internal_revenue_service number release date index number ----------------------------------- ------------------- ------------------------ ------------------------------ department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ---------------- id no ------------------ telephone number ---------------------- refer reply to cc psi b01 plr-100344-15 date date legend x ---------------------------------------------------- -------------------- y ----------------------------------------------------- ----------------------------------------- a b c d ------------------- ------------------------- -------------------------- --------------------- trust ----------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------- trust --------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------ ---------------------------------------------- ----------------------------------------------------- trust ----------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- - plr-100344-15 -------------------------------------------------- ----------------------------------------------------- date date date date date year sec_1 year sec_2 year sec_3 year sec_4 year sec_5 state ---------------------------- ---------------------- ---------------------- ---------------------- ---------------------------- --------------- --------------- --------------- ------------------------------- --------------- ------- dollar_figurea ------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------ dollar_figureb -------------- dear -------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x by x’s authorized representative requesting relief under sec_1362 of the internal_revenue_code facts according to the information submitted and representations within x was incorporated on date under the laws of state x elected to be treated as an s_corporation effective date plr-100344-15 as of date trust trust and trust were shareholders of x x represents that trust was eligible to make an electing_small_business_trust esbt election as of date however the trustee of trust inadvertently failed to file an esbt election x represents that trust was eligible to make a qualified_subchapter_s_trust qsst election as of date however the income_beneficiary of trust inadvertently failed to file a qsst election effective date x elected to treat y as a qualified_subchapter_s_subsidiary qsub however x’s s election was not valid on date thus invalidating x’s qsub election x represents that at all times on and after date x has owned all of the outstanding_stock of y x represents that it intended to elect to treat y as a qsub effective date and that x has filed tax returns for all tax years consistent with the treatment of y as a qsub x represents that on date trust a grantor_trust was an eligible shareholder of x under sec_1361 on date b the grantor of trust died upon b’s death a sub-trust of trust was created and all of the assets from trust were allocated to the sub-trust the sub-trust was administered as a family_trust for the benefit of c as of date an esbt election was not timely filed for trust thereby causing trust to become an ineligible shareholder of x trust held the x shares until date when the x shares were transferred to d an eligible shareholder x represents that trust intended to be an esbt effective date and that trust intended to be an esbt effective date however timely esbt elections were not filed x represents that trust intended to be a qsst effective date however a timely qsst election was not filed x represents that the circumstances resulting in the failure to make the esbt and qsst elections were inadvertent and not motivated by tax_avoidance or retroactive tax planning x further represents that x has filed its income_tax returns consistent with having a valid s election in effect for all taxable years since x elected to be an s_corporation x represents that other than the failure to make valid esbt elections on date and date and a valid qsst election on date x has qualified as a small_business_corporation at all times since its election on date lastly x and its shareholders agree to make any adjustments required as a condition of obtaining relief under sec_1362 that may be required by the secretary in addition x represents that trust has at all times since date met the requirements of an esbt under sec_1361 and that trust has met the requirements of an esbt since date x further represents that trust has not filed its income_tax returns consistent with being an esbt for year sec_1 and that trust has not filed its income_tax returns consistent with being an esbt for year sec_2 x represents that trust has qualified as a qsst under sec_1361 at all times with the exception of year sec_3 since plr-100344-15 trust acquired x stock on date x also represents that since date trust has been treated as a qsst for year sec_4 x represents that the inadvertent invalid election and potential later termination of its s_corporation_election was inadvertent and was not motivated by tax_avoidance or retroactive tax planning law and analysis sec_1361 provides that an s_corporation is a small_business_corporation for which an election under sec_1362 is in effect sec_1361 provides that the terms small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than class of stock sec_1361 generally provides that a qsub shall not be treated as a separate corporation and all assets liabilities and items of income deduction and credit of a qsub shall be treated as assets liabilities and such items as the case may be of the s_corporation sec_1361 defines a qsub as a domestic_corporation which is not an ineligible_corporation if percent of the stock of the corporation is owned by the s_corporation and the s_corporation elects to treat the corporation as a qualified_subchapter_s_subsidiary sec_1361 provides that for purposes of sec_1361 a_trust all of which is treated under subpart e of part i of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states may be an s_corporation shareholder sec_1361 provides that for purposes of sec_1361 an esbt is a permissible s_corporation shareholder sec_1361 provides that in the case of a qsst with respect to which a beneficiary makes an election under paragraph d such trust shall be treated as a_trust described in sub sec_1361 and for purposes of sec_678 the beneficiary of such trust shall be treated as the owner of that portion of the trust which consists of stock in an s_corporation with respect to which the election under paragraph d is made plr-100344-15 sec_1361 defines a qsst as a_trust all of the income within the meaning of sec_643 of which is distributed or required to be distributed currently to one individual who is a citizen or resident_of_the_united_states in addition the terms of the trust must require that i during the lifetime of the current income_beneficiary there shall be only one income_beneficiary of the trust ii any corpus distributed during the life of the current income_beneficiary may be distributed only to such beneficiary iii the income_interest of the current income_beneficiary in the trust shall terminate on the earlier of such beneficiary's death or the termination of the trust and iv upon the termination of the trust during the life of the current income_beneficiary the trust shall distribute all of its assets to such beneficiary sec_1361 provides that an election under sec_1361 shall be made by the trustee any such election shall apply to the taxable_year of the trust for which made and all subsequent taxable years of such trust unless revoked with the consent of the secretary sec_1_1361-1 of the income_tax regulations provides that the trustee of an esbt must make the esbt election by signing and filing with the service_center where the s_corporation files its income_tax return a statement that meets the requirements of sec_1_1361-1 sec_1_1361-1 provides that the trustee of an esbt must file the esbt election within the time requirements prescribed in sec_1_1361-1 for filing a qsst election generally within the 16-day-and-2-month period beginning on the day that the stock is transferred to the trust sec_1_1361-3 prescribes the time and manner for making an election to be classified as a qsub sec_1_1361-3 provides that an election may be effective up to two months and days prior to the date the election is filed or not more than months after the election is filed the proper form for making the election is form_8869 qualified_subchapter_s_subsidiary election sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1362 provides that an election under sec_1362 shall be valid only if all persons who are shareholders in such corporation on the day on which such election is made consent to such election sec_1362 provides that an election under sec_1362 shall be terminated whenever at any time on or after the 1st day of the 1st taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation plr-100344-15 sec_1362 provides in relevant part that if an election under sec_1362 or sec_1361 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under paragraph or sec_1362 or sec_1361 the secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such ineffectiveness or termination steps were taken a so that the corporation for which the election was made or the termination occurred is a small_business_corporation or a qsub as the case may be or b to acquire the required shareholder consents and the corporation for which the election was made or the termination occurred and each person who was a shareholder in such corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of such corporation as an s_corporation or a qsub as the case may be as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such ineffectiveness or termination such corporation shall be treated as an s_corporation or a qsub as the case may be during the period specified by the secretary conclusion based solely on the facts submitted and the representations made we conclude that x’s s election was ineffective on date and that if the election has been effective it would have terminated on date we further conclude that the missed qsst and esbt elections that caused the ineffectiveness termination were inadvertent within the meaning of sec_1362 therefore x will be treated as an s_corporation effective date and thereafter provided x’s s_corporation_election is otherwise valid and not otherwise terminated under sec_1362 this letter_ruling is subject_to the following conditions no later than days from the date of this letter as an adjustment under sec_1362 a payment of dollar_figurea and a copy of this letter must be sent to the following address internal_revenue_service cincinnati service_center west rivercenter blvd covington ky stop terri lackey manual deposit the trustee of trust must make a distribution of dollar_figureb to a x and each of its shareholders must file any original and amended returns for year sec_5 consistent with the relief granted in this letter the trustee of trust must file an esbt election for trust effective date the beneficiary of trust must file a qsst election for trust effective date and the trustee of trust must file an esbt election for trust effective date these elections must be made with the appropriate service_center within days from the date of this letter a copy of this letter should be attached to the elections if these conditions are not met then this ruling is null and void furthermore if these conditions plr-100344-15 are not met x must send notification that its s election has terminated to the service_center with which x’s s election was filed furthermore y will be treated as a qsub effective date and thereafter provided y otherwise is eligible to be treated as a qsub except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed or implied concerning whether x otherwise qualifies as an s_corporation or whether y is eligible to be a qsub for federal tax purposes this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer’s authorized representatives sincerely joy c spies joy c spies senior technician reviewer branch office of the chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes


