department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc psi b02 plr-108435-10 date date internal_revenue_service number release date index number ------------------------------------ -------------------------------- -------------------------- ------------- -------------------------- legend legend x --------------------------------- ----------------------------- y ---------------------------------- ----------------------------- a -- b -- c ---- d -------------- e -------------- f -------------- g -------------- l ---------------------------------------------------------------------------------------------- m --------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- n --------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------- plr-108435-10 o --------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------- p --------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- state ------ date1 ------------------ date2 ----------------------- date3 ---------------------- year1 ------- year2 ------- dear --------------- this responds to a letter dated date submitted on behalf of x by x’s authorized representative requesting a ruling that the rental income received by x from certain rental real_estate is not passive_investment_income within the meaning of sec_1362 of the internal_revenue_code the code the information submitted states that x was incorporated under the laws of state on date1 y is a wholly-owned subsidiary of x that was incorporated under the laws of state on date2 x elected to be an s_corporation effective date3 and x also made the election under sec_1362 to treat y as a qualified_subchapter_s_subsidiary effective date3 x through y develops owns operates and leases high-technology office buildings and provides high-technology companies with facilities security office management and onsite technologies y currently owns a office buildings and operates and leases a total of b office buildings including buildings leased from third parties l m n o and p collectively the properties y also owns undeveloped land contiguous to the properties and this undeveloped land gives y the potential to significantly increase the amount of high-technology office space it can develop own operate and lease in the future y’s tenants primarily include small high-technology companies that are in the initial stages of their development and growth y provides its tenants with office space with potential to expand as the tenants grow in size y also provides its tenants with expertise and assistance in the areas of space planning leasing and facility management y currently has c tenants that occupy the properties plr-108435-10 y utilizes a standard form lease with a base_year for all of its tenants under the form lease y is generally responsible for the payment of taxes maintenance insurance and utilities the tenants pay a certain base rent and a share of the operating_expenses for the calendar_year in which the tenancy begins thereafter the tenants are responsible for their proportionate share of any increase in the operating_expenses over the base_year expenses x and y operate manage and maintain the properties through a full-time_employee certain other individuals and a property management company the services provided for the properties include the maintenance of all mechanical electrical bms and control monitoring emergency power fire alarm elevators plumbing and other major and minor systems in the properties the performance of exterior and interior cleaning painting decorating plumbing carpentry landscaping roofing maintenance of heating ventilating and air conditioning systems and such other normal maintenance repair work and minor construction as may be necessary investigating all necessary preventative maintenance programs purchasing supplies materials and services and regularly inspecting and testing the physical condition of the properties x and y also provide various services to the tenants including janitorial services security services rubbish removal interior and exterior landscape maintenance vermin extermination and other services that may be required for the proper operation of the properties in year1 x collected approximately dollar_figured in gross rents and incurred approximately dollar_figuree in relevant operating_expenses for the properties in year2 x collected approximately dollar_figuref in gross rents and incurred approximately dollar_figureg in relevant operating_expenses for the properties x also represents that x and y both have accumulated_earnings_and_profits except as provided in sec_1362 sec_1362 provides that 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 terminated whenever the corporation has accumulated_earnings_and_profits at the close of each of three consecutive taxable years and has gross_receipts for each of such taxable years more than percent of which are passive_investment_income except as otherwise provided in sec_1362 sec_1362 provides that the term passive_investment_income means gross_receipts derived from royalties rents dividends interest annuities and sales or exchanges of stock_or_securities sec_1_1362-2b i of the income_tax regulations provides that rents means amounts received for_the_use_of or the right to use property whether real or personal of the corporation plr-108435-10 sec_1_1362-2 provides that rents does not include rents derived in the active trade_or_business of renting property rents received by a corporation are derived in the active trade_or_business of renting property only if based on all of the facts and circumstances the corporation provides significant services or incurs substantial costs in the rental business generally significant services are not rendered and substantial costs are not incurred in connection with net leases whether significant services are performed are substantial costs are incurred in the rental business is determined based upon all of the facts and circumstances including but not limited to the number of persons employed to provide the services and the types and amounts of costs and expenses_incurred other than depreciation based solely on the facts submitted and the representations made we conclude that the rental income x receives from its operations described above is not passive_investment_income under sec_1362 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 further the passive_investment_income rules of sec_1362 are independent of the passive_activity_loss rules of sec_469 unless an exception under sec_469 applies the rental_activity remains passive for purposes of sec_469 the ruling contained in this letter is 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 this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office copies of this letter are being sent to x’s authorized representatives sincerely bradford r poston acting chief branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number -------------------------------------------- --------------------------------------- -------------------------------------------------- --------------------------------- ---------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------------- id no --------------- ------------------ telephone number ---------------------- refer reply to cc ita plr-102556-18 date date re request to revoke taxpayer’s election not to deduct the additional first year depreciation legend taxpayer gp lp1 lp2 year1 year2 date1 date2 final return_period initial return_period m n dear -------------- -------------------------------------------------- ----------------------------- ------------------------------------------------------------------ ---------------------------------------------------- ----------------------------- ------------------------------------------------------------------------ ------- ------- --------------------- --------------------------- ------------------------------------------------------- ----------------------------------------------------------- ------------------- ------------------- this letter_ruling responds to a letter dated date submitted by taxpayer requesting the consent of the commissioner of internal revenue to revoke taxpayer’s election under sec_168 of the internal_revenue_code not to deduct the plr-102556-18 additional first year depreciation that was made on its federal tax_return for the short taxable_year beginning date1 and ended date2 the year1 taxable_year except as specifically stated otherwise all references in this letter_ruling to sec_168 or sec_708 are treated as a reference to sec_168 or sec_708 respectively as in effect prior to amendment by the tax cuts and jobs_act pub_l_no 131_stat_2054 date taxpayer represents that the facts are as follows facts taxpayer a limited_partnership files form_1065 u s return of partnership income on a calendar_year basis taxpayer’s principal business activity is taxpayer’s overall_method_of_accounting is an accrual_method taxpayer is owned by a general_partner and two limited partners the general_partner is gp which owns an m interest in taxpayer the limited partners are lp1 which owns an m interest in taxpayer and lp2 which owns an n interest in taxpayer during year1 taxpayer experienced a technical_termination under sec_708 as the result of a former limited_partner transferring all of its interest to lp2 as a result of the technical_termination taxpayer was required to file a final federal tax_return covering the final return_period and an initial federal tax_return covering the initial return_period the initial return_period and the year1 taxable_year are the same during year1 taxpayer also placed_in_service qualified_property as defined in sec_168 on its timely filed form_1065 for the year1 taxable_year taxpayer made an election under sec_168 not to deduct the additional first year depreciation deduction for the following eligible classes of property property in the 5-year class and property in the 15-year class gp was responsible for filing taxpayer’s federal tax returns for the final return_period and for the year1 taxable_year gp made the election not to deduct the additional first year depreciation based on its awareness that taxpayer had reported losses on its federal tax returns for the prior year and year1 and based on its anticipation of more losses in year2 however gp did not understand that lp2 its new limited_partner needed and expected to pass-through the additional_depreciation deductions to its investors for year1 gp also did not understand that the election to not deduct the additional first year depreciation could not be revoked on an