t c memo united_states tax_court cascade partnership james m and margaret c costello tax_matters_partner petitioner v commissioner of internal revenue respondent docket no filed date larry n johnson for petitioner edward d fickess for respondent memorandum opinion gerber judge the parties by means of cross-motions for partial summary_judgment seek resolution of their controversy over whether the period for assessment had expired at the time respondent mailed the notice of final_partnership_administrative_adjustment fpaa more specifically the question we consider is whether a consent to extend the period for assessment executed by one of the partnership’s general partners effectively extended the assessment_period petitioner contends that the general_partner who executed the consent was not authorized to do so and that the consent is of no effect respondent contends that the general_partner was authorized to execute the consent thereby extending the period for assessment alternatively respondent argues that even if the executing general_partner was unauthorized petitioner is equitably estopped from now asserting that the general_partner lacked authority background cascade partnership cascade was formed under the uniform_partnership_act of the state of washington wash rev code sec dollar_figure west on date by individuals each of cascade’s partners was also a partner in price waterhouse a certified public accounting partnership that also specializes in tax matters john r walsh jr walsh who also was a price waterhouse partner but not a partner of cascade was the promoter of cascade walsh promoted partnership interests to james m costello costello and other partners of price waterhouse walsh was appointed by the partners to manage cascade by means of the following partnership language the partners appoint john r walsh jr as the manager who shall have all the rights to manage the partnership assets including designating an agent to serve under his direction he shall not be liable for any loss or diminution of the partnership’s assets unless due to his gross negligence misconduct or lack of good_faith the partnership_agreement also contained the statement that all decisions and management of the partnership shall be made by the majority of the shares held by the partners the partnership shares were in dollar_figure units with total capital_investment set at dollar_figure no partner possessed a majority percentage interest in cascade the partner with the largest percentage interest as of the close of was william smart cascade a tefra1 partnership for federal tax purposes was formed as an investment vehicle for the price waterhouse accounting partners to collectively invest as a limited_partner in wall street associates wall street a partnership not subject_to the provisions of tefra wall street issued a schedule_k-1 in cascade’s name in care of walsh by a letter dated date respondent notified cascade of the commencement of an examination of cascade’s and income_tax returns under the unified partnership audit procedures of sections the letter was addressed to cascade partnership tax_matters_partner third floor times square building seattle washington an information document tefra partnership provisions were added to the code by the tax equity fiscal responsibility act of tefra publaw_97_248 96_stat_324 all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated request form requesting financial and partnership information was sent along with the date letter cascade’s partnership return for was signed on behalf of the partnership by costello as a general_partner it was also signed by walsh as preparer initially respondent’s agent dealt and corresponded with walsh in connection with cascade’s audit in a date letter to walsh at price waterhouse respondent’s agent confirmed a date appointment with walsh and indicated that the examination would be limited to inspecting certain requested records and verifying each partner’s cascade basis in that letter the agent pointed out that cascade was a pass-through partnership that would most likely be placed in suspense until the examination of wall street was completed from the correspondence it appears that respondent’s agent believed that walsh was authorized to represent cascade after receiving notice that the period for assessment would soon expire respondent’s agent sent a letter dated date to cascade in care of walsh attaching a special consent to extend the time to assess tax attributable to items of a partnership form 872-o and requesting its execution to extend the assessment_period after receipt of the form 872-o walsh realizing that he was not a partner of cascade contacted costello the only partner of cascade who worked in close approximation to walsh at price waterhouse walsh advised costello that a partner of cascade had to sign the form 872-o and costello agreed to be the signing partner costello signed the form 872-o on date and returned it to respondent’s agent costello signed the form 872-o on the line designated for the tax_matters_partner tmp rather than the one designated for a representative of the partnership because he was a general_partner of cascade costello did not do any research to determine if he was or was not authorized to sign as tmp and or on behalf of cascade or its other partners during date walsh received a copy of the form 872-o that had been counter-executed on behalf of respondent on date by a date letter addressed to cascade in care of costello as tmp respondent transmitted a summary report of the examination that contained a single adjustment disallowing dollar_figure of pass-through loss claimed through wall street the letter also directed costello as tmp to provide a copy of the summary report to the other partners costello in an date letter corresponded with respondent advising that wall street’s examination was at the appeals level and because of cascade’s pass-through status petitioner chose not to attend a closing conference petitioner protested with respect to the summary report in a date document that was signed by costello as tmp respondent’s agents continued to send correspondence to costello addressed to him as cascade’s tmp costello received a date fpaa containing a determination disallowing the pass-through loss claimed through wall street costello’s petition to this court filed date disagreed with the adjustment and requested that the case be held in suspense until the outcome of the wall street examination at the time costello executed the petition he had become aware that there may be some question about whether he was authorized to be cascade’s tmp in spite of this recognition costello signed the petition to this court containing the allegation that it was filed by him in his capacity as cascade’s tmp by an date order of this court the caption of this case was changed the original caption as shown on the petition reflected james m costello and margaret c costello as petitioners the order changed the caption to reflect cascade partnership james m and margaret c costello tax_matters_partner on date almost years later petitioner moved to amend its petition in order to plead that the assessment_period had expired prior to the time respondent mailed the fpaa in this case thereafter the parties each moved for partial summary_judgment walsh had not been formally designated as cascade’s tmp and he had not received a power_of_attorney from cascade or its partners for the specific purpose of representing the partnership before respondent costello although a general_partner of cascade had not been expressly designated as cascade’s tmp and he was not the partner with the largest partnership_interest costello held himself out as an agent of cascade and permitted respondent to believe that he was cascade’s tmp respondent’s agents relied to their detriment on costello’s manifestation of authority to act as tmp on behalf of cascade the other partners of cascade were aware that costello held himself out as cascade’s tmp discussion rule b provides that a motion for summary_judgment shall be allowed and considered if the pleadings and admissions show that there is no genuine issue of material fact and that a decision may be rendered as a matter of law 98_tc_518 affd 17_f3d_965 7th cir 90_tc_753 85_tc_527 the moving party bears the burden of proving that there is no genuine issue of material fact and factual inferences will be read in a manner most favorable to the party opposing summary_judgment 85_tc_812 85_tc_267 the facts are viewed in a light most favorable to the nonmoving party 79_tc_340 in this case both parties moved for summary_judgment based on documents and affidavits there is no genuine issue of material fact as between the parties and this matter is ripe for resolution by means of summary_judgment petitioner argues for a decision in its favor because the fpaa was issued outside the normal 3-year period for assessment because the consent to extend the assessment_period was executed by a person who was without capacity to do so more specifically petitioner contends that under the applicable statutes and regulations costello was not cascade’s tmp and he was otherwise not authorized in writing by the partnership to extend the assessment_period conversely respondent argues that the consent was valid and effective to extend the period for assessment to include the date on which the fpaa was mailed more specifically respondent contends that under the partnership_agreement and the law of the state of washington costello was authorized in writing to bind the partnership to the consent extending the assessment_period addressing petitioner’s argument respondent contends that even if costello was not an authorized tmp petitioner should be equitably estopped from now denying that costello lacked authority to execute the consent to extend the assessment_period section a generally provides for a 3-year period within which respondent may assess a partnership or affected a tmp is defined as the general_partner designated as such by the partnership or the general_partner with the largest profits interest at the close of the year in question or where there is more than one such partner then the one of such partners whose name appears first alphabetically if no partner is designated and the secretary determines it is impracticable to apply the above rules then the secretary may select a tmp sec_6231 item section b permits extension of the 3-year period by means of agreement subparagraph a of section b permits an individual partner to extend the assessment_period with respect to that partner subparagraph b of section b provides for