t c memo united_states tax_court james e blasius and mary jo blasius et al petitioners v commissioner of internal revenue respondent docket nos filed date ps and r have settled all issues in these consolidated cases save for ps’ claims made pursuant to sec_7430 i r c for recovery_of administrative and litigation costs totaling dollar_figure ps’ grounds for recovery are that r’s position in these proceeding with respect to the capitalization of certain expenditures which position r conceded before trial was not substantially justified within the meaning of sec_7430 i r c held r’s position with respect to the capitalization of the expenditures in question was substantially justified within the meaning of sec_1 cases of the following petitioners are consolidated herewith steven g balan docket no and steven g balan and rachel margules docket no c b i i r c with the result that ps’ are not entitled to recovery under sec_7430 i r c erwin a rubenstein and nicole r tennenhouse for petitioners eric r skinner and phoebe l nearing for respondent memorandum opinion halpern judge these cases the consolidated cases or when referred to prior to consolidation the cases are before the court on petitioners’ motions for litigation and administrative fees and costs the motions filed date the motions are made pursuant to sec_7430 and rules through petitioners seek to recover attorney’s fees of dollar_figure and costs of dollar_figure in connection with respondent’s determinations of deficiencies in tax with respect to petitioners’ taxable calendar years and the audit years attorney’s fees of dollar_figure incurred through date in connection with filing the motions plus on date petitioners moved to consolidate the cases for purposes of disposing of the motions which motions to consolidate were granted on date unless otherwise indicated all section references are to the internal_revenue_code_of_1986 as amended and all rule references are to the tax_court rules_of_practice and procedure docket no involves calendar years and docket no involves calendar_year docket no involves calendar years and other fees and expenses since date petitioners also request that we increase the statutory fee limit based on the expertise of petitioners’ counsel respondent objects to the motions in all respects on date the parties jointly moved pursuant to rule b to bifurcate consideration of the issues presented in the motions they requested that the court first decide the primary legal issue whether respondent has met his burden of proving that his position in the consolidated cases was substantially justified within the meaning of sec_7430 if and only if the court were to decide that issue in petitioners’ favor then the court would decide the remaining issues which involve the amount of the attorney’s fees and other expenses properly recoverable by petitioners during a date teleconference counsel for the parties agreed that the court may decide the substantial justification issue without a trial or hearing on date the court issued an order granting the parties’ joint motion to bifurcate no trial or hearing has been held because the parties appear to agree on the underlying facts necessary for us to reach a decision on the substantial a decision in respondent’s favor on the substantial justification issue would result in a denial of the motions and render moot the issues relating to the amount of any recoverable attorney’s fees or other expenses see sec_7430 justification issue there are no factual issues in that respect to resolve therefore we shall proceed on the basis of the parties’ submissions for the reasons discussed below we shall deny the motions factual and procedural background the parties filed a stipulation of agreed facts which with accompanying exhibits is incorporated herein by this reference petitioners petitioners james e blasius blasius and mary jo blasius are husband and wife who at the time their petition was filed resided in northville michigan petitioners steven g balan balan and rachel margules are husband and wife who at the time their petitions were filed resided in west bloomfield michigan during the audit years blasius and balan were the sole shareholders blasius percent balan percent of automotive credit corporation acc an s_corporation respondent concedes that none of the limitations on recovery found in sec_7430 limits petitioners’ rights to a recovery and each petitioner is a prevailing_party as that term is defined in sec_7430 except with respect to the issue of substantial justification raised by sec_7430 and herein addressed the term s_corporation is defined in sec_1361 in general an s_corporation has no federal_income_tax liability and its items of income deduction credit and such are passed through to ie taken into account by its shareholders see sec_1363 sec_1366 history of the consolidated cases by notices of deficiency dated december and the notices of deficiency respondent determined deficiencies in the federal income taxes of petitioners for the audit years explanations included with the notices of deficiency show adjustments to petitioners’ incomes resulting from changes in the treatment of items of acc passed through to blasius and balan on account of their status as shareholders of acc respondent required the capitalization of certain costs incurred and deducted by acc in connection with loan origination acquisition offering expenses and professional fees on date petitions were filed in the cases the petitions and on date respondent answered the petitions denying all assignments of error on date the court notified the parties that the cases were set for trial at the trial session of the court commencing date in detroit michigan on date attorney oksana o xenos on behalf of all petitioners wrote a letter to eric r skinner one of respondent’s counsel in this case in that letter ms xenos requested that in light of respondent’s position regarding the deductibility of the types of costs at issue in the consolidated cases as stated in announcement 2002_1_cb_536 issued on date discussed infra respondent should without inordinate delay confess error and concede the instant cases in their entirety on date mr skinner informed ms xenos that in light of the date issuance of chief_counsel notice_2002_21 discussed infra respondent would concede the deductibility of the loan origination acquisition costs at issue in each of the cases the loan origination acquisition costs sometime previously mr skinner had been instructed by his superior division counsel large_and_mid-size_business_division lmsb to contact victoria balacek senior legal counsel lmsb to confirm the office’s position with respect to the loan origination acquisition costs on date mr skinner learned from ms balacek that a concession of the issue was appropriate in light of chief_counsel notice_2002_21 he then contacted ms xenos on date ms xenos again wrote mr skinner alleging that he was reneging in part on his promise to concede the costs at issue in the consolidated cases ms xenos requested that any stipulated decision you propose for our consideration although petitioners argue that respondent did not concede the deductibility of the loan origination acquisition costs and professional fees until date they do not dispute mr skinner’s affidavit stating that he informed ms xenos of the concession on date provide for an award of reasonable administrative and litigation fees and costs incurred in these civil proceedings on date we filed respondent’s trial memorandum in each of the cases in those memoranda respondent concedes the deductibility of both the loan origination acquisition costs and the professional fees at issue on date the cases were called for trial no trial was held however since the court received from the parties stipulations of settled issues that resolved all of the then outstanding issues in the casesdollar_figure a section of each stipulation is entitled adjustments to automotive credit corporation inc 1120s in those sections petitioner s in each case concede s that acc’s expenditures_for commissions and offering expenses should be capitalized rather than deducted in the year incurred and respondent in each case concedes the deductibility ms xenos does not identify the portion of the costs at issue that respondent is alleged to be reneging on we surmise that ms xenos is not referring to the loan origination acquisition costs conceded by respondent on date because her letter specifically confirms that the service has disavowed the position it pursued in the lychuk case ie the capitalization of loan acquisition costs see the description infra of the costs at issue in 116_tc_374 the request for costs and fees recoverable under sec_7430 suggests it is to those costs eg attorney’s fees that ms xenos refers in her letter although stipulations of settled issues were not filed in the cases until date the parties urge and we agree that identical stipulations were reached on date we shall therefore treat date as the date the parties stipulated as set forth in the stipulations filed on oct of acc’s loan origination acquisition costs and professional fees nature of the expenses conceded by respondent to be deductible in the year incurred loan origination acquisition costs acc is the same s_corporation that was the focus of our report in 116_tc_374 which dealt with the and tax years of its then shareholders including petitioners james e and mary jo blasius in lychuk v commissioner supra pincite we reported certain basic facts with respect to acc it was formed to provide alternate financing for purchasers of used automobiles or light trucks collectively automobiles who have marginal credit its sole business operation is the acquisition of installment contracts from automobile dealers dealers who have sold automobiles to high credit risk individuals and the servicing of those contracts its primary business activities are credit investigation credit evaluation documentation and the monitoring of collections on installment contracts we have no reason to believe that those reported facts have changed moreover the parties appear to agree that the loan origination acquisition costs are essentially identical in nature to costs described in lychuk v commissioner supra pincite as incurred by acc in investigating and acquiring automobile dealer installment contracts with purchasers of automobiles briefly the costs at issue were incurred by acc employees in analyzing credit applications submitted by the dealers’ customers analyzing credit reports verifying information provided by credit applicants the credit analysis activities and purchasing the approved installment contracts from the dealers those costs consisted of employee salaries and benefits deemed