amended_return had gp understood this gp would have obtained a more final and complete understanding of the needs and tax positions of lp2’s investors prior to filing taxpayer’s form_1065 for the year1 taxable_year plr-102556-18 ruling requested taxpayer requests consent to revoke its election under sec_168 not to deduct the additional first year depreciation under sec_168 for the 5-year and 15-year eligible classes of qualified_property that were placed_in_service by taxpayer during the short taxable_year beginning date1 and ended date2 and for the 5-year and 15-year eligible classes of qualified_property that were placed_in_service by the terminated partnership during year1 and contributed to taxpayer in a transaction described in sec_708 by the terminated partnership during year1 law sec_168 allowed in the taxable_year that qualified_property is placed_in_service a 50-percent additional first year depreciation deduction for qualified_property placed_in_service by the taxpayer before january before january for qualified_property described in sec_168 or sec_168 sec_4 of revproc_2017_33 2017_19_irb_1236 provides guidance under sec_168 as amended by sec_143 of the protecting americans from tax hikes act of path act enacted as division q of the consolidated appropriations act pub_l_no 129_stat_2242 date pursuant to sec_4 of revproc_2017_33 rules similar to the rules in sec_1_168_k_-1of the income_tax regulations for qualified_property or for 30-percent additional first year depreciation deduction apply to sec_168 and however in applying sec_1_168_k_-1 the computation of the allowable 50-percent additional first year depreciation deduction is made in accordance with the rules for 50-percent bonus_depreciation property and in applying sec_1_168_k_-1 the rules for 50-percent additional first year depreciation deduction apply sec_1_168_k_-1 provides that in the case of a technical_termination of a partnership under sec_708 the additional first year depreciation deduction is allowable for any qualified_property placed_in_service by the terminated partnership during the taxable_year of termination and contributed by the terminated partnership to the new partnership the allowable additional first year depreciation deduction for the qualified_property shall not be claimed by the terminated partnership but instead shall be claimed by the new partnership for the new partnership’s taxable_year in which the qualified_property was contributed by the terminated partnership to the new partnership however if qualified_property is both placed_in_service and contributed to a new partnership in a transaction described in sec_708 by the terminated partnership during the taxable_year of termination and if such property is disposed of by the new partnership in the same taxable_year the new partnership received such property from the terminated partnership then no additional first year depreciation deduction is allowable to either partnership plr-102556-18 sec_168 provides that a taxpayer may elect not to deduct the additional first year depreciation for any class of property placed_in_service during the taxable_year sec_4 of revproc_2017_33 provides that the rules for making the election under sec_168 not to deduct the additional first year depreciation the sec_168 election are similar to the rules for making such election under sec_168 as in effect before the enactment of the path act as a result the sec_168 election applies to all qualified_property that is in the same class of property and placed_in_service in the same taxable_year if the sec_168 election is made for a class of property that is qualified_property placed_in_service during the taxable_year no additional first year depreciation deduction is allowable for that property and sec_168 does not apply to that property sec_4 of revproc_2017_33 provides that in general rules similar to the rules in sec_1_168_k_-1 and apply for purposes of sec_168 sec_1_168_k_-1 defines the term class of property as meaning among other things each class of property described in sec_168 for example 5-year_property sec_1_168_k_-1 provides that the election not to deduct additional first year depreciation must be made by the due_date including extensions of the federal tax_return for the taxable_year in which the property is placed_in_service by the taxpayer sec_1_168_k_-1 provides that an election not to deduct the additional first year depreciation for a class of property that is qualified_property once made may be revoked only with the written consent of the commissioner of internal revenue to seek the commissioner's consent the taxpayer must submit a request for a letter_ruling conclusion based solely on the facts and representations submitted we conclude that a revocation of taxpayer’s election not to deduct any additional first year depreciation under sec_168 for the 5-year and 15-year eligible classes of qualified_property that were placed_in_service by taxpayer during the short taxable_year beginning date1 and ended date2 and for the 5-year and 15-year eligible classes of qualified_property that were placed_in_service by the terminated partnership during year1 and contributed to taxpayer in a transaction described in sec_708 by the terminated partnership during year1 is permitted under sec_1_168_k_-1 accordingly taxpayer is granted calendar days from the date of this letter to revoke such election the revocation must be made in a written_statement filed with taxpayer’s amended federal tax_return for the taxable_year beginning date1 and ended date2 a copy of this letter_ruling must be attached to such amended_return a copy is enclosed for that purpose alternatively a taxpayer filing its federal_income_tax return plr-102556-18 electronically may satisfy this requirement by attaching a statement to the return that provides the date and control number of the letter_ruling except as specifically set forth above no opinion is expressed or implied concerning the federal tax consequences of the facts described above under any other provisions of the code including other subsections of sec_168 specifically no opinion is expressed or implied on whether any item of depreciable_property that was placed_in_service by taxpayer during the short taxable_year beginning date1 and ended date2 or that was placed_in_service by the terminated partnership during year1 and contributed to taxpayer in a transaction described in sec_708 by the terminated partnership during year1 is eligible for the additional first year depreciation deduction under sec_168 or whether taxpayer’s classification of any item of depreciable_property under sec_168 or revproc_87_56 1987_2_cb_674 is correct the ruling contained in this letter is based upon information and representations submitted by 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 this letter_ruling is directed only to the taxpayer requesting it sec_6110 provides that this ruling may not be used or cited as precedent in accordance with the power_of_attorney on file with this office we are sending copies of this letter_ruling to taxpayer’s authorized representatives we are also sending a copy of this letter_ruling to the appropriate operating division director sincerely kathleen reed kathleen reed branch chief branch office of associate chief_counsel income_tax and accounting enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service number release date index number ---------------------------------- -------------------------------------------------- -------------------------------------------------- -------------------------------- in re ------------------------------------------------- --------------------- ------------------------------------------------- ------------ - department of the treasury washington dc person to contact --------------- id no ------------- telephone number --------------------- refer reply to cc psi - plr-133563-03 date march trust --------------------- legend ------------------------------------------ h ------------------ w --------------------- daughter ------------------ daughter ------------------------------------------------------------------------ trust ------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------ date dear ---------------- ----------------- -------------------------- ------------------ ------------------------- ----------------------- ----------------------------- ------------------------------------ ---------------------------------------------------- ----------- ------------ ------------ ----------- date date date date date date attorney accounting firm law firm a b c d ---------------- plr - this is in response to your letter dated date and subsequent correspondence submitted on behalf of h’s estate requesting an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to sever a_trust into an exempt and non-exempt trust to make reverse qualified_terminable_interest_property qtip elections with respect to two trusts and to allocate h’s generation-skipping_transfer gst_exemption to one of those trusts and the gst exempt portion of the other trust the facts and representations submitted are summarized as follows on date h and w created trust a revocable_trust trust was amended and restated in its entirety on date on date h created trust an irrevocable_life_insurance_trust h transferred his interest in four insurance policies to trust h died within three years after the transfer of the insurance policies to trust h died on date survived by w and two children daughter and daughter the current trustees of trust and trust are daughter and daughter under the terms of trust upon h’s death trust is to be divided into four separate trusts including a qtip_trust intended to qualify for the marital_deduction under sec_2056 of the internal_revenue_code w is to receive all the income of the qtip_trust payable at least annually for her lifetime trustees may also make discretionary payments of principal for the health medical and educational needs and support and maintenance of w upon w’s death any accrued or undistributed_net_income of qtip_trust shall be distributed in the manner and to the persons including w’s estate or creditors as w appoints by specific reference to this power in w’s last will upon w’s death the qtip_trust principal is to be distributed to the trustees of trust to be held administered and distributed according to the terms of trust under the terms of trust upon h’s death if h is survived by w a portion of trust 2’s assets w’s share shall be held in trust for w all of w’s share’s net_income is to be paid annually to w trustees