t c no united_states tax_court samuel t seawright and carol a seawright petitioners v commissioner of internal revenue respondent docket no filed date r’s examination of ps’ tax_liability commenced no later than date after ps petitioned this court to redetermine the deficiency r’s trial counsel informally contacted potential third-party witnesses without providing advance notice to ps held sec_7602 i r c which requires that r give the taxpayer advance notice of third-party_contacts regarding r’s examination or collection activities is inapplicable with respect to r’s examination activities here which all occurred before the date effective date of sec_7602 held further sec_7602 i r c is inapplicable with respect to r’s trial preparation activities held further sec_7602 i r c which restricts r’s use of financial status or economic reality examination techniques is inapplicable with respect to r’s examination techniques which were employed before the date effective date of sec_7602 sec_4 held further ps bear the burden_of_proof held further the allowable business_expenses of ps’ salvage business determined held further the cost_of_goods_sold of ps’ salvage business determined samuel t seawright and carol a seawright pro sese james r rich for respondent thornton judge respondent determined a dollar_figure deficiency in petitioners’ joint federal_income_tax the issues for decision are whether respondent’s agents violated sec_7602 which requires the internal_revenue_service irs to give taxpayers advance notice of certain third-party_contacts whether respondent’s agents violated sec_7602 limiting respondent’s use of financial status or economic reality examination techniques whether pursuant to sec_7491 respondent bears the burden_of_proof whether petitioners are entitled to deduct various business_expenses of their salvage business in amounts greater than respondent has allowed and whether petitioners are entitled to reduce gross_receipts from their salvage business by certain amounts for cost_of_goods_sold all section references are to the internal_revenue_code as in effect for the relevant taxable_year and all rule references are to the tax_court rules_of_practice and procedure findings_of_fact the parties have stipulated some of the facts which we incorporate herein by this reference petitioners petitioners are married when they filed their petition they resided in columbia south carolina columbia north bast used parts petitioner samuel t seawright samuel owned and operated a family business known as columbia north east used parts columbia located on hardscrabble road in columbia south carolina samuel was the primary laborer for columbia petitioner carol seawright carol was the record-keeper and petitioners’ son monty seawright monty worked with samuel at columbia on weekends columbia began operations in when samuel paid about dollar_figure for five junked cars petitioners owned a ford truck with a wrecker boom in the bed samuel used the truck to pick up and haul away items such as appliances scrap metal and junked vehicles samuel did not charge for the hauling service petitioners stored the junked vehicles and other hauled-away items at their scrap yard on hardscrabble road samuel rebuilt some of the junked vehicles to sell petitioners salvaged and sold used parts from some of the junked vehicles q4e- in columbia crushed out all its inventory of junked vehicles and other items selling it as scrap metal in and samuel continued to haul various items to petitioners’ scrap yard including junked or abandoned vehicles petitioners did not pay for any of the items samuel hauled away during these years the only gross_receipts generated from columbia’s business during and were attributable to some automobile body work and other labor that samuel performed in columbia recommenced rebuilding junked vehicles between april and date petitioners spent a total of dollar_figure to purchase junked vehicles at a total cost of dollar_figure and various automotive parts at a total cost of dollar_figure petitioners bought a number of these junked vehicles at auctions conducted by sadisco of columbia sadisco a company which operated as a middleman between insurance_companies in possession of wrecked automobiles and dealers who buy them during columbia rebuilt or was in the process of rebuilding at least six damaged vehicles five of which were sold to third parties in for an aggregate sales_price of dollar_figure as required by state law along with the application of certificate for title registration for each of these six vehicles there was filed with the south carolina department of none of the rebuilt vehicles were sold in during petitioners sold none of its inventory to scrap dealers - revenue and taxation division of motor vehicles dmv an owner’s rebuilder’s affidavit certifying among other things the fair_market_value of each rebuilt vehicle as estimated in the national automobile dealers association nada official used car guide blue_book four of these affidavits were filed in on these affidavits samuel certified nada estimated fair market values for four of the rebuilt vehicles in amounts totaling dollar_figure petitioners’ federal_income_tax returns carol prepared petitioners’ and joint federal_income_tax returns on the schedule c profit or loss from business sole_proprietorship schedule c attached to their return petitioners reported that columbia had dollar_figure gross_receipts and zero cost of goods showing no opening_inventory no purchases and no ending inventory for petitioners reported that columbia had a net_loss of dollar_figure on the schedule c attached to their return petitioners reported that columbia had dollar_figure in gross_receipts cost of petitioners did not have a car dealer’s license in order to sell the six rebuilt vehicles columbia north east used parts columbia first transferred title to petitioners’ son monty seawright monty for no consideration monty then made application_for certificates of title registration with the south carolina department of revenue and taxation division of motor vehicles dmv the two remaining affidavits were filed in march and date on these affidavits samuel certified fair market values of the other two rebuilt vehicles totaling dollar_figure -- - goods sold of dollar_figure and business_expenses totaling dollar_figure resulting in a net_loss of dollar_figure in computing cost_of_goods_sold petitioners reported dollar_figure opening_inventory dollar_figure purchases and dollar_figure ending inventory respondent’s examination and determinations on date carol had her first meeting with respondent’s examining