that petitioner earned from american and taxable pensions and annuity income the uninterrupted substantial losses realized in petitioner’s airplane activity over many years are highly indicative of a lack of profit objective see golanty v commissioner supra pincite petitioner testified that a business plan for his airplane activity was developed in namely to build from kits and to sell airplanes for a substantial profit petitioner however did not offer into evidence written documentation of this business plan petitioner acknowledged that prior to his airplane activity was a pencil and paper operation other than income_tax returns flight logs and a business license issued to petitioner during the last month of the last year at issue herein petitioner did not offer into evidence any written documentation of his business plans or projections payroll or other employee records sales contracts or any other --- - business records regarding petitioner’s airplane activity from to the time of trial in petitioner’s testimony that during the late 1970s and early 1980s his airplane activity realized some profits was not corroborated petitioner testified that at the time of trial he employed three people in his airplane activity and that he had contracts to build from kits two glasair airplanes and one thunder mustang airplane for an expected profit of approximately dollar_figure petitioner however did not offer into evidence written documentation of the above contracts or any employee records to corroborate petitioner’s testimony petitioner is a highly educated trained and experienced pilot who loves airplanes and who has devoted much of his time and money to his airplane activity we conclude for the years in issue that petitioner’s airplane activity constitutes a hobby and is not to be regarded as an activity engaged in for profit under sec_183 accordingly we sustain respondent’s disallowance of the losses relating to petitioner’s airplane activity accuracy--related penalties under sec_6662 a 20-percent accuracy-related_penalty is imposed on the portion of any underpayment_of_tax attributable to among other things negligence or disregard of federal tax -- - rules and regulations or a substantial_understatement of tax an understatement_of_tax is substantial if it exceeds either percent of the tax required to be shown on the return or dollar_figure sec_6662 d a the above accuracy-related_penalty however is not imposed with respect to any portion of a taxpayer’s understatement_of_tax for which the taxpayer acted with reasonable_cause and in good_faith sec_6664 in our discretion and based on the facts before us we conclude that petitioners had reasonable_cause in treating petitioner’s airplane activity as a for profit activity petitioners are not liable for the accuracy-related_penalties determined by respondent under sec_6662 with respect to the deficiencies at issue herein to reflect the foregoing decision will be entered under rule


department of the treasury internal_revenue_service number release date index number washington dc person to contact telephone number refer reply to cc psi - plr-101971-03 date date a b c country country d1 dear this responds to your letter dated date and subsequent correspondence submitted on behalf of c requesting a ruling that c be granted an extension of time to elect under sec_301_7701-3 of the procedure and administration regulations facts the information submitted states that a a domestic_partnership is the sole owner of b a country corporation b is the sole owner of c c was formed on d1 pursuant to the laws of country c represents that under sec_301_7701-3 c is an eligible_entity that is not required to be classified as a corporation for federal tax purposes c intended to elect under sec_301_7701-3 effective on d1 however c inadvertently failed to timely file a form_8832 entity classification election plr-101971-03 law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes a business_entity is any entity recognized for federal tax purposes that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the internal_revenue_code sec_301_7701-2 sec_301_7701-3 provides that unless a foreign eligible_entity elects otherwise the entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owners if it has a single owner that does not have limited_liability sec_301_7701-3 provides that for purposes of sec_301_7701-3 a member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member sec_301_7701-3 provides that to elect to be classified other than as provided in sec_301_7701-3 an eligible_entity must file form_8832 with the designated service_center sec_301_7701-3 provides that an election will be effective on the date specified on the form_8832 or on the date filed if no such date is specified the effective date specified on the form_8832 cannot be more than days prior to the date the election is filed under c the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or an announcement published in the internal_revenue_bulletin sec_301_9100-1 and sec_301_9100-3 provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 plr-101971-03 sec_301_9100-3 provides that requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer failed to make the election because after exercising reasonable diligence taking into account the taxpayer's experience and the complexity of the return or issue the taxpayer was unaware of the necessity for the election conclusion based solely on the facts submitted and representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result c is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center and elect under sec_301_7701-3 its classification for federal tax purposes effective d1 a copy of this letter should be attached to the form_8832 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to c sincerely heather c maloy associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


