department of the treasury internal_revenue_service washington d c date number release date uil cc dom it a wta-n-110527-99 memorandum for director office of interest and penalty administration op ex st i p from senior technician reviewer branch income_tax accounting cc dom it a subject overpayment interest on refunds of sec_847 special estimated_tax payments this responds to your request for advice regarding whether the service must pay interest on overpayments of special estimated_tax payments made pursuant to sec_847 of the internal_revenue_code code issue whether the service must pay interest under sec_6611 on overpayments of special estimated_tax payments made pursuant to sec_847 of the code conclusion because of the revenue neutrality concept underlying sec_847 special estimated_tax payments should be treated as payments of tax within the meaning of sec_6611 and the service must generally pay interest on overpayments of these amounts however overpayments of special estimated_tax payments are subject_to the same limitations that the code places on overpayments generally further sec_847 provides certain rules for special estimated_tax payments that have not been used to offset additional tax within years from the date the payments were made additional limitations apply to the payment of interest on refunds of these amounts wta-n-110527-99 discussion overview of sec_847 sec_832 of the code requires that property and casualty insurance_companies discount their deductions for insurance loss_reserves in order to take into account the time_value_of_money sec_846 provides the methodology for computing the discount and determining the amount of the discounted loss deduction section a of the technical_and_miscellaneous_revenue_act_of_1988 p l no 102_stat_3342 added sec_847 to the code effective for taxable years beginning after sec_847 of the code permits an insurance_company an additional deduction for the amount of the discount computed under sec_846 thus by claiming a deduction for discounted losses in accordance with sec_846 and the additional deduction for the amount of the discount in accordance with sec_847 a taxpayer may essentially deduct its full undiscounted reserve for losses sec_847 was not intended to give the taxpayer an additional tax_benefit however the purpose of sec_847 is to offset the negative effects on financial_accounting reporting caused by the discounting requirement of sec_846 thus the legislative_history indicates that sec_847 was intended to be revenue_neutral while sec_847 allows the taxpayer an additional deduction sec_847 offsets the tax_benefit of that deduction by requiring that the taxpayer make a special estimated_tax payment in an amount equal to the tax_benefit derived from the sec_847 deduction sec_847 provides that the taxpayer must make this special estimated_tax payment to the government on or before the date on which any taxes determined without the benefit of sec_847 would be due for the taxable_year for which the sec_847 deduction is claimed taxpayers who are allowed a deduction under sec_847 are required by sec_847 to establish and maintain a special loss discount account to keep track of the unreversed discount for each year for which a sec_847 deduction was claimed the amount of the discount claimed as a deduction for any taxable_year is added to the account pursuant to sec_847 amounts are subtracted from the account and simultaneously included in the taxpayer’s gross_income as time passes and the unreversed discount decreases assuming this inclusion in income gives rise to an additional tax_liability sec_847 provides that the special estimated_tax payments previously made are used to pay the additional tax_liability sec_847 also provides that to the extent a special estimated_tax payment was not used to pay additional tax due for any of the first taxable years beginning h_r conf_rep no 100th cong 2d sess tamra conference_report wta-n-110527-99 after the year for which the payment was made the special estimated_tax payment shall be treated as an estimated_tax payment made under sec_6655 a regular estimated_tax payment for the 16th year after the year for which the payment was made the tamra conference_report clarifies that if the amount of special estimated_tax payments that are treated as regular estimated_tax payments made under sec_6655 for the 16th year along with the taxpayer’s other_payments credited against tax_liability for the 16th year exceed the tax_liability for that year then the excess may be refunded to the taxpayer to the same extent provided under existing law with respect to overpayments of tax revenue neutrality as indicated above congress intended that sec_847 operate in a revenue_neutral manner the statute ensures revenue neutrality by requiring a special estimated_tax payment in an amount equal to the tax_benefit derived from the additional sec_847 deduction the tamra conference_report notes that because of this neutrality the total payments made by a taxpayer including regular_tax payments and special estimated payments made pursuant to sec_847 are generally the same as the total_tax payments that the taxpayer would make if the taxpayer did not elect to claim the additional deduction provided by sec_847 see h_r conf_rep no 100th cong 2d sess an example demonstrates this concept taxpayer a is a taxpayer entitled to claim a sec_847 deduction of dollar_figure taxpayer a’s taxable_income computed without regard to the deduction allowed by sec_847 is dollar_figure assuming a marginal tax_rate of taxpayer a will pay dollar_figure in federal_income_tax if it claims no sec_847 deduction dollar_figure x dollar_figure on the other hand if taxpayer a claims the sec_847 deduction its taxable_income is dollar_figure resulting in federal_income_tax of dollar_figure dollar_figure x dollar_figure in addition taxpayer a must make the special estimated_tax payment required by sec_847 of dollar_figure the amount of the tax_benefit derived from the sec_847 deduction dollar_figure x dollar_figure accordingly taxpayer a will pay a total of dollar_figure dollar_figure dollar_figure dollar_figure with its return for the taxable_year the same amount as it would have paid had it not claimed the sec_847 deduction if in the case where taxpayer a did not claim the sec_847 deduction the service later determined that taxpayer a’s tax was overpaid the amount of the overpayment would constitute an overpayment_of_tax on which interest i sec_2 taxpayers calculate and report the amount of the special estimated_tax payments on form_8816 special loss discount account and special estimated_tax payments for insurance_companies form_8816 is attached to the income_tax return for the taxable_year in which a sec_847 deduction is claimed wta-n-110527-99 allowable in order for sec_847 to be revenue_neutral the same result should occur in the situation where taxpayer a claimed the sec_847 deduction in both cases the taxpayer was required to make total payments of dollar_figure on or before the due_date of the return there is evidence in the legislative_history accompanying the omnibus budget reconciliation act of obra amendments to sec_847 which suggests