t c summary opinion united_states tax_court richard a boring and margaret a boring petitioners v commissioner of internal revenue respondent docket no 13828-14s filed date richard a boring and margaret a boring pro sese christopher j richmond for respondent summary opinion wherry 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 section references are to the internal_revenue_code_of_1986 as amended and in effect for the year at issue and all rule references are to the tax_court rules_of_practice and procedure 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 respondent mailed a statutory_notice_of_deficiency to petitioners on date which determined an income_tax deficiency for petitioners’ tax_year of dollar_figure respondent also determined an accuracy-related_penalty under sec_6662 for of dollar_figure petitioners filed a timely tax_court petition in response on date petitioners’ case was tried in date in los angeles california after a concession by petitioners and ignoring purely computational matters the issues for consideration are whether petitioners are entitled to deduct various expenses reported on schedule c profit or loss from business for whether alternatively petitioners may deduct any of the claimed schedule c expenses on schedule a itemized_deductions in excess of the amount respondent allowed whether petitioners are liable for an accuracy- related penalty for and whether the court should impose a sec_6673 the petition was sent to the clerk of the tax_court via the u s mail in an envelope postmarked date and was therefore deemed timely see sec_7502 petitioners have conceded that they received dollar_figure of taxable interest_income in which they neglected to report or pay federal_income_tax on penalty as respondent requested in his motion to impose sanctions filed date for maintaining this case primarily to delay collection of their proper income_tax utilizing arguments for which their position is groundless background petitioners are no strangers to this court this case constitutes at the minimum their 14th case involving at least one of petitioners spanning almost taxable years from to most recently they litigated the consolidated cases at docket nos 16195-12s 26201-12s and 1070-13s which were decided by this court’s t c summary opinion those cases like this one addressed similar continuing issues arising primarily from petitioners’ efforts to substantiate and deduct expenses which they attribute to mr boring’s schedule c sole_proprietorship d b a rambor technology rambor or his partnership board automation the substantive tax disputes emanate from petitioners’ misunderstanding of the terms ordinary and necessary as used in their cases as to which the court still has retained records were assigned docket nos as follows 13828-14s 1070-13s 26201-12s 16195-12s 17698-05l 17612-05l 12836-99s 4639-99s the partnership’s name used here is derived from the transcript of mr boring’s trial testimony however other documents in the record indicate the name may have been borett automation technologies for simplicity we refer to it as board automation defining deductible business_expenses pursuant to sec_162 and the interrelationship of that section with sec_262 defining nondeductible personal expenses petitioners resided in their longtime residence in california when they filed their petition in this case during the year petitioner margaret boring worked as a bookkeeper for the conejo valley unified school district petitioner richard boring worked as an engineer for tecom industries inc tecom a division of smith’s group which is headquartered in thousand oaks california petitioners filed a late joint federal_income_tax return form_1040 u s individual_income_tax_return for the taxable calendar_year on date this tax_return references a federal schedule allegedly attached to that tax_return although no document entitled federal schedule was in fact attached to the filed tax_return petitioners provided an exhibit during the pendency of this case which they assert consists of the alluded-to federal schedule and that exhibit was admitted into the evidentiary record respondent disallowed all of the claimed schedule c rambor expense deductions for lack of substantiation as follows the record does not explain why the revenue_agent who examined petitioners’ tax_return and respondent failed to assert a sec_6651 late- filing penalty in this case expense business use of home repairs and maintenance legal and professional services insurance other than health insurance other depreciation and sec_179 car and truck total amount dollar_figure big_number big_number big_number big_number big_number big_number big_number mr boring was a motion control designer whose full-time job with rambor during and his earlier in the air networks itan work efforts have since involved semiconductors and signal directional and tracking devices while he has apparently worked diligently on his itan and rambor activities and with other associates achieved some technological successes rambor’s income has never exceeded the reported expenses and he has reported only losses on schedule c of his federal_income_tax returns for a number of years at trial mr boring explained that his business is a business of intangible assets or liabilities primarily our focus is to get the tangible assets tangible products our business is basically the sustainability of product development we’re trying to survive