may also make discretionary payments of principal for the health medical and educational needs and support and maintenance of w moreover no person shall have the right to appoint property of w’s share to any person other than w for the remainder of w’s lifetime trust provides that the trustees have the authority to make a qtip_election for trust property after both h’s and w’s death the trustees are to divide w’s share into two equal shares to be known as the daughter share and daughter share the daughter share shall be distributed outright and free of trust to daughter if daughter does not survive w then her share shall be allocated to her issue if daughter does not have surviving issue then her share shall be added to the daughter share plr - paragraph of trust provides that in allocating h’s gst_exemption the trust and trust provide the trustees with the authority to make a reverse the daughter share shall be added to and held in trust for the remainder of daughter 2’s life in daughter trust under the terms of trust daughter shall have a limited power to appoint any portion of the daughter trust’s estate for the benefit of daughter 2’s issue upon daughter 2’s death the trustees shall distribute any remaining assets of the daughter trust pursuant to daughter 2’s exercise of the limited_power_of_appointment if daughter fails to exercise the limited_power_of_appointment the assets shall be allocated to daughter 2’s issue by right of representation if daughter has no issue then living the remaining assets shall be allocated to h’s issue then living by right of representation qtip_election on the form_706 united_states estate and generation-skipping_transfer_tax return for h’s estate trustees may include or exclude any property of which h is the transferor for generation- skipping purposes including property transferred before h’s death the trustees may base the decision on prior transfers gift_tax returns and other information the allocations need not proportionately equally or in any other manner benefit the various transferees or beneficiaries another’s gst_exemption is allocated to property of a_trust under this document or to the exempt portion of that trust and the trust results in a generation-skipping inclusion_ratio other than zero then the trustees must immediately create two separate trusts so each has a generation-skipping inclusion_ratio of either zero the exempt portion or one the nonexempt_portion the trustees do this by allocating to a nonexempt trust the minimum amount of property needed to create that trust with an inclusion_ratio of one while leaving an exempt trust with a zero inclusion_ratio paragraph of trust further provides in part if any of h’s gst_exemption or upon h’s death w was appointed as executor of h’s will w also became the sole successor trustee of trust w engaged accounting firm and attorney to advise her in federal gift estate and generation-skipping_transfer_tax matters and to prepare the form_706 for h’s estate attorney was a long time advisor of h and w and had done their estate_tax planning the form_706 for h’s estate was filed late on date w as executor divided trust into four trusts including a qtip_trust qtip_trust on the form_706 an election was made to treat property held in qtip_trust and fractional portion of trust that was includible in h’s gross_estate qtip_trust as qualified terminal interest property under sec_2056 on schedule r generation-skipping_transfer_tax of form_706 the executor reported that none of h’s allowable gst_exemption had been plr - allocated to h's lifetime transfers and the maximum allowable gst_exemption was still available for allocation schedule r reflected an allocation of dollar_figurea of h’s available gst_exemption to the credit_shelter_trust decedent’s trust and an incorrect allocation of dollar_figureb of h’s available gst_exemption to the daughter trust it is represented that the correct amount transferred to the daughter trust is dollar_figurec and the overallocation of dollar_figured is void under sec_26_2632-1 of the generation-skipping_transfer_tax regulations it is also represented that w relied on accounting firm and attorney to advise w in the preparation of the return and accounting firm and attorney failed to make or advise w to make the reverse qtip elections with respect to the two qtip trusts w died on date daughter and daughter were duly appointed as successor co-executors of h’s will and co-executors of w’s will daughter and daughter engaged law firm and accounting firm to advise them in federal gift estate and generation-skipping_transfer_tax matters and to prepare the form_706 for w’s estate the form_706 for w’s estate was timely filed on date however while reviewing the form_706 for h’s estate law firm discovered that the reverse qtip elections had not been made on h’s form_706 with respect to the qtip trusts that h’s remaining gst_exemption had not been allocated to those trusts and that the gst exempt portion of trust had not been bifurcated from the gst non-exempt portion of trust you are requesting an extension of time under sec_301_9100-3 to sever trust into gst exempt and non-exempt trusts to make reverse qtip elections pursuant to sec_2652 with respect to qtip_trust and the gst exempt portion of qtip_trust and to allocate h’s remaining gst_exemption to qtip_trust and the gst exempt portion of qtip_trust sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2056 provides that for purposes of the tax imposed by sec_2001 the value of the taxable_estate shall except as limited by sec_2056 be determined by deducting from the value of the gross_estate an amount equal to the value of any interest in property which passes or has passed_from_the_decedent to the surviving_spouse but only to the extent that such interest is included in determining the value of the gross_estate sec_2056 disallows this deduction where on the lapse of time on the occurrence of an event or contingency or on the failure of an event or contingency to occur an interest passing to the surviving_spouse will terminate or fail plr - sec_2056 provides that in the case of qualified_terminable_interest_property for purposes of sec_2056 such property shall be treated as passing to the surviving_spouse and for purposes of sec_2056 no part of such property shall be treated as passing to any person other than the surviving_spouse sec_2056 defines the term qualified_terminable_interest_property as property i which passes from the decedent ii in which the surviving_spouse has a qualifying_income_interest_for_life and iii to which an election under sec_2056 applies sec_2056 provides that the surviving_spouse has a qualifying_income_interest_for_life if i the surviving_spouse is entitled to all the income from the property payable annually or at more frequent intervals or has a usufruct interest for life in the property and ii no person has a power to appoint any part of the property to any person other than the surviving_spouse sec_2056 provides that an election under sec_2056 with respect to any property shall be made by the executor on the return of tax imposed by sec_2001 such an election once made shall be irrevocable sec_2044 provides that the value of the gross_estate shall include the value of any property to which sec_2044 applies in which the decedent had a qualifying_income_interest_for_life sec_2044 provides in relevant part that sec_2044 applies to any property if a deduction was allowed with respect to the transfer of such property to the decedent under sec_2056 sec_2044 provides that for purposes of chapter and chapter property includible in the gross_estate of the decedent under sec_2044 shall be treated as property passing from the decedent sec_2652 provides that for purposes of chapter the term transferor means a in the case of any property subject_to the tax imposed by chapter the decedent and b in the case of any property subject_to the tax imposed by chapter the donor an individual shall be treated as transferring any property with respect to which such individual is the transferor sec_2652 provides in pertinent part that in the case of any trust with respect to which a deduction is allowed to the decedent under sec_2056 the estate of the decedent may elect to treat all of the property in such trust for purposes of plr - this chapter as if the election to be treated as qualified_terminable_interest_property had not been made reverse_qtip_election sec_26_2652-2 provides in part that a reverse_qtip_election is not effective unless it is made with respect to all of the property in the trust to which the qtip_election applies sec_26_2652-2 provides that an election under sec_2652 is made on the return on which the qtip_election is made sec_26_2654-1 provides that the severance of a_trust that is included in the transferor’s gross_estate or created under the transferor’s will into two or more trusts is recognized for purposes of chapter if the trust is severed pursuant to a direction in the governing instrument providing that the trust is to be divided upon the death of the transferor sec_26_2654-1 provides that an individual's gst_exemption under sec_2632 may be allocated to the separate trusts created pursuant to this section at the discretion of the executor or trustee sec_2601 imposes a tax on every generation-skipping_transfer sec_2611 provides that the term generation-skipping_transfer means a taxable_distribution a taxable_termination and a direct_skip sec_2602 provides that the amount of the gst tax is determined by multiplying the taxable_amount by the applicable_rate sec_2641 defines the term applicable_rate with respect to any gst as the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer sec_2642 provides that generally the inclusion_ratio with respect to any property transferred in a gst is the excess if any of over the applicable_fraction sec_2642 provides in part that the applicable_fraction is a fraction the numerator of which is the amount of the gst_exemption allocated to the trust and the denominator of which is the value of the property transferred to the trust sec_2631 provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure adjusted for inflation under sec_2631 that may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable plr - sec_2632 provides that any allocation by an individual of his or her gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual's estate determined with regard to extensions regardless of whether such a return is required to be filed sec_26_2632-1 provides in part that except as otherwise provided in