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 tege eoeg teb presp-148782-06 date date dear -------------- pursuant to sec_54 of the internal_revenue_code the code and notice_2005_98 2005_52_irb_1211 and after review of your application submitted on date including supplements thereto we have determined that the project described in appendix a attached hereto is qualified for purposes of sec_54 and will be owned by one or more qualified borrowers we allocate authority to ----------------------------------- -------------- the issuer a qualified issuer under sec_54 to issue up to dollar_figure----------- of clean renewable energy bonds crebs bonds issued pursuant to this allocation must be designated by the issuer as bonds for purposes of sec_54 for the project described in appendix a up to the amount allocated for each project described in appendix a bonds so designated must be issued on or before date please be aware that in order for bonds to be crebs the applicable_requirements of the code including without limitation sec_54 notice_2005_98 and notice_2006_7 2006_10_irb_559 must be met please note that creb proceeds may be used to reimburse capital expenditures paid_by qualified borrowers for qualified projects only if the provisions of sec_54 are met if you have any questions with respect to this allocation please contact --------------------- ------------------------------------------------------------------------------------------------------------------- - ---------or -----------------------------of the office of division counsel associate chief_counsel tax-exempt and government entities on --------------------- not a toll-free call 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 presp-148782-06 for purposes of the renewable_electricity_production_credit under sec_45 of the code no inference may be drawn from this allocation that any project listed in appendix a is a qualified_facility or that electricity to be produced at such project s is electricity from a qualified_energy resource at a qualified_facility within the meaning of sec_45 this determination is directed only to the applicant named above sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any form 8038-g information_return for tax- exempt governmental obligations filed for bonds issued pursuant to this allocation the allocation contained in this letter is based upon information and representations submitted by the applicant for the creb allocation 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 application_for an allocation it is subject_to verification on examination sincerely assistant chief_counsel exempt_organizations employment_tax government entities tax exempt government entities by timothy l jones senior counsel tax-exempt_bonds branch presp-148782-06 borrower name appendix a project type project location ------------------------------- wind facility --------------- -------------------------------- ----------------------------- ---------------------------------- amount allocated dollar_figure----------- ------------------------------------------------ ------------------------------------------------- -------------------------- -------------------------------------------- ---------------------------


internal_revenue_service number release date index number ---------------------------------- ------------------------------------ ------------------------------ ---------------------- ------------------------------------ legend taxpayer state a state b date operating partnership trs a type a company a company b dear ------------ 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 fip b02 plr-147655-10 date date --------------------------------------- --------------------------- ------------ ------------- ---------------------- ------------------------------------ ------------------------------------------- ------ ------------------------------------------ -------------------------------- this is in reply to a letter dated date and a subsequent submission requesting rulings on behalf of taxpayer the requested rulings concern the treatment of a reit and its taxable_reit_subsidiary trs under sec_856 of the internal_revenue_code in the circumstances described below plr-147655-10 facts taxpayer is a publicly held state a corporation that elected to be taxed as a real_estate_investment_trust reit for its tax_year beginning date taxpayer owns substantially_all of its assets and conducts all of its operations through operating partnership and operating partnership’s subsidiaries taxpayer is the sole general_partner of operating partnership and owns approximately percent of the outstanding partnership interests of operating partnership trs a is a state b corporation and a wholly-owned subsidiary of operating partnership that has jointly elected with taxpayer to be treated as a trs of taxpayer pursuant to sec_856 taxpayer is engaged primarily in the acquisition ownership and leasing of a portfolio of type a properties the properties through its interest in operating partnership and operating partnership’s lower-tier subsidiaries the properties are leased to trs a and other trss of taxpayer taxpayer represents that each lease between operating partnership or one of its subsidiaries and a trs was negotiated at arm’s length and reflects market rates and commercially reasonable terms the properties are operated by unrelated third-party type a property operators the operators taxpayer represents that each operator is in the business of operating and managing type a properties for persons unrelated to taxpayer and qualifies as an eligible_independent_contractor eik within the meaning of sec_856 taxpayer further represents that each management agreement between operating partnership or one of its subsidiaries and one of the operators was negotiated by the parties at arm’s length and reflects market terms sale of property to operator although taxpayer represents that it acquires and holds the properties for investment and not primarily for sale in the ordinary course of its trade_or_business taxpayer may sell one of the properties when it is economically advantageous taxpayer represents that it will not sell a property to any entity that directly operates or manages the properties and that any potential buyer that is affiliated with the operator of a property would be a separate legal entity for state law purposes and federal_income_tax purposes from the entities directly operating or managing the properties would maintain its own bank accounts books_and_records and would have its own employees under its separate control in certain cases an operator of one of the properties has negotiated as part of the management agreement a right of first offer rofo and or a right_of_first_refusal rofr with respect to the property being sold by taxpayer taxpayer represents that each management agreement providing a rofo and or rofr was negotiated by plr-147655-10 the parties at arm’s length and a sale pursuant to a rofo or rofr is intended to result in a market price being paid_by an operator to taxpayer even if no rofo or rofr exists an operator may offer taxpayer the most competitive bid for a property taxpayer represents that any agreement to sell to an operator will be negotiated at arm’s length investment in target management company taxpayer is considering acquiring on an arm’s length basis