attributable to the foregoing activities professional fees the professional fees at issue in the consolidated cases professional fees were payments apparently to third parties relating to the creation of a bank line of credit for acc which extended over calendar years chronology of administrative and judicial developments regarding the capitalization versus expense issues conceded by respondent in the consolidated cases cases and public pronouncements on date this court issued its report in 110_tc_349 revd 212_f3d_822 3d cir in which we held that a bank’s costs associated with making loans extending beyond the years in which the costs were incurred including salaries and benefits paid to employees are not currently deductible under sec_162 and must be capitalized under sec_263 on date this court issued its report in 112_tc_89 affd in part and revd in part sub nom 224_f3d_874 8th cir in which we held that officer salaries and outside legal fees incurred in investigating a potential consolidation that was ultimately consummated are capital expenditures not currently deductible under sec_162 on date the internal_revenue_service irs released a document entitled priority guidance plan in which it listed loan origination costs among the expenditures to be addressed in g uidance on deduction and capitalization on date the court_of_appeals for the third circuit reversed our decision in 212_f3d_822 3d cir revg 110_tc_349 on date the court_of_appeals for the eighth circuit reversed in part our decision in norwest corp v commissioner supra affirming only our capitalization of outside legal fees incurred after a final_decision had been made to enter into the consolidation 224_f3d_874 8th cir affg in part and revg in part 112_tc_89 dollar_figure before the court_of_appeals the commissioner conceded the deductibility of outside legal fees incurred before a final_decision was made on the basis of revrul_99_23 1999_1_cb_998 released on date 224_f3d_874 8th cir affg in part and revg in part 112_tc_89 continued on date this court issued its report in lychuk v commissioner supra in which we held that loan acquisition costs of the type at issue in the consolidated cases and certain offering expenditures are capital expenditures not deductible under sec_162 on date the irs released an advance notice of proposed rulemaking anprm describing rules and standards that the irs and treasury_department expect to propose in in a notice of proposed rulemaking that will clarify the application of sec_263 to expenditures incurred in acquiring creating or enhancing certain intangible assets or benefits fed reg date the anprm invites public comments regarding these standards id pincite one of the anticipated proposals is a 12-month rule applicable to expenditures paid to create or enhance certain intangible rights or benefits id pincite the anprm states under the rule capitalization under sec_263 would not be required for certain described expenditures paid to create or enhance certain intangible rights or benefits unless that expenditure created or enhanced intangible rights or benefits for the taxpayer that extend beyond the earlier of i months after the first date on which the taxpayer realizes the rights or benefits attributable to the continued revrul_99_23 c b pincite distinguishes between investigatory expenses_incurred in order to determine whether to enter a new business and which new business to enter deductible and expenses_incurred in the attempt to acquire a specific business nondeductible_expenditure or ii the end of the taxable_year following the taxable_year in which the expenditure is incurred id the list of described expenditures eligible for immediate deduction under the 12-month rule does not include an expenditure for or with respect to a bank line of credit of the type acquired by acc the professional fees the anprm also advises that as one alternative approach designed to minimize uncertainty and to ease the administrative burden of accounting for transaction costs the rules could allow a deduction for all employee compensation including bonuses and commissions that are paid with respect to the transaction id pincite on date the irs issued announcement 2002_1_cb_536 originally published in i r b which is identical to the anprm on date the chief_counsel_irs issued chief_counsel notice ccn in which the chief_counsel announced that the irs would no longer assert capitalization under sec_263 for employee compensation other than bonuses and commissions that are paid with respect to the transaction fixed overhead or de_minimis under dollar_figure costs related to the acquisition creation or enhancement of intangible assets or benefits on date the treasury_department issued proposed_regulations under sec_263 the proposed or proposed indopco12 regulations which contain the 12-month rule described above and make it generally applicable to amounts paid to create or enhance an intangible asset sec_1 a - f proposed income_tax regs fed reg date the proposed_regulations also permit a deduction in the year incurred for all compensation paid to employees including bonuses and commissions paid to employees sec_1 a - e i proposed income_tax regs fed reg date the final regulations under sec_263 the final or final indopco regulations published in the federal_register on date include both rules sec_1_263_a_-4 and ii income_tax regs employee compensation including salary bonuses and commissions treated as deductible and sec_1_263_a_-4 income_tax regs month rule applicable to amounts paid to create or to facilitate the creation of an intangible pursuant to sec_1_263_a_-4 income_tax regs the final regulations apply to amounts paid_or_incurred on or after date which is in accord with the statement in the proposed_regulations that as proposed sec_1_263_a_-4 would apply to amounts paid or so named for the u s supreme court decision that was the genesis of the regulations project that ultimately resulted in the final regulations see 503_us_79 incurred on or after the date the final regulations are published in the federal_register sec_1_263_a_-4 proposed income_tax regs fed reg date internal irs developments the motions also reference a number of internal irs documents released by respondent to petitioners in connection with date freedom_of_information_act foia requests made by petitioners’ counsel one of those documents is entitled case history report form internal_revenue_service - office_of_chief_counsel it further states case name capitalization of self-created intangibles regulation case history report form it traces the chief counsel’s and treasury department’s actions that resulted in the issuance of the proposed indopco regulations it reflects that on date chief_counsel and treasury_department officials met to discuss the scope of a proposed_regulations project regarding capitalization of self- created intangibles and that throughout the balance of and into date when the anprm was issued there were numerous chief_counsel - treasury_department discussions at first when the discussions began on date they were with regard to the issuance of a moratorium on capitalization of intangibles in examinations pending issuance of regulations beginning on date when treasury the chief_counsel and commissioner lmsb decided that guidance should take the form of an anprm and should not impose a moratorium on examination the discussions turned to the drafting of the anprm which was filed with the federal_register on date and published the following day see fed reg date another document obtained by petitioners pursuant to their foia request and attached to their reply to respondent’s objection to the motions is a memorandum dated date and entitled memorandum for lmsb and sb_se small_business_self-employed_division employees the lmsb-sb se memorandum or the memorandum the memorandum is from the commissioners of those two divisions and the subject of the memorandum is guidelines for the application of advance notice of proposed rulemaking for intangibles under sec_263 the memorandum advises the rules and standards in the anprm are not service position and do not provide any authority for the concession of capitalization issues discussed in the anprm the memorandum notes however the statement in the anprm that the irs and treasury_department expect to propose the 12-month rule and that that rule would be consistent with 270_f3d_1137 7th cir revg 113_tc_329 which recognized a ‘a one-year rule’ for purposes of allowing a deduction for prepaid license fees and insurance premiums the memorandum states that although the anprm does not provide authority for present application of a month rule it is likely that treasury and the service will ultimately adopt such a rule in regulations the memorandum concludes given this likelihood and considering the opinion in u s freightways corp we must consider whether it is an efficient utilization of our resources to propose capitalization of those expenditures particularly in light of the relatively short tax_deferral period one taxable_year that results from the application of the 12-month rule accordingly the memorandum recommends that with respect to examinations initiated prior to the release of the regulations the issue of whether to capitalize certain short-term expenditures should be pursued but only where the examination has already resulted in the preparation of a form_5701 notice of proposed_adjustment lmsb or form_4549 revenue agents report sb_se otherwise that issue should not be pursued in the absence of contrary guidance i sec_7430 a general scope discussion sec_7430 provides that a taxpayer may recover reasonable costs including attorney’s fees incurred in connection with any_tax proceeding administrative or judicial against the united_states if the taxpayer is the prevailing_party in the proceeding sec_7430 provides that a taxpayer shall not be treated as the prevailing_party in any proceeding if the united_states establishes that its position in the proceeding was substantially justified see sec_7430 the position_of_the_united_states in an administrative_proceeding is established as of the earlier of the date the taxpayer receives notice of a decision of the irs office of appeals or the date of the notice_of_deficiency sec_7430 the position_of_the_united_states in a deficiency proceeding in this court is that set forth in the commissioner’s answer e g 108_tc_430 see sec_7430 b substantial justification for purposes of sec_7430 a position_of_the_united_states is substantially justified if it has a reasonable basis in both law and fact e g maggie mgmt co v commissioner supra pincite the determination of the reasonableness of that position is based upon the available facts that formed the basis for the