extensions applicable to all partners by means of agreements entered into with the tmp or any other partner who is authorized in writing by the partnership to enter into an extension agreement at the time early that costello executed the form 872-o no regulations had been issued concerning the provisions of section temporary procedural regulations were adopted providing specific requirements for the written authorization for persons other than a tmp to execute a consent binding on all partners after the consent to extend the assessment_period had been executed see sec_301_6229_b_-1t temporary proced admin regs fed reg date under the temporary_regulation the statement or writing is to contain the identity of the partnership and the person being authorized along with their address and taxpayer_identification_number in addition the particular taxable_year s of the partnership was to be identified and the writing was to be signed by all persons who were general partners at any time during the effective year or years of the authorization in 95_tc_227 we held that the taxpayer’s reliance on this temporary_regulation for a consent executed prior to the regulation’s issuance was misplaced we held that the regulation would not invalidate prior authority given to execute a consent signed by all persons who were general partners at any time during the effective year or years of the authorization petitioner relies on the temporary_regulation because no writing existed here it was also noted in amesbury apartments ltd v commissioner supra pincite and 97_tc_287 that the regulation’s specific requirements for authorizing a person to execute a consent are not mandatory more significantly respondent would not have been informed by such notification as set forth in the regulation because that regulatory requirement did not exist at the time the consent in question was executed by costello respondent does not address the temporary_regulation instead respondent relies on state of washington statutory provisions for her argument that costello as a general_partner was capable of binding cascade to the agreement to extend the assessment_period in particular respondent relies on wash rev code sec_25 which in pertinent part provides partner agent of partnership as to partnership business every partner is an agent of the partnership for the purpose of its business and the act of every partner including the execution in the partnership name of any instrument for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership unless the partner so acting has in fact no authority to act for the partnership in the particular matter and the person with whom he is dealing has knowledge of the fact that he has no such authority a partner who deals with third persons without notice of any lack of authority binds the other partners if the transaction be such as the public may reasonably conclude is directly and necessarily embraced within the partnership business as being incident or appropriate to such business according to the course and usage of conducting it cummings v nordmark p 2d wash quoting merrill v o’bryan p wash whether a partner is within the scope of his authority is a question for the trier of fact 145_us_512 cummings v nordmark supra pincite respondent also relies on amesbury apartments ltd v commissioner supra a case in which we held valid a consent to extend the assessment_period that was signed for the partnership by an accountant the accountant signed the consent based on a power_of_attorney authorizing him to represent that partnership before the internal_revenue_service including the power to extend the period for assessment with respect to the partnership the power_of_attorney had been signed by one of two general partners who was not the tmp respondent argues that a partnership can only act through its agents and that a general_partner is an agent who under washington law may bind a partnership in this regard and in connection with washington law this court has held that the execution of a consent is not an extraordinary act and thus not beyond the authority normally extended to a general_partner cambridge research v commissioner supra pincite petitioner argues that the partnership_agreement modified the normal provisions of the washington statute which embodies the uniform_partnership_act petitioner refers to paragraph of the partnership_agreement that provides all decisions and management of the partnership shall be made by the majority of the shares held by the partners petitioner contends that the quoted provision generally limits any partner from acting on behalf of the partnership in a similar case involving a louisiana partnership we held that a partner who was neither the tmp nor explicitly authorized by the other partners had effectively extended the period for assessment by joining in the execution of consents with the government agent see medical business facilities ltd v commissioner tcmemo_1994_38 revd 60_f3d_207 5th cir this court’s holding in that case was based on two analyses first under louisiana law and federal tax cases it see also investment engrs ltd v commissioner tcmemo_1994_255 was held that the general_partner who signed the consent had authority to bind the partnership second interpreting the partnership_agreement in that case we held that the signing partner was not prohibited from extending the period for assessment for the partnership however the u s court_of_appeals for the fifth circuit reversed our decision in medical the court_of_appeals disagreed with our interpretation of the partnership_agreement based on its interpretation the court_of_appeals found that the general_partner who signed the consent under state law was not authorized to bind the partnership finally the court_of_appeals addressed an estoppel argument raised at the appellate level the court_of_appeals stated that in order for equitable_estoppel to apply the government must show that the partnership was aware of the facts that the partnership intended the irs to act on its representation that the signing partner was the tmp that the government did not know of the facts and that the government reasonably relied on the partnership's representations to its substantial detriment medical business facilities ltd v commissioner f 3d pincite the court_of_appeals also explained that the regulations which provided the circumstances under which a tmp is designated and made known to the commissioner were promulgated date see sec_301_6231_a_7_-1t temporary proced admin regs fed reg date that regulation required the designation of a tmp at the time the return is filed or subsequently by a statement filed at the service_center at which the partnership return was filed the court_of_appeals then reasoned that the commissioner would be on actual notice of the identity of the tmp after date and would not be in reasonable reliance of a partner’s portrayal as tmp based on that reasoning and the fact that several consents were executed by the general_partner as tmp both before and after the regulation was promulgated or enacted the court_of_appeals in medical held that estoppel did not apply because only one of the consents was executed prior to the promulgation of the regulation the court held that the commissioner’s estoppel argument applies to only one of the consents medical business facilities ltd v commissioner f 3d pincite the facts of this case are generally similar to those in medical one significant difference that distinguishes this case from medical is that in this case only one consent was executed on date which was prior to the date promulgation of the regulation the consent used in this case is of the open-ended variety in that it continues in effect until certain action s are taken by the parties the facts in this case show that the partnership was aware of the circumstances costello executed documents as the tmp of the partnership walsh the promoter and manager of the partnership specifically requested costello to execute the consent costello was requested by respondent’s agents to notify the other partners of action taken by respondent there is no question that costello walsh and the other partners were aware that respondent was acting on costello’s execution of documents including the consent and correspondence with respondent in addition costello signed the partnership return for the year in question we also note that walsh costello and the other partners of cascade were all partners in a nationally known firm of certified public accountants that among other matters specializes in federal taxation finally it is clear that respondent did not know that costello was not the appointed or qualified tmp and that costello's representations were reasonably relied on to respondent's substantial detriment under these circumstances we hold that cascade is estopped to deny costello’s authority to execute a consent binding the partnership to an extension of the period for assessment there is no need to express our agreement or disagreement with the rationale of the u s court_of_appeals for the fifth circuit this is so because the facts in this case are distinguishable from the facts in medical business facilities ltd v commissioner supra as to the estoppel issue moreover the partnership’s place of business was washington state and the u s court_of_appeals for the ninth circuit would be the appropriate appellate venue see sec_7482 54_tc_742 affd 445_f2d_985 10th cir 27_tc_713 revd on other grounds 258_f2d_562 9th cir the u s court_of_appeals for the ninth circuit has not addressed this specific question and accordingly it is not necessary to analyze whether the consent was properly executed under any other theory additionally the circumstances here are reminiscent of those we considered in 100_tc_353 mishawaka in mishawaka a tefra partnership petition filed during the period designated for the tmp was executed by a partner other than the tmp for that partnership neither mishawaka properties co 's partners nor respondent designated a tmp about years after the petition was filed and after pretrial and test case activity mishawaka properties co 's partners moved to dismiss because the petition was filed by a partner other than a tmp relying on 70_tc_623 we held that the mishawaka properties co partners implicitly adopted and or ratified the filing of the petition by knowingly allowing their interests to be represented before the internal_revenue_service and before this court in part our holding relied on california cases providing that a purported agent's act may be adopted expressly or it may be adopted by implication based on conduct of the purported principal from which an intention to consent to or adopt the act may be fairly inferred including conduct which is 'inconsistent with any reasonable intention on his part other than that he intended approving and adopting it ' rakestraw v rodrigues p 2d pincite quoting ballard v nye cal p mishawaka properties v commissioner supra pincite we further stated that the underlying concept of the implied ratification principle is to reach the same result where the person s with control_over the authority allow others to exercise it without repudiation that principle is no less appropriate or proper in the setting of sec_6226 and sec_6231 than in sec_6212 and sec_6213 id pincite although the holding in mishawaka is not directly relevant the circumstances and rationale of that case are comparable to those considered in this case to reflect the foregoing an appropriate order will be issued granting respondent’s and denying petitioner’s motion for partial summary_judgment