that congress intended sec_847 to be revenue_neutral not only with respect to the amount of a taxpayer’s tax but with respect to interest on that tax as well the text of the obra committee report and its related footnote provide the bill also provides that special estimated_tax payments are to be made on or before the due_date determined without regard to extensions for filing the return for the taxable_year for which the deduction is allowed this provision is necessary in order to clarify the due_date of such payments for any taxable_year for which a deduction for unreversed discount is allowed due solely to the carryback of a net_operating_loss this provision is not intended to affect the revenue_neutral nature of the provision including the amount of interest payable to or by the federal government where special estimated_tax payments are timely made emphasis added for example in the case where a deduction for unreversed discount results in a refund of taxes paid in an earlier taxable_year if the insurance_company makes the required special estimated_tax payments on or before the date that the refund is paid and the internal_revenue_service is not required to pay interest with respect to the refund no interest or penalty is to be imposed on the insurance_company to the extent that the special estimated_tax payment is made after the payment of the refund interest and penalties will apply only from the date that the refund is paid or if applicable the first date with respect to which the internal_revenue_service was required to pay interest this text suggests that sec_847 should be applied in a manner that is revenue_neutral with respect to both the amount of interest and the amount of tax thus to ensure neutrality a taxpayer that claimed the sec_847 deduction and overpaid its tax should be entitled to interest on that overpayment to the same extent as if it had not claimed the sec_847 deduction a contrary conclusion would directly violate the revenue_neutral policy underlying sec_847 no express disallowance of overpayment interest in addition to its suggestion that both tax and interest are to be considered in determining revenue neutrality the legislative_history of the obra amendments to sec_847 implies that underpayment interest is payable on amounts of special p l 103_stat_2106 wta-n-110527-99 estimated_tax payments specifically the footnote reproduced above indicates that penalties and interest will apply to special estimated_tax payments that are not timely made this statement accompanied by the lack of any express prohibition on the payment of overpayment interest further supports the conclusion that interest is allowable on overpayments of special estimated_tax payments where congress intends to deny overpayment interest on refunds of particular overpayments it does so expressly see eg sec_547 overpayments of the personal_holding_company_tax resulting from the allowance of a deficiency_dividend deduction are to be refunded without interest sec_6412 a portion of the amount of excise_taxes imposed on certain floor_stocks of a manufacturer producer or importer are to be refunded without interest sec_2011 overpayments of the federal estate_tax resulting from a credit_for_state_death_taxes are to be refunded without interest sec_7519 no interest is allowed on refunds of required_payments sec_847 contains no comparable provision denying interest on an overpayment of special estimated_tax payments this supports the conclusion that congress intended for the service to pay interest on these overpayments offsetting additional tax arising under sec_847 further evidence that congress intended for special estimated_tax payments to constitute payments of tax is found in sec_847 which provides in part if amounts are included in gross_income under paragraph or for any taxable_year and an additional tax is due for such year or any other year as a result of such inclusion an amount of special estimated_tax payments equal to such additional tax shall be applied against such additional tax the fact that special estimated_tax payments are required to be used to pay income taxes due as a result of the reversal of the discount in the reserve_account further supports the conclusion that special estimated_tax payments are payments of tax within the meaning of sec_6611 and should accrue interest to the same extent a sec_4 one year prior to its enactment of sec_847 congress enacted sec_7519 sec_7519 requires partnerships_and_s_corporations that maintain a fiscal_year under sec_444 to make certain required_payments to compensate the government for the value of the tax_deferral obtained by using a fiscal_year instead of the calendar_year these monies remain on account with the government until the taxpayer’s sec_444 election is terminated or the taxpayer is liquidated at which point the amounts are refunded to the taxpayer see sec_7519 of the code and sec_1 1t c of the income_tax regulations sec_7519 provides that for purposes of determining interest the required_payment shall be treated as a tax except that no interest shall be allowed with respect to the refund of these required_payments wta-n-110527-99 overpayments of any other tax the tamra conference_report supports this view providing that to the extent special estimated_tax payments are not applied against additional taxes arising under sec_847 or and are not needed to pay sec_6655 estimated_taxes in the 16th year then such amounts should be refunded to the taxpayer to the same extent provided under existing law with respect to overpayments of tax application of sec_6611 to refunds of special estimated_tax payments sec_6611 provides that interest shall be allowed and paid upon any overpayment in respect of any internal revenue tax at the overpayment rate established under sec_6621 sec_301_6611-1 of the regulations on procedure and administration adds that the interest allowed by sec_6611 of the code shall be allowed from the date of overpayment of the tax sec_301_6611-1 of the regulations clarifies the date of overpayment providing in part there can be no overpayment_of_tax until the entire tax_liability has been satisfied therefore the dates of overpayment of any_tax are the date of payment of the first amount which when added to previous payments is in excess of the tax_liability and the dates of payment of all amounts subsequently paid with respect to such tax_liability based on the analysis above we conclude that special estimated_tax payments made pursuant to sec_847 are payments of tax within the meaning of sec_6611 further we conclude that these amounts become payments of tax on the date they are made or the date prescribed for payment whichever is later accordingly despite the fact that special estimated_tax payments may be held in suspense by the service until they are needed to offset tax arising from the discount reversal the special estimated_tax payments should not be considered either a deposit or an advance_payment of tax during that suspension_period under sec_847 the date prescribed for payment is the due_date determined without regard to extensions for filing the return for the taxable_year for which the sec_847 