position as well as any controlling legal precedent id the inquiry is not a static one that is a position_of_the_united_states that was reasonable when established may become unreasonable in light of changed circumstances see eg 86_tc_962 see also sec_301 c proced admin regs any award of administrative costs may be limited to costs attributable to the portion of the proceeding during which the position of the irs was not substantially justified the fact that respondent ultimately concedes an issue does not by itself establish that his prior position with respect to that issue was unreasonable maggie mgmt co v commissioner supra pincite however it is a factor that may be considered id there is a rebuttable_presumption of no substantial justification if the irs did not follow its applicable_published_guidance in the administrative_proceeding sec_7430 the term applicable_published_guidance is defined to mean i regulations revenue rulings revenue procedures information releases notices and announcements and ii private letter rulings technical_advice memoranda and determination letters issued to the taxpayer sec_7430 sec_7430 requires that courts take into account whether the united_states has lost in courts of appeal s sic for other circuits on substantially_similar issues in determining whether the position_of_the_united_states was substantially justified ii summary of the parties’ arguments a petitioners’ arguments petitioners make the following arguments in support of their position beginning on date when the irs released its priority guidance plan listing loan origination costs among the expenditures to be addressed in g uidance on deduction and capitalization respondent was pursuing the petitioners for deficiencies under a litigating position capitalization of such costs that he knew would soon be reversed petitioners reason that respondent’s litigating position even though ultimately successful in 116_tc_374 was not substantially justified because respondent’s placement of the issue of loan origination costs on the tax_accounting issues list for priority guidance shows not only the high priority accorded to the issue by the irs at least as of date but also the irs’ affirmative intent to actually publish guidance on this controversial issue in petitioners also point to the internal irs and joint irs -- treasury_department meetings in through which ultimately led to the date issuance of the anprm petitioners consider those meetings evidence of respondent’s then present intent to concede issues that petitioners were being forced to litigate in the consolidated cases during that timeframe under sec_7430 we must take into account the fact that the commissioner’s position was overruled in 212_f3d_822 3d cir and 224_f3d_874 8th cir in determining whether respondent’s present position seeking to capitalize acc’s loan origination acquisition costs and professional fees was substantially justified petitioners argue that respondent was not substantially justified in litigating his position before finally conceding after two years had past sic since the pnc and wells fargo circuit_court decisions because respondent did not concede the loan origination acquisition costs and professional fees issues until date which was months after the issuance of the anprm announcement 2002_1_cb_536 and ccn and years after the issuance of revrul_99_23 1999_1_cb_998 respondent did not follow his own published guidance and therefore he must meet a higher standard of proof to rebut the presumption of no justification created by section c b ii which he has not met b respondent’s argument sec_1 loan origination acquisition costs capitalization is substantially justified by the court’s decision in lychuk v commissioner supra which upheld the commissioner’s capitalization of costs identical to those at issue in the consolidated cases ie employee salaries and see supra note benefits paid_by acc in connection with its loan origination acquisition activities professional fees capitalization is consistent with the capitalization arguments presented for the loan origination acquisition and offering expenses of acc in lychuk respondent argues that the professional fees at issue were related to acc’s securing a line of credit with nbd bank n a and thus were similar to the offering expenses_incurred in securing the source of borrowing in lychuk also like the offering expenses capitalized in lychuk they established an intangible asset a line of credit that extended beyond the year in which the fees were incurred timeliness of respondent’s concessions a loan origination acquisition costs respondent’s date concession that petitioners’ loan origination acquisition costs for the audit years are deductible just over month after the issuance of ccn on date wherein the irs announced that it would no longer seek to capitalize employee compensation related to a capital_transaction other than bonuses and commissions paid with respect to the transaction was timely b professional fees respondent does not appear to consider timeliness to be an issue because the deductibility of petitioners’ professional fees for the audit years was conceded first in the trial memorandum filed date and again in the stipulation of settled issues filed date in deference to the anticipated but not yet formally adopted 12-month rule iii analysis a introduction petitioners’ argument that respondent’s proposed capitalization of the loan origination acquisition costs and professional fees at issue was not substantially justified within the meaning of sec_7430 appears to proceed down three separate but ultimately converging roads respondent has been improperly litigating against a position that he knew as early as date would be adopted by the irs controlling adverse caselaw in certain u s courts of appeals 212_f3d_822 3d cir and 224_f3d_874 8th cir and his own published guidance in the form of revrul_99_23 1999_1_cb_998 the anprm issued date announcement issued date and ccn issued date petitioners’ first two approaches relate to the deductibility of the loan origination acquisition costs their third approach relates to the deductibility of both those costs and the professional fees and it posits that respondent’s concession in june of of both issues almost months after the issuance of cnn and months after issuance of the anprm and announcement and some years after the issuance of rev_rul was not timely we consider each argument in turn b effect of respondent’s litigating against a position likely to be adopted in the future petitioners characterize the listing of loan origination costs as an item slated for irs published guidance as a step that evidences years of intensive and ultimately successful lobbying by the likes of the indopco coalition to impress its views on the irs petitioners appear to be suggesting that the selection of loan origination costs for published guidance was tantamount to an irs decision on date to treat those costs as deductible in the taxable_year incurred therefore respondent was not substantially justified in seeking to capitalize petitioners’ loan origination acquisition costs in despite the subsequent decision of the tax_court in 116_tc_374 sustaining the commissioner’s capitalization of those costs we disagree as noted supra there is a rebuttable_presumption of no substantial justification if respondent fails to follow his own applicable_published_guidance in the administrative_proceeding sec_7430 the term applicable_published_guidance is defined to mean regulations revenue rulings revenue procedures information releases notices and announcements and if issued to the taxpayer private letter rulings technical_advice memoranda and determination letters sec_7430 see also 119_tc_157 wherein we refused to allow the commissioner’s counsel to argue the legal principles of court opinions against the principles and public guidance articulated in the commissioner’s currently outstanding revenue rulings the priority guidance plan does not constitute applicable_published_guidance that would trigger a rebuttable_presumption of no substantial justification pursuant to sec_7430 because it is not among the irs pronouncements listed in sec_7430 and because it was not a revenue_ruling or guidance of comparable stature it did not under rauenhorst prohibit respondent from litigating to require the capitalization of loan origination acquisition costs more fundamentally the priority guidance plan is not the type of guidance contemplated by either sec_7430 or rauenhorst it is on its face no more that an informal announcement of anticipated guidance projects that may be published in not specific guidance to taxpayers on any particular issue petitioners’ suggestion that the inclusion of loan origination costs in the list of planned projects was intended to be an unambiguously favorable response to taxpayer lobbying efforts to have the irs treat those costs as deductible in the year incurred is sheer speculation without support in the record petitioners also imply that they were improperly required to expend their resources litigating the deductibility of loan origination acquisition costs while the irs and treasury_department had meetings in may june and date in connection with the project that eventually led to the irs’s change in litigating position with respect to those costs the internal irs and the irs-treasury department meetings and correspondence referred to in the case history report form reflect efforts to reach a decision on the capitalization of various types of expenses including those at issue in the consolidated cases not the decision itself in fact the discussions between date and date concerning the issuance of a moratorium on irs examiners capitalizing intangibles pending issuance of regulations were aborted when it was decided to issue the anprm and not impose a moratorium on capitalization of intangibles in examinations we conclude that none of the internal administrative actions referred to by petitioners indicate a present intent to permit a deduction for loan origination acquisition costs in the year incurred moreover even if they did those actions do not constitute applicable_published_guidance under sec_7430 iv or public guidance under rauenhorst v commissioner supra therefore none of those actions is sufficient to support the conclusion or even raise a presumption that respondent was not substantially justified in seeking to capitalize acc’s through loan origination acquisition costs c controlling effect of the courts of appeals decisions in pnc bancorp and wells fargo petitioners argue that after the decisions in 212_f3d_822 3d cir and 224_f3d_874 8th cir reversing this court’s capitalization of employee salaries respondent was improperly seeking