2uvu595 department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division jun uil no legend taxpayera individualb bank y bank z ira x amount a date date dear this is in response to your request submitted by your authorized representative dated date and date in which you request a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code the code’ as supplemented by correspondence dated the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a age represents that she received a distribution from ira x totaling amount a taxpayer a asserts that her failure to accomplish a rollover within the 60-day period prescribed by sec_408 was due to her page of 20u938038 diminishing mental capacity which affected her ability to understand financial transactions taxpayer a whose intent had always been to continue investing amount a did not use amount a for any other purpose taxpayer a received a distribution of amount a from ira x on date on in a non-ira account where it remains due to taxpayer a’s date taxpayer a went to bank y with individual b and taxpayer a deposited amount a diminishing mental capacity caused by a stroke and other medical conditions taxpayer a relied on individual b age who was taxpayer a’s sister to handle taxpayer a’s financial affairs however documentation shows that because of individual b’s medical conditions she was not capable of assisting taxpayer a during the 60-day rollover period based on the facts and representations you request a ruling that the internal_revenue_service waive the 60-day rollover requirement with respect to the distribution of amount a contained in sec_408 of the code in this instance sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in section page of 2vuvu938038 d a i from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the rollover provisions of sec_408 do not apply to any amount required to be distributed under sec_408 sec_408 of the code provides that the secretary may waive the 60-day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 of the code revproc_2003_16 2003_4_irb_359 date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and documentation submitted by taxpayer a are consistent with her assertion that her failure to accomplish a timely rollover was caused by her diminishing mental capacity which affected her ability to understand financial transactions therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount a from ira x taxpayer a is granted a period of days from the issuance of this ruling letter to contribute amount a all other requirements of sec_408 of the code except the 60-day requirement are met with respect to such contribution amount a will be considered a rollover_contribution within the meaning of sec_408 of the code into a rollover ira provided this ruling does not authorize the rollover of amounts that are required to be distributed by sec_401 of the code page of no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative if you wish to inquire about this ruling please contact please address all correspondence to se t ep ra t4 at id no sincerely yours a r dle fe aa q donzell littlejohn manager employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose cc


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 plr-139491-14 date date legend x ------------------------------------------- -------------------------------- y ------------------------------------------ state --------------- date1 --------------------------- date2 ------------------ date3 ------------------------ month ---------------- dear --------------- this letter responds to a letter dated date and subsequent correspondence requesting a ruling under sec_7704 of the internal_revenue_code facts x is a limited_partnership organized under the laws of state on date2 ----------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------- plr-139491-14 y is a limited_partnership organized under the laws of state on date1 the units representing assignments of beneficial_ownership of limited_partnership interests in y are publicly traded on the new york stock exchange nyse y represents that it is treated as a partnership for u s federal_income_tax purposes ---------------------------------- ------------------------------------------------------------------------------------- on date3 y contributed its assets to x in a transaction governed by sec_721 and thereafter the principal business activity of y became owning units of limited_partnership_interest in x at the time of the transaction y offered its unitholders a one-time opportunity to exchange their y units for x units on a one-for-one basis x units are not traded on a public exchange and are subject_to substantial transfer restrictions the x limited_partnership agreement prohibits the general_partner from consenting to a transfer of x units that does not comply with the publicly-traded partnership safe harbors provided in sec_1_7704-1 the general_partner is further required to take any and all actions necessary or desirable to prevent a risk of x being classified as a publicly-traded partnership under sec_7704 x provides long-term incentive compensation awards to certain employees in the form of y units the compensation program x obtains y units for its compensation program as follows x purchases y units for the compensation plan throughout the year in accordance with plans disclosed in the sec documents upon x’s purchase of y units y promptly cancels such units x cancels a corresponding number of x units held by y in order to maintain the one-to-one correlation between outstanding x units and outstanding y units in month of each year x determines the amount of new awards under the compensation program and the number of y units to be awarded to employees x and y issue a corresponding number of new units to each other newly issued y units are awarded to the employees law and analysis sec_721 provides that subject_to certain exceptions no gain_or_loss shall be recognized to a partnership or to any of its partners in the case or a contribution of property to the partnership in exchange for an interest in the partnership sec_731 provides that in the case of a distribution by a partnership to a partner gain will not be recognized to such partner except to the extent that any money distributed exceeds the adjusted_basis of such partner’s interest in the partnership immediately before the distribution sec_731 provides that a partnership does not recognize gain_or_loss upon a distribution_of_property including money to a partner plr-139491-14 sec_7704 provides that except as provided in sec_7704 a publicly_traded_partnership will be treated as a corporation sec_7704 provides that the term publicly_traded_partnership means any partnership if interests in such partnership are traded on an established_securities_market and interests in such partnership are readily_tradable on a secondary market or the substantial equivalent thereof sec_1_7704-1 provides that for purposes of sec_7704 a transfer of an interest in a partnership means a transfer in any form including a redemption by the partnership or the entering into of a financial_instrument or contract described in sec_1_7704-1 conclusion based solely on the information submitted and the representations made we conclude that the cancellation and reissuance of units of limited_partnership_interest in x as described above as part of the compensation program will not be treated as a transfer pursuant to sec_1_7704-1 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 provision of the code in particular we express no opinion concerning the federal tax classification of x or y under sec_7704 or the application of sec_409a furthermore no opinion is expressed concerning the application of the self-employment contributions act the federal_insurance_contributions_act the federal_unemployment_tax_act or the federal_income_tax withholding provisions to the holding unit award program this ruling is directed only to the taxpayer requesting 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 a copy of this letter is being sent to your authorized representative sincerely david r haglund david r haglund chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