internal_revenue_service department of the treasury washington dc person to contact telephone number refer reply to cc it a 05-cor-117829-00 date date index number number info release date this letter is in response to your letters dated date and date in which you requested a clear cut ruling addressing the deductibility of legal expenses_incurred by you in connection with a post-decree proceeding brought against you by your former wife for unpaid permanent maintenance and child_support we interpret your request for a clear cut ruling as a request for a private_letter_ruling a private_letter_ruling is a written response issued to a taxpayer by the national_office of the internal_revenue_service service that interprets and applies the tax laws to that taxpayer's specific set of facts the procedures for obtaining a private_letter_ruling are described below we would be pleased to consider your request once these requirements are satisfied however at the present we can supply only general information procedures for obtaining private letter rulings in revproc_2000_1 2000_1_irb_4 the service has published guidelines for taxpayers to follow when requesting private letter rulings a copy of revproc_2000_1 is enclosed for your reference this revenue_procedure contains very specific requirements including a checklist of important matters that taxpayers must meet in order to obtain a ruling for example section dollar_figure requires that the taxpayer’s submission include a complete statement of facts copies of all pertinent documents and certain other information in your situation for example such documents should include a copy of the divorce decree and all documents submitted to the trial and appellate courts concerning your former wife’s motion additionally the taxpayer’s submission must state a position and include a legal analysis in support of that position the submission must be accompanied by a statement signed under penalty of perjury cor-117829-00 further section dollar_figure of revproc_2000_1 provides that in income_tax matters the national_office generally issues letter rulings on proposed transactions and on completed transactions if the letter_ruling request is submitted before the return is filed for the year in which the transaction that is the subject of the request was completed it is unclear from your letters when you incurred the legal expenses in question if they were incurred during years for which you have already filed income_tax returns the service may be precluded by section dollar_figure of revproc_2000_1 from issuing a ruling on payments made during those years finally revproc_2000_1 would require paying a user_fee of at least dollar_figure to the service an alternative approach that might be less costly would be to consult your own tax advisor for the proper tax treatment of your legal fees general information general information letters such as this letter are statements issued by the service that call attention to well-established principles of tax law these letters are advisory only and have no binding effect the service issues them where a taxpayer's inquiry shows a need for general information you are seeking information about the treatment of legal fees incurred as a result of a dispute about the terms and conditions of a separation agreement generally attorneys fees and other costs paid in connection with a divorce separation or decree for support are not deductible in contrast legal expenses_incurred for the management_conservation_or_maintenance_of_property_held_for_the_production_of_income may be deducted however an otherwise nondeductible expense does not become deductible by reason of the fact that property held by the taxpayer may be required to be used or sold for the purpose of satisfying the liability we hope that this information will be helpful to you if you have any further questions regarding this matter please call sincerely associate chief_counsel income_tax accounting by douglas a fahey acting chief branch


t c memo united_states tax_court mary ann tobin petitioner v commissioner of internal revenue respondent docket no filed date robert thomas blackburn jr chris meinhart and scott r cox for petitioner rebecca dance harris edsel ford holman jr and robert b nadler for respondent memorandum findings_of_fact and opinion colvin judge respondent determined deficiencies in petitioner's federal_income_tax of dollar_figure for and dollar_figure for respondent also determined that petitioner is liable -2 - for an accuracy-related_penalty for negligence under sec_6662 of dollar_figure for and dollar_figure for during the years in issue petitioner deducted certain costs related to establishing public display gardens on her farm respondent determined that the display gardens and the farm were separate activities and that petitioner did not operate the display gardens with a profit objective see sec_183 after concessions the issues for decision are whether for purposes of sec_183 petitioner's display gardens undertaking’ known as broadmoor gardens and farming undertaking are one activity as petitioner contends or two activities as respondent contends we hold that they are one activity respondent concedes that petitioner prevails on the sec_183 issue if broadmoor gardens and petitioner's farm are one activity thus we hold that petitioner operated broadmoor gardens for profit in and whether as respondent contends depreciation of the addition to petitioner's residence built in and which includes a conservatory used for broadmoor gardens is subject_to the restrictions of sec_280a we hold that it is ' for purposes of sec_183 two or more undertakings may be one activity sec_1_183-1 income_tax regs we refer to the display gardens and farm as undertakings because one of the issues in dispute is whether they were one activity -3- whether petitioner is liable for the accuracy-related_penalty for negligence under sec_6662 for and we hold that she is not ’ i findings_of_fact some of the facts have been stipulated and are so found a petitioner petitioner has lived in irvington kentucky since including when she filed her petition and on a farm since petitioner graduated from the university of kentucky with a degree in accounting petitioner was a kentucky state representative from to the beginning of she was kentucky state auditor from to date petitioner ran for the kentucky state senate in but lost in the general election petitioner is on the boards of directors of a family owned telephone company a bank_holding_company and two banks petitioner and her brother own a controlling_interest in the brandenburg telephone and first state bank in brandenburg kentucky petitioner's friend brucie beard ms beard also lives in petitioner's home in light of our holding on the tax issues petitioner's motion for relief is moot insofar as it requests that we shift the burden_of_proof grant summary_judgment or suppress evidence b petitioner's farm petitioner owned about big_number acres of mostly contiguous kentucky farmland including about big_number acres of cropland in and petitioner raises cattle and horses and grows corn wheat hay and tobacco at her farm petitioner developed part of her farm into a public display garden called broadmoor gardens discussed below at paragraph i-d petitioner grew no corn or tobacco on her farm during the years in issue because she leased the acres available for growing tobacco and participated in the corn set-aside program cc petitioner's residence petitioner's residence was built in and the addition petitioner added an addition to her residence in and at a cost of dollar_figure she added a conservatory about big_number square feet or about 32' x 74' a bedroom and office hereafter called petitioner's room square feet an office closet about square feet a second bedroom hereafter called ms beard's room about square feet a bathroom containing a hot tub about square feet a closet that adjoins both petitioner's and ms beard's rooms about square feet and an attached structure called a pole barn about big_number square feet the addition is connected to the side of petitioner's house - petitioner used the pole barn to care for mares for the weeks before they were ready to foal to foal horses and to store lawn mowers and farm equipment she occasionally parked her cars in the pole barn there is one door from the pole barn to petitioner's bedroom and one to the closet the conservatory and petitioner's room the conservatory contains many plants and has large glass windows across the front the conservatory has one front door and one side door to the outside three rooms in the addition are connected to the conservatory by double glass doors petitioner’s room the bathroom with the hot tub and ms beard’s room next to the conservatory is a catering kitchen the doors from the conservatory to petitioner's room were generally not locked during the day because people came to water plants or feed doves kept there when petitioner was not home eg for a few months each winter when petitioner and ms beard were in florida petitioner has a barn which is about yards from her house the front door of the conservatory is visible from the front of the barn the back of the house is not visible from the front of the barn petitioner's records petitioner generally keeps her farm financial and other personal records in her room ms beard has a desk in petitioner's room some of petitioner's records are in boxes -6- around ms beard's desk petitioner's room also contains petitioner's bed and a credenza with built-in filing cabinets she sometimes works in bed and she usually keeps books a computer