to establish a split of authority in the u s courts of appeals by continuing to litigate the deductibility of the loan origination acquisition costs in support of that argument petitioners cite sec_7430 which requires that we take into account whether respondent has lost in courts of appeal s sic for other circuits on substantially_similar issues petitioners also cite two cases in which the court_of_appeals for the fifth circuit awarded attorney’s fees pursuant to sec_7430 under circumstances in which the commissioner appealed an adverse decision of the tax_court in the face of adverse decisions on the same issue in other courts of appeals see 37_f3d_183 5th cir affg tcmemo_1993_490 931_f2d_1044 5th cir in lychuk v commissioner t c pincite we distinguished the facts of that case from the facts in wells fargo co and subs v commissioner supra we said that in wells fargo the services performed by the bank’s employees as to the capital_transaction under consideration were extraordinary in the daily course of their employment they would have been paid the same salaries regardless of whether the transaction was consummated lychuk v commissioner supra pincite by contrast in lychuk and in the consolidated cases the employees spent much or all of their time working on installment contract acquisitions and the employees’ compensation hinged directly on the number of installment contracts acquired by acc id pincite we also stated our belief in lychuk that pnc bancorp inc v commissioner supra is not so factually distinguishable from the instant case and by extension from the consolidated cases to support contrary results id pincite the issue then is whether the reversal of this court by the court_of_appeals for the third circuit in pnc bancorp requires a finding that respondent was not substantially justified in seeking to capitalize acc’s loan origination acquisition costs we do not believe so at the time the notices of deficiency were issued to petitioners capitalization of employee salaries allocable to capital_transactions had in various instances been upheld by the supreme court in 418_us_1 by other u s courts of appeals eg 651_f2d_942 4th cir vacated on other grounds 684_f2d_285 4th cir 539_f2d_409 5th cir fee paid to managing partner of a partnership affg 63_tc_86 briarcliff candy corp v commissioner 475_f2d_775 2d cir revg and remanding t c memo by the court of claims in s natural_gas co v united_states ct_cl 412_f2d_1222 and by the tax_court eg 112_tc_89 110_tc_349 44_tc_382 affd 373_f2d_45 10th cir the cases cited by petitioners in which attorney’s fees were awarded under sec_7430 are readily distinguishable in allbritton v commissioner supra the commissioner’s position had been previously rejected by three u s courts of appeals by this court upon reconsideration of a decision that had been reversed on appeal and by several u s district courts the court_of_appeals stated that it had been unable to find a single published opinion supporting the commissioner’s position allbritton v commissioner id pincite in estate of perry v commissioner supra pincite the commissioner had lost identical appeals in two other circuits and the court_of_appeals for the fifth circuit rejected the commissioner’s argument that a contrary decision by that same court justified his litigating position merely because that decision had not been specifically overruled the court_of_appeals noted that in the context of an amendment to the code the clear and unequivocal language of which unmistakably overrules its earlier decision the absence of a new decision does not equate with unsettled law or first impression id unlike the circumstances present in allbritton and estate of perry respondent in the consolidated cases can point to numerous cases that reasonably support his litigating position we conclude that the decisions of the courts of appeals in pnc bancorp inc v commissioner supra and wells fargo co and subs v commissioner supra did not preclude respondent’s reliance on inconsistent supreme court courts of appeals court of claims and tax_court authority buttressed in date by our decision in lychuk in litigating the deductibility of the loan origination acquisition costs therefore those cases do not require us to decide that respondent was not substantially justified in seeking to capitalize those costs d controlling effect of revrul_99_23 the anprm announcement and u s freightways corp revrul_99_23 petitioners argue that respondent’s issuance of revrul_99_23 1999_1_cb_998 and his concession based on that ruling in wells fargo co and subs v commissioner supra of the deductibility of the costs attributable to the investigatory stage of the transaction results in a presumption under sec_7430 of no substantial justification for respondent’s litigating position with respect to the loan origination acquisition costs as noted supra note revrul_99_23 c b pincite classifies as an expense eligible for amortization as a startup expenditure under sec_195 and in the context of a business expansion as a deductible expense investigatory costs that are paid_or_incurred in order to determine whether to enter a new business and which new business to enter although there is an undeniable similarity between the investigatory costs described in revrul_99_23 supra as eligible for amortization under sec_195 and the credit analysis activities performed by acc’s employees preparatory to acc’s purchase of any installment contract we find that respondent’s refusal to concede the deductibility of the loan origination acquisition costs in light of revrul_99_23 supra was substantially justified respondent does not address the relevance of revrul_99_ 1999_1_cb_998 to the deductibility of the loan origination acquisition costs in his objection to the motions he does however address the applicability of that ruling to costs incurred in connection with the acquisition of credit card receivables in an irs field_service_advice memorandum to the associate area_counsel lmsb philadelphia field_service_advice date the fsa which we assume expresses respondent’s position on that issuedollar_figure the costs in question are described as expenses of determining whether to acquire certain loans and which loans to acquire a description that resembles the credit analysis activities of acc’s employees in the fsa respondent concludes that no expression of congressional intent and neither section nor its legislative_history suggest sic that costs of investigating the acquisition of a specific capital_asset are currently deductible respondent concludes that the holdings in revrul_99_23 are not although they have no precedential status field_service_advice memoranda may be cited as an expression of the commissioner’s position see 114_tc_533 appeal dismissed and remanded 249_f3d_175 3d cir inconsistent with the capitalization of the acquisition costs at issue in the fsa the legislative_history of sec_195 lends support to respondent’s position in the fsa that that provision was not intended to apply to the cost of investigating the acquisition of a specific capital_asset h rept 1980_2_cb_709 is the report of the committee on ways and means the committee that accompanied h_r which when enacted in the miscellaneous revenue act of publaw_96_605 94_stat_3522 added sec_195 to the code in describing the pre- sec_195 law the committee makes the following observation expenditures made in acquiring or creating an asset which has a useful_life that extends beyond the taxable_year normally must be capitalized these costs ordinarily may be recovered through depreciation or amortization deductions over the useful_life of the asset however costs which relate to an asset with either an unlimited or indeterminate useful_life may be recovered only upon a disposition or cessation of the business h rept c b pincite under the heading reasons for change the committee expresses its belief that providing for the amortization of business startup and investigatory expenses will encourage formation of new businesses and decrease controversy and litigation arising under present law with respect to the proper income_tax classification of startup expenditures id those statements when read together indicate that the committee viewed investigatory and startup costs in connection with the acquisition of a new business as particularly apt candidates for amortization because the taxpayer’s recovery_of those costs otherwise would not be available until disposition or abandonment of the new business the committee thus appears to view sec_195 as an exception to the rule that the costs of acquiring or creating an asset which has a useful_life that extends beyond the taxable_year normally must be capitalized a rule that the committee views as intrinsically fair when the costs are not incurred in connection with the acquisition of a business since in that situation the costs are normally recovered over the useful_life of the asset id also because acc was in the business of acquiring dealer installment contracts and the credit analysis activities related to specific installment contracts that had been selected for acquisition solely contingent on the debtor’s creditworthiness it is not at all clear that those activities are not akin to the post- final_decision ‘due diligence’ and or ‘investigatory’ expenses capitalized by the court_of_appeals for the eighth circuit in wells fargo co and subs v commissioner f 3d pincite in light of the foregoing we find that respondent was substantially justified in not considering revrul_99_23 supra to be controlling published guidance requiring the loan origination acquisition costs to be treated as deductible in the year incurred the anprm and announcement petitioners suggest that after the date issuance of the anprm and the date issuance of the identical announcement which indicate the future adoption of the 12-month rule respondent was not substantially justified in taking the position expressed in the lmsb-sb se memorandum that irs examiners should pursue the capitalization of expenses that would be deductible under the 12-month rule provided the issue had already been raised in a revenue agent’s report or in a notice of proposed_adjustment petitioners also suggest that the lmsb-sb se memorandum is indicative of an improper irs policy pursued in the consolidated cases to continue with a case based on a litigating position that respondent will soon change unless it is decided to be an inefficient use of their resources we interpret petitioners’ position to be that after the issuance of the anprm and announcement respondent was no longer substantially justified in litigating the capitalization of either the professional fees or the loan origination acquisition costs the anprm and