agent susan leary leary regarding petitioners’ federal_income_tax return at this initial meeting leary asked carol a number of routine background questions including but not limited to questions about petitioners’ ages and education levels and about their savings and investments leary also requested sales records relating to columbia at the initial meeting carol gave leary no indication where the sales records might be carol and leary met on two subsequent occasions in date at the subsequent meetings carol informed leary that the columbia sales records had been lost by notice_of_deficiency dated date respondent determined a dollar_figure deficiency in petitioners’ federal_income_tax as part of this determination respondent reduced petitioners’ claimed schedule c expenses by dollar_figure as follows amount claimed expense item on return amount allowed adjustment car truck -- sec_467 s depreciation --- employee benefit program dollar_figure -- big_number insurance -- office expense sec_514 other rent big_number -- big_number supplies big_number -- big_number taxes licenses big_number big_number mortgage - utilitie sec_646 totals dollar_figure dollar_figure dollar_figure respondent also disallowed petitioners’ claimed cost_of_goods_sold in its entirety on the grounds that petitioners had failed to substantiate the amount of purchases and had failed to establish the value of columbia’s opening and closing inventories for taxable_year respondent made no adjustment to the amount of columbia’s gross_receipts as reported by petitioners on date petitioners filed their petition with this court on date respondent filed his answer requesting that his determination as set forth in the notice_of_deficiency be in all respects approved on date the trial was held in columbia south carolina --- - opinion third-party_contacts petitioners contend that respondent’s agents violated sec_7602 by contacting third parties without giving petitioners proper advance notice respondent contends that sec_7602 has no application to this case sec_7602 which was added by section of the internal_revenue_service restructuring and reform act of rra publaw_105_206 112_stat_757 provides as follows c notice of contact of third parties -- general notice --an officer_or_employee of the internal_revenue_service may not contact any person other than the taxpayer with respect to the determination or collection of the tax_liability of such taxpayer without providing reasonable notice in advance to the taxpayer that contacts with persons other than the taxpayer may be made notice of specific contacts ---the secretary shall periodically provide to a taxpayer a record of persons contacted during such period by the secretary with respect to the determination or collection of the tax_liability of such taxpayer such record shall also be provided upon request of the taxpayer exceptions --this subsection shall not apply-- a to any contact which the taxpayer has authorized b if the secretary determines for good cause shown that such notice would jeopardize collection of any_tax or such notice may involve reprisal against any person or c with respect to any pending criminal investigation - sec_7602 is effective for contacts made after the 180th day after the date enactment of rra e after date see rra sec b 112_stat_758 alleged third-party_contacts during the examination on brief petitioners allege that during the initial date meeting leary told carol that she had previously contacted petitioners’ bank and that leary subsequently asked carol why petitioners changed banks so often petitioners allege that this line of inquiry shows that she leary had extensive third party contacts petitioners allege that they told leary that they wanted to be notified whenever a third party was contacted but they never received any third-party contact information from the internal_revenue_service irs sec_7602 has no application to any third-party_contacts that might have been made by respondent’s agents before the date effective date the evidence does not show that leary or any other of respondent’s agents made any third- party contacts after date in the course of the examination that culminated in the date issuance of the notice_of_deficiency alleged third-party_contacts during trial preparation on brief petitioners allege that shortly before the date trial date respondent’s agents contacted various third -- - parties including representatives of sadisco the department of motor vehicles dmv and certain purchasers of petitioners’ rebuilt vehicles on reply brief respondent concedes that in the course of preparing for trial respondent’s trial counsel contacted potential witnesses without advance notice to petitioners respondent contends that these contacts did not violate sec_7602 we agree with respondent sec_7602 restricts the irs’s third-party_contacts with respect to the determination or collection of the tax_liability the statute does not expressly indicate whether the irs’s trial preparations in the course of a court_proceeding should be considered to be with respect to the determination or collection of the tax_liability the proposed_regulations state that sec_7602 does not apply to contacts made in the course of a pending court_proceeding sec_301_7602-2 proposed proced admin regs fed reg date proposed_regulations are given no greater weight than a position advanced by respondent on brief see 54_tc_1233 nevertheless they can be useful guidelines where as here they closely follow the legislative_history of the statutory provision in question see 113_tc_440 the pertinent legislative_history states that the purpose of sec_7602 is to require the irs to notify the taxpayer before contacting third parties regarding examination or collection activities including summonses with respect to the taxpayer s rept pincite 1998_3_cb_537 emphasis added accordingly we conclude that congress did not intend sec_7602 to apply to third-party_contacts made by the irs in the course of trial preparation activities where those contacts are not with respect to examination or collection activities this interpretation is consistent with the general statutory scheme which distinguishes between the litigation of tax_liabilities see chapter captioned judicial proceedings we are mindful that under sec_6212 the internal_revenue_service irs may in certain circumstances determine an additional deficiency after the taxpayer files a timely petition with the tax_court and that in the course of making such further determination the irs is not barred from exercising its examination authority under sec_7602 see 782_f2d_89 7th cir pending tax_court proceedings