and other papers at her bed petitioner kept her bank statements for each year ina drawer with that year's tax documents such as forms w-2 at the end of the year petitioner put her bank statements canceled checks receipts for paid bills for the farm her forms and any other tax-related records in a box labeled for that year beside the desk to give to her certified_public_accountant joseph richardson richardson to prepare her return richardson is a partner in the louisville accounting firm of richardson pennington skinner rp s petitioner also kept records for past years in boxes in her room petitioner filed spiral---bound copies of her tax returns one per folder in the credenza ms beard kept some of her tax records in the credenza and stored her bank statements mortgage information vehicle registration and personal correspondence in petitioner's room petitioner and ms beard occasionally handled each other's records d broadmoor gardens in the mid-1980's the university of kentucky and state agricultural officials began promoting alternatives to growing _7- tobacco about that time petitioner began looking for other sources of revenue to replace tobacco as her main cash crop petitioner's farm is located on u s highway which is the main road from louisville to owensboro kentucky she wanted to find a way to use her farm to make money from people using u s highway she considered many alternatives such as a vegetable stand a recreational vehicle park a flower cutting garden a chuck wagon and show and a petting zoo ms beard was experienced in flower gardening and enjoyed arranging flowers and gardening petitioner however did not particularly like flowers or gardening petitioner and ms beard visited some public display gardens in burope in spring and in the united_states in the late 1980's petitioner believed that she could develop a profitable public display garden she thought people would pay to see a public display garden like those she and ms beard had seen in other states and abroad because her farm was in a good location and kentucky had no other similar gardens petitioner also believed that if she could attract people to the gardens they would buy produce from the farm petitioner had no income from broadmoor gardens in and broadmoor gardens opened to the public in its features include a display garden and conservatory including two rose gardens an all-white moon garden a rock garden with -8- pool and fountain an english garden water gardens indoor and outdoor a japanese garden with koi pool a shade garden several animal topiaries a pond with black and white swans an artificial stream through one of the gardens a 2-mile trail for hayrides and hiking through wild flower meadows and woodlands and domestic animals such as chickens peacocks ducks other fowl and pygmy goats there was also a gift shop which sold items such as birdhouses handmade art objects from kenya and other knickknacks petitioner and ms beard and occasionally their friend michael patterson patterson and their employee clinton haynes conducted public tours of broadmoor gardens visitors were taken through the rooms in petitioner's residence that existed before she built the addition including the family room living room dining room and two kitchens and also the conservatory petitioner's room the bathroom hot tub and ms beard's room many tropical plants were displayed in the conservatory the conservatory also contained a patio garden and garden furniture for visitors petitioner used the conservatory primarily to display plants to show to the public she also made it available to rent for weddings petitioner hosted the wedding of ms beard's daughter in and in after the years in issue two political events ms beard held a surprise birthday party for petitioner in in the conservatory petitioner and ms beard also had a political reception and a couple of parties and family gatherings at petitioner's home during which guests walked through the conservatory on dates not specified in the record petitioner contracted with a nursery in brandenburg kentucky to grow seedlings for the conservatory until she built her own greenhouse sometime after broadmoor gardens opened in petitioner did not advertise broadmoor gardens in or she paid dollar_figure in dollar_figure in dollar_figure in dollar_figure in and dollar_figure in to advertise broadmoor gardens broadmoor gardens opened on the first of april each year and closed when visitors stopped coming in mid-to-late fall petitioner obtained a general business license for broadmoor gardens in she had no business license for the farm she had commercial liability insurance for broadmoor gardens through lloyd's of london because her farm insurance_policy did not cover tourists who visited the gardens petitioner managed both the farm and broadmoor gardens petitioner and ms beard had an informal unwritten joint_venture agreement under which ms beard would share part of any profits from broadmoor gardens in exchange for her efforts --10- petitioner worked on the farm and in the gardens for example she delivered colts fed calves cut bushes mowed removed the dead heads of flowers planted flower bulbs and cleaned the ponds petitioner's employees generally worked both on the farm and in the gardens however each worker had responsibilities related mostly to either the gardens or the farm petitioner used some equipment and some of the facilities such as the pole barn for both the farm and the gardens during the years in issue petitioner had one bank account that she used for the farm broadmoor gardens and for her personal expenses eb petitioner's federal_income_tax returns and the notice_of_deficiency petitioner assembled all of her records relating to broadmoor gardens and her farm and gave them to richardson to prepare her tax returns petitioner calculated that dollar_figure of the dollar_figure cost of remodeling her home related to personal_use she estimated that this was the cost of ms beard's room the bathroom but not the hot tub and the closet she began to depreciate dollar_figure e dollar_figure - dollar_figure on her and returns under the heading greenhouse petitioner deducted the following depreciation related to the greenhouse from to --11- year amount dollar_figure big_number big_number big_number big_number -o- -o- -o- -o- petitioner reported on the schedules f profit or loss from farming she attached to her returns for to that her farm and broadmoor gardens were one activity petitioner incurred losses for the farm and broadmoor gardens in each of those years whether the calculation is made for the farm and broadmoor gardens as one or two activities on her schedules f for to petitioner reported income and expenses from raising cattle horses and tobacco agricultural payments and income from a colorado rental property she reported depreciation of a greenhouse on a schedule f for each year from to petitioner reported the following amounts of gross_receipts interest_expense deductions losses and depreciation on her schedules f for to --12 - losses gross including year receipts interest depreciation depreciation dollar_figure dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number -0o- 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 big_number big_number big_number respondent mailed a notice_of_deficiency to petitioner on date respondent determined that broadmoor gardens and petitioner's farm were separate activities and disallowed petitioner's deductions for depreciation and other business_expenses related to broadmoor gardens petitioner timely filed her petition on date ii opinion a whether petitioner's farm and broadmoor gardens undertakings were separate activities we must decide whether petitioner's farm and broadmoor gardens were one or two activities in and the applicable regulations state that generally the most important factors in deciding whether two or more undertakings are operated as one activity or separate activities are the degree of organizational and economic interrelationship of the --13- undertakings the business_purpose served by carrying on the undertakings separately or together and the similarity of the undertakings see sec_1_183-1 income_tax regs the commissioner generally accepts a taxpayer's characterization of two or more undertakings as one activity unless it is artificial or unreasonable see id respondent argues that under sec_1_183-1 income_tax regs broadmoor gardens and petitioner's farm were separate sec_1_183-1 income_tax regs provides in part d activity defined-- ascertainment of activity in order to determine whether and to what extent sec_183 and the regulations thereunder apply the activity or activities of the taxpayer must be ascertained for instance where the taxpayer is engaged in several undertakings each of these may be a separate activity or several undertakings may constitute one activity in ascertaining the activity or activities of the taxpayer all the facts and circumstances of the case must be taken into account generally the most significant facts and circumstances in making this determination are the degree of organizational and economic interrelationship of various undertakings the business_purpose which is or might be served by carrying on the various undertakings separately or together in a trade_or_business or in an investment setting and the similarity of various undertakings generally the commissioner will accept the characterization by the taxpayer of several undertakings either as a single activity or as separate activities the taxpayer's characterization will not be accepted however when it appears that his characterization is artificial and cannot be reasonably supported under the facts and circumstances of the case if the taxpayer engages in two or more separate activities deductions and income from each separate activity are not aggregated either in determining whether a particular activity is engaged in for profit or in applying sec_183 -14- activities respondent contends broadmoor gardens and the farm did not have a close organizational and economic interrelationship petitioner had no business_purpose for operating broadmoor gardens and the farm as one activity and broadmoor gardens and the farm were not similar activities we have applied various factors in deciding whether a taxpayer's characterization of two or more undertakings as one activity 1s unreasonable for purposes of sec_183 such as a whether the undertakings share a close organizational and economic relationship b whether the undertakings are conducted at the same place c whether the undertakings were part of a taxpayer's efforts to find sources of revenue from his or her land d whether the undertakings were formed as separate businesses e whether one undertaking benefited from the other f whether the taxpayer used one undertaking to advertise the other g the degree to which the undertakings shared management