announcement do not advise taxpayers of an irs decision to cease capitalizing costs related to intangibles that had been previously subject_to capitalization by the commissioner rather as noted supra they describe rules and standards that the irs and treasury expect to propose not final rules and standards and they invite public comments regarding those standards although they suggest that a deduction for all employee compensation which would include acc’s loan origination acquisition costs might be proper that approach is only one of several alternative approaches to the treatment of employee compensation suggested therein and deductibility of acc’s professional fees under the 12-month rule is at best unclear as those costs are not among the costs specifically referred to as deductible when they fall within the 12-month rule moreover to conclude that the anprm and announcement constitute applicable_published_guidance under sec_7430 binding on respondent with respect to the capitalization_rules discussed therein would be to negate the date effective date provided in the final indopco regulations and anticipated in the proposed_regulations a date that respondent has uniformly enforced in connection with requests to change to a method_of_accounting provided by the final regulations and in particular by sec_1_263_a_-4 income_tax regs which sets forth the 12-month rule see revproc_2004_23 sec_2 2004_1_cb_785 under sec_7430 notices and announcements are included in the list of irs pronouncements that constitute applicable_published_guidance for purposes of establishing a rebuttable_presumption of no justification under sec_7430 proposed_regulations are not included in that list as an advance notice of proposed rulemaking both the anprm and announcement are no more than advance notice of a future issuance proposed_regulations that when issued will not constitute applicable_published_guidance therefore it is not clear that such pronouncements can under any circumstances constitute applicable_published_guidance it is not necessary to resolve that issue in this case however because the anprm and announcement do not constitute guidance in any sense of that term they merely suggest principles of expense capitalization or deductibility that may be adopted in the future they do not purport to change existing administrative positions therefore they did not negate the authorities under the then existing law discussed supra that render respondent’s litigating position with respect to loan origination acquisition costs and professional fees substantially justified moreover we find no inequity or impropriety in respondent’s decision reflected in the lmsb-sb se memorandum to capitalize selectively expenses that otherwise would be deductible under the 12-month rule if and when adopted in order to accomplish an efficient utilization of resources the irs is not precluded from challenging the tax treatment of an item with respect to less than all similarly situated taxpayers subject_to such challenge as stated by the court of federal claims in 33_fedclaims_685 affd 82_f3d_433 fed cir the mere fact that another taxpayer has been treated differently from the plaintiff does not establish the plaintiff’s entitlement the fact that all taxpayers or all areas of the tax law cannot be dealt with by the internal_revenue_service with equal vigor and that there thus may be some taxpayers who avoid paying the tax cannot serve to release all other taxpayers from the obligation the commissioner’s failure to assess deficiencies against some taxpayers who owe additional tax does not preclude the commissioner from assessing deficiencies against other taxpayers who admittedly owe additional taxes on the same type of income a taxpayer cannot premise its right to an exemption by showing that others have been treated more generously leniently or even erroneously by the irs the fact that there may be some taxpayers who have avoided paying a tax does not relieve other similarly situated taxpayers from paying their taxes fn refs omitted accord 611_f2d_117 5th cir 355_f2d_639 u s freightways corp we also conclude that the adoption of the 12-month rule by the court_of_appeals for the seventh circuit in 270_f3d_1137 7th cir revg 113_tc_329 does not require a finding that respondent was not substantially justified in seeking to capitalize expenses otherwise deductible under that rule in this case the professional fees after the issuance of that decision on date u s freightways corp is inconsistent with the decision of this court which it reversed and with the decisions of other u s courts of appeals which have held or suggested that expenses that give rise to property with a life extending beyond the taxable_year in which the expense is incurred must be capitalized see eg 597_f2d_395 4th cir am dispenser co v commissioner 396_f2d_137 2d cir affg tcmemo_1967_153 359_f2d_191 2d cir affg in part revg in part and remanding tcmemo_1965_39 131_f2d_966 1st cir affg a memorandum opinion of the board_of_tax_appeals those cases provide substantial justification for respondent’s attempt to capitalize the professional fees despite the decision of the court_of_appeals in u s freightways corp e timeliness of respondent’s concessions respondent’s initial published guidance that he would no longer contest or litigate the deductibility of employee compensation here the loan origination acquisition costs appeared on date with the issuance of ccn and his initial published guidance adopting the 12-month rule applicable to the professional fees was the promulgation of sec_1_263_a_-4 income_tax regs as part of the final indopco regulations effective december dollar_figure respondent’s concession with respect to the deductibility of the professional fees was obviously timely as it preceded respondent’s adoption of the 12-month rule the only remaining issue is whether respondent’s date concession with respect to the deductibility of the loan origination acquisition costs was timely respondent’s concession with respect to the deductibility of the loan origination acquisition costs occurred month and days after issuance of ccn respondent argues that he should be allowed a reasonable period of time following his change in position to concede the deductibility of the loan origination acquisition costs in pending cases and that the slightly more than month between the issuance of ccn and his concession is reasonable we agree the 12-month rule was also contained in the proposed_regulations issued on date although proposed_regulations do not constitute applicable_published_guidance under sec_7430 and iv we have considered them as representing respondent’s position on an issue but lacking the effect of law see eg 54_tc_1233 allen v commissioner tcmemo_1988_166 n we are not at this time required to decide whether proposed_regulations constitute a position against which respondent may not litigate consistent with the rationale of 119_tc_157 because the proposed indopco regulations like the final regulations postdate respondent’s concessions in the consolidated cases in 89_tc_784 we stated that the commissioner must review the taxpayer’s case following adverse controlling litigation in a reasonable and timely manner accord mid-del therapeutic ctr inc v commissioner tcmemo_2000_383 correspondingly respondent must demonstrate that he acted in a reasonable and timely manner after the issuance of ccn preparatory to conceding the deductibility of the loan origination acquisition costs we find that he so acted respondent’s counsel mr skinner was under instructions to confirm his office’s position with respect to the consolidated cases in light of ccn and immediately upon obtaining confirmation that he should concede the deductibility of the loan origination acquisition costs he contacted petitioners’ counsel to concede that issue the same or even longer periods between the event requiring the commissioner to concede an issue and the actual concession have been held to be reasonable see 854_f2d_263 7th cir government’s conduct considered reasonable where after being advised that the partnership in which the taxpayer was a limited_partner had received a no- change letter the government’s counsel conceded the case within a month during which time counsel verified information demonstrating that that was the proper course affg tcmemo_1987_52 740_f2d_843 11th cir government’s conduct considered reasonable and substantially justified where it took months after the taxpayer filed his complaint for government counsel to obtain from the irs and review the relevant administrative files and after deciding to concede the government’s case an additional days to obtain permission to concede from the irs and the review section of the department of justice 740_f2d_836 11th cir government’s concession of an issue less than months after taxpayer raised it in an amended complaint considered reasonable behavior and therefore substantially justified shifman v commissioner tcmemo_1987_347 government’s concession within months after the petition was filed considered reasonable thereby barring taxpayer’s recovery_of litigating costs under sec_7430 dollar_figure 854_f2d_263 7th cir affg tcmemo_1987_52 and shifman v commissioner tcmemo_1987_347 were decided under sec_7430 before it was amended by the tax_reform_act_of_1986 publaw_99_514 100_stat_2752 to substitute was not substantially justified for was unreasonable in describing a government position that could give rise to an award of reasonable_litigation_costs under that provision as we noted in shifman v commissioner supra at note this court has previously held that the test of whether a government action is ‘substantially justified’ is essentially one of reasonableness citing 83_tc_822 vacated and remanded on another issue 787_f2d_637 d c cir 740_f2d_843 11th cir and 740_f2d_836 11th cir were decided under the equal_access_to_justice_act eaja u s c sec a principal reason for the enactment of sec_7430 was to extend the relief afforded by eaja to proceedings in this court so that one set of rules would continued petitioners reliance on stieha v commissioner supra is misplaced in that case after this court issued a dispositive decision that caused the commissioner’s position to no longer be substantially justified the commissioner continued to oppose the taxpayer’s motion to dismiss ignoring our decision the commissioner ultimately conceded the case more than months after the release of our decision under the circumstances we found that the commissioner’s failure to review petitioners’ case in a reasonable and timely manner caused the taxpayer to incur more attorneys fees than should have been necessary stieha v commissioner t c pincite here after the issuance of ccn respondent’s counsel took no steps other than to confirm his office’s position in the consolidated cases in light of that notice and immediately upon being told to concede the deductibility of the loan origination acquisition costs at issue he did so we conclude that respondent was substantially justified in not conceding the deductibility of the loan origination acquisition costs until date or the deductibility of the professional fees until he filed his trial memorandum on date or alternatively until the stipulation of settled continued apply to awards of litigation costs in tax cases whether the action is brought in a u s district_court the court of claims or the u s tax_court h rept pincite issues was submitted to the court on date iv conclusion respondent was substantially justified in seeking to capitalize the loan origination acquisition costs and professional fees at issue in the consolidated cases until the dates on which he conceded those issues as determined herein an appropriate order denying petitioners’ motions for costs under sec_7430 will be issued