sec_26_2632-1 an allocation of a decedent’s unused gst_exemption by the executor of the decedent’s estate is made on the appropriate united_states estate and generation-skipping_transfer_tax return form_706 or form 706na filed on or before the date prescribed for filing the return by sec_6075 including any extensions actually granted the due_date an allocation of gst_exemption with respect to property included in the gross_estate of a decedent is effective as of the date of death sec_2642 provides that if property is transferred as a result of the death of the transferor the value of such property for purposes of a shall be its value as finally determined for purposes of chapter except that if the requirements prescribed by the secretary respecting allocation of post-death changes in value are not met the value of such property shall be determined as of the time of the distribution concerned sec_2642 provides that any allocation to property transferred as a result of the death of the transferor shall be effective on and after the date of the death of the transferor sec_2642 provides generally that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 or and an election under sec_2632 or c such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of sec_2642 which was enacted into law on date sec_2642 provides that in determining whether to grant relief under this paragraph the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief the time for making the allocation or election shall be treated as if not expressly prescribed by statute notice_2001_50 2001_34_irb_189 provides that under sec_2642 the time for allocating the gst_exemption to lifetime transfers and transfers at death the time for electing out of the automatic allocation rules and the time for electing to treat any trust as a gst_trust are to be treated as if not expressly prescribed by statute the notice further provides that taxpayers may seek an extension of time to make an plr - allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 under sec_301_9100-1 the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 provides that a regulatory election includes an election whose due_date is prescribed by a notice published in the internal_revenue_bulletin sec_301_9100-2 provides an automatic_extension of time for making certain elections sec_301_9100-3 provides in pertinent part that requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 must be made under the rules of section requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government sec_301_9100-3 provides in part except as provided in sec_301_9100-3 through iii a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election sec_301_9100-3 provides in pertinent part that the commissioner will grant a reasonable extension of time to make a regulatory election only when the interests of the government will not be prejudiced by the granting of relief as a result of the qtip_election made on h's form_706 the property of qtip_trust and qtip_trust is includible in w’s gross_estate pursuant to sec_2044 accordingly w is considered the transferor of the property for gst tax purposes and h’s remaining gst_exemption may not be allocated to the assets of these trusts however if qtip_trust is severed into two portions and reverse qtip elections under sec_2652 are made with respect to qtip_trust and the gst exempt portion of qtip_trust h will be treated as the transferor of the qtip_trust trust assets and the gst exempt portion of qtip_trust plr - based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly an extension of time of days from the date of this letter is granted to sever trust into the gst exempt trust and the gst non-exempt trust pursuant to paragraphs and of trust to make reverse qtip elections with respect to qtip_trust and the gst exempt portion of qtip_trust and to allocate h’s remaining gst_exemption to qtip_trust and the gst exempt portion of qtip_trust the reverse qtip elections and the gst_exemption allocations should be made on supplemental form_706 filed with the internal_revenue_service center cincinnati ohio a copy of this letter should be attached to the form a copy is enclosed for this purpose 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 ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent 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 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer sincerely heather c maloy associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter cc


department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------- id no ------------ telephone number -------------------- refer reply to cc psi b01 plr-142985-08 date date internal_revenue_service number release date index number --------------- -------------------------- ----------------------------------------- -------------------- ---------- legend x y a b ----------------------------------------------------------- ---------------- -------------- ---------------------------------------------------------- ----------------------------------------------------- -------------------------------- ------------------------------------------------------------ -------------------------------- country year date ---------- ------ ------------------------- dear -------------- this letter responds to your request dated date on behalf of x seeking an extension under sec_301 of the procedure and administration regulations to file an election to treat x as an entity disregarded as separate from its owner for federal tax purposes plr-142985-08 facts based on the material submitted and the representations contained within we understand the relevant facts to be as follows y is a corporation formed in accordance with the laws of country as part of a restructuring that started in year x was formed to facilitate the transfer some of the interests in y a publicly traded corporation formed under the laws of country and historically owned by a to b however the form_8832 entity classification election inadvertently was not timely filed x represents that it was eligible to elect to be an entity disregarded as separate from its owner as of its formation on date law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes a business_entity is an entity recognized for federal tax purposes that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the code sec_301_7701-2 an eligible_entity with a single owner can elect either to be classified as an association and thus a corporation under sec_301 b or to be disregarded as an entity separate from its owner sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association_taxable_as_a_corporation if all members have limited_liability unless the entity makes an election to be treated otherwise if a foreign eligible_entity has one owner it may elect to be treated as a disregarded_entity pursuant to the rules in sec_301_7701-3 if a foreign eligible_entity has more than one owner it may elect to be treated as a partnership pursuant to the rules in sec_301_7701-3 sec_301 c provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date on which the form is filed to elect to be classified other than as provided in sec_301_7701-3 an eligible_entity must file form_8832 entity classification election with the designated service_center sec_301_7701-3 an election can be effective on the date specified on the form_8832 or on the date filed if no such date is specified the effective date specified on the form_8832 cannot be more than days prior to the date the election is filed sec_301_7701-3 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_9100-1 sec_301_9100-2 provides automatic extensions of plr-142985-08 time for making certain elections sec_301_9100-3 provides extensions for 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_9100-3 have been satisfied accordingly x is granted an extension of time of sixty days from the date of this letter to elect to be treated as an entity disregarded as separate from its owner for federal tax purposes effective date the election should be made by filing form_8832 with the appropriate service_center a copy of this letter should be attached to the election 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 ruling is directed only to the taxpayer s requesting it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this letter will be sent to the taxpayer’s representative sincerely curt g wilson curt g wilson associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


t c memo united_states tax_court william g and debra c kellen petitioners v commissioner of internal revenue respondent docket no filed date robert s schriebman and patrick be mcginnis for petitioners timothy s sinnott for respondent memorandum findings_of_fact and opinion armen special_trial_judge in a so-called affected items notice_of_deficiency respondent determined additions to tax to petitioners’ federal_income_tax for the year and in the amounts as shown below additions to tax sec sec sec year a a dollar_figure dollar_figure dollar_figure ' throughout this opinion and unless otherwise indicated all section references are to the internal_revenue_code in effect for the taxable_year in issue the first page of the notice_of_deficiency mistakenly shows this amount as the sum of the additions to tax under sec_6653 and ie dollar_figure the first page of the notice_of_deficiency mistakenly references sec_6662 which section is the successor to sec_6661 and is applicable for returns the due_date for which determined without regard to extensions is after date see omnibus budget reconciliation act of publaw_101_239 sec a c d stat after concessions by the parties ’ the issues for decision are as follows whether petitioner william g kellen petitioner is liable for additions to tax under sec_6653 and for negligence or intentional disregard of rules or regulations we hold that petitioner is liable for such additions whether petitioner is liable for the addition_to_tax under sec_6661 for substantial_understatement of tax ' petitioners concede that the notice_of_deficiency is valid cf 814_f2d_1363 cir revg 81_tc_855 respondent concedes and petitioner william g kellen does not dispute that pursuant to sec_6015 petitioner debra c kellen is entitled to relief from joint_and_several_liability for the additions to tax - - liability we hold that petitioner is liable for such addition the foregoing two issues relate to the participation of petitioner as a limited_partner in a jojoba partnership known as san nicholas research ltd findings_of_fact some of the facts have been stipulated and they are so found