did not bar irs from invoking summons authority rather than using tax_court discovery procedures in seeking the taxpayers’ financial records where the taxpayers’ liability was still subject_to redetermination pursuant to sec_6212 67_f2d_894 2d cir since the commissioner may apply to the board_of_tax_appeals to increase the assessment in the notice_of_deficiency he may need to prepare his case in advance by a further examination which is guite another matter from producing evidence in support of it the instant case does not present and we do not reach the issue of the extent to which the restrictions of sec_7602 might apply with respect to examinations conducted by the irs to determine an additional deficiency pursuant to sec_6212 c during the pendency of a tax_court proceeding and the irs’s examination and enforcement activities see chapter captioned discovery of liability and enforcement of title sec_7602 captioned examination of books and witnesses appears in subchapter_a captioned examination and inspection of chapter sec_7602 contains a very broad grant of authority to the irs to examine books_and_records issue summons and take testimony under oath for the purpose inter alia of determining or collecting the federal tax_liability of any person sec_7602 is drafted as a restriction on the sec_7602 examination authority the authority of the irs’s trial counsel to informally interview prospective third- party witnesses to gather evidence in preparation for trial does not emanate from sec_7602 consequently sec_7602 c the authority of the irs’s trial counsel to conduct trial preparation inheres in sec_7452 which provides that the secretary shall be represented before the tax_court by the chief_counsel of the irs or_his_delegate the exercise of this authority is subject_to the tax court’s rules_of_practice and procedure see sec_7453 with exceptions not relevant here proceedings before the tax_court shall be conducted in accordance with such rules_of_practice and procedure as this court may prescribe the tax_court has not prescribed rules specifically relating to informal pretrial interviews of potential witnesses cf 104_tc_408 arguably respondent’s efforts to arrange informal witness interviews do not fall within our discovery procedures and thus are not subject_to restriction under rule citing 116_frd_36 d mass interpreting fed r civ p c pursuant to this court’s standing_pretrial_order however respondent was required to identify witnesses in his trial memorandum which was required to continued does not restrict that authority as far as the record reveals respondent’s examination activities ceased no later than date when respondent issued the notice_of_deficiency respondent has not sought to use the sec_7602 examination power to determine any additional deficiency pursuant to sec_6212 there is no evidence that respondent used the sec_7602 examination power to summon prospective third-party witnesses and take testimony under oath cf westreco inc v commissioner tcmemo_1990_501 modified in 96_tc_459 there is no evidence to suggest that respondent’s agents made any third-party_contacts in connection with any collection activity ’ we conclude that the informal contacts of potential witnesses by respondent’s trial counsel in preparation for trial were not made in the course of respondent’s examination or collection activities and therefore are not subject_to the restrictions of sec_7602 continued be submitted to the court and to petitioners at least days before the trial session respondent complied with these requirements of the standing_pretrial_order ’ as a general matter if the taxpayer has filed a petition with this court for a redetermination of the deficiency the irs may not commence collection activities until this court’s decision has become final sec_6213 conclusion petitioners have not shown that respondent’s agents violated sec_7602 statutory limitation on financial status audits citing various background questions that leary asked carol at their initial meeting on date petitioners contend that on or about that date respondent used a financial status or economic reality examination technique in violation of sec_7602 sec_7602 became effective on the date of enactment of rra ie date h conf rept pincite 1998_3_cb_755 petitioners do not contend that any actions taken by respondent’s agents on or after date violated sec_7602 accordingly sec_7602 has no application to this case burden_of_proof petitioners contend that respondent bears the burden_of_proof pursuant to sec_7491 respondent contends that sec_7491 is inapplicable we agree with respondent sec_7602 as added by internal_revenue_service restructuring reform act of publaw_105_206 sec 112_stat_751 provides e limitation on examination of unreported income ---the secretary shall not use financial status or economic reality examination techniques to determine the existence of unreported income of any taxpayer unless the secretary has a reasonable indication that there is a likelihood of such unreported income - - under rule the burden_of_proof is upon the petitioner except as otherwise provided by statute in certain circumstances if the taxpayer introduces credible_evidence with respect to any factual issue relevant to ascertaining the proper tax_liability sec_7491 places the burden_of_proof on respondent sec_7491 rule a sec_7491 is effective with respect to court proceedings arising in connection with examinations commencing after date rra sec c 112_stat_726 the undisputed facts indicate that respondent’s examination of petitioners’ federal_income_tax return commenced before date accordingly sec_7491 has no application to this case petitioners bear the burden_of_proof rule a petitioners’ trade_or_business_expenses the parties disagree about petitioners’ entitlement to deduct pursuant to sec_162 various trade_or_business_expenses vehicle expenses on their return petitioners claimed no deduction for vehicle expenses in the notice_of_deficiency respondent allowed petitioners a deduction of dollar_figure petitioners have not established that they are entitled to a vehicle expense deduction greater than respondent has allowed_depreciation on their return petitioners claimed no depreciation deduction in the notice_of_deficiency respondent allowed petitioners a depreciation deduction of dollar_figure petitioners have not established that they are entitled to a depreciation deduction greater than respondent has allowed employee benefit programs on brief petitioners concede that they are not entitled to any deduction for employee benefit programs as claimed on their schedule c insurance on their