part or all of the real_estate_assets of company a and company b collectively referred to as targets and as part of that acquisition making an investment through operating partnership or trs a in company a’s type a management company and company b’s type a management company collectively referred to as target management companies or their subsidiaries company a is a publicly-traded company that owns and operates all of its assets through its management company a limited_liability_company in which it owns substantially_all of the outstanding interests company b is a private company the investment in target management companies or their subsidiaries may take various forms including investments in secured and unsecured loans and equity investments such as common_stock preferred_stock warrants or options to acquire stock convertible debt and loans with warrants the loans will have market-based terms taxpayer represents that it will not make a loan to or an equity_investment in any of the entities that would operate or manage any of the type a properties acquired by taxpayer from targets or already owned by taxpayer or a trs of taxpayer each of the entities operating or managing one of the acquired or previously owned type a properties would be a separate legal entity for state law purposes and federal_income_tax purposes would maintain its own bank accounts books_and_records and would have its own employees under its separate control taxpayer further represents that any loan that is determined to be a security under sec_856 will represent not more than percent of the value of the total outstanding securities of the loan recipient and any equity_investment will represent not more than either percent of the total voting power or value of the total outstanding securities of the issuer and both before and after the proposed transaction neither targets nor target management companies will own more than percent of the shares of taxpayer and no one or more persons owning more than percent of the shares of taxpayer will own more than percent of the shares of targets or target management companies measured in each case both by combined voting power and total number of shares plr-147655-10 trs a may make a loan to or an equity_investment in an entity that would operate or manage one of the type a properties acquired by taxpayer from targets or already owned by taxpayer or a trs of taxpayer however taxpayer represents that any investment by trs a in target management companies or their subsidiaries will not cause trs a to own directly or indirectly securities possessing more than percent of the total voting power or having a value of more than percent of the total value of the outstanding securities of target management companies or any of their subsidiaries for this purpose trs a will take into account any investment by taxpayer or operating partnership other than through trs a in applying these percent undertakings following the acquisition of a type a property of targets operating partnership and its subsidiaries intend to lease the properties to trs a pursuant to leases negotiated at arm’s length and reflecting market rates and commercially reasonable terms trs a will enter into or assume a management agreement for each property with an entity a subsidiary of target management companies that meets the definition of an eik within the meaning of sec_856 trs a will bear all the expenses for the operation of the properties and will receive all of the revenues net of operating_expenses and fees payable to the operator from the operation of the properties pursuant to the management agreement the management agreements will reflect terms negotiated at arm’s length and the fees payable to the operator will be at market rates law and analysis sec_856 provides that at least percent of a reit's gross_income must be derived from among other sources rents_from_real_property sec_856 provides that at least percent of a reit's gross_income must be derived from among other sources rents_from_real_property sec_856 provides that rents_from_real_property include subject_to exclusions provided in sec_856 a rents from interests_in_real_property b charges for services customarily furnished or rendered in connection with the rental of real_property whether or not such charges are separately_stated and c rent attributable to personal_property leased under or in connection with a lease of real_property but only if the rent attributable to the personal_property for the taxable_year does not exceed percent of the total rent for the tax_year attributable to both the real and personal_property leased under or in connection with the lease sec_856 provides that rents_from_real_property does not include any amount received or accrued directly or indirectly from any person if the reit owns directly or indirectly in the case of a corporation stock possessing percent or more of the total combined voting power of all classes of stock entitled to vote or plr-147655-10 percent or more of the total value of shares of all classes of stock of the corporation or in the case of any person that is not a corporation an interest of percent or more in the assets or net profits of the person sec_856 provides that any impermissible_tenant_service_income is excluded from the definition of rents_from_real_property sec_856 defines impermissible_tenant_service_income to mean with respect to any real or personal_property any amount received or accrued directly or indirectly by the reit for services furnished or rendered by the reit to tenants at the property or for managing or operating the property sec_856 provides certain exclusions from impermissible_tenant_service_income sec_856 provides that for purposes of sec_856 services furnished or rendered or management or operation provided through an independent_contractor from whom the reit does not derive or receive any income shall not be treated as furnished rendered or provided by the reit and there shall not be taken into account any amount which would be excluded from unrelated_business_taxable_income under sec_512 if received by an organization described in sec_511 sec_856 provides that amounts paid to a reit by a trs shall not be excluded from rents_from_real_property by reason of sec_856 when a reit leases a qualified_lodging_facility or qualified health_care_facility to a trs and the facility or property is operated on behalf of the trs by a person who is an eligible_independent_contractor sec_856 defines an independent_contractor as any person who does not own directly or indirectly more than percent of the reit’s shares and if such person