deduction is allowed service centers record and account for special estimated_tax payments on a non-masterfile nmf account as we understand the facts when the discount in the loss reserve_account reverses and amounts are taken into gross_income pursuant to sec_847 the service applies an amount of special estimated_tax payments against the resulting income_tax wta-n-110527-99 examples of interest computations the following examples demonstrate the effect of various interest provisions on a refund of special estimated_tax payments these examples illustrate that the provisions of sec_6611 and f may limit the amount of interest payable on refunds of special estimated_tax payments in each example we assume that the taxpayer is a calendar_year property and casualty insurance_company with a constant marginal tax_rate of percent we also assume that the taxpayer in each example files its return and pays its tax on the due_date of the return march of the year following the taxable_year and there are no audit or other adjustments to the original return other than those specifically mentioned in the examples example refunds resulting from a net_operating_loss_carryback to a year in which the sec_847 deduction was claimed facts for taxable_year the taxpayer has dollar_figure of taxable_income prior to the sec_847 deduction the taxpayer claims a dollar_figure sec_847 deduction for which it makes timely special estimated_tax payments of dollar_figure for taxable_year the taxpayer has a dollar_figure net_operating_loss without regard to sec_847 on date the taxpayer files a refund claim carrying back the dollar_figure net_operating_loss to the taxable_year on date the service refunds the dollar_figure of special estimated_tax payments made for the year analysis pursuant to sec_6611 the overpayment of special estimated_tax payments is deemed to have been made on date the filing_date for the return in addition because the service refunded the overpayment within days after the refund claim was filed no interest is allowed on the overpayment see sec_6611 and f example refunds resulting from an amended_return for the year in which the sec_847 deduction was claimed facts for taxable_year the taxpayer has dollar_figure of taxable_income prior to the sec_847 deduction the taxpayer claims a dollar_figure sec_847 deduction for which it makes timely special estimated_tax payments of dollar_figure on date the taxpayer files an amended_return for taxable_year claiming additional operating_expenses of dollar_figure which were mistakenly omitted from the original return the additional expenses reduce the taxable_income prior to the sec_847 deduction to zero thus eliminating the need for the sec_847 deduction on date the service allows this refund claim and refunds the dollar_figure of special estimated_tax payments made for the year wta-n-110527-99 analysis the overpayment of special estimated_tax payments arises on date the date on which the taxpayer’s total_tax payments first exceed its tax_liability however because the service refunded the overpayment within days after the refund claim was filed interest is allowed on the overpayment only from date to date see sec_6611 example refunds in the 16th year following the year the special estimated_tax payment was made facts for taxable_year the taxpayer claims a sec_847 deduction of dollar_figure for which it makes timely special estimated_tax payments of dollar_figure during taxable_year the taxpayer determines that dollar_figure of the original dollar_figure special estimated_tax payments has not been used to offset additional tax due pursuant to sec_847 for the taxable years beginning with the taxpayer’s regular estimated_tax payments made pursuant to sec_6655 are equal to the amount of the taxpayer’s tax_liability for the taxable_year and the service refunds the dollar_figure of special estimated_tax payments on date analysis the date of overpayment with regard to the special estimated_tax payments is date pursuant to sec_847 the dollar_figure of special estimated_tax payments which was not used to offset additional tax pursuant to sec_847 becomes a regular sec_6655 estimated_tax payment for the taxable_year pursuant to sec_6611 and sec_6513 this regular estimated_tax payment is deemed to have been made on date because this amount was not needed to satisfy the taxpayer’s tax_liability it was refunded to the taxpayer on date because the service refunded the overpayment within days after the return for taxable_year was filed no interest is allowed on the overpayment see sec_6611 if you have any questions please contact pincite0


department of the treasury internal_revenue_service washington d c date number release date tl-n-5462-99 uilc cc dom it a memorandum for m k mortensen associate district_counsel salt lake city cc wr rmd slc attn mark h howard from subject george j blaine chief cc dom it a request for significant service_center advice on allocation of joint estimated_tax payments this is in response to your request for significant service_center advice dated date regarding the proper allocation of joint estimated_tax payments by spouses who subsequently file separate returns the ogden service_center questions whether the current internal_revenue_manual procedures satisfactorily resolve all the allocation issues as your memorandum points out former sec_6015 of the internal_revenue_code the code permitted the division of estimated_tax payments by spouses who had filed a joint estimated_tax declaration but then chose not to file joint returns sec_1 b -1 b of the income_tax regulations was promulgated setting forth rules for dividing the joint estimated_tax payments pursuant to that regulation joint estimated_tax payments may be treated as payments on account of the tax_liability of either the husband or wife for the taxable_year or may be divided between them in such manner as they agree thus if the spouses agree to an allocation of the payments as evidenced by their claiming the payments on their respective separate tax returns the service will accept the allocation the regulation provides that if the spouses do not agree to the allocation of the payments the service will allocate the payments in proportion to their separate tax a formula is provided for computing the allocation in that case cc dom it a as you state in your memorandum sec_6015 of the code was repealed in current sec_6015 is the innocent spouse provision however the service has continued to use the allocation rules set forth in sec_1 b -1 b those rules set forth a rational means of dividing the joint estimated_tax payments in 818_fsupp_444 n d mass the service argued that sec_1 b -1 b of the regulations still governed the proper division of estimated_tax payments filed jointly but claimed separately the district_court stated that insofar as the regulation represents a facially rational method for dealing with the problem of jointly made but separately claimed estimated_tax payments the irs is entitled to employ that regulation to determine the proper method of allocating credits against such payments in addition although the regulations under sec_6654 of the code do not contain rules for