return petitioners claimed an dollar_figure deduction for business insurance expense all of which respondent disallowed on the basis of our detailed review of the record we find that petitioners are entitled to a deduction of dollar_figure for insurance expense office expenses on their return petitioners claimed a dollar_figure deduction for office expenses in the notice_of_deficiency respondent allowed dollar_figure on the basis of our detailed review of the record we find that petitioners are entitled to a deduction of dollar_figure for office expenses other rent on their return petitioners claimed a dollar_figure deduction for other rent all of which respondent disallowed petitioners have not established that they are entitled to any deduction for other rent supplies on their return petitioners claimed a dollar_figure deduction for supplies all of which respondent disallowed in the notice_of_deficiency on brief respondent concedes that petitioners incurred dollar_figure in expenses for materials used to rebuild vehicles but contends that this amount should be added to purchases in computing petitioners’ cost_of_goods_sold rather than deducted as a current_expense we agree with respondent the evidence in the record indicates that the claimed supplies expenses relate to petitioners’ rebuilding junked automobiles for sale and that these expenses represented either raw materials or supplies entering into the rebuilt automobiles or direct labor relating thereto these amounts are includable in the cost of petitioners’ rebuilt automobiles see sec_1 c income_tax regs and thus are not deductible as trade_or_business_expenses pursuant to sec_162 but rather enter into the calculation of petitioners’ cost_of_goods_sold in determining their gross_income see 106_tc_268 small tools petitioners contend that they are entitled to a dollar_figure deduction for small tools while small tools with a useful_life - - of less than year are currently deductible clemons v commissioner tcmemo_1979_273 the cost of tools with a useful_life that exceed sec_1 year are recovered by depreciation sec_167 and sec_168 petitioners offered no evidence about the type expected useful_life or cost of each tool acquired consequently we have no basis for determining which costs might be currently deductible or for estimating appropriate depreciation_deductions for tools with useful lives greater than year taxes and licenses on their return petitioners claimed a dollar_figure deduction for taxes and licenses in the notice_of_deficiency respondent allowed dollar_figure on the basis of our detailed review of the record we find that petitioners are entitled to a deduction of dollar_figure for taxes and licenses utilities on their return petitioners claimed a dollar_figure deduction for utilities in the notice_of_deficiency respondent allowed sec_404 petitioners have not established that they are entitled to a deduction for utilities expenses greater than respondent has allowed cat food on brief respondent concedes that petitioners are entitled to a dollar_figure business_expense deduction for cat food that petitioners purchased and set out in their scrap yard for the purpose of attracting wild cats to deter snakes and rats cost_of_goods_sold petitioners contend that in columbia had cost_of_goods_sold of dollar_figure computed as follows opening_inventory dollar_figure add purchases big_number less closing_inventory big_number cost_of_goods_sold dollar_figure on brief respondent concedes that petitioners have substantiated purchases in the amount of dollar_figure but contends that petitioners have not established the value of their opening or ending inventory and thus are not entitled to reduce columbia’s gross_receipts for cost_of_goods_sold we agree with respondent in a manufacturing merchandising or mining business gross_income means total sales less the cost_of_goods_sold sec_1 a income_tax regs cost_of_goods_sold is computed by subtracting the value of ending inventory goods still on hand at the end of the year from the sum of the opening_inventory and purchases during the year 78_tc_705 on their federal_income_tax return petitioners claimed to have used the lower_of_cost_or_market as the basis for valuing their inventory under this approach the market_value of each - - article on hand at the inventory date shall be compared with the cost of the article and the lower_of such values shall be taken as the inventory value of the article sec_1_471-4 income_tax regs ’ in columbia disposed of all its then-existing inventory although they subsequently acquired additional items of inventory petitioners incurred no direct_cost and have established no indirect_costs for the items acguired prior to their purchase of some junked vehicles in date consequently columbia’s opening_inventory for had a cost of zero which is consistent with petitioners’ reporting of a zero ending inventory for see 13_tc_636 consistency requires that the opening_inventory of each year correspond to the closing_inventory of the preceding year the supreme court has summarized the lower_of_cost_or_market approach as follows the taxpayer must value inventory for tax purposes at cost unless the ‘market’ is lower ‘market’ is defined as ‘replacement cost ’ and the taxpayer 1s permitted to depart from replacement cost only in specified situations when it makes any such departure the taxpayer must substantiate its lower inventory_valuation by providing evidence of actual offerings actual sales or actual contract cancellations in the absence of objective evidence of this kind a taxpayer’s assertions as to the ‘market value’ of its inventory are not cognizable in computing its income_tax 439_us_522 - columbia’s ending inventory for consisted of whatever no-cost items remained from its opening_inventory plus the items purchased for dollar_figure including junked vehicles plus the dollar_figure expended on supplies as previously discussed thus columbia’s ending inventory had a cost of dollar_figure petitioners contend that the market_value of columbia’s ending inventory was only dollar_figure which they argue was the scrap_value of the ending inventory petitioners have failed to substantiate their claimed market_value by providing evidence of actual offerings actual sales or actual contract cancellations 439_us_522 in any event petitioners’ contention is contradicted by samuel’s admissions in the owner’ s rebuilder’s affidavits filed with the dmv in certifying that the nada estimated fair market values of just four of the rebuilt automobiles in columbia’s inventory totaled dollar_figure petitioners’ contention is further undermined