internal_revenue_service number release date index number --------------------------- --------------------------- --------------------------------------------- - department of the treasury washington dc person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc psi b07 - plr-135478-04 date date -------------------------- ------------------------- --------------------------- -------------------------------------------------------------------- --------------------------------------------- --------------------------- --------------------------- --------------------------------------------- legend product a b c x y z dear ---------- under sec_1235 of the internal_revenue_code this letter responds to that request --------------------------- --------------------------------------------- -------------------------- ------------------------ we received a letter from your authorized representative requesting a ruling -------------------------- --- --- --- a has requested two rulings following the transfer of a’s interest in the a b and c are independent inventors who have been developing product a b plr-135478-04 and c filed several patent applications in the united_states relating to product the patent filings were made as co-inventors and a joint owner’s agreement was executed between a b and c a b and c are contemplating filing additional u s patent applications and foreign patent applications relating to product the product related patents patent applications and contemplated patent applications are referred to collectively hereinafter as the patents a b and c represent that in a transaction qualifying under sec_721 of the code they will transfer their respective interests in product including without limitation all of their interest in the patents and trade secrets know how and other intellectual_property associated with product to a newly formed limited_liability_company llc in exchange for membership interests in llc the sole members of llc would be a who would have a x interest in both capital and profits and b and c who would have y and z interests respectively in both capital and profits llc will be manager-managed with a as the manager patents to llc a will retain a’s status as a holder for purposes of sec_1235 of the code and assuming the other requirements of sec_1235 are satisfied a’s share of any gain recognized by llc on disposition of all substantial rights in the patents will qualify under sec_1235 as long term capital_gain sec_1235 provides that a transfer other than by gift inheritance or devise of property consisting of all_substantial_rights_to_a_patent or an undivided_interest therein which includes a part of all such rights by any holder shall be considered the sale_or_exchange of a capital_asset held for more than year regardless of whether or not payments in consideration of the transfer are -- use of the patent or any individual whose efforts created the property holder means any individual whose efforts created the patent property and who would qualify as the original and first inventor or joint inventor within the meaning of title of the united_states_code sec_1_1235-2 provides that although a partnership cannot be a holder each member of the partnership who is an individual may qualify as a holder as to his payable periodically over a period generally coterminous with the transferee’s sec_1235 provides that for purposes of sec_1235 the term holder means sec_1_1235-2 of the income_tax regulations provides that the term contingent on productivity use or disposition of the property transferred in the present case the llc formed by a b and c would be treated as a plr-135478-04 share of a patent owned by the partnership for example if an inventor who is a member of a partnership composed solely of individuals uses partnership property in the development of his invention with the understanding that the patent when issued will become partnership property each of the inventor’s partners during this period would qualify as a holder if in this example the partnership were not composed solely of individuals nevertheless each of the individual partners’ distributive shares of income attributable to the transfer of all substantial rights to the patent or an undivided_interest therein would be considered proceeds from the sale_or_exchange of a capital_asset held for more than year months for taxable years beginning before months for taxable years beginning in sec_301_7701-3 of the procedure and administration regulations provides that a domestic eligible_entity a business organization not classified as a corporation under sec_301_7701-2 or with two or more members is treated as a partnership for federal tax purposes unless the entity elects to be treated as a corporation partnership for federal tax purposes under sec_301_7701-3 consequently llc would be classified as any other partnership and each member of llc would be treated as a partner for purposes of sec_1235 and the regulations under sec_1235 that following the transfer of a’s interests in the patents to llc a will retain a’s status as a holder for purposes of sec_1235 and provided the other requirements of sec_1235 are satisfied a’s shares of any gain recognized by llc on a disposition of an interest in the patents will qualify under sec_1235 as long term capital_gain concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in particular we express or imply no opinion concerning a a’s status as a holder before the transfer of the patents to llc b the application of sec_1235 to any persons other than a or c the tax consequences of forming llc the code provides that it may not be used or cited as precedent letter is being sent to your authorized representatives based on the information submitted and the representations made we conclude this ruling is directed only to the taxpayer requesting it sec_6110 of in accordance with the power_of_attorney on file with this office a copy of this except as expressly provided herein no opinion is expressed or implied a copy of this letter must be attached to any income_tax return to which it is plr-135478-04 relevant 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 the rulings contained in this letter are based upon information and sincerely s joseph h makurath senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries cc


number release date id office uilc cca-923843-10 ---------------- from ------------------------ sent thu am to ---------------------- cc subject form_1128 -------- -------- --------- forwarded a form ------- to the national_office for ---------------------------------- ------------------------------ the form indicates that the taxpayer is requesting to change to a --------tax year effective --------------- however copy of tax_return submitted indicates that the taxpayer properly adopted a -------- tax_year when it filed its first return for the period ------------------------- though -------------------------- -------- tax_year please correct them taxpayer properly adopted its tax_year under sec_1_441-1 if your records do not reflect a --


t c summary opinion united_states tax_court magellean askew jr petitioner v commissioner of internal revenue respondent docket no 1486-04s filed date magellean askew jr pro_se beth a nunnink and richard c grosenick for respondent armen special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time that the petition was filed the decision to unless otherwise indicated all subsequent section references are to the internal_revenue_code in effect for the taxable_year in issue and all rule references are to the tax_court rules_of_practice and procedure all monetary amounts are rounded to the nearest dollar be entered is not reviewable by any other court and this opinion should not be cited as authority respondent determined a deficiency in petitioner’s federal_income_tax for the taxable_year of dollar_figure and an accuracy- related penalty under sec_6662 of dollar_figure the issues for decision are whether petitioner received taxable_distributions from his tax-sheltered annuity policies we hold that he did whether petitioner is liable under sec_6662 for an accuracy-related_penalty we hold that he is adjustments to petitioner’s itemized_deductions and child_tax_credit are purely computational matters the resolution of which is dependent on our disposition of the first disputed issue background2 some of the facts have been stipulated and they are so found we incorporate by reference the parties’ stipulation of the evidence introduced at trial was incomprehensible accordingly we calendared this case for further trial so that respondent could subpoena specific documentary_evidence from americo financial life and annuity insurance co americo concerning the annuity policies at issue at the subsequent trial respondent produced several documents that respondent received pursuant to the subpoena although these documents were necessary to develop a part of the documentary record the documents still failed to adequately describe the details of the annuity policies and the transactions that occurred during the life of the annuity policies we thus are constrained to make factual findings on the basis of a limited evidentiary record facts and accompanying exhibits at the time that the petition was filed petitioner resided in memphis tennessee petitioner has been employed as a teacher by memphis city schools continually since in petitioner became a participant in an employer-sponsored tax-sheltered account tsa group plan wherein he made biweekly pretax contributions by payroll deduction initially lincoln burnett finance co administered the plan but the company changed to fidelity