the stipulated facts and attached exhibits are incorporated herein by this reference petitioner resided in cora wyoming at the time that his petition was filed with the court a petitioner’s education and experience petitioner is a highly educated individual in he graduated from loyola university of los angeles with a bachelor of science degree in civil engineering specializing in water systems ten years later in he received a law degree from western state college of law in fullerton california since petitioner has practiced engineering in both the public and private sectors since he has practiced law in the private sector petitioner also has experience related to farming in he formed a company known as the great american hay company that grew hay in desert center california in he and certain friends and investors purchased property known as brown’s farm that grew citrus alfalfa and row crops - in the taxable_year in issue petitioner was actively engaged in the practice of law although he also served as a consulting engineer and was involved in farming petitioner maintained a law office in riverside california and he specialized in the formation of financial institutions such as banks savings and loan associations and thrift and loan associations petitioner formed more than financial institutions in southern california neither in nor at any other time relevant to this case did petitioner have any expertise in accounting or tax matters nor did he ever attempt to render advice on those subjects in petitioner was financially well-off and sophisticated for that year he earned a net profit of dollar_figure from his law practice and he derived capital_gains from stock transactions in the net amount of dollar_figure and interest in the amount of dollar_figure in addition petitioner had equity interests in an equipment rental proprietorship a partnership known as fontana bancorp development five jojoba partnerships see pp and an s_corporation known as any income that petitioner may have earned in from consulting as an engineer or from farming was minimal in one instance petitioner parlayed a dollar_figure investment in corona bancorp in date into a dollar_figure sale in date vancouver coors inc b petitioner’s initial involvement in jojoba partnerships in late petitioner became the general_partner and tax_matters_partner of four limited_partnerships utah jojoba research ltd utah jojoba blythe jojoba i research ltd blythe jojoba i blythe jojoba ii research ltd blythe jojoba iit and desert center jojoba research ltd desert center jojoba each of these partnerships was similar if not identical to san nicholas research ltd described infra pp prior to petitioner did not have any experience in growing jojoba nor did he have any experience in either the research or development of jojoba prior to that time petitioner’s knowledge concerning jojoba was limited to articles that he had read in various magazines and a general familiarity with the existence of an experimental jojoba plantation located at the university of california at riverside at trial petitioner testified that he became a general_partner in coordinated financial services cfs of salt lake city utah in the latter part of the record is not clear whether petitioner continued to be a partner in cfs in cfs is described in utah jojoba i research v commissioner tcmemo_1998_6 see infra pp petitioner also became a limited_partner in desert center jojoba c petitioner’s investment in san nicholas research ltd in late petitioner signed a subscription agreement and purchased limited_partnership units an 719-percentage interest in san nicholas research ltd san nicholas or the partnership petitioner purchased the partnership units pursuant to a private_placement memorandum dated date see infra pp petitioner paid dollar_figure per limited_partnership unit ora total of dollar_figure for hi sec_15 units in san nicholas of this amount dollar_figure per unit or dollar_figure for units was paid in cash the balance dollar_figure per unit or dollar_figure for units was payable pursuant to a 10-year promissory note ’ at the time that he signed the subscription agreement petitioner believed that his investment in san nicholas offered tax benefits and his decision to invest was influenced by that belief d putative nature of san nicholas’ business according to the private_placement memorandum dated date the offering memorandum san nicholas was formed in the general_partner and tax_matters_partner of san nicholas was alfred m clancy an individual whom petitioner did not know at the time that he invested in san nicholas ’ the note which was recourse in form contemplated payments of interest only for the first years as matters actually transpired in the late 1980s the limited partners were given the option of paying a discounted percentage of the principal in cash petitioner elected this option - j- order to undertake a comprehensive research_and_development program on the plant simmondsia chinesis jojoba the offering memorandum described how this program was to be carried out the partnership will enter into a research_and_development contract with u s agri research_and_development corp the r d contractor who will conduct the experiments in various test sites as well as its laboratory or greenhouse facilities that it in its sole discretion deems advisable in addition the r d contract sets forth that a site in the vicinity of desert center and blythe california of from acres will be delineated as the applied research site upon which all technology and improved cultivars developed on behalf of the partnership during the term of the contract will be placed in field the partnership will also have the right but not be obligated to enter into a license agreement to license to u s agri research_and_development corp all technology developed on behalf of the partnership for a period of forty years and receive therefrom an amount equal to of the products produced from the developed technology copies of the research_and_development r d contract and the license agreement referred to in the preceding paragraph were attached as exhibits to the offering memorandum the r d contract identified u s agri research_and_development corp u s agri as a party to the contract and the r d contractor thereunder the license agreement identified u s agri as a although san nicholas may not have been obligated to enter into a license agreement with u s agri research_and_development corp it was a foregone conclusion that it would do so indeed the research_and_development r d contract and the license agreement were executed concurrently notably execution of the license agreement by san nicholas served to automatically terminate the r d contract pursuant to the terms of the latter contract see infra pp --- - party to the contract and the licensee thereunder br u s agri and eugene pace as previously indicated the offering memorandum identified u s agri as the r d contractor under the r d contract and as the licensee under the license agreement u s agri was also the r d contractor and the licensee for utah jojoba blythe jojoba i blythe jojoba ii and desert center jojoba the president of u s agri was bugene pace mr pace who was also a member of its board_of directors petitioner also served as a member of u s agri’s board until he became general_partner of utah jojoba blythe jojoba i blythe jojoba ii and desert center jojoba in late at the time that petitioner invested in san nicholas he and mr pace had been personal friends and business associates for a number of years ff cautionary language in the san nicholas offering memorandum the face of the offering memorandum warned in block letters that this offering involves a high degree of risk the offering memorandum also included the following cautionary language in block letters prospective investors are cautioned not to construe this memorandum or any prior or subsequent communications as constituting legal or tax_advice investors are urged to consult their own counsel as to all matters concerning this investment there is no public or other market for the units nor will such market develop the purchase of such units described in this memorandum involves a high degree of risk see risk factors and should be considered only by persons who can afford the total loss of their investment bach purchaser of the units herein should and is expected to consult with his own tax advisor as to the tax aspects in addition the offering memorandum limited the sale of partnership units to investors with a net_worth exclusive of home furnishings and automobiles of at least dollar_figure or investors whose net_worth was at least dollar_figure exclusive of home furnishings and automobiles and who anticipated that for the taxable_year of the investment they would have gross_income of at least dollar_figure or taxable_income a portion of which but for tax-advantaged investments would be subject_to federal_income_tax at a marginal_rate of percent the offering memorandum included a section entitled risk factors which was the single longest section it began with a general warning the purchase of the interests offered hereby involves various risk factors investment in the partnership involves an extremely high degree of risk investors should consider carefully the various risk factors set forth in this and other portions of this memorandum investment in the partnership is suitable only for persons of substantial financial means who -- - will not require liquidity in the investment investors must be prepared for the possible loss of their entire investment the offering memorandum then proceeded to discuss a number of specific and significant risk factors associated with an investment in san nicholas among those risks the offering memorandum warned research_and_development risks were so great that an investment in san nicholas should be considered highly speculative the general_partner had no previous experience in dealing in jojoba there was no structured market or distribution system for jojoba there were no facilities dedicated to the processing of jojoba commercial applications of jojoba are not extensive the general_partner had not conducted any market analysis or similar studies there was no assurance of any increase in marketing or production facilities or in the demand for jojoba in the absence of any such increase the production of jojoba might be unprofitable regardless of any technology that might be developed by the r d contractor and there was the likelihood of audit by the internal_revenue_service indeed the discussion