h the degree to which one caretaker oversaw the assets of both undertakings i whether the taxpayers used the same accountant for the undertakings and j the degree to which the undertakings shared books_and_records see 94_tc_41 estate of brockenbrough v commissioner tcmemo_1998_454 hoyle v commissioner tcmemo_1994_592 de mendoza v commissioner tcmemo_1994_314 scheidt v commissioner tcmemo_1992_9 --15- applying these factors we conclude that the farm and broadmoor gardens undertakings were one activity petitioner's farm and broadmoor gardens had a close organizational and economic relationship both undertakings were conducted at petitioner's farm and both were attempts to make the farm profitable petitioner used her farmland for both undertakings petitioner created and developed broadmoor gardens in an attempt to replace tobacco as the farm's main cash crop both the gardens and the farm required the planting tending and harvesting of plants or crops petitioner managed both undertakings as one activity the farm and broadmoor gardens shared the same employees and equipment richardson was the accountant for both undertakings petitioner used the same checking account and books for her farm and broadmoor gardens and reported both undertakings on one schedule f in each of the years in issue respondent points out that petitioner reported income from different undertakings such as tobacco leases corn subsidies and horse and cattle sales on her schedules f and that the common ownership of several undertakings does not mean they are a single activity respondent maintains that the only farming activity conducted on petitioner's farm was the raising and selling of cattle and horses and that this activity was conducted away from petitioner's residence we disagree that -1 petitioner's various undertakings are not part of a single farming activity raising crops and animals leasing cropland and participating in a government agricultural subsidy program may be one activity if they are attempts by the farmer to generate income from the farm see eg hoyle v commissioner supra respondent relies on drummond v commissioner tcmemo_1997_71 affd in part and revd in part without published opinion 155_f3d_558 4th cir for the proposition that two farm undertakings that are not conducted on the same land are separate activities respondent's reliance on drummond v commissioner supra is misplaced in drummond we held that the taxpayer's horse and cattle undertakings were separate activities because we were not convinced that the taxpayer intended to use his herd of cattle to manage the pasture for his horses in contrast petitioner operated the gardens and farm as one activity respondent contends that broadmoor gardens and petitioner's farm were separate activities because petitioner and ms beard operated the gardens as a joint_venture respondent also contends that the farm and broadmoor gardens did not depend on the success of the other we disagree respondent cites no reason or authority to support the contentions that an undertaking may not be part of an activity just because it is --l17- operated as a joint_venture or that two undertakings may not be one activity just because each does not depend on the success of the other respondent contends that petitioner's farm and gardens are too dissimilar to be one activity and that petitioner had no business_purpose for operating the two undertakings together respondent characterizes broadmoor gardens as a tourist attraction and contends that a tourist attraction is clearly separate from a farm we disagree the taxpayers in hoyle v commissioner supra and sparre v commissioner tcmemo_1980_ attempted to attract the public to their farms to participate in undertakings they devised in an attempt to supplement their income from traditional farming activities including guided hunting a gun club and crabbing in hoyle v commissioner supra the taxpayer grew raspberries soybeans corn and grain guided hunting boarded horses raised horses and cattle bred game birds had a crabbing venture raced thoroughbred horses and participated in agricultural set-asides according to hoyle those undertakings were one activity for purposes of sec_183 this case is like hoyle v commissioner supra and estate of brockenbrough v commissioner supra in that petitioner was trying to find sources of revenue from her farm it is also similar to cases where we held that horse breeding and other undertakings involving horses were one activity see eg --18- scheidt v commissioner tcmemo_1992_9 horse farm and stallion syndication mary v commissioner tcmemo_1989_118 horse farm and horse racing yancy v commissioner tcmemo_1984_431 same we conclude that petitioner operated her farm and broadmoor gardens as one activity for purposes of sec_183 respondent concedes that petitioner prevails on the broadmoor gardens issue if we hold that petitioner operated the farm and broadmoor gardens as one activity thus we hold that petitioner operated broadmoor gardens for profit in and b depreciation of the addition applicability of sec_280a to the addition sec_280a bars business deductions for a taxpayer's residence unless an exception applies sec_280a a allows a taxpayer to deduct home_office expenses if the taxpayer uses the home_office exclusively and regularly as the principal place of any trade_or_business petitioner points out that visitors to broadmoor gardens toured her entire residence and contends that sec_280a does not apply to her residence because it was her principal_place_of_business and she used all of it for business purposes we disagree sec_280a applies to any dwelling_unit that is used during the year as a residence whether a taxpayer uses part or all of it for business see sec z280a a petitioner lived in her residence in and thus the restrictions of sec_280a apply to the addition including the conservatory because it was part of petitioner's residence petitioner's reliance on burkhart v commissioner tcmemo_1989_417 for the proposition that sec_280a was intended to disallow expenses only where a taxpayer performs some as opposed to all of his or her business in the taxpayer's residence is misplaced in burkhart the taxpayer operated a photographic studio in the basement of his residence we held that sec_280a applied to the studio because it was part of the taxpayer's residence we did not consider whether sec_280a does not apply if a taxpayer uses his or her entire residence for business sec_280a limitation a taxpayer's deductions for the business use of a residence are limited to the amount that the gross_income from business use of the residence exceeds the amount_of_deductions allocable to such use which are allowable regardless of whether the residence was used for business such as mortgage interest and property taxes plus deductions for expenses of the business which are not allocable to the business use of the residence see sec_280a petitioner argues that the income against which we apply the sec_280a limitation is the gross_income from the broadmoor gardens and farm activity as a whole we disagree sec_280a specifically limits the taxpayer's deduction for business use of a residence to the amount of income derived from the business use of the residence petitioner contends that she earned dollar_figure from tour tickets in however she reported no ticket income on her return and broadmoor gardens did not open until thus we conclude that petitioner had no income from business use of her residence in and and that she may not deduct depreciation related to her residence for and see sec_280a a ’ the result would not differ even if we considered all of the income from petitioner's farm and garden activity that is because under sec_280a b we would consider only income in excess of expenses petitioner had large losses from her farm and garden activity in the years at issue to the extent deductions are disallowed under sec_280a they may be carried forward to the succeeding taxable_year see sec_280a flush language sec_168 d provides a 10-year period for depreciation for single purpose horticultural structures as defined by sec_168 b petitioner contends that the conservatory is a single_purpose_horticultural_structure petitioner also contends that she used the conservatory exclusively for business based on our holding that petitioner may not depreciate any costs of the conservatory in and we need not decide whether petitioner used the conservatory exclusively for business in and or whether the conservatory was a single_purpose_horticultural_structure under sec_168 b c accuracy--related penalty under sec_6662 respondent determined that petitioner was liable for the accuracy-related_penalty for negligence under sec_6662 and c for and respondent now concedes that petitioner is not liable for the negligence_penalty for and except for any deficiencies related to petitioner's depreciation of the addition sec_6662 imposes a 20-percent penalty on the portion of an underpayment attributable to negligence negligence includes a failure to make a reasonable attempt to comply with the internal_revenue_code or to exercise ordinary and reasonable care in that respect see sec_6662 petitioner bears the burden of proving that she was not liable for the accuracy-related_penalty imposed by sec_6662 see rule a respondent contends that petitioner was negligent because the returns richardson prepared included a deduction for depreciation of parts of her residence despite the income limits of sec_280a and contained an allocation of percent of the costs of the addition to business we disagree good_faith reliance on the advice of a competent independent tax professional may offer relief from the imposition of the addition_to_tax for negligence see 469_us_241 414_f2d_749 4th cir affg tcmemo_1968_98 73_tc_671 richardson was fully aware of the facts about petitioner's residence and broadmoor gardens petitioner's reliance on richardson to prepare accurately her and returns was reasonable thus we hold that petitioner is not liable for the accuracy-related_penalty for and to reflect the foregoing an appropriate order will be issued