by evidence showing that these four rebuilt automobiles along with another vehicle ‘0 although columbia transferred title to the rebuilt vehicles to monty for no consideration before the vehicles were sold to third parties samuel testified that the transfers to monty were not gifts stating the fact is that these vehicles were put in his monty’s name in order to sell it sic all of them were reported as income through our business consequently we ignore petitioners’ transfers of the rebuilt automobiles to monty - contained in columbia’s ending inventory were sold to third parties in for dollar_figure in sum petitioners have failed to show that the market_value of columbia’s ending inventory was less than its dollar_figure cost we conclude and hold that columbia’s cost_of_goods_sold was zero computed as dollar_figure opening_inventory plus dollar_figure purchases minus dollar_figure ending inventory accordingly respondent’s determination on this issue is sustained all other contentions raised by the parties are irrelevant without merit or moot to reflect the foregoing and concessions of the parties decision will be entered under rule


internal_revenue_service number release date index numbers ------------------------------- --------------------------- ----------------------------------------- ----------------------------------------------- --------------------------------- 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 b03 plr-104315-09 date date legend x --------------------------------------------------------------------------------------------------- ------------------------ country ----------------- date1 -------------------------- date2 ----------------------- dear -------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x by x’s authorized representative requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election to be classified as a partnership facts x was formed under country law on date1 x represents that it is a foreign_entity eligible to elect to be classified as a partnership for federal tax purposes x intended that it be classified as a partnership effective date2 however due to inadvertence a valid form_8832 entity classification election to treat x as a partnership effective date2 was not timely filed law and analysis plr-104315-09 sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 sec_301_7701-3 provides that unless the entity elects otherwise a foreign eligible_entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides that a member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member this determination is based solely on the statute or law pursuant to which the entity is organized thus generally under sec_301_7701-3 a foreign eligible_entity is treated as an association_taxable_as_a_corporation if all members have limited_liability unless the entity makes an election to be treated otherwise sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided in sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described plr-104315-09 in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time of sixty days from the date of this letter to elect to be classified as a partnership for federal tax purposes effective date2 the election should be made by filing form_8832 with the appropriate service_center a copy of this letter should be attached to the election except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely s curtis g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service national_office technical_advice_memorandum july number release date third party contact none index no control number tam-100984-00 cc psi b8 district_director taxpayer name taxpayer address taxpayer identification no quarters involved date of conference issues is aviation_fuel used in an aircraft actually engaged in foreign trade when it is used in an aircraft flying from a city in the united_states to another city in the united_states as a domestic_segment of a direct international flight between a city in the united_states and a city in a foreign_country did the irs erroneously credit and pay the taxpayer under the facts described below amounts the taxpayer claimed under sec_6427 of the internal_revenue_code for the nontaxable_use of aviation_fuel is the taxpayer liable for the tax imposed by with respect to the untaxed aviation_fuel that it used in its aircraft on domestic segments of direct international flights conclusions aviation_fuel is used in an aircraft actually engaged in foreign trade when it is used in an aircraft flying from a city in the united_states to another city in the united_states as a domestic_segment of a direct international flight between a city in the united_states and a city in a foreign_country the irs erroneously credited and paid the taxpayer certain amounts claimed under sec_6427 for the nontaxable_use of aviation_fuel the erroneous credits and payments were with respect to amounts included in 4th quarter claims on forms and amounts included in claims on forms the taxpayer is not liable for the tax imposed by with respect to the untaxed aviation_fuel that it used in its aircraft on domestic segments of direct international flights facts the taxpayer is a domestic commercial airline company that provides air transportation of persons and property for hire between the united_states and foreign countries the taxpayer is a calendar_year income taxpayer this technical_advice request involves aircraft used by the taxpayer for direct international flights that include at least one domestic_segment the aviation_fuel under consideration is aviation_fuel purchased and delivered into the fuel supply tank of the taxpayer’s aircraft in the united_states the flights under consideration are not chartered flights the following examples illustrate the domestic segments of direct international flights at issue a a direct international flight from city in the united_states to city in a foreign_country stopped in city and city in the united_states the domestic segments were the flights from city to city and city to city no paid passengers or property were transported from city to city one paid passenger was transported from city to city b a direct international flight from city in a foreign_country to city in the united_states stopped in city and city in the united_states the domestic segments were the flights from the city to city and city to city two paid passengers were transported from city to city before date the taxpayer purchased taxed aviation_fuel that it used in aircraft flying domestic segments of direct international flights the taxpayer took credits in the amount of that tax on its forms