is a corporation not more than percent of the total combined voting power of whose stock or percent of the total shares of all classes of whose stock is owned directly or indirectly by one or more persons owning percent or more of the shares of the reit sec_856 provides that the term eligible_independent_contractor means with respect to any qualified_lodging_facility or qualified_health_care_property any independent_contractor if at the time such contractor enters into a management agreement or similar service_contract with the trs to operate the facility or property the contractor or any related_person is actively engaged in the trade_or_business of operating qualified lodging_facilities or qualified health care properties for any person who is not a related_person with respect to the reit or the trs sec_856 provides that a reit and a corporation other than a reit may jointly elect to treat such corporation as a trs to be eligible for treatment as a trs plr-147655-10 sec_856 provides that the reit must directly or indirectly own stock in the corporation and the reit and the corporation must jointly elect such treatment sec_856 provides that any corporation in which a trs owns directly or indirectly more than percent of the total voting power or value of the outstanding securities shall be treated as a trs sec_856 provides that a trs cannot directly or indirectly operate or manage a lodging_facility or a health_care_facility revrul_75_136 1975_1_cb_195 concerns whether a wholly-owned subsidiary of a reit’s corporate investment adviser can serve as an independent_contractor to manage the reit’s property as required under sec_856 in determining that the subsidiary may qualify as an independent_contractor the ruling states that it is the relationship of the entity or individual such as an employee or trustee to the trust itself that precludes the entity from qualifying as an independent_contractor for the management of the property a relationship between the entity or individual and the trustee or employee or investment adviser of the reit would not in itself disqualify the entity assuming the other requirements for qualification as an independent_contractor are met accordingly the ruling holds that the wholly-owned subsidiary of the investment adviser is not precluded from qualifying as an independent_contractor if it operates as a separate_entity with its own separate officers and employees and keeps its own separate books_and_records that clearly reflect its activities in the management of the property in revrul_73_194 a reit entered into a partnership with x corporation to construct and hold apartment buildings for investment the partnership_agreement provided that the partners would engage a management company to manage an apartment building the management company was employed in an arm’s length transaction and was paid a market rate for its services x corporation was a wholly- owned subsidiary of y corporation which owned a substantial percentage of the stock of the management company in concluding that the income received by the reit from the partnership will not be disqualified as rents_from_real_property due to the relationship between x y and the management company the ruling cites the legislative_history underlying sec_856 which states that the restrictions imposed by that section were intended to prevent income from active business operations from being included in a reit’s income the legislative_history indicates that for this requirement to be satisfied the reit and the independent_contractor must have an arm’s length relationship see h_r no 86th cong 2d sess 1960_2_cb_819 in revrul_2003_86 c b a reit owned all of the stock of a trs that owned an interest in a partnership the partnership was an independent_contractor under sec_856 the partnership provided certain noncustomary services to the reit’s tenants although the reit did not directly receive payments from the independent_contractor the reit indirectly held an equity_interest in the independent_contractor through its ownership of the trs the revenue_ruling states that section plr-147655-10 d c i provides an exception for services furnished or rendered through a trs noting that the reit’s only interest in the independent_contractor is through the trs the ruling states that the services provided by the independent_contractor are provided by the trs to the extent of the trs’s interest in the independent_contractor accordingly the ruling concludes that the reit will not be treated as providing impermissible tenant services in the present case taxpayer may receive income from an entity affiliated with an operator arising from the sale of one of the properties taxpayer may provide loans to an entity affiliated with a manager or operator of the properties taxpayer may also receive income from an equity_investment in an entity affiliated with a company operating or managing one or more of the properties trs a may provide loans or receive income from an equity_investment in a company operating or managing one or more of the properties or an entity affiliated with the company in each situation the income received by taxpayer or trs a is not derived from or dependent upon taxpayer’s relationship with the company operating or managing any of the properties all of the agreements entered into by taxpayer or trs a for the management or operation of the properties are represented to be arm’s length and to reflect market terms accordingly based on the information received and representations made we conclude that income received by taxpayer from the sale of a type a property to an entity affiliated with an eik that directly operates or manages a type a property leased to or owned by a trs of taxpayer will not cause that eik to not be considered an eik within the meaning of sec_856 with respect to the properties operated or managed on behalf of the trs of taxpayer a trs of taxpayer to be considered to be directly or indirectly operating or managing any properties managed by that eik within the meaning of sec_856 or rents received by taxpayer with respect to any of the type a properties leased to its trs and operated or managed by that eik to be treated as other than rents_from_real_property under sec_856 a loan to or an equity_investment in target management companies or any of their subsidiaries other than the entities that directly operate or manage type a properties leased to or owned by a trs of taxpayer as described herein by taxpayer through operating partnership will not cause any affiliated entity of target management companies that directly operate or manage such properties