concerning the tax risks associated with an investment in san nicholas constituted half of the section on risk factors the offering memorandum also included projections of revenue cashflow and taxable_income or loss investors were warned however that those projections which had been prepared for the general_partner had not been audited and that they should not be relied on to indicate the actual results that might be attained g petitioner’s friend and associate e t jacobs e t jacobs mr jacobs a former irs agent and examination manager was a certified_public_accountant in private practice he was also one of petitioner’s friends and business associates in or about mr jacobs became involved in the farming of jojoba in desert center california mr jacobs sold limited_partnership interests in a number of jojoba partnerships h petitioner’s schedule k-1l and income_tax return petitioner received a schedule_k-1 partner’s share of income credits deductions etc from san nicholas for the schedule_k-1 reported that petitioner’s distributive_share of partnership loss from san nicholas was dollar_figure for that year petitioner timely filed a federal_income_tax return form_1040 for petitioner attached to his return page of schedule e supplemental income schedule and claimed thereon a loss from san nicholas in the amount of dollar_figure petitioner then offset this loss against his other income see supra p i jojoba partnership litigation san nicholas was examined by the internal_revenue_service the return was prepared by david macher a certified_public_accountant in riverside california and a notice of final_partnership_administrative_adjustment fpaa was ultimately issued to the partnership in date alfred m clancy mr clancy the general_partner and tax_matters_partner of san nicholas commenced a tefra partnership proceeding in this court subsequently in date mr clancy and the commissioner agreed to be bound by the decision to be entered in utah jojoba i research v commissioner docket no a tefra partnership proceeding involving utah jojoba that had previously been commenced by petitioner in his capacity as tax_matters_partner of that partnership in utah jojoba i research v commissioner tcmemo_1998_ the court made detailed findings_of_fact related to the jojoba limited_partnerships petitioner u s agri and mr pace the court described the r d contract between the partnerships and u s agri as mere window dressing and held that the partnerships did not directly or indirectly engage in research or experimentation and that the partnerships lacked a realistic prospect of entering into a trade_or_business in upholding the the tefra partnership proceeding was assigned docket no tefra stands for the tax equity and fiscal responsibility act of publaw_97_248 96_stat_648 see secs n c f energy partners v commissio89_tc_741 87_tc_783 ‘t at least docketed cases were bound by stipulation to the outcome of utah jojoba i research v commissioner docket no commissioner’s disallowance of research_and_experimental_expenditures the court concluded that the agreements between the partnerships and the r d contractor u s agri had been designed and entered into solely to provide a mechanism to disguise the capital contributions of limited partners as currently deductible expenditures ’ the court stated that the activities of the partnerships were another example of efforts by promoters and investors in the early 1980s to reduce the cost of commencing and engaging in the farming of jojoba by claiming inaccurately that capital expenditures in jojoba plantations might be treated as research or experimental expenditures_for purposes of claiming deductions under sec_174 id in date mr clancy acting in his capacity as tax_matters_partner of san nicholas consented to entry of decision against the partnership subsequently in date the court entered decision against san nicholas pursuant to the commissioner’s motion for entry of decision under rule a thereafter the commissioner assessed a deficiency in petitioner’s income_tax for in the amount of dollar_figure and mailed a so-called affected items notice_of_deficiency to in other words in order to decrease the limited partners’ cost of investing in the jojoba partnerships large up- front deductions were manufactured from expenditures that were actually capital contributions all rule references are to the tax_court rules_of_practice and procedure -- petitioner determining additions to tax for negligence and substantial_understatement of tax_liability see sec a n c f energy partners v commissio89_tc_741 87_tc_783 n it is those additions to tax that are in issue in the present case j epiloque demise of the jojoba partnerships the jojoba partnerships proved to be financial failures in date some to jojoba partnerships under contract with u s agri were consolidated into one large limited_partnership jojoba plantation ltd sometime thereafter jojoba plantation ltd filed a petition in bankruptcy under chapter of the bankruptcy act see utah jojoba i research v commissioner supra at trial petitioner testified that the jojoba partnerships failed because of the internal_revenue_service at a previous trial petitioner testified that the collapse basically of the tax incentive for doing jojoba contributed to the partnerships’ failure see id petitioner’s sole third-party witness suggested a different reason that no commercially viable method of harvesting jojoba was ever developed - - opinion we have decided many jojoba cases involving additions to tax for negligence and substantial_understatement of tax_liability we have found the taxpayers liable for additions to tax for negligence in all of those cases likewise we have found the taxpayers liable for the addition_to_tax for substantial_understatement of tax_liability in all of those cases that have presented that issue i sec_6653 and negligence the first issue for decision is whether petitioner is liable for additions to tax under sec_6653 and with respect to the underpayment_of_tax attributable to petitioner’s investment in san nicholas petitioner has the burden_of_proof to show that he is not liable for these additions to tax see 205_f3d_54 2d cir affg sann v commissioner tcmemo_1997_259 58_tc_757 anderson v commissioner t c memo 's see eg lopez v commissioner tcmemo_2001_278 christensen v commissioner tcmemo_2001_185 serfustini v commissioner tcmemo_2001_183 carmena v commissioner tcmemo_2001_177 nilsen v commissioner tcmemo_2001_163 ruggiero v commissioner tcmemo_2001_162 robnett v commissioner tcmemo_2001_17 harvey v commissioner tcmemo_2001_16 hunt v commissioner tcmemo_2001_15 fawson v commissioner tcmemo_2000_195 downs v commissioner tcmemo_2000_155 glassley v commissioner tcmemo_1996_206 stankevich v commissioner tcmemo_1992_458 -- - affd 62_f3d_1266 cir see generally rule a 503_us_79 290_us_111 sec_6653 imposes an addition_to_tax in an amount equal to percent of the underpayment_of_tax if any part of the underpayment is due to negligence or intentional disregard of rules or regulations sec_6653 imposes another addition_to_tax in an amount equal to percent of the interest due on the portion of the underpayment attributable to negligence or intentional disregard of rules or regulations negligence is defined as the failure to exercise the due care that a reasonable and ordinarily prudent person would exercise under like circumstances see 62_f3d_1266 cir affg tcmemo_1993_607 85_tc_934 the focus of inquiry is the reasonableness of the taxpayer’s actions in light of the taxpayer’s experience and the nature of the investment see 60_tc_728 see also 82_f3d_918 cir whether a taxpayer is negligent in claiming a tax deduction depends upon both the legitimacy of the underlying cf sec_7491 effective for court proceedings arising in connection with examinations commencing after date in the present case the examination of petitioner’s income_tax return for commenced well before date investment and the due care in the claiming of the deduction affg tcmemo_1994_217 turner v commissioner tcmemo_1995_363 in this regard the determination of negligence is highly factual under some circumstances a taxpayer may avoid liability for negligence if reasonable reliance on a competent professional adviser is shown see 469_us_241 89_tc_849 affd 904_f2d_1011 5th cir affd on another issue 501_us_868 however reliance on professional advice standing alone is not an absolute defense to negligence but rather a factor to be considered see freytag v commissioner supra for reliance on professional advice to excuse a taxpayer from negligence the taxpayer must show that the professional had the requisite expertise as well as knowledge of the pertinent facts to provide informed advice on the subject matter see 43_f3d_788 2d cir affg tcmemo_1993_621 39_f3d_402 2d cir affg tcmemo_1993_480 freytag v commissioner supra the facts pertinent to the present case relating to the structure formation and operation of san nicholas are as found above and as discussed in utah jojoba i research v commissioner tcmemo_1998_6 the offering memorandum identified u s agri -- - as the contractor under the r d contract in addition a license agreement between san nicholas and u s agri granted u s agri the exclusive right to use all technology developed for the partnership for years in exchange for a royalty of percent of the products produced from such technology the r d contract and the license agreement were executed concurrently according to its terms the r d contract expired upon the partnership’s execution of the license agreement because the two contracts were executed concurrently amounts paid_by the partnership to u s agri were not paid pursuant to a valid r d contract but rather were passive investments in a farming venture under which the investors’ return if any was to be in the form of royalties pursuant to the license agreement thus as the court held in utah jojoba i research v commissioner supra the partnership was never engaged in research or experimentation either directly or indirectly moreover the court found that u s agri’s attempt to farm jojoba commercially did not constitute r d thereby concluding that the r d contract was designed and entered into solely to decrease the limited partners’ cost of investing in an jojoba partnership through large upfront deductions for expenditures that were actually capital contributions the court further concluded that the partnership was not involved in a trade_or_business and had no realistic prospect of entering into a trade_or_business with respect to any technology that was to be developed by u s agri