finance co then to college life_insurance co of america college life and finally to americo financial life and annuity insurance co americo under the plan petitioner had the following annuity policies policy no first policy policy no second policy and policy no third policy because of the changes in the tsa plan’s underwriter petitioner became concerned about the financial stability of his annuity policies as a result petitioner submitted to americo in surrender request forms concerning his policies with regard to the first policy petitioner submitted to americo a surrender request form in late april or early date electing a full cash surrender of this policy because of a a tsa also known as a sec_403 retirement_plan is designed exclusively for employees of nonprofit institutions such as public schools sec_403 separation_from_service under this option the form stated that any indebtedness thereon to the company will be deducted from the cash_value petitioner elected in the section entitled federal_income_tax withholding election for ‘non- eligible rollover distributions’ not to have federal_income_tax withheld from the taxable_portion of his distribution check in response americo sent petitioner a letter dated date requesting petitioner to clarify whether he wanted a transfer or a direct distribution return the policy contract or submit written acknowledgment that the policy had been lost or destroyed and submit written acknowledgment of the reason or eligibility for a direct distribution under the technical_and_miscellaneous_revenue_act_of_1988 tamra publaw_100_647 stat the options listed were age separation_from_service with employer disability and financial hardship as defined by the i r c on the letter petitioner marked separation_from_service with employer and financial hardship as defined by the i r c and signed the letter on date on date petitioner submitted to americo another surrender request form certifying that the policy had been lost or destroyed with regard to the second policy and similarly with respect to the first policy petitioner submitted to americo a surrender request form electing a full cash surrender of this policy because of a separation_from_service and electing not to have federal_income_tax withheld from the taxable_portion of his distribution check in response americo sent petitioner a letter dated date requesting petitioner to return the policy contract or submit written acknowledgment that the policy had been lost or destroyed and submit written acknowledgment of the reason or eligibility for a direct distribution under tamra on the letter petitioner marked financial hardship as defined by the i r c and signed the letter on date subsequently americo sent to petitioner another letter dated date again requesting petitioner to return the policy contract or submit written acknowledgment that the policy had been lost or destroyed on date petitioner signed the date letter acknowledging that the policy contract had been lost or destroyed on date petitioner also signed the surrender request form certifying that the policy had been lost or destroyed with regard to the third policy and similarly with respect to the first two policies petitioner submitted to americo a surrender request form signed date electing a full cash surrender of this policy because of a separation_from_service and electing not to have federal_income_tax withheld from the taxable_portion of his distribution check on date petitioner sent to americo another surrender request form certifying that the policy had been lost or destroyed in date petitioner received checks in full settlement of the current cash_surrender_value of each policy as follows account date paid jun jun jun accumulated loan payoff cash_value value dollar_figure big_number big_number 3dollar_figure big_number -0- cash value1 dollar_figure big_number big_number surrender net penalty distribution2 dollar_figure dollar_figure big_number cash_value equals accumulated cash_value less loan payoff value net distribution equals cash_value less surrender penalty on date college life sent petitioner a loan check of dollar_figure petitioner deposited this check into his wife’s account at first south credit_union fscu although petitioner claims that his wife’s account is an annuity account there is no evidence in the record to support his claim rather based on the documents in the record it appears that the account is a savings account on date college life sent petitioner a loan check of dollar_figure petitioner deposited this check into his wife’s account at fscu this computation includes a reduction for federal_income_tax withheld of dollar_figure at the time of the distributions petitioner was under years of age he was not disabled and he had been employed with memphis city schools continually since americo issued to petitioner three forms 1099-r distributions from pensions annuities retirement or profit- sharing plans iras insurance contracts etc for reporting the following amounts as taxable_distributions account distribution1 dollar_figure big_number big_number withholding -0- -0- dollar_figure code distribution amount equals accumulated cash_value less surrender penalty distribution code is defined as a distribution on account of a disability which is not subject_to the 10-percent additional tax under sec_72 distribution code is defined as an early distribution with an applicable exception from the 10-percent additional tax under sec_72 petitioner did not report these distributions on his federal_income_tax return for in the notice_of_deficiency respondent determined that petitioner failed to report the distributions from americo of dollar_figure respondent further determined that petitioner is liable for the accuracy-related_penalty under sec_6662 for negligence and or substantial_understatement_of_income_tax petitioner filed a timely petition with this court paragraph of the petition states the request is because-funds from one ira were placed into another ira these funds although reported to you on an were only transferred i believe this request should be granted i can provide paperwork supporting this claim a americo distributions discussion generally the commissioner’s determinations are presumed correct and the taxpayer bears the burden of proving that those determinations are erroneous rule a 290_us_111 sec_7491 does not apply in this case to shift the burden_of_proof to respondent because petitioner neither alleged that sec_7491 is applicable nor introduced credible_evidence with respect to any factual issue relevant to ascertaining his income_tax_liability see 116_tc_438 sec_6201 also does not apply in this case if for no other reason than that petitioner failed to cooperate with respondent did petitioner receive the distributions at issue in petitioner first contends that he did not receive any distributions from americo in and therefore the forms 1099-r are incorrect therefore we first address whether petitioner received the distributions at issue in the taxable_year petitioner denies receiving any distribution from americo in instead petitioner argues that he received distributions from his annuity policies only in in the following amounts dollar_figure from the first policy on date dollar_figure from the second policy on date dollar_figure and dollar_figure the reason for these distributions petitioner argues is because he closed his tsa in petitioner further argues that these amounts were based on the surrender_value of the policies at such time petitioner’s contention strains credulity petitioner presented to the court inter alia only copies of the checks in the amount of dollar_figure and dollar_figure remarkably the supporting documentation attached to these check sec_5 petitioner testified at trial however that he received this amount in date the check dated date clearly contradicts petitioner’s assertion petitioner presented no evidence of the latter two amounts that he claimed to have received from americo in specifically indicated that the disbursements were loans from petitioner’s respective annuity policies other than his bare assertions that he did not take any loans against the policies petitioner presented no documentary_evidence to demonstrate that the disbursements were anything other than loans against the policies moreover petitioner presented no evidence aside from his self-serving statements that he did not receive the distributions as reported in the forms 1099-r for see 87_tc_74 we are not required to accept the self-serving testimony of petitioner as gospel indeed petitioner submitted signed surrender request forms for each policy in or about may and date the year in which he received the distributions at issue pursuant to petitioner’s surrender request forms americo distributed to petitioner the full cash_surrender_value of each annuity policy in date thereafter americo issued forms 1099-r indicating such distributions accordingly we conclude that petitioner received a total_distribution of dollar_figure from americo in are the distributions at issue includable in petitioner’s gross_income as relevant to the instant case annuities purchased by a tax-exempt educational_organization for the benefit of its teachers and other employees receive a special tax advantage the amounts contributed to the annuity are excluded from the employee’s gross_income at the time of the contribution and taxation is deferred until such time when the employee receives payments under the annuity_contract sec_403 the amount actually distributed under such contract is taxable to the distributee in the year in which he or she receives the payments under the exclusion percentage rule_of sec_72 id generally a tax-sheltered annuity offered by a tax-exempt_organization will lose the sec_403 tax_deferral advantage unless under such contract distributions attributable to contributions made pursuant to a salary reduction agreement may be paid only when the employee a attains age b separates from service c dies or d becomes disabled or in the case of hardship sec_403 in addition an early distribution satisfying the aforementioned requirements that is rolled over is not included in income in the year so distributed if any portion of the balance_to_the_credit of an employee in an annuity_contract is paid to him in an eligible_rollover_distribution as defined in sec_402 and the employee transfers any portion of such property he receives in such distribution to an eligible_retirement_plan as this includes annuity_contracts issued by an insurance_company sec_403 defined in sec_402 within days of receipt of the distributed property sec_403 under sec_402 an eligible_rollover_distribution specifically excludes any hardship_distribution moreover an early