quarterly federal excise_tax return further on date the taxpayer filed claims for refund on forms claim_for_refund of excise_taxes for additional gallons of taxed aviation_fuel used in aircraft flying domestic segments during tax periods the irs credited the amounts claimed on forms and paid the amounts claimed on forms and later notified the taxpayer that the claims were erroneous on date the taxpayer was registered by the irs as a producer of aviation_fuel and thus could purchase untaxed aviation_fuel beginning date the taxpayer purchased untaxed aviation_fuel the taxpayer did not pay tax on the untaxed aviation_fuel it used in aircraft flying domestic segments of direct international flights the district_director asserts that the aviation_fuel used in aircraft flying domestic segments of direct international flights is not used in aircraft actually engaged in foreign trade as such the district_director finds that the credits and the refunds related to amounts claimed on forms and forms were erroneous with respect to aviation_fuel used in aircraft flying domestic segments of direct international flights further the district_director finds that the taxpayer is liable for the tax imposed by on the untaxed aviation_fuel it used on domestic segments of direct international flights law and analysis section a imposes a tax on the sale of aviation_fuel by the producer thereof or any producer of aviation_fuel section a as in effect during the periods at issue provides that if any producer uses aviation_fuel other than for a nontaxable_use as defined in sec_6427 on which no tax has been imposed then that use is considered a sale section a provides that no tax is imposed on aviation_fuel sold by a producer for use by the purchaser in a nontaxable_use as defined in sec_6427 section b provides that in the case of fuel sold for use in commercial_aviation other than as supplies_for_vessels_or_aircraft within the meaning of sec_4221 the exemption for nontaxable_use in a does not apply to so much of the tax as is attributable to the leaking_underground_storage_tank_trust_fund financing rate and cents per gallon for fuel sold after date sec_6427 provides that if aviation_fuel on which tax was imposed by is used by any person in a nontaxable_use the secretary shall pay without interest to the ultimate_purchaser of the fuel an amount equal to the aggregate amount of tax imposed on such fuel under sec_6427 provides that the term nontaxable_use means in the case of aviation_fuel any use which is exempt from the tax imposed by sec_4041 sec_4041 provides that no tax is imposed by sec_4041 on aviation_fuel sold for use or used as supplies_for_vessels_or_aircraft within the meaning of sec_4221 sec_4221 provides that the term supplies_for_vessels_or_aircraft means fuel supplies ships’ stores sea stores or legitimate equipment on vessels actually engaged in foreign trade or trade between the united_states and any of its possessions for purposes of the preceding sentence the term vessels includes civil aircraft sec_48_4221-4 of the manufacturers and retailers excise_tax regulations provides that the terms fuel supplies and legitimate equipment include all articles materials supplies and equipment necessary for the navigation propulsion and upkeep of vessels actually engaged in foreign trade even though such vessels may make intermediate stops in the united_states issue under a l b g and d aviation_fuel used as supplies for aircraft actually engaged in foreign trade is used in a nontaxable_use revrul_69_259 1969_1_cb_287 describes a domestic airline that operates an airplane plane no that flies from a city in the united_states to a city in a foreign_country with intermediate stops in the united_states the airline also operates an airplane plane no that flies only within the united_states plane no carries some passengers whose ultimate destinations are cities within the united_states and other passengers with tickets to a city in a foreign_country the foreign bound passengers are transferred from plane no to another airplane for completion of their flights to the foreign_country the ruling holds that plane no is engaged in foreign trade within the meaning of the statute and regulations even though it makes intermediate stops in the united_states the ruling holds that plane no cannot be considered as being engaged in foreign trade even though it carries passengers with tickets to a city in a foreign_country to be considered engaged in foreign trade the airplane itself must travel to a foreign destination as such when aviation_fuel is used in an aircraft that flies between the united_states and a foreign_country with intermediate stops in the united_states the aviation_fuel is used in an aircraft actually engaged in foreign trade in example a the aircraft was flying a direct international flight from city in the united_states to city in a foreign_country thus the aircraft was actually engaged in foreign trade on the domestic segments from city to city and city to city in example b the aircraft was flying a direct international flight from city in a foreign_country to city in the united_states thus the aircraft was actually engaged in foreign trade on the domestic segments from city to city and from city to city issue the taxpayer’s claims on forms and forms raise procedural issues sec_6427 as in effect during the tax periods at issue provides that if at the close of any of the first three quarters of a person’s taxable_year at least dollar_figure is payable under sec_6427 to such person with respect to fuel used during such quarter or any prior quarter during the taxable_year a claim may be filed under sec_6427 with respect to that fuel sec_6427 provides that no claim filed under sec_6427 shall be allowed unless filed during the first quarter following the last quarter included in the claim a 4th quarter claims on forms the taxpayer made claims on forms for tax periods and a claim is permitted for 1st 2nd and 3rd quarters of the taxable_year under sec_6427 the taxpayer is a calendar_year taxpayer tax periods and are the 4th quarter of the taxpayer’s taxable_year therefore the claims on forms for tax periods and were not allowable the irs erroneously credited the taxpayer the amounts claimed in the 4th quarter under sec_6427 for the nontaxable_use of aviation_fuel b claims on forms the taxpayer filed forms for tax periods and on date the taxpayer would need to have filed the claim for tax periods and by date at the latest the claim for tax period sec_9503 sec_9506 and sec_9509 would need to have been filed by date at the latest the taxpayer’s claims were not timely filed