id notwithstanding the foregoing petitioner contends that his investment in san nicholas was motivated solely by the potential to earn a profit petitioner also contends that taking into account his experiences as a farmer and engineer and the nature of his investment he exercised the due care that a reasonable and ordinarily prudent person would have exercised under like circumstances finally petitioner contends that reliance on mr pace mr jacobs and a professor at the university of california should absolve him of liability for negligence in this case for the following reasons we disagree with petitioner’s contentions first the principal flaw in the structure of san nicholas was evident from an examination of the r d contract and the license agreement both of these documents were a part of the offering memorandum a reading of the r d contract and the license agreement demonstrates that the license agreement canceled or rendered ineffective the r d contract because of the concurrent execution of the two documents accordingly san nicholas was never engaged in either directly or indirectly any research or experimentation rather san nicholas was merely a passive investor seeking royalty returns pursuant to the license agreement see lopez v commissioner tcmemo_2001_278 christensen v commissioner tcmemo_2001_185 serfustini v - - commissioner tcmemo_2001_183 carmena v commissioner tcmemo_2001_177 nilsen v commissioner tcmemo_2001_163 fawson v commissioner tcmemo_2000_195 petitioner an experienced attorney should have understood the legal ramifications of the license agreement canceling the r d contract second we are unable to accept uncritically petitioner’s contention that he invested in san nicholas solely to earn a profit ’ rather at the time that he signed the subscription agreement petitioner believed that his investment in san nicholas offered tax benefits and his decision to invest was influenced by that belief third we do not think that petitioner a well-educated and successful attorney and a sophisticated investor exercised due care at the time that he signed the subscription agreement in this regard we are again unable to accept uncritically petitioner’s contention that he reasonably relied on the offering memorandum the short answer to this contention is that ‘7 it is the duty_of the court to listen to testimony observe the demeanor of witnesses weigh the evidence and determine what to believe the court is not required to accept testimony at face value and the court may discount a party’s self-interested testimony and place reliance on other evidence that is believed to be more reliable see 786_f2d_1382 cir affg in part and remanding in part tcmemo_1984_197 99_tc_202 duralia v commissioner tcmemo_1994_269 see also 87_tc_74 - - petitioner either did not read the offering memorandum in its entirety or chose to ignore portions thereof see 39_f3d_402 cir affg tcmemo_1993_480 holding that the taxpayer’s reliance on offering materials was not reasonable see also 990_f2d_893 cir affg donahue v commissioner tcmemo_1991_181 holding that claims that are probably too good to be true should be investigated by a reasonably prudent person ’ the offering memorandum was replete with caveats and warnings regarding the business and tax risks associated with an investment in san nicholas the cover page cautioned that this offering involves a high degree of risk and warned prospective investors not to construe this memorandum or any prior or subsequent communications as constituting legal or tax_advice potential inventors were urged to consult their own counsel as to all matters concerning this investment and were advised to consult with their own tax advisor as to the tax aspects the single longest section of the offering memorandum was devoted to risk factors and warned of numerous risks specifically including tax risks the lack of a structured market and in the present case the parties stipulated to a promotional videotape produced by u s agri that described jojoba as liguid gold and the industrial crop of the future which would be cultivated in some of the most hostile land anywhere -- - distribution system for jojoba and the highly speculative nature of the investment petitioner ignored these warnings on brief petitioner painstakingly dissects portions of the offering memorandum in an attempt to show that he carefully perused what he calls a business plan petitioner’s piecemeal approach to the offering memorandum ignores the existence of the strong cautionary language a careful review of the offering memorandum especially the portion discussing the tax risks would have caused a prudent investor to question the propriety of the tax benefits we would certainly expect no less from a well- educated and sophisticated individual such as petitioner petitioner contends that he also conducted his own analysis of san nicholas prior to investing however there is no persuasive evidence that petitioner’s analysis was based on anything other than the projections set forth in the offering memorandum see 87_tc_74 investors were warned however that those projections had been prepared for the general_partner had not been audited and should not be relied on there is nothing in the record to persuade us that petitioner’s projections were ever audited or examined by any disinterested third party any reliance on those projections was unreasonable petitioner contends that his experience with farming and his reading about jojoba gave him confidence in the viability of his - - investment in san nicholas yet petitioner’s experience and his knowledge should have led him to inquire into both the operational aspects of the partnership and the nature of the research that u s agri was to conduct under the terms of the r d contract see fawson v commissioner tcmemo_2000_195 although petitioner claims to have visited the jojoba sites about once a month the primary purpose of these visits was to see how the plants were growing and that proper watering and weeding methods were being utilized however there is no persuasive evidence in the record to demonstrate that petitioner either as a limited_partner in san nicholas or as the general_partner and tax_matters_partner of four other jojoba partnerships visited the jojoba sites in order to determine whether research or development was being conducted if petitioner had visited the jojoba sites for that purpose he would have quickly discovered that u s agri was engaged in we find it curious that petitioner would choose to emphasize his experience when the record clearly demonstrates that prior to he did not have any experience in growing jojoba nor did he have any experience in either the research or development of jojoba petitioner’s experience first came in late when he became the general_partner and tax_matters_partner of utah jojoba blythe jojoba i blythe jojoba ii and desert center jojoba we find it equally curious that petitioner would choose to emphasize his knowledge when the record demonstrates that prior to his knowledge was limited to articles that he had read in various magazines and a general familiarity with the existence of an experimental jojoba plantation located at the university of california at riverside -- - nothing more than a farming activity see fawson v commissioner supra petitioner should have realized that in the absence of any research_and_development there could be no deduction for research_and_experimental_expenditures under sec_174 fourth petitioner contends that in deciding to invest in san nicholas he reasonably relied on advice from mr pace mr jacobs and a professor at the university of california for reasons that we shall discuss we disagree that any such reliance was reasonable petitioner contends that he reasonably relied on advice from mr pace at the time of trial mr pace was deceased accordingly we do not know first hand what knowledge he may have had or what advice he may have given the record does establish that mr pace was the president of u s agri and a member of its board_of directors petitioner who for a period of time was also a member of u s agri’s board obviously knew that mr pace was an interested_party and that mr pace had a conflict of interest thus whatever advice petitioner may have received from mr pace fails as a defense to negligence because of mr pace’s lack of competence to give such advice and the clear presence of a conflict of interest see rybak v commissioner in utah jojoba i research v commissioner tcmemo_1998_6 the court found that before mr pace had only limited knowledge of and minimal background in jojoba 91_tc_524 petitioner also contends that he reasonably relied on advice from mr jacobs at the time of trial mr jacobs was deceased accordingly we do not know first hand what knowledge he may have had or what advice he may have given the record does establish that mr jacobs only became involved in the farming of jojoba in or about so his experience was limited and there is nothing to suggest that he was knowledgeable about research_and_development of jojoba see freytag v commissioner t c pincite the record also establishes that mr jacobs was involved in the sale of limited_partnership interests in a number of jojoba partnerships accordingly any advice that he may have given can be analogized to that of a promoter which advice is inherently suspect e g addington v commissioner f 3d pincite pasternak v commissioner f 2d pincite in glassley v commissioner tcmemo_1996_206 we found that the taxpayers acted on their fascination with the idea of participating in a jojoba farming venture and their satisfaction with tax benefits of expensing their investments which were clear to them from the promoter’s presentation they passed the offering circular by their accountants for a glance the record in the present case suggests that whatever advice may have been given by mr jacobs was nothing more than a generalized affirmation to invest in jojoba indeed at trial petitioner testified that mr jacobs was very high on the investments in - - jojoba and i--and that was the primary reason i invested in it petitioner also contends that he reasonably relied on advice from a professor at the university of california at riverside a dr yermanos this individual did not testify at trial so we do not know first hand what advice he may have given or on what basis such advice may have been rendered ’ however the record suggests that petitioner never compensated dr yermanos for his time and that dr yermanos may have merely opined on whether the jojoba industry as a whole could become profitable