t c summary opinion united_states tax_court henry anthony williams petitioner v commissioner of internal revenue respondent docket no 11734-08s filed date henry anthony williams pro_se bryan e sladek and robert d heitmeyer for respondent goldberg special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure respondent determined a dollar_figure deficiency in petitioner’s federal_income_tax the deficiency resulted from the disallowance of a dollar_figure deduction petitioner claimed for alimony payments the sole issue for decision is whether petitioner is entitled to a deduction under sec_215 for alimony payments he made in to his former wife background some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference petitioner resided in california when he filed his petition petitioner married phyllis eve williams ms williams in date their marriage produced one child the couple separated in throughout the marriage ms williams abused petitioner when they separated they did not obtain a court order of separation but subsequently petitioner drafted an informal handwritten agreement informal agreement on date which they both signed in this informal agreement petitioner agreed to make alimony payments to ms williams during the time of the separation and that ms williams shall receive as alimony payment the rental income from the property owned by henry a williams the amount is dollar_figure per month the informal agreement did not discuss petitioner’s obligation to ms williams upon or after her death without petitioner’s knowledge ms williams fraudulently obtained a second mortgage on the rental property petitioner became aware of the second mortgage in late but was unable to prevent his loss of the property in a foreclosure in late or after the foreclosure petitioner and ms williams made oral changes to the terms of petitioner’s spousal support obligation to ms williams they never reduced these oral understandings to writing the court received into evidence copies of three checks and one money order each for dollar_figure dated june through date from petitioner payable to ms williams the court also received a copy of a check for dollar_figure dated date from petitioner payable to pfcs petitioner did not explain this acronym petitioner obtained a judgment of dissolution divorce decree terminating the marriage which the superior court of california los angeles county superior court entered on date ms williams was not present at the hearing the divorce decree ordered spousal support and a property division referencing an attached terse written judgment attachment the divorce documents did not discuss child custody and did not order child_support under the attachment the superior court retained jurisdiction over income_tax debts from and spousal support and stated that ms williams had defrauded petitioner of dollar_figure neither the divorce decree nor the attachment stated a fixed amount of spousal support or provided a mechanism to determine the precise amount of spousal support discussion the commissioner’s determinations are presumed correct and the taxpayer bears the burden of proving that a determination set forth in a notice_of_deficiency is incorrect see rule a 290_us_111 deductions are a matter of legislative grace and taxpayers must satisfy the statutory requirements for claiming the deductions 503_us_79 292_us_435 this includes the burden of substantiation 65_tc_87 affd per curiam 540_f2d_821 5th cir sec_6001 requires taxpayers to maintain records sufficient to establish the amount of each deduction see also 90_tc_74 sec_1_6001-1 e income_tax regs under sec_7491 the burden may shift to the commissioner regarding factual matters if the taxpayer produces credible_evidence and meets other requirements of the section petitioner has neither argued for a burden shift nor established his compliance with the requirements of sec_7491 petitioner therefore bears the burden of proving that respondent’s determination in the notice_of_deficiency is erroneous as a threshold matter petitioner has failed to satisfy his burden of substantiating the dollar_figure expenditure petitioner provided copies of disbursements showing that he paid dollar_figure to ms williams during the dollar_figure check to pfcs is inconclusive a payment to a third party can certainly qualify as alimony under the right circumstance including payments for the payee spouse’s shelter or utilities see leventhal v commissioner tcmemo_2000_92 however petitioner did not elucidate the pfcs payee the type of expense he paid or the separation or divorce instrument that purportedly required the dollar_figure check petitioner also did not provide evidence to support the rest of his dollar_figure figure therefore at best petitioner has substantiated dollar_figure of the deduction however for the reasons stated below petitioner is not entitled to a deduction for alimony even for that reduced_amount sec_215 allows an individual a deduction for alimony or separate_maintenance payments made during a year if those amounts are includable in the gross_income of the recipient under sec_71 sec_215 provides in relevant part sec_215 alimony etc payments a general_rule --in the case of an individual there shall be allowed as a deduction an amount equal to the alimony or separate_maintenance payments paid during such individual’s taxable_year b alimony or separate_maintenance payments defined -- for purposes of this section the term alimony_or_separate_maintenance_payment means any alimony_or_separate_maintenance_payment as defined in sec_71 which is includible in the gross_income of the recipient under sec_71 sec_71 provides that gross_income includes amounts received as alimony or separate_maintenance payments as previously stated alimony or separate_maintenance payments are defined by sec_71 which provides sec_71 alimony or separate_maintenance payments defined --for purposes of this section-- in general --the term alimony_or_separate_maintenance_payment means any payment in cash if- a such payment is received by or on behalf of a spouse under_a_divorce_or_separation_instrument b the divorce_or_separation_instrument does not designate such payment as a payment which is not includible in gross_income under this section and not allowable as a deduction under sec_215 c in the case of an individual legally_separated from his spouse under a decree of divorce or of separate_maintenance the payee spouse and the payor spouse are not members of the same household at the time such payment is made and d there is no liability to make any such payment for any period after the death of the payee spouse and there is no liability to make any payment in cash or property as a substitute for such payments after the death of the payee spouse a payment is deductible as alimony only if all four requirements of sec_71 are satisfied see jaffe v commissioner tcmemo_1999_196 the only two elements at issue here are subparagraphs a and d whether petitioner made the payments under a divorce decree or separation instrument and whether petitioner’s obligation to ms williams did not extend beyond her death we first discuss the requirement of sec_71 that the liability not extend beyond the death of the payee spouse in instances as here where the separation instrument and divorce decree are inconclusive or silent as to the alimony obligation after the death of the payee the court will look to any applicable default provision in the jurisdiction in which the divorce took place le v commissioner tcmemo_2008_183 the applicable statute is cal fam code sec west see hilton v mcnitt p 2d cal citing predecessor statute according to this california family law code section except as otherwise agreed by the parties in writing the obligation of a party under an order for the support of the other party terminates upon the death of either party or the remarriage of the other party cal fam code sec consequently because the applicable california default statute terminates the alimony payments upon ms williams’ death the informal agreement and the divorce decree satisfy the termination requirement of sec_71 that leaves one final requirement namely whether petitioner made his payments under_a_divorce_or_separation_instrument in accordance with sec_71 sec_71 defines a qualifying divorce_or_separation_instrument as follows a a decree of divorce or separate_maintenance or a written instrument incident to such a decree b a written_separation_agreement or c a decree not described in subparagraph a requiring a spouse to make payments for the support or maintenance of the other spouse the term written_separation_agreement is not defined by the code the legislative_history or applicable regulations 59_tc_97 leventhal v commissioner tcmemo_2000_92 while courts have interpreted the writing requirement leniently see leventhal v commissioner supra azenaro v commissioner tcmemo_1989_224 courts require nonetheless an actual writing that expresses a clear ascertainable_standard by which to calculate support amounts 66_tc_308 holding that payments made under an oral agreement were not alimony leventhal v commissioner supra petitioner’s informal agreement may have qualified as a written_separation_agreement before the foreclosure of his rental property in or however once petitioner lost his stated source of rental income with which to make the contractual support payments the couple made oral changes to their informal agreement petitioner acknowledges that they did not reduce the changes to writing while it is strange that petitioner would continue to make support payments to ms williams after she defrauded him of dollar_figure the key point is that the informal agreement is simply not a written_separation_agreement that governed the payments petitioner made in the year at issue in other words because the informal agreement did not reflect the oral changes that the couple made to their arrangement the informal agreement does not satisfy sec_71 which requires that ms williams received the payments in under_a_divorce_or_separation_instrument the divorce decree and the attachment are likewise insufficient for purposes of sec_71 first as a matter of timing petitioner made the payments in before the entry date of the divorce decree date payments made before the existence of a written divorce_or_separation_instrument are not deductible by the payor spouse ali v commissioner tcmemo_2004_284 therefore with respect to the divorce decree because petitioner made the payments to ms williams before the superior court entered the divorce decree he did not make the payments under_a_divorce_or_separation_instrument as sec_71 requires further the divorce decree and its attachment ordered petitioner to provide a property division as well as spousal support but did not provide a specific amount or an ascertainable_standard by which to compute these obligations therefore the language in the divorce decree and the attachment fails to establish that petitioner’s payments were for spousal support and not for a nondeductible purpose such as a property settlement accordingly petitioner’s divorce decree and its attachment do not satisfy the sec_71 requirement for the foregoing reasons we sustain respondent’s determination none of petitioner’s payments in to ms williams qualify as alimony and therefore petitioner is not entitled to an alimony deduction for under sec_215 or any other provision we have considered the other arguments made by petitioner and to the extent that we have not specifically addressed them we conclude that those arguments are without merit irrelevant or moot to reflect the foregoing decision will be entered for respondent