internal_revenue_service number release date index number -------------------------------------------- ------------------------------------------------------------ ------ -------------------------------------- ------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- id no ------------ telephone number -------------------- refer reply to cc intl b02 plr-146428-13 date date ty ------- legend shareholder state x country y country z fc1 fc2 a b c d date date date year year year year year tax advisor tax advisor --------------------------------------------------------------------------------------- ----------------------------------- ------------ ---------------- ------------ ---------------------------------- -------------------------------- --- --- ------ ------ ------------------ ----------------------- ----------------------- ------ ------ ------ ------ ------ --------------------------------------- -------------- dear ----------------- this is in response to a letter dated date submitted by your authorized representative that requested the consent of the commissioner of the internal_revenue_service commissioner for shareholder to make a retroactive qualified_electing_fund plr-146428-13 qef election under sec_1295 of the internal_revenue_code and sec_1_1295-3 with respect to shareholder’s investment in fc1 the ruling contained in this letter is based upon information and representations submitted on behalf of shareholder by its authorized representative 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 this request_for_ruling such material is subject_to verification on examination the information submitted in the request is substantially as set forth below facts shareholder is a domestic_partnership organized under the laws of state x in year shareholder acquired an a interest in fc1 an entity organized under the laws of country y that was treated as a corporation for u s federal tax purposes and fc1 acquired a b interest in fc2 an entity organized under the laws of country z that was treated as a corporation for u s federal tax purposes in year fc1 executed an initial_public_offering ipo for fc2 as a result of its initial sale of fc2 stock pursuant to the ipo fc1’s ownership_interest in fc2 declined to c as of date as a result of a second sale of fc2 stock pursuant to the ipo fc1’s ownership_interest in fc2 declined to d as of date in year as a result of a final sale of fc2 stock pursuant to the ipo fc1 disposed of its remaining interest in fc2 as of date fc1’s only asset in year through year was its interest in fc2 fc2 was an active company that derived income that was not passive_income under sec_1297 and owned assets that gave rise to non-passive income sufficient to prevent it from qualifying as a passive_foreign_investment_company pfic as defined in sec_1297 for year through year fc1’s b ownership_interest in fc2 was sufficient to allow fc1 to be treated under sec_1297 as if it held its proportionate share of the assets of fc2 and received directly its proportionate share of the income of fc2 thus fc1 did not qualify as a pfic in year through year as a result of the ipo initiated in year however fc1’s c ownership_interest in fc2 as of date was not sufficient to allow fc1 to look through fc2 under sec_1297 and thus fc1’s ownership_interest in fc2 was a passive_asset therefore fc1 qualified as a pfic in year for year through year shareholder engaged tax advisor to prepare its u s federal partnership returns and its tax filings relating to fc1 and engaged tax advisor to prepare its tax filings relating to fc2 in year through year tax advisor employing experienced tax professionals advised shareholder with respect to u s federal_income_tax matters relating to shareholder’s ownership of fc1 shareholder plr-146428-13 made available to tax advisor the books_and_records of fc1 and any other information requested by tax advisor to provide tax_advice and prepare shareholder’s tax returns including any information relating to fc2 tax advisor held itself out as a qualified_tax professional and shareholder reasonably believed that tax advisor was competent to render tax_advice with respect to the ownership of shares of a foreign_corporation with respect to year tax advisor advised that fc1 was not a pfic based on fc1’s b ownership_interest in fc2 and the sec_1297 look through rule with respect to year tax advisor did not appropriately take into account the sales of fc2 stock pursuant to the ipo and as a result incorrectly calculated the average value of the assets held by fc1 for purposes of the sec_1297 asset test accordingly tax advisor did not inform shareholder that fc1 was a pfic or of the availability of a qef election during the preparation of shareholder’s year tax_return in year tax advisor reviewed the transactions completed by fc1 during year following its conclusion that fc1 did not own a sufficient interest in fc2 during year to be eligible for sec_1297 look through treatment tax advisor reviewed fc1’s year transactions including the date of the initial sale of fc2 stock pursuant to the ipo date tax advisor then realized that a mistake was made with respect to shareholder’s year tax_return and notified shareholder shareholder has submitted an affidavit signed under penalties of perjury describing the events that led to the failure to make the qef election before the election due_date including the role of tax advisor shareholder represents that tax advisor did not identify fc1 as a pfic for year or advise shareholder of the possibility of making a qef election with respect to fc1 for year and thus did not advise shareholder of the consequences of making or failing to make a qef election for year shareholder has also submitted an affidavit from tax advisor signed under penalties of perjury corroborating the statements made by shareholder both year and year are open taxable years that would be affected by shareholder’s retroactive qef election with respect to fc1 for year shareholder will not file amended returns for year and year to redetermine its income_tax_liability despite its ability to do so instead shareholder will enter into a closing_agreement with the commissioner that confirms that there is no prejudice to the interests of the united_states government as a result of shareholder’s failure to make a retroactive qef election with respect to fc1 for year the closing_agreement also will require shareholder to pay an additional_amount of tax and interest that would have been owed by shareholder’s direct and indirect partners as a result of shareholder’s failure to treat fc1 as a pfic for year and year plr-146428-13 shareholder represents that as of the date of this request_for_ruling the pfic status of fc1 has not been raised by the internal_revenue_service irs on audit for any of the taxable years at issue ruling requested shareholder requests the consent of the commissioner to make a retroactive qef election with respect to fc1 for year under sec_1_1295-3 law sec_1295 provides that a pfic will be treated as a qef with respect to a shareholder if an election by the shareholder under sec_1295 applies to the pfic for the taxable_year and the pfic complies with the requirements prescribed by the secretary for purposes of determining the ordinary_earnings and net capital_gains of the company under sec_1295 a qef election may be made for a taxable_year at any time on or before the due_date determined with regard to extensions for filing the return for the taxable_year to the extent provided in regulations the election may be made after the due_date if the shareholder failed to make an election by the due_date because the shareholder reasonably believed the company was not a pfic under sec_1_1295-3 a shareholder may request the consent of the commissioner to make a retroactive qef election for a taxable_year if the shareholder reasonably relied on a qualified_tax professional within the meaning of sec_1_1295-3 granting consent will not prejudice the interests of the united state sec_3 government as provided in sec_1_1295-3 the request is made before a representative of the irs raises upon audit the pfic status of the company for any taxable_year of the shareholder and the shareholder satisfies the procedural requirements of sec_1 f the procedural requirements include filing a request for consent to make a retroactive election with and submitting a user_fee to the office of the associate chief_counsel international sec_1_1295-3 additionally affidavits signed under penalties of perjury must be submitted that describe the events that led to the failure to make a qef election by the election due_date the discovery of the failure the engagement and responsibilities of the qualified_tax professional and plr-146428-13 the extent to which the shareholder relied on the professional sec_1_1295-3 and iii conclusion based on the information submitted and representations made with shareholder’s ruling_request we conclude that shareholder has satisfied sec_1_1295-3 accordingly consent is granted to shareholder to make a retroactive qef election with respect to fc1 for year provided that shareholder complies with the rules under sec_1_1295-3 regarding the time and manner for making the retroactive qef election other than the requirement to file amended returns for all open years subsequent to the year in which the retroactive election is made 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 this private_letter_ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter_ruling is being sent to your authorized representatives a copy of this letter_ruling must be attached to any federal_income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling sincerely barbara e rasch senior technical reviewer branch international cc


t c memo united_states tax_court steven a monaco petitioner v commissioner of internal revenue respondent docket no filed date steven a monaco pro_se jonathan j ono for respondent memorandum opinion ruwe judge respondent determined a deficiency of dollar_figure in petitioner's federal_income_tax plus additions to tax pursuant to sections and in the respective amounts of dollar_figure and dollar_figure respondent concedes that one of the 1unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure adjustments in the notice_of_deficiency overstated income that petitioner received from crawford co by dollar_figure there is no disagreement regarding the remaining items which form the basis for respondent's deficiency determination and petitioner does not argue that he is entitled to any deductions credits or other allowances in addition to those used by respondent the only issue raised by petitioner at trial and in his posttrial brief is his contention that the notice_of_deficiency was improper because it was not supported by a properly signed assessment thus petitioner in his brief makes the following argument before any liability of any type can be created there must be an assessment that assessment must be certified as a true and correct assessment by an assessment officer the petitioner questions how a notice_of_deficiency can state that this is legal notice when legal notice could only be legal if it was supported by a properly signed assessment what officer agent employee or other person is authorized to issue a notice_of_deficiency without an assessment being signed and certified to by an assessment officer according to ir code sec_6065 the notice_of_deficiency has been improperly signed where is the attested signature the petitioner desires to have the assessment officer or other individual who has certified to the correctness of this assessment be identified if