allocating joint estimated_tax payments where the taxpayers file separate returns they refer to the sec_6015 allocation rules sec_1_6654-2 of the regulations states for rules with respect to the allocation of joint payments of estimated_tax see sec_6015 and sec_1 b -1 b the current internal_revenue_manual provision irm formerly irm uses the same basic rules allowing the spouses to agree on an allocation and defaulting to the sec_1 b -1 b allocation formula in the absence of such agreement as your memo points out the irm provision asks the taxpayer to submit the computation under the formula in the event they cannot agree on an allocation however the manual does not explain what to do in the event both spouses disagree or claim all the estimated_tax payments on their separate returns likewise publication tax withholding and estimated_tax rev date expects the spouses to agree on an allocation on page of the publication under the heading separate returns the publication reads if you and your spouse made separate estimated_tax payments for and you file separate returns you can take credit only for your own payments sec_1_6654-2 of the regulations provides for a similar allocation formula to determine the preceding year’s tax for purposes of the sec_6654 safe_harbor in the case of married taxpayers who are filing separate returns but filed jointly last year see also sec_20_2053-6 of the estate_tax regulations which sets forth a similar allocation formula to determine spouses’ separate tax and refers to sec_1 b -1 b of the regulations to compute the decedent-spouse’s contribution to joint tax in order to determine the decedent’s share of a refund cc dom it a if you made joint estimated_tax payments you must decide how to divide the payments between your returns one of you can claim all of the estimated_tax paid and the other none or you can divide it in any other way you agree on if you cannot agree you must divide the payments in proportion to each spouses’s individual tax as shown on your separate returns for the instructions for form_1040 page under estimated_tax payments state the following if you and your spouse paid joint estimated_tax but are now filing separate_income tax returns either of you can claim all of the amount_paid or you can each claim part of it see pub for details on how to report your payments although the irm provision and publication do not state that the service will determine the allocation of joint estimated_tax payments if the taxpayer-spouses disagree on the allocation the service does have the authority to do so pursuant to the sec_6015 regulation therefore if the spouses’ separate returns each claim percent of the joint payments or if the two returns together claim more than percent the service should treat this as unagreed and divide the payments pursuant to the formula in the regulation note that in either instance agreement of the spouses or allocation per formula the source of the joint estimated_tax payment is not relevant under sec_1 b -1 b of the regulations as your memorandum points out this may effectively ignore local law one spouse may have to resort to suing the other in state court as noted above the regulations under sec_6654 of the code refer to sec_1 b -1 b of the regulations for guidance in the case of spouses filing separate returns who have made joint estimated_tax payments as you suggest it would be beneficial if the sec_6654 regulations provided the rules for allocating such payments there is no current controlled project to amend the sec_6654 regulations however we will consider proposing such a project for the next business plan until we issue further guidance the service should continue current administrative practice based on the sec_6015 regulations if you have further questions please call nancy rose at


internal_revenue_service department of the treasury index no washington dc person to contact donna m crisalli id no 50-18843r telephone number refer reply to cc ita - cor-129097-01 date date number info release date dear this responds to your letter of date you requested general information on whether expenses for the diagnosis and treatment of obesity by a physician under generally accepted medical guidelines qualify as expenses for medical_care under the internal_revenue_code sec_213 allows as a deduction the expenses paid during the taxable_year for medical_care of the taxpayer spouse or dependent under sec_213 an expense is for medical_care if its primary purpose is the diagnosis cure mitigation treatment or prevention of disease the income_tax regulations state that the deduction for medical_care expenses will be confined strictly to expenses_incurred primarily for the prevention or alleviation of a physical or mental defect or illness an expense that is merely beneficial to the general health of an individual is not an expense for medical_care sec_1_213-1 a taxpayer who claims that an expense of a peculiarly personal nature is primarily for medical_care must establish that fact among the objective factors that indicate that an otherwise personal_expense is for medical_care are the taxpayer’s motive or purpose recommendation by a physician linkage between the treatment and the illness treatment effectiveness and proximity in time to the onset or recurrence of a disease 12_tc_409 there is no strict requirement that a medical treatment must be provided by a physician see eg revrul_70_170 1970_1_cb_51 however as in havey a diagnosis by a physician is sometimes necessary to substantiate that the taxpayer is suffering from a disease or that an expense for something peculiarly personal eg a hot tub a treadmill or a trip to florida is treatment for a disease see also revrul_55_261 1955_1_cb_307 questions and in accordance with these principles revrul_79_151 1979_1_cb_116 holds that if participation in a weight loss program is to improve the participant’s appearance general health or sense of well-being the expenses of the program are not for medical cor-129097-01 care and are not deductible however the expenses of a weight-loss program that is intended to treat a specific disease such as heart disease or high blood pressure are for medical_care and are deductible we are aware that there is considerable scientific and regulatory authority that obesity is in and of itself a disease e g national heart lung and blood institute clinical guidelines on the identification evaluation and treatment of overweight and obesity in adults page vii world health organization press release date national academy of sciences institute of medicine weighing the options criteria for evaluating weight-management programs national academy press page food and drug administration final_regulation on statements made for dietary supplements fed reg date social_security administration ruling on the evaluation of disability claims involving obesity fed reg date if obesity is a disease then expenses for the diagnosis and treatment of obesity may qualify as expenses for medical_care there are however certain limitations on the medical_expense_deduction that may apply to expenses for treating obesity expenses for medicines and drugs to assist in weight loss can be for medical_care only if the medicine or drug is a prescribed_drug or insulin a prescribed_drug is a drug or biological that requires a prescription of a physician for use by an individual sec_213 and d additionally while many obese individuals may follow special diets as part of their treatment the cost of food is not an expense for medical_care to the extent the food is a substitute for the food that an individual would normally consume to meet nutritional requirements if a special diet is directed as treatment for a disease only the excess cost of the special diet over the cost of a regular diet could be an expense for medical_care revrul_55_261 1955_1_cb_307 question 46_tc_672 i hope that this general information is helpful if you have any questions or require additional information please contact donna m crisalli at sincerely associate chief_counsel income_tax accounting by robert a berkovsky chief branch