internal_revenue_service department of the treasury number release date index numbers washington dc person to contact telephone number refer reply to cc ita plr-124614-01 date date legend taxpayer x date dear this is in reply to the private_letter_ruling request in which taxpayer requests permission to change an election it made under sec_108 of the internal_revenue_code facts taxpayer an s_corporation realized cancellation_of_indebtedness_income in the amount of dollar_figure 1x1 on date taxpayer’s liabilities exceeded its assets by more than dollar_figure 1x immediately before the discharge therefore taxpayer excluded the entire amount of the cancellation_of_indebtedness_income under sec_108 on form_982 which was filed with its income_tax return for the tax_year that included date taxpayer elected to reduce the basis of its depreciable_property by dollar_figure 1x as permitted by sec_108 and sec_301 9100-13t of the procedure and administration regulations rather than reducing its net operating losses nol the reduction made by taxpayer is commonly referred to as an attribute reduction several months after the return was filed the supreme court of the united_states decided 531_us_206 gitlitz holds that an insolvent s corporation’s discharge_of_indebtedness income that is excluded from gross_income under sec_108 is an item_of_income passed through to the shareholders the bases of shareholders’ stock in the corporation are increased by the excluded income followed by a reduction under sec_108 of the corporation’s tax_attributes 1all dollar amounts are approximate taxpayer has represented that if the law as decided in the gitlitz decision had been clear at the time taxpayer made the election it would not have made the election the request considered in this letter was filed less than months after gitlitz was decided law and analysis sec_108 provides that gross_income does not include any amount that would be includible in gross_income by reason of the discharge_of_indebtedness of the taxpayer if the discharge occurs when the taxpayer is insolvent sec_108 provides that the amount excluded from gross_income shall be applied to reduce certain tax_attributes of the taxpayer sec_108 provides in general that the reduction shall be made to tax_attributes in the following order a net operating losses b general business credits c minimum_tax credits d net capital losses and capital_loss carryovers e basis_of_property f passive_activity_losses and g foreign_tax_credit carryovers sec_108 states that the taxpayer may elect to apply any portion of the amount excluded from income to the reduction under sec_1017 of the basis of the depreciable_property of the taxpayer sec_108 states that for an s_corporation for purposes of sec_108 any loss or deduction disallowed for the taxable_year of the discharge under sec_1366 shall be treated as a net_operating_loss for such taxable_year sec_1017 provides in general that in the event of exclusion from income of discharge_of_indebtedness income by an insolvent taxpayer under sec_108 the reduction in basis_of_property shall not exceed the excess of the total basis_of_property held by the taxpayer over the taxpayer’s total liabilities however this limitation does not apply to any reduction in basis by reason of an election under sec_108 sec_301 9100-13t e provides that an election under sec_108 may be revoked only with the consent of the commissioner sec_301 9100-13t is generally effective for discharges of indebtedness occurring after date and before date taxpayer represents that it made an election under sec_108 because it was unsure of the law in this area this situation is analogous to situations in which taxpayers seek extensions of time under sec_301_9100-1 in which to make elections after failing to do so because after exercising reasonable diligence the taxpayer is unaware of the necessity for the election or the taxpayer relied on a qualified_tax professional who failed to advise the taxpayer to make the election sec_301_9100-3 provides that requests for extensions of time for regulatory elections will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government sec_301_9100-3 states that a taxpayer will be deemed to have acted reasonably and in good_faith if the taxpayer- i requests relief before the failure to make the regulatory election is discovered by the service ii inadvertently failed to make the election because of intervening events beyond the taxpayer's control iii failed to make the election because after exercising due diligence the taxpayer was unaware of the necessity for the election iv reasonably relied on the written advice of the service or v reasonably relied on a qualified_tax professional and the tax professional failed to make or advise the taxpayer to make the election under sec_301_9100-3 a taxpayer will not be considered to have acted reasonably and in good_faith if the taxpayer-- i seeks to alter a return position for which an accuracy-related_penalty could be imposed under sec_6662 at the time the taxpayer requests relief and the new position requires a regulatory election for which relief is requested ii was fully informed of the required election and related tax consequences but chose not to file the election or iii uses hindsight in requesting relief if specific facts have changed since the original deadline that make the election advantageous to a taxpayer the service will not ordinarily grant relief the application of factors similar to those above is appropriate to determine whether a taxpayer may revoke an election made under sec_108 see revrul_83_74 1983_1_cb_112 which determined that a homeowner’s association should be permitted to revoke an election made under sec_528 in the revenue_ruling the taxpayer relied on the advice of a professional tax advisor in making the election showed due diligence by selecting the advisor to prepare its returns acted promptly and diligently to retain another professional tax advisor to review the first advisor’s work and promptly filed a request to revoke the election similar to taxpayers seeking relief under sec_301_9100-3 taxpayer made the election because after exercising due diligence it was unaware because of the lack of clarity in the law before the gitlitz decision that the election was not advantageous to it factors similar to those described in sec_301_9100-3 and sec_301_9100-3 do not apply here conclusion taxpayer is granted days from the date of this letter in which to revoke the sec_108 election the revocation should be made in a written_statement filed with taxpayer’s amended_return a copy of this letter should be attached caveats except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any item discussed or referenced in this letter this ruling is directly only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent enclosed is a copy of the letter_ruling showing the deletions proposed to be made in the letter when it is disclosed under sec_6110 sincerely robert a berkovsky branch chief office of associate chief_counsel income_tax accounting enclosure


t c summary opinion united_states tax_court randall b and kay f ollett petitioners v commissioner of internal revenue respondent docket no 7096-03s filed date randall b and kay f ollett pro sese jason w anderson for respondent wolfe special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed unless otherwise indicated all subsequent section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority respondent determined deficiencies in petitioners’ federal income taxes in the amount of dollar_figure for and dollar_figure for the issue for decision is whether petitioners engaged in their amway quixtar activity during and with the objective of making a profit within the meaning of sec_183 background some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference when they filed their petition petitioners resided in st charles illinois petitioners filed joint federal_income_tax returns for and at all relevant times petitioner randall ollett petitioner was employed as a computer data security manager by the american medical association in chicago illinois he typically worked at this employment between and hours each week and spent an additional to hours each week commuting to and from work petitioner kay ollett mrs ollett worked approximately hours each week as a preschool teacher at evangelical covenant church petitioners reported combined wages of dollar_figure in and dollar_figure in petitioner graduated from princeton university with a bachelor of science degree in electrical engineering and he has a master’s degree in business administration from lamar university in beaumont texas now part of the university of texas in date petitioners began to operate an amway distributorship under the name of ollett enterprises amway is a supplier of household and personal_use products sold by direct marketing petitioners were recruited into amway by their so- called upline sponsors david and carole marzke in the amway pyramidal sales structure petitioners and the marzkes are ultimately members of the large network established by bill florence the florence organization neither of the petitioners had any sales experience prior to joining amway petitioners did not write a business plan or establish a budget and did not consult with any business advisers other than their amway uplines concerning techniques for making their distributorship profitable around late or early amway changed its name to alticor inc and petitioners became an independent business owner ibo of quixtar a wholly owned subsidiary of alticor amway’s restructuring had no significant impact on the federal upline and downline refer to a distributor’s position within the amway network distributors are generally recruited into amway by a sponsoring distributor the sponsoring distributor is considered the upline distributor and his recruits are downline as downline distributors recruit additional distributors those recruits also become members of the original sponsor’s downline network tax consequences of petitioners’ activity for simplicity and consistency we generally refer to petitioners as an amway distributorship rather than as a quixtar ibo an amway distributor earns income by selling products and recruiting new downline distributors under amway’s compensation system a distributor earns a performance bonus based not only on the sales volume generated by the distributor himself but also on the sales volume generated by the distributor’s downline network generally distributors earning large performance bonuses have developed a large and broad network of downline distributors petitioners focused their efforts upon building their downline network rather than developing a customer base and according to petitioners the primary change that resulted from amway’s restructuring was that quixtar expanded the range of items available for sale to customers to include many commonly used household and personal products not manufactured by amway and its internet-based sales system eliminated the need for petitioners