not to be considered an eik within the meaning of sec_856 with respect to the properties operated or managed on behalf of the trs of taxpayer a trs of taxpayer that leases or owns type a properties to be considered to be directly or indirectly operating or managing such properties within the meaning of sec_856 or rents received by plr-147655-10 taxpayer with respect to any of the type a properties leased to its trs and operated or managed by that eik to be treated as other than rents_from_real_property under sec_856 provided that the loan or equity_investment represents not more than percent of the vote or value of the total outstanding securities of the issuer a loan by trs a to or an equity_investment by trs a in target management companies or any of their subsidiaries as described herein will not cause a trs of taxpayer that leases or owns the properties to be considered to be directly or indirectly operating or managing such properties within the meaning of sec_856 or rents received by taxpayer with respect to any of the type a properties to be treated as other than rents_from_real_property under sec_856 provided that any such investment will not cause trs a to own directly or indirectly securities possessing more than percent of the total value of the outstanding securities of target management companies or any of their subsidiaries determined by taking into account any other_securities owned by taxpayer operating partnership or any other trs of taxpayer except as specifically ruled upon above no opinion is expressed concerning any federal_income_tax consequences relating to the facts herein under any other provision of the code specifically we do not rule whether taxpayer otherwise qualifies as a reit under part ii of subchapter_m of chapter of the code also no opinion is expressed concerning the treatment of payments between taxpayer’s trs and taxpayer for purposes of sec_857 this ruling is directed only to the taxpayer requesting it taxpayer should attach a copy of this ruling to each tax_return to which it applies sec_6110 of the code provides that this ruling may not be used or cited as precedent sincerely david b silber______________ david b silber chief branch office of associate chief_counsel financial institutions products


t c memo united_states tax_court bonnie maria armour petitioner and mark v poulsen intervenor v commissioner of internal revenue respondent docket no filed date bonnie maria armour pro_se john s pontius jr glen e frost and jessica f marine for intervenor timothy b heavner matthew s reddington and wendy c yan for respondent memorandum findings_of_fact and opinion jacobs judge this case is before us with respect to respondent’s denial of petitioner’s request for relief from joint_and_several_liability under section for and years involved petitioner and intervenor were married during the years involved they separated in and divorced in after nearly years of marriage petitioner and intervenor filed their and form sec_1040 u s individual_income_tax_return as married_filing_jointly following an audit of petitioner and intervenor’s joint income_tax returns on date petitioner signed a form 870-ad offer to waive restrictions on assessment and collection of tax_deficiency and to accept overassessment agreeing to the assessment and collection of income_tax deficiencies and penalties under sec_6662 as follows unless otherwise indicated all section references are to the internal_revenue_code as amended at all relevant times all dollar amounts are rounded to the nearest dollar intervenor has no legal_obligation to pay the outstanding tax_liability pursuant to the divorce decree intervenor has paid approximately dollar_figure of the outstanding tax_liability while petitioner has made no such payment the record does not reveal for which tax_year s intervenor’s payment was applied regardless of whether intervenor’s payment satisfied any year’s tax_liability that payment does not render petitioner’s request for relief from joint_and_several_liability moot see kaufman v commissioner tcmemo_2010_89 year deficiency dollar_figure big_number big_number penalty sec_6662 dollar_figure big_number -0- on the same day she signed the form 870-ad petitioner signed a form_8857 request for innocent spouse relief and filed it with the internal_revenue_service irs petitioner’s request for relief was denied on date findings_of_fact some of the facts in this matter have been stipulated and are so found at the time she filed her petition petitioner resided in maryland petitioner holds a high school diploma she attended the university of delaware for six months taking noncredit courses in data processing while married petitioner and intervenor owned the marital home two rental properties and a farm because petitioner and intervenor had a large blended family they owned a large van in addition to two pickup trucks and an oldsmobile cutlass which intervenor described as a classic car they took family vacations each year including trips to bermuda and mexico they enjoyed camping and throughout the years they purchased several campers which they used on family camping trips every few months intervenor owned m v p builders which was the primary source of the family’s income established in the early 1980s m v p builders is a home improvement company focusing on residential remodeling a carpenter by trade intervenor operated the business but he did not have the bookkeeping background to maintain the company’s records he hired petitioner to be the company’s bookkeeper and office manager their relationship blossomed and they eventually wed petitioner was m v p builders’ bookkeeper office manager for approximately years including the years involved she developed and maintained the accounting program used by the business her duties included managing the company’s financial records bank accounts and american express credit card account managing the company’s end of the month check run which reconciled all charge accounts that m v p builders had from its vendors roofing suppliers lumber yards plumbing supply houses and other subcontractors reconciling the company’s bank and credit card statements managing the accounts_payable and accounts_receivable tracking inventory and managing the company’s payroll to these ends petitioner had authority during the years involved m v p builders was a sole_proprietorship it was later incorporated at a time not specified in the record to write and sign checks on behalf of m v p builders deposit money into the company’s accounts and prepare checks and receipts for the business petitioner was familiar with m v p