under sec_6427 the taxpayer filed a claim on form_8849 for tax period a 4th quarter claim was not allowable therefore the claims on forms for tax periods and were not allowable the irs erroneously refunded to the taxpayer the amounts claimed on forms under sec_6427 for the nontaxable_use of aviation_fuel further only one quarterly claim is permitted for aviation_fuel used in a quarter quarterly claims for tax periods were made previously by the taxpayer on its forms as such even if the claims had been timely the claims were not allowable because they were second claims issue as described in issue aviation_fuel used as supplies for aircraft actually engaged in foreign trade is used in a nontaxable_use therefore the taxpayer is not liable for the tax imposed by on the untaxed aviation_fuel it used in aircraft flying from a city in the united_states to another city in the united_states as a segment of a direct international flight between a city in the united_states and a city in a foreign_country caveat a copy of this technical_advice_memorandum is to be given to the taxpayer sec_6110 provides that it may not be used or cited as precedent in accordance with sec_6110 names addresses and identifying numbers have been deleted


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 ccs psi plr-111389-17 date date legend husband wife trust trust accountant attorney date date year year year year a b c d e f g h i j k l account partnership corporation corporation ------------------- ------------------------------ ------------------------------ ------------------------------ ---------------------------------------------------------------------- -------------------------------------------- -------------------------------------------- ------------------------------ -------------------- --------------------------- ------- ------- ------- ------- ------------ -- ------------ ---------- -------- ---------- -------------- ----------- ------------ ------------ ----------- -------------- ---------------------------- --------------------------------------------- ------------------------------------------------- ----------------------------------------------------------------- plr-111389-17 corporation corporation corporation corporation corporation insurance_policy ------------------------------------- -------------------------------------------------------------- ----------------------------------------------------------------- ----------------------------------------------------------------------- -------------------------------------------------------- ------------------------------------------------------ dear ----------------- this letter responds to your authorized representative’s letter dated date and subsequent correspondence requesting an extension of time under sec_2642 of the internal_revenue_code code and sec_301_9100-3 of the procedure and administration regulations to allocate wife’s generation-skipping_transfer gst_exemption to certain transfers to trust 1and trust facts the facts and representations submitted are as follows on date a date after date husband established trust an irrevocable_trust for the benefit of the lineal_descendants of husband and wife although trust has gst tax potential a portion of trust has the potential to be included in the gross_estate of a non-skip_person other than husband or wife if such person died immediately_after_the_transfer in year husband transferred to trust ownership interests in corporation valued at dollar_figurea and corporation valued at dollar_figureb in year husband transferred to trust an ownership_interest in partnership valued at dollar_figurec insurance_policy valued at dollar_figured and cash in the amount of dollar_figuree in year husband transferred to trust cash in the amount of dollar_figuref on date a date after date wife established trust an irrevocable_trust for the primary benefit of husband and wife’s children although trust has gst tax potential a portion of trust has the potential to be included in the gross_estate of a non-skip_person other than wife if such person died immediately_after_the_transfer in year wife transferred to trust account valued at dollar_figureg and ownership interests in corporation corporation corporation corporation and corporation valued at dollar_figureh dollar_figurei dollar_figurej dollar_figurek and dollar_figurel respectively during year and year sec_2 through husband and wife retained attorney for estate_planning advice and preparation of the governing instruments of several trusts including trust and trust attorney coordinated this estate_planning with accountant who husband and wife retained to prepare any necessary form sec_709 united_states gift and generation-skipping_transfer_tax returns during the planning and preparation of the governing instruments of trust and trust accountant was advised of the intent of husband and wife to a elect under sec_2513 to plr-111389-17 treat gifts made by each as made one-half by both to the extent the gifts are eligible for split gift treatment and b allocate gst_exemption to transfers made or deemed to be made by each of husband and wife to trust and trust accountant prepared year form sec_709 for husband and wife on which husband and wife each elected to treat gifts made by each as made by both under sec_2513 and reported one-half of the year transfers to trust as a gift in year however in preparing the year form sec_709 accountant failed to allocate gst_exemption to the respective amount of year transfers to trust made or deemed to be made by each of husband and wife for year sec_2 through accountant failed to prepare form sec_709 for both husband and wife to report the transfers to trust and trust and therefore failed to allocate gst_exemption to the transfers it is represented that at all relevant times wife had sufficient gst_exemption to allocate to the transfers she made or is deemed to have made to trust and trust in year and year sec_2 through it is further represented that the terms of trust preclude split gift treatment under sec_2513 wife requests an extension of time to allocate gst_exemption to the transfers she made or is deemed to have made to trust and trust in year sec_1 through law and analysis sec_2601 imposes a tax on every gst a gst is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2602 provides that the amount of the tax is the taxable_amount multiplied by the applicable_rate sec_2641 defines applicable_rate as the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer under sec_2642 the inclusion_ratio with respect to any property transferred in a gst is generally defined as the