and other distributors to warehouse products petitioners’ compensation did not change as they received credit for any products ordered online through their distributor number just as they previously had received credit for items ordered through them or their downline distributors to calculate the performance bonus amway uses a performance bonus schedule based upon a distributor’s business value bv and point value pv bv is a dollar amount assigned to each product bv is used for the calculation of monthly and annual bonuses pv is a unit amount assigned to each product pv determines the distributor’s performance bonus bracket if the pv is high because of high unit sales by the distributor and his downlines that distributor will receive a correspondingly high performance bonus in the form of a high percentage of his bv selling products petitioners spent approximately to hours weekly prospecting contacting and showing the plan and attending local meetings in petitioners had approximately downline distributors petitioners believed the key to succeeding in amway was to meet people and get them into this business and that the profit comes when you have enough people when you’ve registered enough people mrs ollett testified that she would prepare sample baskets and regularly spoke with customers and prospects about ordering amway products but petitioners admit that approximately percent of their sales were from products purchased by them for their own personal_use the olletts purchased most of their ordinary household products through their distributorship including soap shampoo deodorant dish-washing liquid detergent facial products food items such as health food bars and energy drinks a water treatment system and clothing such as men’s socks slacks and sport shirts between and petitioners reported the following losses from their amway distributorship on schedule c profit or as mrs ollett put it i’m not going to give wal-mart -- make ms wal-mart wealthy when i can buy it from myself it’s my store i wouldn’t buy it from anywhere else loss from business year total gross_income total expenses dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number net losses dollar_figure big_number big_number big_number big_number big_number the parties also stipulated that petitioners reported continuing losses from their amway distributorship on their tax returns for and for the years in issue petitioners’ expenses from their amway activity were as follows expenses advertising car and truck expenses depreciation expenses office expenses supplies travel meals entertainment utilities other expenses dollar_figure big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number books and training aids professional membership total big_number big_number big_number a substantial portion of petitioners’ amway expenses was incurred in their traveling to various locations throughout the country to attend meetings and seminars hosted by the florence organization petitioner generally described these meetings as training functions that petitioners attended to learn techniques for building a successful network from instruction by his upline distributors since mrs ollett does not like to fly petitioners purchased a used cadillac deville in for about dollar_figure and drove to these functions petitioners generally deducted car expenses hotel and meal expenses and the cost of tickets to attend the events the attendees at these conferences fluctuated but generally included many of the same people in petitioners attended the following seminars and conferences sponsored by the florence organization dream weekend in birmingham alabama from date to date florence spring leadership conference in chattanooga tennessee from march weekend of the diamonds in charlotte north carolina from may florence family reunion in tampa city florida from july a training on cosmetics sponsored by florence enterprises from july to august in columbia south carolina a free enterprise celebration in st louis missouri from september and florence fall leadership conference in knoxville tennessee from november in addition petitioners claimed travel-related expenses in for several out-of-town trips purportedly made to show the plan to prospective recruits but which had significant personal motivations petitioners did not recruit any downlines during any of these out-of-town trips petitioners continued their allegedly business-related travel in during they traveled to atlanta georgia from january knoxville tennessee from march greensboro north carolina from may a renaissance hotel at an unspecified location from june through july columbia south carolina from july and atlanta from november in addition to the travel-related expenses petitioners also had expenses of dollar_figure in and dollar_figure in for professional books and other materials that were part of amway’s training program these books were recommended by petitioners’ upline network and may be described as general self-motivation books petitioners also purchased various audio tapes that included stories told by other amway distributors of how they built successful networks as noted above petitioners’ revenue from the amway activity for the years in issue was minimal and even that amount was attributable in part to petitioners’ purchases of household goods for their own personal_use when asked about how they intended to turn their losses into profits mr ollett responded the only way i can solve it is to talk to more people and there in essence is the challenge that i have which is finding those people discussion in general a taxpayer bears the burden of proving his entitlement to a business_expense deduction rule a 290_us_111 burrus v commissioner tcmemo_2003_285 sec_7491 provides that the burden_of_proof shifts to respondent under certain specified conditions petitioners have not established that the burden_of_proof has shifted and in any event the resolution of this case does not depend upon the burden_of_proof the deductibility of a taxpayer’s expenses attributable to an income-producing activity depends upon whether that activity was engaged in for profit see sec_162 sec_183 sec_212 sec_162 provides that a taxpayer who is carrying_on_a_trade_or_business may deduct ordinary and necessary expenses_incurred in connection with the operation of the business sec_212 provides a deduction for expenses paid_or_incurred in connection with an activity engaged in for the production_or_collection_of_income or for the management_conservation_or_maintenance_of_property_held_for_the_production_of_income sec_183 specifically precludes deductions for activities not engaged in for profit except to the extent of the gross_income derived from such activities sec_183 and b for a taxpayer’s expenses in an activity to be deductible under sec_162 or sec_212 and not subject_to the limitations of sec_183 the taxpayer must show that he engaged in the activity with an actual and honest objective of making a profit 94_tc_41 78_tc_642 affd without opinion 702_f2d_1205 d c cir lopez v commissioner tcmemo_2003_142 although a reasonable expectation of a profit is not required the taxpayer’s profit objective must be actual and honest dreicer v commissioner supra pincite sec_1_183-2 income_tax regs whether a taxpayer has an actual and honest profit objective is a question of fact to be resolved from all the relevant facts and circumstances keanini v commissioner supra pincite lopez v commissioner supra sec_1_183-2 income_tax regs greater weight is given to objective facts than to a taxpayer’s statement of intent keanini v commissioner supra pincite dreicer v commissioner supra pincite sec_1_183-2 income_tax regs as stated earlier the taxpayer bears the burden of establishing the requisite profit objective rule a keanini v commissioner supra pincite lopez v commissioner supra regulations promulgated under sec_183 provide the following nonexclusive list of factors which normally should be considered in determining whether an activity was engaged in for profit the manner in which the taxpayer carried on the activity the expertise of the taxpayer or his advisers the time and effort expended by the taxpayer in carrying on the activity the expectation that the assets used in the activity may appreciate in value the success of the taxpayer in carrying on other similar or dissimilar activities the taxpayer’s history of income or losses with respect to the activity the amount of occasional profits if any which are earned the financial status of the taxpayer and elements of personal pleasure or recreation sec_1_183-2 income_tax regs no single factor nor the existence of even a majority of the factors is controlling but rather it is an evaluation of all the facts and circumstances in the case taken as a whole that is determinative 72_tc_411 affd without published opinion 647_f2d_170 9th cir sec_1_183-2 income_tax regs after careful consideration of all facts and circumstances presented in this case we conclude that petitioners did not have an actual and honest objective of making a profit from their amway distributorship petitioners did not have any sales experience prior to becoming amway distributors petitioners relied exclusively on their upline distributors who stood to benefit from petitioners’ participation for advice and training they did not seek independent business advice at the beginning of their amway activity to assess their potential for success and they did not seek independent business advice for turning around years of operating losses petitioners’ failure to seek independent business advice strongly suggests that petitioners did not carry on the amway distributorship in a businesslike manner petitioners did not write a business plan and although they kept track of expenses they never established a budget petitioner testified not only that they did not set up a budget but that by they had decided they were going to spend whatever it took to go to those meetings petitioners did keep receipts and detailed records but apparently more for substantiation purposes than as a tool for analyzing and improving their business see lopez v commissioner supra hart v commissioner tcmemo_1995_55 petitioners’ amway activity resulted in a substantial and sustained pattern of losses between and the activity produced very little income and most of petitioners’ sales were for their own use yet petitioners continued to incur significant expenses largely for automobile costs and other travel-related expenses for attending out-of-town seminars losses_incurred in the initial stages of a business may be expected but losses that continue without explanation