builders’ clients and knew or at least could have learned the amounts they paid the company before becoming m v p builders’ bookkeeper petitioner had other experience in accounting when petitioner managed m v p builders’ finances her duties included the end-of-year accounting for the company she reviewed the company’s books and provided information and documents to the company’s certified_public_accountant c p a joe tigne who prepared petitioner and intervenor’s joint tax returns she also met and interacted with mr tigne during the years involved she admitted to booking things wrong for m v p builders and was advised that she had done so by mr tigne for petitioner and intervenor’s joint returns underreported income attributable to m v p builders for the returns underreported income and overstated expenses attributable to m v p builders the irs made no adjustments with respect to m v p builders for in addition to working for m v p builders petitioner operated a horse care and boarding business on the farm that she and intervenor owned she exclusively controlled the business and under her stewardship the business’ income for each of the years involved was underreported all adjustments made by the irs for were due to underreported income with respect to the horse care and boarding business petitioner wrote checks drawn on m v p builders’ bank account to herself and she used the m v p builders’ american express credit card to pay horse care and boarding business and household expenses petitioner was given the joint income_tax returns for and before they were filed but she did not review them before signing them petitioner was not a victim of spousal abuse or domestic violence during the years involved respondent filed his posttrial brief on date intervenor notified the court on that same day that he would not file a brief petitioner’s reply brief was due by date no brief was filed by petitioner opinion i introduction to relief from joint_and_several_liability in general married taxpayers who file a joint federal_income_tax return under the provisions of sec_6013 and d are jointly and severally liable for the tax reported or reportable on the tax_return sec_6015 provides that a spouse who has made a joint_return may elect to seek relief from joint and several_liability under subsection b sec_6015 provides that if an individual is eligible to elect the application of subsection c that individual may in addition to any election under subsection a elect to limit his her liability for any deficiency with respect to the joint_return in a manner prescribed in subsection c of sec_6015 ii sec_6015 relief sec_6015 provides that a taxpayer will be relieved of liability for an understatement_of_tax if a a joint_return was made for the taxable_year in question b there is an understatement_of_tax attributable to erroneous items of the nonrequesting spouse c the requesting spouse establishes that in signing the return he or she did not know and had no reason to know that there was such understatement d taking into account all the facts and circumstances it would be inequitable to hold the requesting spouse liable for the deficiency attributable to the understatement and e the requesting spouse elects to invoke subsection b within two years after the date the secretary has begun collection actions with respect to the requesting spouse the requirements of sec_6015 are conjunctive failure of a requesting spouse to satisfy any one of the elements precludes relief 119_tc_306 aff’d 101_fedappx_34 6th cir the requesting spouse bears the burden of proving entitlement to sec_6015 relief id pincite respondent concedes that petitioner satisfies the requirements of sec_6015 and e petitioner and intervenor filed joint tax returns for and and petitioner sought relief within the two-year limitations_period but asserts that petitioner does not meet the requirements of subparagraphs c the spouse requesting relief must establish he she did not know and had no reason to know of the understatement_of_tax on the returns and d it would be inequitable to hold the requesting spouse liable for the deficiency we agree with respondent that the requirements of sec_6015 have not been met in that petitioner did not establish that she did not know and had no reason to know of the understatements of tax as a preliminary matter petitioner concedes she is responsible for the understatement_of_tax attributable to the horse care and boarding business and therefore she does not qualify for relief with respect to the unpaid tax attributed thereto petitioner maintains she is entitled to relief from liability with respect to the deficiencies attributable to the requirement in sec_6015 is virtually identical to the same requirement of former sec_6013 therefore cases interpreting former sec_6013 remain instructive to our analysis doyel v commissioner tcmemo_2004_35 wl at m v p builders because she was not the owner of the company and only made data entries we disagree as m v p builders’ bookkeeper and office manager for approximately two decades including the years involved petitioner was directly responsible for maintaining all records relating to the company’s finances she had access to the business’ checking accounts credit card account payroll bills receipts and deposits she wrote checks made the bank_deposits and reconciled the company’s bank records she provided the information and documentation that the c p a used in connection with the preparation of petitioner and intervenor’s joint income_tax returns and despite having access to the information underlying the income and expenses reported on the joint income_tax returns petitioner failed to review the returns or inquire as to their accuracy before they were filed in sum we find that petitioner knew of the understatements of tax on each of the returns filed for each of the years involved within the meaning of sec_6015 accordingly petitioner is not entitled to the requested relief from joint_and_several_liability under sec_6015 because we agree with respondent that the requirements of sec_6015 have not been met we do not address the requirements of subpara d iii sec_6015 relief sec_6015 provides that a divorced or legally_separated spouse may elect to limit liability for a deficiency on a joint_return to the portion allocable to him or her under subsection d ie the tax_liability is allocated between the individuals who filed a joint_return in approximately the same way it would have been had the individuals filed separately to be eligible for sec_6015 relief the electing spouse must establish that the spouses filed joint returns for