excess if any of over the applicable_fraction the applicable_fraction as defined in sec_2642 is a fraction the numerator of which is the amount of the gst_exemption allocated to the trust or to property transferred in a direct_skip and the denominator of which is the value of the property transferred to the trust or involved in the direct_skip reduced by the sum of any federal estate_tax or state death_tax actually recovered from the trust attributable to such property and any charitable deduction allowed under sec_2055 or sec_2522 with respect to such property sec_2631 provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption amount which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made is irrevocable plr-111389-17 sec_26_2632-1 of the generation skipping transfer_tax regulations provides in part that an allocation of gst_exemption to property transferred during the transferor's lifetime other than in a direct_skip is made on form_709 sec_2632 provides that if any individual makes an indirect_skip during such individual’s lifetime any unused portion of such individual’s gst_exemption shall be allocated to the property transferred to the extent necessary to make the inclusion_ratio for such property zero if the amount of the indirect_skip exceeds such unused portion the entire unused portion shall be allocated to the property transferred sec_2632 provides that for purposes of sec_2632 the term indirect_skip means any transfer of property other than a direct_skip subject_to the tax imposed by chapter to a gst_trust sec_2632 provides that the term gst_trust means a_trust that could have a gst with respect to the transferor unless the trust is a_trust any portion of which would be included in the gross_estate of a non-skip_person other than the transferor if such person died immediately_after_the_transfer the value of transferred property shall not be considered to be includible in the gross_estate of a non-skip_person or subject_to a right of withdrawal by reason of such person holding a right to withdraw so much of such property as does not exceed the amount referred to in sec_2503 with respect to any transferor sec_2642 provides that except as provided in sec_2642 if the allocation of the gst_exemption to any transfers of property is made on a timely filed gift_tax_return or is deemed to be made under sec_2632 or c the value of such property for purposes of sec_2632 shall be its value as finally determined for purposes of chapter and such allocation shall be effective on and after the date of such transfer if property is transferred as a result of the death of the transferor the value of such property for purposes of sec_2632 shall be its value as finally determined for purposes of chapter and such allocation shall be effective on and after the due_date of the death of the transferor sec_2513 provides that a gift made by one spouse to any other person other than his spouse shall be considered as made one-half by him and one-half by his spouse but only if at the time of the gift each spouse is a citizen or resident_of_the_united_states sec_2513 only applies if both spouses have signified their consent to the application of this section in the case of all such gifts made during the calendar_year by either while married to the other sec_2652 provides in part that except as provided in sec_2652 or sec_2653 the term transferor means in the case of any property subject_to the tax imposed by chapter the donor sec_2652 provides that if under sec_2513 plr-111389-17 one-half of a gift is treated as made by an individual and one-half of such gift is treated as made by the spouse of such individual such gift shall be so treated for purposes of chapter under sec_26_2652-1 in the case of a transfer with respect to which the donor’s spouse makes an election under sec_2513 to treat the gift as made one-half by the spouse the electing spouse is treated as the transferor of one-half of the entire value of the property transferred by the donor regardless of the interest the electing spouse is actually deemed to have transferred under sec_2513 the donor is treated as the transferor of one-half of the value of the entire property sec_2642 provides generally that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of sec_2642 sec_2642 provides that in determining whether to grant relief the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief the time for making the allocation shall be treated as if not expressly prescribed by statute notice_2001_50 2001_2_cb_189 provides that under sec_2642 the time for allocating the gst_exemption to lifetime transfers is to be treated as if not expressly prescribed by statute the notice further provides that taxpayers may seek an extension of time to make an allocation described in sec_2642 under the provisions of sec_301_9100-3 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute under sec_301_9100-1 a regulatory election includes an election whose due_date is prescribed by a notice published in the internal_revenue_bulletin in accordance with sec_2642 and notice_2001_50 taxpayers may seek an extension of time to make an allocation described in sec_2642 under the provisions of sec_301_9100-3 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the plr-111389-17 taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly wife is granted an extension of time of days from the date of this letter to allocate gst_exemption to transfers to trust in year year and year to the extent she is considered the transferor under sec_26_2652-1 further wife is granted an extension of time of days from the date of this letter to allocate gst_exemption to the transfers to trust in year the allocations will be effective on the respective dates of the transfers and are based on the value of the transferred property as finally determined for purposes of chapter with respect to the year transfer to trust wife should allocate her gst_exemption on a supplemental form_709 for year with respect to the transfers in year sec_2 through to trust wife should allocate her gst_exemption on a form_709 for each of year sec_2 through all form sec_709 should be filed with the internal_revenue_service center cincinnati ohio a copy of this letter should be attached to each form_709 a copy of this letter is enclosed for this purpose except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent plr-111389-17 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 associate chief_counsel passthroughs special industries by karlene m lesho karlene m lesho senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy for sec_6110 purposes copy of this letter