internal_revenue_service number release date date cc pa cbs br2 gl-121883-00 uil memorandum for associate area_counsel - birmingham small_business self-employed attention charles pillitteri from senior technical reviewer branch joseph w clark collection bankruptcy summonses subject claims for post-petition tax periods in chapter cases this constitutes our response to your date request for advice on whether a claim for taxes payable post-petition in a chapter case can be filed as an administrative claim as opposed to a claim made pursuant to b c a we believe that in a chapter case a claim for post-petition taxes is not properly characterized as one for administrative expenses issue whether a claim for taxes payable post-petition in a chapter case can be filed as one for administrative expenses entitled to first-priority status pursuant to b c sec_507 or whether such a claim can only be filed as one pursuant to b c a entitled to eighth-priority status pursuant to b c sec_507 conclusion because a bankruptcy_estate does not constitute a separate taxable entity in a chapter it cannot incur a tax_liability constituting an administrative expense accordingly claims for post-petition taxes should not be filed as administrative claims moreover once a chapter plan is confirmed estate property other than that needed to fund the plan generally vests in the debtor so there no longer exists any bankruptcy_estate which could potentially generate administrative expenses factual and statutory background the relevant facts set forth in your request for advice are as follows a debtor files a motion to modify his chapter plan to add a post-petition liability this liability consists of federal income taxes which are payable post-petition in your district where the insolvency specialist agrees to allow the debtor to pay the liability through the plan the specialist files an administrative claim as you point out various reference materials developed by this division offer gl-121883-00 contradictory guidance on whether this practice is appropriate on the one hand the most recent version of the bankruptcy practice seminar material sec_1 indicates that this means of seeking payment of post-petition taxes in bankruptcy is acceptable litigation_guideline_memorandum lgm gl-26 dated date in contrast indicates that post-petition taxes at least those incurred following confirmation do not constitute administrative expenses of a chapter estate since the estate essentially terminates upon confirmation in light of this contradiction you have requested that we provide this division’s current position on whether post-petition taxes are properly the subject of an administrative claim in a chapter case several statutory provisions are relevant to analysis of this issue initially sec_507 states in pertinent part a the following expenses and claims have priority in the following order first administrative expenses allowed under sec_503 of this title b c sec_507 sec_503 in turn provides that t here shall be allowed administrative expenses including - a the actual necessary costs and expenses of preserving the estate including wages salaries or commissions for services rendered after the commencement of the case b any_tax - i incurred by the estate except a tax of a kind specified in sec_507 of this title b c sec_503 b i section of the bankruptcy code provides that property of the estate includes in a chapter case and in addition to the property specified in b c sec_541 all property of the kind specified in sec_541 which is acquired these materials are in the process of being revised gl-26 states that it concerns only collection of post-petition post-confirmation tax_liabilities gl-121883-00 post-petition and all earnings from services performed by the debtor post-petition but before the case is closed dismissed or converted whichever occurs first b c a section b provides except as otherwise provided in the plan or the order confirming the plan the confirmation of a plan vests all of the property of the estate in the debtor b c b finally section entitled filing and allowance of postpetition claims provides that a creditor may file a proof_of_claim inter alia for taxes that become payable to a governmental_unit while the case is pending b c a a claim filed under this provision is determined as of the date such claim arises and shall be allowed the same as if such claim had arisen before the date of the filing of the petition b c b law and analysis the language of the first two relevant statutory provisions sec_507 and sec_503 indicates that if an expense constitutes either an actual necessary cost of preserving the estate or any_tax incurred by the estate except a tax of a kind specified in sec_507 it can be characterized as an administrative expense entitled to first-priority payment see b c sec_503 b i a emphasis supplied thus the central issue to be addressed here is whether taxes incurred post-petition in a chapter case constitute an expense of the bankruptcy_estate or an expense of the debtor in his individual capacity the position of this division generally has been that at least with respect to tax_liabilities no separate bankruptcy_estate exists in a chapter the basis of this position is that the internal_revenue_code creates a separate taxable entity upon the filing of certain petitions by individuals under chapter and chapter but does not create a separate taxable entity in any chapter case see sec_1398 sec_1399 as a result separate tax returns are not required to be filed for chapter estates given these considerations post-petition taxes are not incurred by the estate as is required for a tax to be characterized as an administrative expense pursuant to b c sec_503 moreover given our view that post-petition taxes constitute a liability of the debtor rather than the estate we would be reluctant to view a post-petition tax as an administrative expense even under sec_503 which affords administrative expense status to costs and expenses necessary to preserve the estate thus our position is that taxes payable post-petition are not properly the subject of an administrative claim in a chapter gl-121883-00 we believe that this is particularly true with respect to post-petition taxes which are