there is nothing in the record to suggest that petitioner ever discussed the details of san nicholas with dr yermanos or that dr yermanos even knew about the existence of that partnership in short petitioner’s testimony concerning dr yermanos is too amorphous for us to conclude that whatever advice dr yermanos may have provided was sufficiently informed to absolve petitioner from liability for the additions to tax for negligence finally petitioner relies heavily on 99_tc_132 affd sub nom 28_f3d_1024 cir that case however is distinguishable on its facts we note that no mention is made of a dr yermanos in utah jojoba i research v commissioner tcmemo_1998_6 remarkably dr yermanos apparently admitted to petitioner that he ie dr yermanos had not been successful in convincing anyone to enter the field of jojoba -- p7 - in krause v commissioner supra we held for the taxpayers on the issue of negligence we did so in the context of oil recovery technology based on special or unusual circumstances related to the energy and oil crisis of the late 1970s and early 1980s in evaluating the imposition of the additions to tax in this case and in light of the above facts encouraging investments in and the development of tertiary oil recovery methods such as enhanced oil recovery technology we are somewhat understanding of the individual investments that were made in partnerships in the context of the hysteria relating to the energy crisis the oil price increases of the late 1970s the industry and the governmental interest in enhanced oil recovery technology the heavy and sophisticated promotion of these investments we conclude that petitioners are not liable for the additions to tax and the additional interest element for negligence under sec_6653 sec_6653 and id pincite none of the circumstances that were determinative in krause v commissioner supra are present in the case at bar petitioner’s reliance on the cited case is misplaced in view of the foregoing we hold that petitioner is liable for the additions to tax under sec_6653 and for negligence respondent’s determination is sustained il sec_6661 substantial_understatement of tax_liability the second issue for decision is whether petitioner is liable for an addition_to_tax under sec_6661 that section as amended by the omnibus budget reconciliation act of publaw_99_509 100_stat_1951 provides for an - - addition_to_tax of percent of the amount of any underpayment attributable to a substantial_understatement_of_income_tax petitioner bears the burden of proving that he is not liable for the addition_to_tax 109_tc_235 mueller v commissioner t c memo 2001-dollar_figure a substantial_understatement_of_income_tax exists if the amount of the understatement exceeds the greater of percent of the tax required to be shown on the return or dollar_figure sec_6661 b a generally the amount of an understatement is reduced by the portion of the understatement that the taxpayer shows is attributable to either the tax treatment of any item for which there was substantial_authority or the tax treatment of any item with respect to which the relevant facts were adequately disclosed on the return see sec_6661 b substantial_authority exists when the weight of the authorities supporting the treatment is substantial in relation to the weight of authorities supporting contrary positions sec_1 b income_tax regs adequate_disclosure of the tax treatment of a particular item may be made either ina statement attached to the return or on the return itself sec_1 b and c income_tax regs if an understatement is attributable to a tax_shelter_item then different standards apply first in addition to showing see supra note - - the existence of substantial_authority a taxpayer must show that he or she reasonably believed that the tax treatment claimed was more_likely_than_not the proper treatment sec_6661 b c ii second disclosure whether or not adequate will not reduce the amount of the understatement sec_6661 b c petitioner appears to concede that there was a substantial_understatement of tax within the meaning of sec_6661 petitioner does not contend however that there was substantial_authority supporting the deduction of the partnership loss that he claimed on his return nor does petitioner contend that there was adequate_disclosure of the facts related to that loss rather petitioner contends that he should be absolved of liability for the addition_to_tax by virtue of sec_6661 sec_6661 vests the commissioner with discretion to waive the addition_to_tax under sec_6661 if the taxpayer shows that he or she acted with reasonable_cause and in good_faith the commissioner’s failure to waive the addition_to_tax is reviewed by this court for abuse_of_discretion 110_tc_189 we note that the understatement_of_tax on which respondent determined the addition_to_tax is dollar_figure the amount_required_to_be_shown_as_tax on petitioner’s return is dollar_figure the understatement is therefore substantial because it exceeds the greater of percent of the amount required to be shown on the return or dollar_figure sec_6661 -- - there is nothing in the record to suggest that petitioner ever requested that respondent waive the addition_to_tax under sec_6661 indeed petitioner does not even allege that he requested such a waiver for that reason alone petitioner is not entitled to relief from liability see 58_f3d_557 cir affg tcmemo_1992_693 klieger v commissioner tcmemo_1992_734 sec_1 income_tax regs even if petitioner had requested a waiver under sec_6661 the record demonstrates that he failed to act reasonably and in good_faith in deducting his claimed loss from san nicholas as general_partner and tax_matters_partner of four other jojoba partnerships specifically including utah jojoba petitioner was aware or should have been aware that san nicholas was not engaged in the research_and_development of jojoba accordingly petitioner knew or should have known that in the absence of any research_and_development there could be no deduction for research_and_experimental_expenditures under sec_174 in view of the foregoing we hold that petitioner is liable for the addition_to_tax under sec_6661 for substantial_understatement of tax_liability respondent’s determination is sustained til conclusion --- - to reflect our disposition of the disputed issues as well as the parties’ concessions see supra note l decision will be entered for petitioner debra c kellen and for respondent as to petitioner william g kellen


o f f i c e o f t h e c h i e f c o u n s e l department of the treasury i n t e r n a l r e v e n u e s e r v i c e w a s h i n g t o n d c date number info release date conex-107104-10 uil 36a the honorable george lemieux united_states senator south orange ave suite orlando fl attention ------------------- dear senator lemieux i am responding to your inquiry dated date on behalf of your constituent - ------------------------------ he asked about his federal_income_tax withholding that he said more than doubled after his pension payor adopted new withholding tables the american_recovery_and_reinvestment_act_of_2009 provides that taxpayers with earned_income in and may be eligible for the making_work_pay_credit sec_1001 of the act the credit is the lesser_of percent of earned_income or dollar_figure for individuals dollar_figure for married couples filing jointly the credit begins phasing out for taxpayers with modified_adjusted_gross_income over dollar_figure per year for individuals dollar_figure for married couples filing jointly only individuals who include their social_security account number on their tax_return are eligible to receive the credit taxpayers claim the making_work_pay_credit on the form_1040 u s individual_income_tax_return the congress indicated that we were to provide for accelerated delivery of the mwp credit by producing the revised income_tax_withholding schedules for the remaining months of see h_r rep in date we issued the revised withholding tables for wages paid in and told employers to begin using them as soon as possible but no later than date you can find information about these tables in news_release enclosed in date we released the enclosed publication making_work_pay_credit and form_w-4 employee’s withholding allowance certificate a one page flyer explaining conex-107104-10 that certain individuals including married couples might need to adjust their withholding before the tax_return filing season we have since provided new tables for use with respect to wages paid in these tables are available in publication circular_e employer’s tax guide for enclosed eligible workers received the benefit of the reduced withholding to reflect the credit without any_action on their part this means that workers do not need to fill out a new form_w-4 employee's withholding allowance certificate however some people may find that the changes built into the withholding tables result in less tax withheld than they prefer for pension payors we made a new optional procedure for adjusting withholding available on date notice 1036-p enclosed this procedure reflects that pension income is not earned_income for purposes of the making_work_pay_credit the tables also include the optional adjustment procedure for pension payors pension payors have no requirement to use this new procedure and may use only the withholding tables the new procedure automatically adjusts withholding on pension payments and pension recipients do not need to take action we designed the new procedure to avoid pension recipients having their taxes underwithheld if a pension payor used the withholding tables issued in date and then switched to the new procedure for pensions once it was available pension recipients would have seen an increase in their withholding at that time because the making_work_pay_credit also applies to taxpayers may want to consult the irs withholding calculator on www irs gov to see if their withholding will cover their expected tax_liability for the enclosed publication how do i adjust my tax withholding provides additional guidance pension recipients may submit a form w-4p withholding_certificate for pension or annuity payments to their pension payor to adjust withholding if necessary i hope this information is helpful if you need further information please contact me or - ------------------- at -------------------- in addition information about the making_work_pay_credit and the changes in withholding is available at www irs gov sincerely janine cook chief employment_tax branch1 division counsel associate chief_counsel tax exempt government entities enclosures