withdrawal from a sec_403 annuity_contract that does not meet the aforementioned distribution_requirements is subject_to an early withdrawal penalty of percent of the portion of such amount that is includable in gross_income sec_72 as relevant to this case any amount that is received under an annuity_contract on its complete surrender which is not received as an annuity and is not subject_to any other income_tax law provision shall be included in gross_income to the extent it exceeds the investment_in_the_contract sec_72 a e ii the investment_in_the_contract is defined generally as the aggregate amount of premiums or other consideration paid for the contract less amounts previously received under the contract to the extent such latter amounts were excludable from gross_income sec_72 petitioner contends that the distributions at issue are not includable in gross_income because he rolled over the an annuity_contract under sec_403 is a qualified_retirement_plan for purposes of sec_72 see sec_4974 distributions into an individual_retirement_account or annuity petitioner’s contention is misplaced in the instant case petitioner did not satisfy the basic distribution_requirements for an early distribution from a tax- sheltered annuity although petitioner indicated in his separation request forms that he separated from service the truth of the matter is that he has been employed by memphis city schools continuously since consequently we find that petitioner did not have a separation_from_service to permit an early distribution in addition we question petitioner’s statement with respect to his claim on his separation request forms for the first and second policy that the reason for the distribution was financial hardship we question his statement for two reasons petitioner has a history of falsifying the reasons for distribution under the plan see discussion supra and clearly if petitioner was suffering from financial hardship he would have used the distribution to relieve that financial burden rather than simply attempting to roll over tax- free the early withdrawal into a purported ira or annuity the the factual predicate for petitioner’s contention is rather murky petitioner implies that he deposited the distributions into his annuity account with aviva life_insurance co aviva which he opened in petitioner however presented no documentary_evidence other than an date general account summary statement of his aviva account establishing that the distributions at issue were transferred to this account this aspect however is not dispositive of the issue before us see discussion infra underlying reason petitioner surrendered his tsa however was because he was concerned about the financial stability of his policies due to the changes in the plan’s underwriter rather than because of a personal financial hardship in any event assuming arguendo that petitioner suffered from a financial hardship a hardship_distribution from an annuity_contract is specifically excluded as an eligible rollover_contribution sec_402 on the basis of the entire record petitioner did not satisfy the distribution_requirements for an early withdrawal under sec_403 and therefore petitioner did not receive an eligible_rollover_distribution under sec_403 accordingly we conclude that petitioner did not make a tax-free_rollover of the americo distributionsdollar_figure the record is clear that the distributions at issue resulted from petitioner’s surrender of his annuity policies as stated earlier sec_72 applies to the surrender of an annuity_contract see sec_72 absent exceptions not applicable in the instant case the law is well settled that a distribution upon the complete surrender of an annuity_contract is includable in gross_income to the extent the distribution based on our conclusion petitioner should be liable for the sec_72 penalty we note however that this issue is not before us because respondent did not challenge americo’s characterization that sec_72 did not apply exceeds the investment in the contractdollar_figure therefore the distribution of dollar_figure is includable in petitioner’s gross_income accordingly we sustain respondent’s determination on this issue b sec_6662 penalty in the notice_of_deficiency respondent determined that petitioner is liable under sec_6662 for an underpayment_of_tax that is attributable to negligence and or substantial_understatement_of_income_tax sec_6662 imposes a penalty equal to percent of any underpayment_of_tax that is attributable to either negligence or disregard of rules or regulations or a substantial_understatement_of_income_tax see sec_6662 and b and the term negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws sec_6662 sec_1_6662-3 income_tax regs the term disregard includes any careless reckless or intentional disregard sec_6662 sec_1_6662-3 income_tax regs petitioner’s annuity policies were tax-deferred_annuities funded with pretax contributions because the contributions to petitioner’s annuity policies were made with pretax income such contribution does not constitute an investment_in_the_contract within the meaning of sec_72 an understatement of income_tax is substantial if it exceeds the greater of percent of the tax required to be shown on the return or dollar_figure sec_6662 an understatement is defined as the excess of the tax required to be shown on the return over the tax actually shown on the return sec_6662 whether the accuracy-related_penalty is applied because of negligence or disregard of rules or regulations or a substantial_understatement of tax sec_6664 provides an exception to imposition of the accuracy-related_penalty if the taxpayer establishes that there was reasonable_cause for the understatement and that the taxpayer acted in good_faith with respect to that portion sec_6664 sec_1_6664-4 income_tax regs the determination of whether a taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all the pertinent facts and circumstances sec_1_6664-4 income_tax regs generally the most important factor is the extent of the taxpayer’s effort to assess the proper tax_liability for such year id by virtue of sec_7491 the commissioner has the burden of production with respect to a taxpayer’s liability for any penalty to meet this burden the commissioner must produce sufficient evidence indicating that it is appropriate to impose the relevant penalty 116_tc_438 once the commissioner meets the burden of production the taxpayer must come forward with persuasive evidence that the commissioner’s determination is incorrect id the taxpayer however bears the burden of proving that he or she acted with reasonable_cause and in good_faith see sec_6664 see also higbee v commissioner supra pincite sec_1_6664-4 income_tax regs respondent satisfied his burden of production under sec_7491 because the record demonstrates that petitioner failed to report annuity income in the amount of dollar_figure and that the understatement was attributable to such unreported income which was substantial within the meaning of sec_6662 accordingly we hold that respondent satisfied his burden of production for the accuracy-related_penalty based on both negligence or disregard of rules or regulations and substantial_understatement_of_income_tax on the basis of the record a prima facie case exists for imposition of the penalty petitioner did not present any evidence or make any showing that respondent’s determination was in error moreover petitioner did not have reasonable_cause nor did he act in good_faith with respect to the understatement of income_tax accordingly we sustain respondent’s determination on this issue conclusion we have considered all of the other arguments made by petitioner and to the extent that we have not specifically addressed them we conclude that they are without merit reviewed and adopted as the report of the small_tax_case division to reflect our disposition of the disputed issues decision will be entered for respondent


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 psi b07 plr-101648-06 date date the facts and representations submitted are as follows this letter responds to your letter requesting permission for corporation to ------------------------- ------------- ------- --------------------- legend legend corporation ------------------------------------------------------- a b c dear ------------------ revoke its election under ' c of the internal_revenue_code corporation is the parent of a sec_41 controlled_group that files a consolidated federal_income_tax return for its b taxable_year corporation on behalf of itself and the members of is controlled_group elected to compute the credit_for_increasing_research_activities research_credit utilizing the alternative_incremental_research_credit airc rules of sec_41 prior to the due_date including extensions for corporation’s income_tax return for the taxable_year ending on c_corporation on behalf of itself and the members of its controlled_group requested permission to revoke its sec_41 election for the taxable_year ending on c and all subsequent years determine their research_credit under the airc rules of ' c sec_41 provides that any election under ' c a shall apply for the taxable_year in which made and all succeeding taxable years unless revoked with the consent of the secretary corporation is an accrual_method taxpayer with each taxable_year ending on a for taxable years beginning after date taxpayers may elect to based solely on the facts submitted and representations made we grant plr-101648-06 permission for corporation and its controlled_group to revoke its election to determine its research_credit under the airc rules of ' c for qualified_research_expenses paid_or_incurred during the taxable_year ending on c_corporation should compute its research_credit for the taxable_year ending on c using the general_rule of ' a except as expressly provided herein we express or imply no opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter further we express or imply no opinion concerning expenditures corporation or any member of its controlled_group treated as qualified_research_expenses provides that it may not be used or cited as precedent relevant 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_ruling it is subject_to verification on examination this ruling is directed only to the taxpayer requesting it sec_6110 a copy of this letter must be attached to any income_tax return to which it is sincerely s brenda m stewart senior counsel branch passthroughs special industries cc ------------- ------------------------ ----------------------------- --------------------------- -------------------------------------------------------- ------------------- ---------------------------------------- -------------------------------