payable post-confirmation the longstanding position of this division is that the chapter bankruptcy_estate terminates upon confirmation given section b except to the extent that funds are either designated by the plan as estate property or are necessary to fund the plan since the bankruptcy_estate does not for the most part even exists post-confirmation clearly any_tax liability incurred at that point is neither a cost or expense of preserving the chapter estate nor incurred by the estate as you indicate the only existing judicial decision directly on point with respect to this issue is 65_br_913 bankr d ks in gyulafia a chapter case both pre- and post-confirmation tax_liabilities were at issue the government argued that the liabilities were actual necessary costs of preserving the estate and should accordingly be granted administrative expense treatment initially the court determined that in light of the language of section b and c addressing the status of estate property upon confirmation post-confirmation taxes are incurred by the debtor rather than the bankruptcy_estate the court accordingly held that taxes incurred after confirmation do not constitute administrative expenses pursuant to b c sec_503 b r pincite with respect to pre-confirmation taxes the court reached the same conclusion but based on a different analysis the court initially noted that since section a provides that the government may file a post-petition claim against the debtor rather than the estate sec_503 is not applicable to any post-petition tax claim in a chapter case prior to or subsequent to confirmation id pincite the court also maintained that sec_346 of the bankruptcy codes provides that in chapter cases any income of the estate or the debtor may be taxed on or measured by income only to the debtor and may not be taxed to the estate further supporting the conclusion that no post-petition tax_liability is properly characterized as an expense of the estate itself id finally the court reasoned that affording administrative expense status to post-petition tax claims would render section a superfluous as the government presumably would never file claims under that section since a claim filed under sec_503 would be entitled to a higher priority status id in finding the government’s claim not entitled to administrative expense status the court in gyulafia relied in part on sec_346 this provision which wa sec_3 this position is substantially embodied in irm in in re gebhart bankr lexi sec_611 bankr m d pa however the court in dictum cited the holding in gyulafia on mischaracterization of post-petition tax_liabilities as administrative expenses claims filed pursuant to b c a are entitled to eighth-level priority along with claims for certain pre-petition taxes pursuant to b c sec_507 gl-121883-00 not quoted in its entirety in gyulafia states in a case under chapter of this title any income of the estate or the debtor may be taxed under a state or local law imposing a tax on or measured by income only to the debtor and may not be taxed to the estate b c sec_346 in contrast to what the court suggested in gyulafia this provision addresses only taxation of income under state or local law and does not require that income taxed under federal_law be taxed only to the debtor accordingly we disagree with that aspect of the analysis in gyulafia which is based on sec_346 nonetheless we agree with the remainder of the gyulafia court’s analysis and concur in its ultimate conclusion that neither pre- or post-confirmation taxes should be deemed administrative expenses in chapter cases we caution that taking this position could present certain litigating hazards first we reiterate that the only case which we have been able to locate on the issue of whether post-petition tax_liabilities can enjoy administrative expense status in a chapter case is gyulafia a bankruptcy court decision moreover in discussing the issue of characterizing post-petition preconfirmation taxes as administrative expenses the court in gyulafia interpreted sec_346 in a way which we regard as incomplete weakening the force of its authority on this issue given the absence of judicial authority on whether preconfirmation taxes can be characterized as administrative expenses it is at least arguable that they can be characterized as such further if they can be so characterized then our position on the issue of whether post-confirmation taxes constitute administrative expenses may not be applicable in all districts this is because the view that the chapter bankruptcy_estate terminates upon confirmation is not one which has been adopted across-the-board as lgm gl-26 indicates the case law reflects various other positions on this issue including both the position that all estate property remains in the estate post-confirmation and the position that property acquired post-confirmation but not that acquired pre-confirmation remains in the estate once confirmation occurs in jurisdictions which view the chapter bankruptcy_estate as continuing to exist after confirmation either as a continuation of the preconfirmation estate or as a newly-constituted estate encompassing only property acquired post-confirmation it is arguable assuming that preconfirmation liabilities would constitute expenses of the estate that even post-confirmation tax_liabilities should enjoy administrative expense status since they are similarly related to funding the estate however because we do not believe that tax_liabilities incurred preconfirmation while a bankruptcy_estate the latter is the position taken in some of the more recent cases see eg barbosa v soloman 231_f3d_31 1st cir united_states of america v holden u s dist lexis d vt in re reynard 250_br_241 bankr e d va gl-121883-00 clearly exists are properly characterized as administrative expenses we do not recommend that post-confirmation liabilities be claimed as administrative expenses even in jurisdictions where the bankruptcy_estate continues after confirmation has occurred in summary our position is that since post-petition tax_liabilities are in chapter cases incurred by the debtor rather than the bankruptcy_estate characterizing such liabilities as administrative expenses is inconsistent with sec_503 of the bankruptcy code and is not a practice which should be perpetuated this type of liability should instead be collected either by filing a claim under b c a if appropriate or by pursuing collection outside of the bankruptcy this position is consistent with lgm gl-26 further we plan to incorporate these conclusions into the current revision of the bankruptcy practice seminar materials if you have further questions please call