beyond that period typically required for an activity to become profitable may indicate the lack of a profit objective see golanty v commissioner supra pincite nissley v commissioner tcmemo_2000_178 seemingly petitioners’ only plan to reverse the years of losses always was based on the premise that their people and sales skills would improve and that they would be able to persuade other downline distributors to join their network petitioners maintained their respective employments during the years in issue petitioners worked approximately to hours per week at their respective jobs and spent only to hours per week on amway from their employment petitioners reported wages of dollar_figure in and dollar_figure in petitioners were able to use the losses from their amway activity to offset income earned from their employment we believe petitioners received enjoyment from the amway activity and we cannot overlook the personal and social aspects of their trips for which they claimed significant travel_expenses they regularly used amway activities as a device to deduct personal expenses as business_expenses for example on two occasions around march and date petitioners drove to champaign illinois where their daughter was attending the university of illinois on the august trip petitioner drove his daughter to school for the start of the fall semester he explained the fact that i was going to use my business car to transport personal effects down there meant i made sure that i would have somebody to show the plan to during the thanksgiving holiday from november petitioners drove to chattanooga tennessee where petitioner’s parents live again petitioner stated because i used my business car i made sure that i prospected and tried to--made contacts with people in chattanooga petitioners did not recruit any downline distributors on these trips and there is no evidence that they sold any amway products on these trips they simply made a few perfunctory calls on unresponsive individuals and claimed deductions for the personal trip at the amway conferences petitioners repeatedly met with many of the same people from the florence organization and many of those trips occurred during holiday weekends such as the new year and the fourth of july petitioners testified that the purpose of the amway conferences was training but they did not explain why they felt it was necessary to attend so many training seminars during their third and fourth years into their amway activity petitioners repeatedly used their amway activity as an attempt to mask obviously personal expenses as deductible business_expenses in effect they attempted to live a deductible lifestyle the conferences at times of the year associated with vacation and recreation are consistent with this same mindset most importantly petitioners reported no significant revenue from their amway activity and no reason for them to believe they ever were going to have significant revenue from this activity petitioner testified that he joined amway with a profit_motive and he may have had that subjective intent initially however as previously stated more weight must be given to objective facts indicating a profit objective than to petitioners’ subjective intent because of the manner in which petitioners carried on their amway activity the lack of revenue and the size and persistence of the continuing losses we hold that petitioners’ amway activity during the years in issue was not carried on for profit within the meaning of sec_183 and petitioners are not permitted to deduct their losses from that activity reviewed and adopted as the report of the small_tax_case division to reflect the foregoing decision will be entered for respondent


internal_revenue_service department of the treasury washington dc person to contact telephone number refer reply to cc corp 4-plr-119599-00 date date number release date index number purchaser x y a parent seller target p sub sub sub state a state b date a date b date c purchaser’s company official plr-119599-00 seller’s company officials tax professional authorized representatives this responds to your authorized representative’s letter dated date requesting on behalf of the taxpayers identified above an extension of time under sec_301_9100-1 through of the procedure and administration regulations to file an election purchaser and parent as the common parent of the consolidated_group of which seller is a member are requesting an extension to file a sec_338 election under sec_338 and sec_338 of the internal_revenue_code and sec_1_338_h_10_-1 of the income_tax regulations with respect to purchaser’s acquisition of the stock of target sometimes hereinafter referred to as the election on date a all citations in this letter to regulations under sec_338 are to regulations in effect on date a we received additional information in a letter dated date the material information is summarized below purchaser a state a corporation has a calendar taxable_year and uses the accrual_method of accounting purchaser is wholly-owned by x which in turn is wholly- owned by y which in turn is wholly-owned by a x and y are state a single-owner limited_liability companies and they are disregarded entities a is an individual parent a state b corporation is the common parent of a consolidated_group that has a calendar taxable_year and that uses the accrual_method of accounting and seller is and at all relevant times was a wholly-owned subsidiary of parent and was included in parent’s consolidated federal_income_tax return prior to the acquisition target was a wholly-owned subsidiary of seller and was included in parent’s consolidated federal_income_tax return target did not have any subsidiaries but it was and is the general_partner of p a state a limited_partnership that in turn owned directly or indirectly various corporations ie sub sub and sub on date a purchaser and seller entered into a stock purchase and sale agreement hereinafter referred to as the agreement for purchaser to acquire all of seller’s target stock also on date a pursuant to the agreement purchaser acquired all of seller’s target stock solely in exchange for cash in a fully taxable transaction following the acquisition new target filed a consolidated federal_income_tax return with purchaser it is represented that purchaser was not related to seller within the meaning of sec_338 and purchaser's acquisition of the target stock qualified as a qualified_stock_purchase as defined in sec_338 purchaser and parent intended to file the election the election was due on date b however for various reasons a valid election was not filed on date c which plr-119599-00 is after date b it was discovered that the election had not been properly filed subsequently this request was submitted under sec_301_9100-1 for an extension of time to file the election the period of limitations on assessments under sec_6501 has not expired for purchaser’s parent’s seller’s or target's taxable years in which the acquisition occurred the taxable years in which the election should have been filed or any taxable years that would have been affected by the election had it been timely filed furthermore the applicable taxable years have not been examined and the service has not discovered that the election was not timely made and all returns were filed as if a valid election had been timely filed sec_338 permits certain stock purchases to be treated as asset acquisitions if the purchasing_corporation makes or is treated as having made a sec_338 election under sec_338 and the acquisition is a qualified_stock_purchase sec_1_338-1 provides that a sec_338 election is an election to apply sec_338 to target sec_338 specifies the requirements for making a sec_338 election sec_1_338_h_10_-1 provides that if a sec_338 election is made for target a sec_338 election is deemed made for target sec_338 defines a qualified_stock_purchase as any transaction or series of transactions in which stock meeting the requirements of sec_1504 of corporation is acquired by another corporation by purchase during the 12-month_acquisition_period sec_338 provides that the term purchase means any acquisition of stock but only if i the basis of the stock in the hands of the purchasing_corporation is not determined i in whole or in part by reference to the adjusted_basis of such stock in the hands of the person from whom acquired or ii under sec_1014 relating to property_acquired_from_a_decedent ii the stock is not acquired in an exchange to which sec_351 sec_354 sec_355 or sec_356 applies and is not acquired in any other transaction described in regulations in which the transferor does not recognize the entire amount of the gain_or_loss realized on the transaction and iii the stock is not acquired from a person the ownership of whose stock would under sec_318 other than paragraph thereof be attributed to the person acquiring such stock sec_338 permits the purchasing and selling corporations to elect jointly to treat the target_corporation as deemed to sell all of its assets and distribute the proceeds in complete_liquidation the sale of stock included in the qualified_stock_purchase generally is ignored a sec_338 election may be made for target only if it is a member of a selling_consolidated_group a member of a selling affiliated_group filing separate returns or an s_corporation sec_1_338_h_10_-1 gain_or_loss on the deemed sale is included in the consolidated_return of the selling group unless the target_corporation is a member of a selling affiliated_group filing separate returns or an s_corporation sec_1_338_h_10_-1 provides that a sec_338 election may be made for the target_corporation if the purchasing_corporation makes a qualified_stock_purchase of the target_corporation stock sec_1_338_h_10_-1 provides that if a sec_338 election is made for the target_corporation it is irrevocable plr-119599-00 sec_1_338_h_10_-1 provides that a sec_338 election is jointly made by a purchaser and the selling_consolidated_group or the selling affiliate or the s_corporation shareholders on form_8023 in accordance with the instructions to the form the regulations further provide that the election must be made not later than the 15th day of the ninth month beginning after the month in which the acquisition_date occurs the instructions to form_8023 provide that a sec_338 election must be made jointly by the purchasing_corporation and the common parent of the selling_consolidated_group or selling affiliate or s_corporation shareholders the instructions provide that the form must be signed by a person authorized to act on behalf of each corporation and if made for an s_corporation