the years involved at the time the election for relief was made the spouses were legally_separated divorced or had not been members of the same household anytime during the previou sec_12 months and the request for relief was made within two years of the first collection activity see sec_6015 moreover no assets may be transferred between the spouses in a fraudulent scheme see sec_6015 respondent does not dispute that petitioner meets these requirements relief under sec_6015 is not available where the commissioner demonstrates that the requesting spouse had actual knowledge at the time he she signed the return of any item giving rise to a deficiency which is not allocable to the requesting spouse under sec_6015 sec_6015 the knowledge standard for purposes of sec_6015 is an actual and clear awareness as opposed to reason to know of the existence of an item which gives rise to the deficiency or portion thereof 115_tc_183 aff’d 282_f3d_326 5th cir see also 182_f3d_275 4th cir aff’g tcmemo_1996_452 if an item_of_income is omitted the requesting spouse must have actual knowledge of the income which includes knowledge of the receipt of the income harrington v commissioner tcmemo_2012_285 sec_1_6015-3 income_tax regs we do not infer actual knowledge from a mere reason to know of the omitted income harrington v commissioner tcmemo_2012_285 sec_1_6015-3 income_tax regs similarly a requesting spouse must have actual knowledge of an improperly deducted item on a return in and of itself the requesting spouse’s knowledge that a deduction appears on the return is insufficient 116_tc_198 the requesting spouse has actual knowledge of an erroneous deduction if he she has knowledge of the factual circumstances which made the item unallowable as a deduction id pincite sec_1_6015-3 income_tax regs with respect to the unpaid tax attributable to the horse care and boarding business petitioner concedes she is responsible for these amounts as she was responsible for operating the horse care and boarding business these amounts are therefore allocable to petitioner ie the requesting spouse with respect to the unpaid tax attributable to m v p builders we find that petitioner had actual knowledge of the company’s unreported income and excessive deductions as previously stated petitioner managed the company’s books and finances and was well aware of the company’s actual income and outlays petitioner also collected and provided the company’s financial information and documentation to the family’s c p a mr tigne to allow him to prepare her and intervenor’s joint income_tax returns she was aware of m v p builders’ receipt of income and she had knowledge of the factual circumstances of the company’s expenses giving her knowledge of the factual circumstances which made the claimed expense items unallowable as deductions we therefore hold that petitioner is not entitled to the requested relief from joint_and_several_liability under sec_6015 iv sec_6015 equitable relief sec_6015 provides for equitable relief under procedures prescribed by the secretary if taking into account all the facts and circumstances it is inequitable to hold the individual liable for any unpaid tax or any deficiency and relief is not available to the requesting spouse under subsection b or c the requesting spouse has the burden of proving that he she is entitled to relief alt v commissioner t c pincite we apply a de novo scope and standard of review in reviewing the requesting spouse’s prayer for relief 132_tc_203 respondent concedes that petitioner meets the requirement of sec_6015 in that relief is not available under subsection b or c with respect to sec_6015 the commissioner published revproc_2013_34 2013_43_irb_397 outlining the factors the irs normally considers in deciding whether sec_6015 relief should be granted while this court is not bound by irs revenue procedures we often look to them for guidance hollimon v commissioner tcmemo_2015_157 at see 136_tc_432 revproc_2013_34 sec_4 i r b pincite sets forth a three- step procedure to be followed in evaluating requests for relief section dollar_figure lists seven threshold conditions which must be met section dollar_figure lists circumstances in which the irs will make streamlined relief determinations and section dollar_figure sets forth nonexclusive factors that the irs will consider in determining whether equitable relief should be granted because it would be inequitable to hold a requesting spouse jointly and severally liable the seven eligibility conditions all of which must be satisfied for the irs to consider a claim for equitable relief under sec_6015 pursuant to revproc_2013_34 sec_4 are as follows the requesting spouse filed a joint_return for the taxable_year for which he or she seeks relief relief is not available to the requesting spouse under sec_6015 or c the claim for relief is timely filed no assets were transferred between the spouses as part of a fraudulent scheme by the spouses the nonrequesting spouse did not transfer disqualified assets to the requesting spouse the requesting spouse did not knowingly participate in the filing of a fraudulent joint_return the income_tax_liability from which the requesting spouse seeks relief is attributable either in full or in part to an item of the nonrequesting spouse or an underpayment resulting from the nonrequesting spouse’s income if the liability is partially attributable to the requesting spouse then relief can only be considered for the portion of the liability attributable to the nonrequesting spouse nonetheless the service will consider granting relief regardless of whether the understatement deficiency or underpayment is attributable in full or in part to the requesting spouse if any of the following exceptions applies a attribution solely due to the operation of community_property law b nominal ownership c misappropriation of funds d abuse e fraud committed by nonrequesting spouse petitioner acknowledges that the understatement in tax arising from the horse care and boarding business is attributable to her because condition is not satisfied petitioner concedes she is ineligible for relief with respect to the understatement_of_tax attributable to the horse care and boarding business however with respect to the understatements attributable to m v p builders because petitioner did not hold an ownership_interest in the company and because respondent concedes that petitioner meets all other threshold conditions set forth in revproc_2013_34 sec_4 we move on to the next step in our analysis revproc_2013_34 sec_4 provides a list of nonexclusive factors to be weighed by the irs in