t c summary opinion united_states tax_court windy w harris petitioner v commissioner of internal revenue respondent docket no 30959-15s filed date franklin brand bredimus jr for petitioner deborah aloof and bradley hillyer bentley student for respondent summary opinion armen special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not unless otherwise indicated all subsequent section references are to the continued reviewable by any other court and this opinion shall not be treated as precedent for any other case respondent determined a deficiency in petitioner’s joint federal_income_tax of dollar_figure substantially_all of which is attributable to the disallowance of various deductions claimed on a particular schedule c profit or loss from business petitioner requests relief from joint_and_several_liability under sec_6015 and c to the extent that the deficiency relates to the disallowance of the schedule c deductions thus the court must decide whether petitioner qualifies for such relief and if not whether the schedule c activity was engaged in for profit within the meaning of sec_183 continued internal_revenue_code as amended and in effect at all relevant times all rule references are to the tax_court rules_of_practice and procedure in the notice_of_deficiency respondent also determined that petitioner received dollar_figure in royalty income in and adjusted her income accordingly petitioner does not dispute this adjustment other adjustments in the notice_of_deficiency are essentially mechanical in nature petitioner does not request relief from liability to the extent that it relates to the dollar_figure adjustment in royalty income background some of the facts have been stipulated and they are so found the court incorporates by reference the parties’ stipulation of facts and accompanying exhibits petitioner resided in the commonwealth of virginia at the time that the petition was filed with the court in date petitioner married richard a harris iii the couple have two children born in and in petitioner and mr harris separated in they entered into a separation and property settlement agreement psa and then divorced in well before their separation and divorce petitioner and mr harris moved from texas to virginia the couple purchased a 5-acre plot of undeveloped land in purcellville virginia and built their marital residence and a run-in shed for their horses on the property marital property during their marriage petitioner and mr harris owned four peruvian paso horses petitioner and mr harris brought the horses from texas when they moved to virginia the horses were kept in the run-in shed on the marital property the run-in shed was a three-sided shed for shelter that allowed the horses to enter and exit on their own neither petitioner nor mr harris bred showed or rented the horses as the horses were used for personal recreational purposes only nor did petitioner or mr harris breed train show rent or stable horses owned by any third party in date mr harris purchased a 8-acre plot of undeveloped land that was adjacent to the marital property mr harris purchased this additional property with the intent of using it for a cattle ranching activity in mr harris switched from full-time to part-time work as a chief information officer so that he could focus on pursuing his cattle ranching activity mr harris researched different types of livestock and their profitability cultivated the land constructed a fence and built a big_number square-foot barn on the 8-acre tract mr harris also kept and maintained the records for his cattle ranching activity at no point was petitioner involved in this activity the aforementioned big_number square-foot barn was not customarily used to stable horses during the year in issue and at all other relevant times petitioner worked actively as a real_estate agent upon their separation and pursuant to the psa mr harris became the sole owner of the 8-acre parcel of property including the big_number square-foot barn and petitioner became the sole owner of both the marital property including the run-in shed and the couple’s horses petitioner and mr harris timely filed a joint federal_income_tax return attached to the return were two schedules c the first schedule c related to petitioner’s realtor business realtor schedule c and showed petitioner as the sole_proprietor on the realtor schedule c petitioner reported gross_receipts of dollar_figure expenses of dollar_figure and a net profit of dollar_figure the second schedule c related to the cattle ranching activity and showed petitioner and mr harris as the proprietors of a business named harris stables harris stables schedule c the harris stables schedule c reported gross_income of dollar_figure and a net_loss of dollar_figure which resulted from a number of deductions specifically including dollar_figure of depreciation on the big_number square-foot barn and related appurtenances in or about the internal_revenue_service commenced an examination of petitioner’ sec_2011 joint_return focusing principally on the harris stables schedule c in date respondent received a form_8857 request for innocent spouse relief from petitioner ultimately in a notice_of_deficiency dated date respondent determined a deficiency of dollar_figure for as relevant respondent disallowed deductions claimed on the harris stables schedule c see sec_183 respondent also denied petitioner’s request for innocent spouse relief petitioner timely filed a petition with this court principally requesting relief from joint_and_several_liability under sec_6015 and c discussion married taxpayers may elect to file a joint federal_income_tax return in order to obtain more favorable tax_rates and other tax benefits sec_6013 see sec_1 d generally each spouse filing the return is jointly and severally liable for the entire tax due sec_6013 nevertheless an individual who has made a joint_return may elect to seek relief from joint_and_several_liability under subsections b c and f of sec_6015 sec_6015 f such relief may or may not be available depending on the particular facts and circumstances of the individual’s situation except as otherwise provided in sec_6015 the taxpayer bears the burden_of_proof to show his or her entitlement to relief rule a 119_tc_306 aff’d 101_fedappx_34 6th cir in the notice_of_deficiency respondent also increased petitioner’s income by dollar_figure to reflect a royalty that petitioner received see supra note i sec_6015 sec_6015 provides full or apportioned relief from joint_and_several_liability for tax including interest penalties and other_amounts to the extent that such liability is attributable to an understatement_of_tax to be eligible for relief the requesting spouse must establish inter alia that in signing the return he or she did not know and had no reason to know of the understatement sec_6015 a spouse seeking relief under sec_6015 has reason to know of the understatement if a reasonably prudent taxpayer in her position at the time she signed the return could be expected to know that the return contained the understatement see 121_tc_73 citing 887_f2d_959 9th cir the understatement_of_tax on petitioner’s joint_return is attributable in large part to the disallowance of a substantial deduction for depreciation and other expenses claimed on the harris stables schedule c that significantly offset the other income reported on the return see levin v commissioner tcmemo_1987_67 petitioner acknowledged that before she consented to the filing of the return she reviewed it accordingly we conclude that petitioner knew or certainly had reason to know of the understatement and therefore does not qualify for relief from