there is no assessment then the petitioner would like to know who the person is that created and caused to be sent a bill for dollar_figure the petitioner would like to subpoena that person as a witness at the present time that person remains unidentified background petitioner resided in kihei hawaii at the time he filed the petition during petitioner worked as a self-employed physical therapist and received nonemployee compensation in the amount of dollar_figure also during petitioner sold a parcel of real_property for dollar_figure petitioner did not file a timely federal_income_tax return and has made no payments regarding his income_tax_liability on date petitioner sent a form 1040nr u s nonresident_alien income_tax return to respondent's service_center in philadelphia pennsylvania which was received on date petitioner's form 1040nr reported zeros on most lines including those for income and tax petitioner altered the jurat and in the space for listing his occupation stated that he had no occupation within the united_states on date respondent mailed a notice_of_deficiency to petitioner regarding his income_tax_liability petitioner timely filed his petition with this court on date respondent has made no assessment of tax regarding petitioner's federal_income_tax in date petitioner mailed a form_1040 u s individual_income_tax_return for the taxable_year to respondent's service_center in fresno california except for amounts representing a claimed standard_deduction and personal_exemption this form_1040 contained only zeros attached to the form_1040 was a statement by petitioner that contains what can be described as typical tax_protester arguments that have been universally rejected by the courts the position that petitioner now argues on brief was not included in those arguments discussion petitioner's argument that the notice_of_deficiency is improper because there has never been a proper assessment of tax regarding his federal_income_tax for has no bearing on the outcome of these proceedings it is true that there has been no assessment of petitioner's income_tax it follows that there is no record of such an assessment the reason why there has been no assessment is that sec_6213 prohibits the commissioner from making an assessment of a deficiency in income_tax until the expiration of days from the day a notice_of_deficiency is mailed that section goes on to provide that if a petition to this court is filed within the aforementioned 90-day period no assessment can be made until after the decision of this court becomes final sec_6213 thus the lack of an existing assessment is in accordance with the statutory provisions upon which our jurisdiction is based and raises no impediment to deciding this case on the facts presented the facts presented clearly support respondent's deficiency determination as modified by the previously mentioned concession as to the addition_to_tax pursuant to sec_6651 for failure_to_file a timely return petitioner bears the burden of proving that it does not apply rule a the facts establish that petitioner did not file a return on or before date petitioner mailed to respondent a form 1040nr that was received by respondent on date even if we were to consider this a return it was received over months from the due_date and the maximum addition_to_tax under sec_6651 of percent per month not to exceed percent would apply at trial petitioner stated that he believed that he had filed a request for an extension of time in which to file his return petitioner failed to produce a copy of such a request the records of the internal_revenue_service indicate that no such request for extension was filed on the basis of record we find that no such request was filed we therefore hold that petitioner is liable for the addition_to_tax under sec_6651 as to the addition_to_tax pursuant to sec_6654 for failure to pay estimated income_tax petitioner bears the burden of proving that it does not apply rule a petitioner offered no evidence or argument on this issue therefore we 2date fell on a saturday therefore petitioner had until monday date to file a timely return see sec_7503 hold that petitioner is liable for the addition_to_tax under sec_6654 decision will be entered under rule


t c memo united_states tax_court c h robinson inc and subsidiaries petitioner v commissioner of internal revenue respondent c h robinson inc petitioner v commissioner of internal revenue respondent docket nos filed date william j hippee jr and david b strong for petitioners in docket nos and edward j plumier for petitioner in docket no jack forsberg for respondent memorandum findings_of_fact and opinion swift judge for the years in issue respondent determined deficiencies in petitioners' consolidated federal income taxes as follows year deficiency dollar_figure big_number big_number for petitioners claim an overpayment of dollar_figure 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 the issues for decision are whether payments totaling dollar_figure qualify as amortizable business_expenses relating to a covenant_not_to_compete and whether payments totaling dollar_figure qualify as deductible salary expenses for services rendered findings_of_fact some of the facts are stipulated and are so found when the petitions were filed petitioners' principal_place_of_business was located in eden prairie minnesota during the years in issue c h robinson inc petitioner was a minnesota corporation and the parent_corporation of a group of affiliated corporations that filed consolidated federal_income_tax returns petitioner and its affiliated corporations were engaged in various businesses relating to the distribution and sale of produce and the provision of transportation and customs brokerage services in meyer customs brokers inc mcb was a minnesota corporation engaged in the customs brokerage business services provided by customs brokers involve the processing and documentation of import goods through u s customs the payment of duties and freight charges and freight forwarding prior to the transaction discussed below joel meyer meyer was president and sole shareholder of mcb and the stock ownership of mcb was not in any way related to the stock ownership of petitioner other than the absence of any relationship in the stock ownership of petitioner and of mcb the identity of the owners of the stock in petitioner is not disclosed in the record in meyer founded mcb as of meyer wa sec_40 years of age and had been involved in the customs brokerage business for over years meyer had developed extensive relationships with the clients of mcb and meyer was the key individual who on behalf of mcb maintained contact with the clients the earnings_of mcb depended primarily on the efforts of meyer in each of and meyer was paid a salary by mcb of dollar_figure and dollar_figure respectively meyer was a particularly effective businessman and was well regarded as a customs broker in late representatives of petitioner and c h robinson international inc international a wholly owned subsidiary of petitioner initiated negotiations with meyer for acquisition by international of certain assets of mcb the assets of mcb including the goodwill customer lists and trade names but excluding certain assets principally cash and accounts_receivable as summarized in the schedule below an offer and several counteroffers were made by meyer individually and as representative of mcb and by representatives of petitioner and international relating to the amount of cash and stock consideration to be paid to mcb for the assets of mcb and relating to amounts to be paid to meyer under a 3-year covenant_not_to_compete and a contingent salary bonus agreement consideration to be paid to mcb and meyer as cash stock in petitioner promissory note salary bonus over years covenant_not_to_compete total amount to be paid to mcb and to meyer under mcb's offer to sell of dollar_figure big_number big_number under international's counteroffer to purchase of dollar_figure big_number big_number dollar_figure dollar_figure after receiving tax_advice in early january of representatives of petitioner and of international revised international's counteroffer to which revised counteroffer meyer and mcb agreed the final form of the agreement that was reached on date between meyer individually and as representative of mcb and international is summarized below consideration to be paid to mcb and meyer as cash stock in petitioner promissory note salary bonus over years covenant_not_to_compete amount at closing amount in amount in amount in total to be paid under covenant total amount to be paid to mcb and to meyer form as finally agreed to dollar_figure big_number big_number dollar_figure big_number big_number big_number big_number dollar_figure on date the acquisition of the assets of mcb was consummated at closing international paid to mcb the dollar_figure cash due and to meyer the dollar_figure due under the purported covenant_not_to_compete and meyer entered into the 3-year covenant_not_to_compete with international and a 3-year employment agreement reflecting the contingent salary bonus after the acquisition mcb's customs brokerage business was conducted as a division of international and continued to prosper under the employment agreement meyer agreed to expand the customs brokerage business throughout the united_states the employment agreement also contained a 2-year nonsolicitation clause to commence upon termination of meyer's employment with international under which after his employment with international meyer was prohibited from soliciting for years any of mcb's former clients the dollar_figure contingent salary bonus was to be paid to meyer ratably in march of and -- dollar_figure in each year -- if the customs brokerage business of international reached a net profits goal in each year of dollar_figure prior to deductions for taxes and prior to meyer's salary bonus and profit-sharing contributions net profits if the dollar_figure net profits goal was not reached a pro_rata share of the dollar_figure salary bonus was to be paid to meyer corresponding to the percentage of the dollar_figure net profits goal that was reached the dollar_figure net profits goal was based on the fact that mcb's annual net profits in years immediately preceding were approximately dollar_figure after termination of employment with international or after meyer's death no salary bonus would be paid to meyer or to his heirs for each of the years and in addition to the dollar_figure paid at closing meyer was paid the dollar_figure under the purported covenant_not_to_compete also with respect to and all or a majority of the dollar_figure net profits goal for the customs brokerage business was reached and meyer was paid_by international as a salary bonus dollar_figure in dollar_figure in february of for and dollar_figure in late for on meyer's