making a decision they include a marital status ie do the spouses remain together b economic hardship c knowledge or reason to know of the requesting spouse d legal_obligation arising from a divorce decree or other binding agreement e significant benefit gained by the requesting spouse f compliance with income_tax laws and g mental or physical health at the time of filing the request for relief no single factor is determinative and all factors are considered and weighed appropriately kellam v commissioner tcmemo_2013_186 at petitioner has not asserted that she qualifies for the streamlined procedures for relief provided in revproc_2013_34 sec_4 2013_43_irb_397 we therefore do not address them respondent concedes that a marital status and f compliance with tax laws weigh in favor of relief we therefore limit our inquiry to factors b economic hardship c knowledge or reason to know d legal_obligation e significant benefit and g mental physical health economic hardship revproc_2013_34 sec_4 b provides that an economic hardship exists if satisfaction of the tax_liability in whole or in part will cause the requesting spouse to be unable to pay reasonable basic living_expenses whether a requesting spouse will suffer economic hardship is based on rules similar to those in sec_301_6343-1 proced admin regs the facts and circumstances considered include the requesting spouse’s age employment status and history ability to earn and number of dependents the amount reasonably necessary for food clothing housing medical_expenses transportation and current tax_payments and any extraordinary circumstances such as special educational expenses a medical catastrophe or a natural disaster id in addition the irs considers the requesting spouse’s current income including how the requesting spouse’s income compares to federal poverty guidelines and assets in comparison with his her expenses revproc_2013_34 sec_4 b factor b economic hardship weighs in favor of relief where the requesting spouse would suffer economic hardship if relief were denied and is neutral where the requesting spouse would not suffer such hardship if relief were denied id at trial petitioner established to the court’s satisfaction that she was in some economic difficulty consequently we find that this factor weighs in favor of relief knowledge or reason to know under this factor we examine whether the requesting spouse knew or had reason to know that there was an understatement or deficiency on the joint income_tax return or did not know or had reason to know that the nonrequesting spouse would not or could not pay a reported but unpaid tax_liability see id sec_4 c ii the factors enunciated in the revenue_procedure are essentially the same as those relied upon by sec_6015 and c as discussed supra petitioner operated the horse care and boarding business and had charge of m v p builders’ books and finances petitioner had reason to know of the understatements of tax moreover petitioner has not claimed that she was abused we note the cincinnati centralized innocent spouse operation’s determination that the economic factor favored relief as petitioner’s gross_income was pincite or less of the federal poverty_line and that she did not have sufficient assets to make payments and still pay basic family living_expenses the irs appeals officer’s own analysis indicated that petitioner’s household_income was below the federal poverty_line and her expenses were slightly less than her income yet the appeals officer found that this factor was neutral by intervenor or that he restricted her access to financial information we find this factor weighs against relief legal_obligation revproc_2013_34 sec_4 d provides that if the nonrequesting spouse has the sole legal_obligation to pay the outstanding income_tax_liability pursuant to a divorce decree or other legally binding agreement this factor will weigh in favor of relief there is no evidence that intervenor has any legal_obligation to pay any outstanding income_tax liabilities for the years involved we find this factor to be neutral significant benefit under this factor we consider whether the requesting spouse received a significant benefit beyond normal support from the unpaid income_tax_liability id sec_4 e normal support is measured by the circumstances of the particular parties porter v commissioner t c pincite this factor will weigh in favor of relief if the nonrequesting spouse significantly benefited from the unpaid tax or understatement and the requesting spouse had little or no benefit or the nonrequesting spouse enjoyed the benefit to the requesting spouse’s detriment id petitioner wrote checks to herself from m v p builders’ checking account for personal_use and to support her horse care and boarding business we find this factor weighs against relief mental physical health there is no evidence that petitioner was ill when she signed the returns for the years involved or when she requested relief nor did she appear to be in ill health at trial we find this factor weighs against relief see pullins v commissioner t c pincite conclusion we conclude that petitioner is not entitled to relief from joint_and_several_liability under sec_6015 for any of the years involved the most significant factor in reaching our conclusion is that petitioner had knowledge of the understatements of tax or deficiencies with respect to the joint income_tax returns petitioner was directly responsible for the underreporting of income with respect to the horse care and boarding business and as m v p builders’ bookkeeper office manager she knew of the underreporting of income and excessive expense deductions attributable to that business to reflect the foregoing decision will be entered for respondent


id office uilc cca_2009110411000564 -------------- number release date from ------------------ sent wednesday november am to ------------------ cc subject re thanks for morsels of wisdom - rev_proc and ic taxpayers --------- i don't know that that was the only reason but i think it played into the rationale rationale since ic taxpayers are not selected for audit in some years they can play audit roulette ie take tax positions beyond reasonable bonds on the chance that they will not be selected for audit cic taxpayers can not play audit roulette for this reason ic taxpayers can not amend returns once selected for audit allowing ic taxpayers to amend their returns after being selected for audit pursuant to revproc_94_69 is the equivalent of permitting audit roulette players to withdraw their bets - in the form of penalty - after the roulette ball falls into the audit pocket