it must be signed by each s_corporation shareholder who sells target stock in the qualified_stock_purchase the instructions further provide that the signatures dates and titles if applicable of those persons must be provided in a signature attachment and they provide specific details as to the preparation of the signature attachment and its attachment to form_8023 sec_1_1502-77 provides that the common parent for all purposes other than for several purposes not relevant here shall be the sole agent for each subsidiary in the group duly authorized to act in its own name in all matters relating to the tax_liability for the consolidated_return_year see also form_8023 and the instructions thereto under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation revenue_ruling revenue_procedure notice or announcement sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections 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 a in this case the time for filing the election is fixed by the regulations ie sec_1_338_h_10_-1 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant an extension of time for purchaser and parent to file the election provided purchaser and parent show they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government plr-119599-00 information affidavits and representations submitted by purchaser parent target purchaser’s company official seller’s company officials tax professional and authorized representatives explain the circumstances that resulted in the failure to timely file a valid election the information establishes that the taxpayers have filed their returns as if a valid election was made that they disclosed this request for an extension on their returns that their returns have not yet been examined and that the service has not discovered that a valid election has not been filed the information also establishes that a competent tax professional was responsible for the election and was aware of all relevant facts that purchaser and parent relied on the tax professional to make the election and that the interests of the government will not be prejudiced if relief is granted see sec_301_9100-3 and v based on the facts and information submitted including the representations made we conclude that purchaser and parent have shown they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly an extension of time is granted under sec_301_9100-1 until days from the date_of_issuance of this letter for purchaser and parent to file the election with respect to the acquisition of the stock of target as described above the above extension of time is conditioned on the filing within days of the issuance of this letter of all returns and amended returns if any necessary to report the transaction in accordance with the election and the taxpayers’ parent’s consolidated group’s and purchaser’s consolidated group’s tax_liability if any being not lower in the aggregate for all taxable years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money no opinion is expressed as to the taxpayers’ tax_liability for the taxable years involved a determination thereof will be made by the director’s office upon audit of the federal_income_tax returns involved further no opinion is expressed as to the federal_income_tax effect if any if it is determined that the taxpayers’ liability is lower sec_301_9100-3 purchaser and parent must file the election in accordance with sec_1 h - d that is a new joint election on form_8023 must be executed by parent and purchaser on or after the date of this letter which grants an extension and filed in accordance with the instructions to the form a copy of this letter should be attached to the election form purchaser and parent must file or amend as applicable their returns for all affected taxable years to report the transaction as a sec_338 transaction ie the taxable_year in which the transaction was consummated and any applicable carryback and or carryforward taxable years and to attach to the returns a copy of this letter and a copy of the election ie form we express no opinion as to whether the acquisition sale of target stock qualifies as a qualified_stock_purchase under sec_338 as to whether the plr-119599-00 acquisition sale of target stock qualifies for sec_338 treatment or if sec_338 is applicable as to the amount and character of gain_or_loss if any recognized on target’s deemed asset sales and deemed liquidation see sec_1_338_h_10_-1 in addition we express no opinion as to the tax consequences of filing the election late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or resulting from filing the election late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-1 we relied on certain statements and representations made by the taxpayers however the director should verify all essential facts in addition notwithstanding that an extension is granted under sec_301_9100-1 to file the election penalties and interest that would otherwise be applicable if any continue to apply this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the powers of attorney on file with this office a copy of this letter is being sent to the designated authorized representative and to the designated seller’s company official sincerely associate chief_counsel corporate by kenneth e cohen senior technician reviewer branch


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 corp plr-118121-07 date june legend v date dear ------------- -- ----------------------- this responds to your date request that we supplement our letter_ruling dated date plr-124298-06 our supplemental ruling dated date plr-151247-06 and our supplemental ruling dated date plr- together the prior rulings the information provided in that letter and in later correspondence is summarized below capitalized terms not defined in this letter have the meanings originally assigned to them in the prior rulings the rulings contained in this letter are based on information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for rulings verification of the information representations and other data may be required as part of the audit process in particular this office has not reviewed any information pertaining to and has made no determination regarding whether the proposed transaction i satisfies the business_purpose requirement of sec_1_355-2 of the income_tax regulations ii is used principally as a device for the distribution of the earnings_and_profits of a distributing or controlled_corporation or both see sec_355 of the internal_revenue_code and sec_1_355-2 or iii is part of a plan or series of related transactions pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent_or_greater_interest in a distributing or controlled_corporation see sec_355 and sec_1_355-7 plr-118121-07 the prior rulings address certain u s federal_income_tax consequences of proposed transactions under sec_351 sec_355 and sec_368 of the code and other code provisions supplemental facts distributing 5's public debt is being refinanced and assumed as follows i distributing has entered into three loan facilities with third-party banks and has tendered for its public debt ii distributing will draw down on the three loan facilities to finance payments to the tendering holders of public debt iii controlled n4 and n5 each will assume the appropriate loan facility in connection with the separation of distributing any public debt not tendered will be assumed by controlled in connection with contribution in addition distributing has outstanding promissory notes the notes that are convertible into shares of distributing common_stock it is expected that some of these notes will remain outstanding and will become obligations of controlled which will remain an affiliate of distributing beginning with the record_date for distribution and distribution any holder of notes that exercises its conversion_right will be entitled to receive stock of distributing controlled and controlled determined as if the notes had been converted immediately prior to the record_date for distribution and distribution to mitigate against market risk with respect to shares of controlled and controlled stock that controlled could be required to deliver pursuant to the conversion of the notes a_trust the trust will be established to hold the maximum number of shares of controlled and controlled stock that could be required to satisfy the conversion the amount of stock of each of controlled and controlled held by the trust is anticipated to be materially less than v percent of the outstanding_stock of such company the trustee of the trust will be required to vote the shares of controlled and controlled stock held by the trust in proportion to the votes cast by all other shareholders of controlled and controlled it is anticipated that controlled will redeem any notes remaining outstanding as of date as soon as possible any shares of controlled and controlled stock remaining in the trust thereafter will be returned immediately to controlled and controlled respectively and in any event no later than five years after the record_date of distribution and distribution plr-118121-07 supplemental rulings based on the information and representations set forth herein and submitted with the prior rulings we rule as follows the supplemental facts submitted shall have no adverse effect on the prior rulings which as modified thereby shall remain in full force and effect caveat no opinion is expressed about the tax treatment of the proposed transactions under other provisions of the code or regulations or the tax treatment of any condition existing at the time of or effects resulting from the proposed transactions that are not specifically covered by the above rulings and the rulings contained in our prior rulings in particular no opinion is expressed regarding i whether the proposed transaction satisfies the business_purpose requirement of sec_1_355-2 ii whether the proposed transaction is used principally as a device for the distribution of the earnings_and_profits of a distributing or controlled_corporation or both see sec_355 and sec_1_355-2 and iii whether the proposed transaction is part of a plan or series of related transactions under sec_355 procedural statements this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent a copy of this ruling letter should be attached to the u s federal_income_tax return of each taxpayer involved for the taxable_year in which the transaction covered by this ruling letter is consummated alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely _____________________________ richard k passales senior counsel branch associate chief_counsel corporate