individual federal_income_tax returns for and meyer reported and treated as ordinary_income the dollar_figure he received at closing under the purported covenant_not_to_compete the three annual payments of dollar_figure he received under the covenant_not_to_compete and the three annual payments of approximately dollar_figure he received as salary bonuses on petitioners' consolidated corporate federal_income_tax returns for and ordinary business_expense deductions were claimed with respect to the covenant_not_to_compete in the respective amounts of dollar_figure dollar_figure and dollar_figure -- a total of dollar_figure also ordinary business_expense deductions were claimed for and with respect to the amounts accrued and or paid to meyer each year as a salary bonus on audit respondent disallowed petitioners' claimed deductions relating to the covenant_not_to_compete and to the salary bonus on the grounds that the amounts paid as such actually represent nondeductible capital expenditures the business_expense deductions claimed for the covenant not to compete represent a 3-year amortization of a total of dollar_figure which is dollar_figure less than the total stated amount of dollar_figure purportedly paid for the covenant_not_to_compete the dollar_figure difference is not explained in the record and the dollar_figure apparently has not been claimed as a business_expense deduction for the years in issue opinion amounts paid to meyer as covenant_not_to_compete amounts paid for covenants not to compete generally are deductible over the life of the covenants as current business_expenses 84_tc_21 amounts paid however for goodwill or for the going_concern_value of a business generally are treated as nondeductible capital expenditures fong v commissioner tcmemo_1984_402 affd without published opinion 816_f2d_684 9th cir to be respected for federal_income_tax purposes covenants not to compete should reflect economic reality 810_f2d_562 6th cir affg tcmemo_1985_53 52_tc_367 affd per curiam 451_f2d_173 9th cir taxpayers generally bear the burden of proving entitlement to claimed deductions rule a 290_us_111 in at the time of the purchase of the assets of mcb meyer was an experienced relatively young and successful customs broker as a result of his investments and the sale of the assets of mcb meyer had sufficient capital available and the ability to start a new customs brokerage business and to compete effectively with international we believe that the covenant_not_to_compete that meyer entered into with petitioner and with international had substantial economic reality although as explained below a portion of the amount allocated thereto by meyer mcb petitioner and international we regard as excessive and we treat as a nondeductible capital_expenditure petitioners' and respondent's expert witnesses valued the covenant_not_to_compete at dollar_figure and at dollar_figure respectively the offer and counteroffers that were made during negotiations for purchase of the assets of mcb suggest that the dollar_figure cash payment made at closing purportedly relating to and for the covenant_not_to_compete did not in substance constitute payment for the covenant_not_to_compete rather this dollar_figure cash payment was made at closing along with the stated dollar_figure cash portion of the purchase_price together these two cash payments are closely associated with the terms of international's original counteroffer under which it was proposed that international would make at closing a dollar_figure million cash payment for the assets of mcb also under that original counteroffer only dollar_figure was to be allocated to the covenant_not_to_compete only after tax_advice was obtained by international were the terms of the counteroffer modified to reflect a much higher stated amount to be allocated to the covenant_not_to_compete ignoring the dollar_figure cash paid at closing purportedly for the covenant_not_to_compete the total of dollar_figure that was paid for and for the covenant_not_to_compete dollar_figure for each of and strongly resembles international's original counteroffer under which a total of dollar_figure was to be paid for the covenant_not_to_compete we conclude that the dollar_figure cash paid at closing purportedly relating to the covenant_not_to_compete does not reflect economic reality should be treated as consideration paid for the assets of mcb and constitutes a nondeductible capital_expenditure we also conclude that the cumulative dollar_figure paid for and for the covenant_not_to_compete does reflect economic reality and the deductions relating thereto to be amortized over years are deductible as current business_expenses for each year amounts paid to meyer as a salary bonus under sec_162 ordinary and necessary business_expense deductions are allowed including reasonable allowances for salaries or other compensation paid for personal services sec_1_162-7 income_tax regs more specifically with regard to salary bonuses amounts paid for salary bonuses to employees are deductible when made in good_faith and as additional compensation_for the services actually rendered by the employees provided such payments when added to the stipulated salaries do not exceed a reasonable_compensation for the services rendered sec_1_162-9 income_tax regs whether amounts paid as salary bonuses are to be treated as reasonable and as paid for services rendered constitutes a factual question american intl coal co inc v commissioner tcmemo_1982_204 affd without published opinion 709_f2d_1490 3d cir many factors are to be considered in determining whether compensation should be treated as reasonable in amount 178_f2d_115 6th cir remanding a memorandum opinion of this court where earnings_of a corporation are not dependent upon efforts of a large number of employees but are primarily dependent upon efforts of a few key individuals and where the retention of these individuals in the employ of the corporation is necessary to its continued successful operation the use of a percentage of profits may be a valid manner to compute a reasonable level of compensation_for services rendered in foos v commissioner tcmemo_1981_61 we treated compensation measured by percent of net corporate profits as not reasonable but we treated compensation measured by percent of net corporate profits as reasonable respondent argues that the annual salary bonus paid to meyer of dollar_figure for and of dollar_figure for and constitutes disguised consideration for acquisition of the assets of mcb respondent also argues that because meyer intended to remain with international and because international was already achieving annual net profits of dollar_figure the annual net profits contingency was not significant petitioners argue that the payments made each year as a salary bonus constitute reasonable_compensation for services rendered by meyer to international and are fully deductible as ordinary and necessary business_expenses we agree with petitioners with regard to the salary bonus meyer’s receipt each year of the salary bonus was contingent on meyer's rendering significant services to international during each year meyer managed the operations and expansion of international and meyer maintained virtually all of the former clients of mcb the earnings_of international depended primarily on the efforts of meyer in the years prior to the acquisition of the assets of mcb meyer received annual salaries from mcb of dollar_figure and dollar_figure during each of the years in issue and treating the salary bonus as part of his annual compensation_for services rendered and not taking into account amounts paid under the covenant_not_to_compete meyer's total annual compensation from international equaled dollar_figure consisting of the stated salary of dollar_figure and the salary bonus of dollar_figure -- approximately percent of the annual salary meyer received in and we conclude that the dollar_figure paid to meyer for and the dollar_figure paid to meyer for each of the years and as a salary bonus should be treated as reasonable_compensation paid to meyer for services he rendered to international and as currently deductible ordinary and necessary business_expenses to reflect the foregoing decisions will be entered under rule


internal_revenue_service number release date index number ------------------------------------------------------------ ------- ------------------------------------ ------------------------------------- -------------------------- ------------ ----------------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- ---------- ------------- telephone number -------------------- refer reply to cc pa apjp b01 plr-111303-06 date date sec_3406 -- backup withholding backup withholding sec_6041 -- information_at_source fixed or determinable gains profits or income payments specifically included sec_6045 -- returns of broker sec_6045 returns of brokers sec_6049 -- returns regarding payments of interest reportable interest legend taxpayer -------------------------------------------------------------- fund -------------------------------------------------------------- x ---------------------------------------------- y ----------------------- z ------------------- a -------------------------- years -------------- year ------- dollar_figurea ------------------ plr-111303-06 dear ------------------ this letter responds to the letter dated date submitted on behalf of the fund requesting the following rulings settlement payments from the fund to mutual_fund investors are not subject_to information reporting under sec_6041 of the internal_revenue_code except in the case of payments made directly to participants in tax-qualified retirement plans settlement payments from the fund to mutual_fund investors are not subject_to information reporting under sec_6045 settlement payments from the fund to mutual_fund investors are not subject_to information reporting under sec_6049 for purposes of meeting any obligations it may have under sec_3406 as a payor of reportable payments the fund need not solicit taxpayer identification numbers tins from the individuals to whom it will make distributions the fund may obtain the tins from the mutual funds or tax-qualified plans in which such individuals held accounts or from transfer agents performing services for the funds or plans facts based upon the facts and the representations made the fund is a qualified_settlement_fund qsf as described in sec_468b and the regulations thereunder the fund was created in year to resolve an administrative_proceeding brought by the securities_and_exchange_commission commission against x relating to investment advice provided to certain mutual funds the proceeding related to the inadequate or nonexistent disclosure of x’s policies allowing market timing trading of mutual_fund units units and to the oversight monitoring