joint_and_several_liability under sec_6015 ii sec_6015 an election under sec_6015 treats the former spouses as if they had filed separate returns and each spouse’s liability is limited to that portion of the deficiency properly allocable to the electing spouse see sec_6015 d see also rowe v commissioner tcmemo_2001_325 according to respondent the deficiency for is allocable to petitioner however the record shows and we have so found that nearly the entire deficiency for was allocable to mr harris and not to petitioner see sec_6015 sec_1_6015-3 income_tax regs stating that the electing spouse has the burden to establish the proper allocation and that none of the applicable limitations applies in other words the manner in which the harris stables schedule c was denominated and its showing both mr harris and petitioner as proprietors is belied by the fact that only mr harris’ cattle ranching activity was the subject of the schedule c and by the further fact that at no point was petitioner involved in that activity under sec_6015 a requesting spouse may elect to allocate a deficiency if the following four conditions are met a joint_return was filed at the time of the election the requesting spouse is no longer married to the nonrequesting spouse the requesting spouse elects the application of sec_6015 no later than two years after the date on which collection activities have begun and the deficiency remains unpaid respondent does not dispute that these requirements are satisfied relief under sec_6015 is not permitted if the secretary is able to demonstrate that the requesting spouse had actual knowledge of any item giving rise to a deficiency that is not allocable to the requesting spouse sec_6015 in other words it is respondent’s burden to establish that petitioner had actual knowledge of the erroneous deduction on the tax_return the item giving rise to the deficiency in this case was a loss resulting from the harris stables schedule c deductions in determining whether a requesting spouse had actual knowledge of an improperly deducted item on the return more is required than the requesting spouse’s knowledge that the deduction appears on the return or that the former spouse operated an activity at a loss 116_tc_198 a requesting spouse has actual knowledge of an erroneous deduction if the requesting spouse has knowledge of the factual circumstances that made the item unallowable as a deduction id pincite sec_1_6015-3 income_tax regs respondent disallowed the harris stables schedule c loss deduction because the activity reported on the schedule c was not in respondent’s view engaged in for profit although petitioner was aware of the cattle ranching activity she did not participate in it in any way see young v commissioner tcmemo_2012_255 at t he taxpayer assisted minimally in the operation of the activity and was aware that it was not profitable but was granted relief because the commissioner failed to specifically demonstrate that the taxpayer knew that her former spouse did not have the primary objective of making a profit citing king v commissioner t c pincite furthermore respondent failed to demonstrate that petitioner knew that mr harris did not have the primary objective of making a profit accordingly respondent has failed to establish that petitioner had actual knowledge of the facts that caused respondent to disallow the claimed loss deduction resulting from the cattle ranching activity therefore we hold that petitioner is entitled to relief from joint_and_several_liability under sec_6015 for to that extent see supra note also given our holding we need not decide whether mr harris operated his cattle ranching activity with the requisite profit objective see supra p to reflect our disposition of the disputed issue as well as petitioner’s concession decision will be entered under rule see supra note sec_2 and


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi b03-plr-106339-02 date date legend p q d1 d2 d3 d4 d5 this letter responds to a letter dated date submitted by your authorized representatives requesting a ruling under sec_301_9100-3 of the procedure and administration regulations that p be granted an extension of time to elect to treat q as a qualified_subchapter_s_subsidiary under sec_1361 of the internal_revenue_code facts according to the information submitted q was formed on d1 for the purpose of carrying on a business p was incorporated on d2 and made a valid election to be treated as a s_corporation under sec_1362 effective for d3 on d2 p acquired all of the outstanding_stock of q p intended to elect to treat q as a qualified_subchapter_s_subsidiary under sec_1361 effective d3 however due to inadvertence by p’s tax advisers the election was not filed timely both p and q are calendar_year accrual basis taxpayers for the year ending d4 and for each successive year through d5 p filed a form_1120s u s income_tax return for an s_corporation for tax years d4 through d5 p reported the assets liabilities and items of income deduction and credit of q as the assets liabilities and items of income deduction and credit of p law sec_1362 generally provides that a small_business_corporation may elect to be an s_corporation sec_1361 defines a qualified_subchapter_s_subsidiary 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_1_1361-3 of the income_tax regulations prescribes the time and manner for making an election to be classified a qualified_subchapter_s_subsidiary sec_1_1361-3 provides that an election to treat an eligible subsidiary as a qualified_subchapter_s_subsidiary 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 subsequent to the passage of the small_business job protection act of pub_l_no 110_stat_1755 but prior to the effective date of sec_1_1361-3 the procedure for electing qualified_subchapter_s_subsidiary status was set forth in notice_97_4 1997_1_cb_351 under that notice a qualified_subchapter_s_subsidiary election was made by filing a form_966 corporate dissolution or liquidation with the words filed pursuant to notice printed at the top under sec_301_9100-1 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 e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose deadline is prescribed by a regulation published in the federal_register sec_301_9100-1 through 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 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 conclusion based solely on the facts submitted and representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied accordingly p is granted an extension of time of days from the date of this letter to file form_8869 qualified_subchapter_s_subsidiary election with the appropriate service_center to elect to treat q as a qualified_subchapter_s_subsidiary effective d3 a copy of this letter should be attached to the form_8869 except for the specific rulings above we express or imply no opinion concerning the federal_income_tax consequences of the facts of this case under any other provision of the internal_revenue_code this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely s william p o’shea acting associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copies of this letter cc