or management of trades of such units trades from at least year through late year in an order instituting proceedings oip directed at x and in related oips directed at individuals y z and a the commission alleged that x made various material omissions and misrepresentations regarding market timing of funds and that x y z and a committed certain other wrongful acts relating to trades in the units improper market timing impairs the value of mutual_fund shares by depressing their net asset value improper market timing also generates excess trading volume and thus increases the advisory fees mutual funds must pay to investment advisors such as x thus the conduct of x y z and a resulted in damage to the investors and a loss of capital the commission based on the improper conduct described above and the resulting damage to mutual_fund investors sought profit disgorgement and civil penalties after investigation and negotiations x y z and a agreed to pay dollar_figurea to settle the commission’s claims pursuant to section a of the sarbanes-oxley_act of plr-111303-06 u s c the oips authorized a fair fund for the disgorgement and penalty components of the settlement thus permitting both components to be paid to injured investors those investors holding units of the mutual funds during any portion of the time period specified in the oip will be eligible to receive distributions from the fund the distributions will be based on the commission’s orders the amount available for distribution is the net settlement pool which includes the sum of dollar_figurea the amount transferred by x y z and a into the fund and the amount of net_income earned by the fund investors will be allocated portions of the net settlement pool the commission’s orders provide that investors will first receive their proportionate share of losses suffered by the mutual funds due to market timing and then a proportionate share of advisory fees paid_by the mutual funds that suffered such losses during the period of market timing law and analysis ruling sec_1_468b-2 of the treasury regulations provides that in general distributions by a qsf are subject_to certain information reporting and withholding requirements sec_1_468b-2 provides that a qsf must make a return for or must withhold tax on a distribution to a claimant if one or more transferors would have been required to make a return or withhold tax had that transferor made the distribution directly to the claimant the regulations further provide that for purposes of sec_6041 and sec_6041a if a qsf makes a distribution on behalf of a transferor or a claimant the fund is deemed to make the distribution to the recipient of that payment or distribution in the course of a trade_or_business in such a situation the qsf is also deemed to have made the distribution to the transferor or claimant see sec_1_468b-2 c - d sec_6041 requires all persons engaged in a trade_or_business and making payment in the course of such trade_or_business to another person of rent salaries wages premiums annuities compensations remunerations emoluments or other fixed or determinable gains profits and income of dollar_figure or more in any taxable_year to file an information_return with the service and to furnish an information statement to the payee sec_1_6041-1 provides that payments are fixed when they are paid in amounts definitely predetermined income is determinable whenever there is a basis of calculation by which the amount to be paid may be ascertained sec_1 a requires a payor to report sec_6041 amounts on form_1099 thus payments that are not fixed or determinable are not subject_to information reporting under sec_6041 amounts a taxpayer receives to restore a loss of capital are not income except to the extent that the payment exceeds the taxpayer’s basis in the injured property that is the subject of the payment 144_f2d_110 1st plr-111303-06 cir fund payments to investors for losses the mutual funds suffered from market timing appear to constitute compensation_for a loss of capital market timing permitted by x depressed the net asset value of mutual_fund shares compensation from the fund will compensate at least partially for this damage because the fund has no access to the investors’ tax basis in their mutual_fund accounts and has no need or occasion to collect information on tax basis the fund is unable to calculate how much of this compensation_for mutual_fund losses constitutes fixed or determinable income accordingly the fund has no information reporting obligations under sec_6041 for such compensation as noted above a portion of the fund payments will compensate investors for improper advisory fees paid_by the mutual funds to x although such payments may constitute gross_income to investors the fund cannot due to limitations on its data collecting authority determine whether the payments will constitute gross_income to investors the payments therefore are not fixed or determinable income within the meaning of the regulations under sec_6041 accordingly subject_to the exception noted below regarding distributions to qualified_retirement_plan participants the fund has no information reporting obligations under sec_6041 the fund states that it may make a certain number of distributions directly to participants in tax-qualified retirement plans sec_72 of the code controls the taxation of such distributions and the distributions must be reported on form 1099-r pursuant to sec_6041 subject_to the dollar_figure reporting threshold set forth in sec_6041 and sec_1_6041-1 ruling sec_1_468b-2 provides that a qsf must make a return for a distribution to a claimant if one or more transferors would have been required to make a return had that transferor made the distribution directly to the claimant sec_6045 provides generally that every person doing business as a broker shall when required by the secretary make a return in accordance with such regulations as the secretary may prescribe sec_6045 defines the term broker to include a dealer a barter_exchange and any other person who for a consideration regularly acts as a middleman with respect to property or services the regulations further define the term broker to mean a person that in the ordinary course of a trade_or_business during the calendar_year stands ready to effect sales to be made by others see sec_1_6045-1 sec_1_6045-1 provides generally that a broker shall make an information_return for each sale effected by the broker in the ordinary course of the broker’s trade_or_business sec_1_6045-1 defines a sale as any disposition of securities commodities regulated_futures_contracts or forward contracts for cash and as including redemptions of stock retirements of indebtedness and entering into short_sales plr-111303-06 the fund’s payments to investors do not result from a sale as that term is defined above the fund therefore has no information reporting obligations under sec_6045 with respect to these payments ruling sec_6049 provides that every person who makes payments of interest aggregating dollar_figure or more to any other person during any calendar_year or receives payments of interest as a nominee and who makes payments aggregating dollar_figure or more during any calendar_year to any other person with respect to the interest so received shall make a return according to the forms or regulations prescribed by the secretary sec_6049 b provides that the term_interest includes interest on any obligation issued in_registered_form or of a type offered to the public other than any obligation with a maturity at issue of a year or less which is held by a corporation pursuant to sec_6049 interest also includes interest on deposits with brokers as defined in sec_6045 the fund distributions in the present case do not relate to deposits with brokers or obligations issued in_registered_form and do not otherwise qualify as interest within the meaning of sec_6049 this is so even though interest earnings may have accrued on the funds to be paid to investors from the time x y z and a paid such funds to the fund the fund distributions to investors relate to violations of securities law and compensation_for financial harm not to obligations issued in_registered_form or other instruments that generate interest as sec_6049 defines that term accordingly the fund has no information reporting obligations under sec_6049 regarding its distributions to the investors ruling sec_3406 generally provides that in the case of any reportable_payment if a the payee fails to furnish his or her tin to the payor in the manner required b the secretary notifies the payor that the tin furnished by the payee is incorrect c there has been a notified_payee_underreporting of interest and dividends or d there has been a certification failure collectively referred to as payee failures then the payor shall deduct and withhold from such reportable_payment a backup withholding amount totaling of such payment sec_3406 provides that the term reportable_payment means any reportable_interest_or_dividend_payment and any other_reportable_payment sec_3406 provides that the term other_reportable_payment includes any payment of a kind and to a payee required to be shown on a return under sec_6041 or sec_6045 in light of rulings one through three above only direct payments by the fund to participants in tax-qualified plans will be reportable payments subject_to backup withholding under sec_3406 in order to meet its obligations under sec_3406 plr-111303-06 and to include tins on information returns it must provide for these reportable payments the fund plans to obtain those tins from one of the following sources the plan_administrator the mutual funds in which the investors held accounts or the transfer agents that provide services to the administrator or mutual funds obtaining the tins in this manner should prove more reliable and less burdensome and costly to the fund than soliciting the tins from the plan participants in light of the authority it has been granted by the commission the fund will be able to obtain the tins of plan participants from the plan administrators mutual funds or transfer agents the fund will not be required to solicit tins from the participants for purposes of applying the backup withholding rules of sec_3406 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 furthermore this letter expresses no opinion about information reporting requirements for fund distributions that are not made directly to the injured investors this letter also expresses no opinion about the income_tax consequences to investors of fund distributions this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative 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 sincerely procedure and administration enclosure carol p nachman acting senior technician reviewer office of associate chief_counsel administrative provisions and judicial practice