to the point where we could take our research_and_experimentation which has been very successful and take it to the next step to product development more specifically rambor was attempting to capitalize on mr boring’s prior work as a contract worker and later as an employee whose wages were reported on form_w-2 wage and tax statement he had focused on development of manned or unmanned aerial vehicles drones with high resolution video cameras with a low-profile tracking pedestal that pedestal moved an ms dos rvt-2000 or similar triband antennas the antenna followed the drone from the ground or was attached to the drone depending on the drone’s size and mission so that it could transmit real-time live video images from the drone or a nasa satellite back to nasa or to army and marine operational unit headquarters his role in this effort was primarily as the architect of the device including the software design and implementation for bare metal software routines that ran at the system algorithm and microcontroller interrupt levels the software in turn directed the operation of electric motors which controlled the tracking of the aircraft or ground-based antennas and selection of the appropriate antennas the principal purpose of the device was earth-satellite or earth-air communications and battlefield intelligence particularly sought with respect to the drones was real-time information regarding improvised explosive devices ied planted in the landscape which could be detected by comparing aerial pictures taken before and after their implantation this ied detection device communications methodology was very successful and rambor with other affiliated parties was attempting to adopt and modify it for use by southwest airlines that airline’s need for a similar device arose in connection with its airline fleet and satellite or land-based linked communications during flight operations complicating this effort was the requirement that the device be quite compact and capable of operating continuously at temperatures ranging from minu sec_55 degrees to plu sec_85 degrees centigrade withstand airplane vibration and maintain pointing angles to a designated satellite within a tenth of one degree at all times the device mr boring and his associates developed for southwest airlines was also very successful petitioners provided numerous documents primarily bills and credit card and bank statements in an effort to substantiate the expenses underlying their claimed schedule c deductions a review of the provided documents indicates they are composed primarily of records documenting living_expenses personal automobile expenses costs of maintaining their personal_residence and costs of assisting relatives mr boring explained that his work was as close to twenty-four- seven as possible until there’s a positive outcome with only christmas easter and thanksgiving off he asserts that because of the long hours he incurs expenses beyond what we would normally consider to be ordinary and necessary he viewed his home_office as rambor’s and board automation’s principal_place_of_business and their parts storage_facility rambor’s and board automation’s ie mr boring’s business_assets comprised intangible assets knowledge and data which was provided to tecom daily as an aspect of his employment consequently any travel from there to tecom at locations where it does business was in mr boring’s view business travel miles not personal commuting expenses similarly mr boring’s daily expenses are often business_expenses in his opinion as they are incurred for his board automation’s and rambor’s intangible assets continued survival his personal knowledge and abilities were intrinsic to these intangible assets and their operational survival in turn depended on his survival and his daily living_expenses discussion i schedule c business_expense deductions a general rules deductions are a matter of legislative grace and a taxpayer seeking a deduction must be able to point to an applicable statute and show that he comes within its terms 292_us_435 see also rule a as a general_rule sec_162 authorizes a deduction for all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business an expense is ordinary for purposes of this section if it is normal or customary within a particular trade business or industry 308_us_488 an expense is necessary if it is appropriate and helpful for the development of the business 320_us_467 sec_262 in contrast generally precludes deduction of personal living or family_expenses this burden may be shifted to the commissioner as to factual issues pursuant to sec_7491 under certain circumstances not present in this case petitioners have not asserted such a shift and petitioners have not maintained the required records nor cooperated with reasonable requests of respondent as required by sec_7491 to trigger the application of this burden-shifting provision the breadth of sec_162 is tempered by the requirement that any amount reported as a business_expense must be substantiated and taxpayers are required to maintain records sufficient therefor sec_6001 65_tc_87 aff’d 540_f2d_821 5th cir sec_1_6001-1 income_tax regs when a taxpayer adequately establishes that he or she paid_or_incurred a deductible expense but does not establish the precise amount we may in some circumstances estimate the allowable deduction bearing heavily against the taxpayer whose inexactitude is of his or her own making 39_f2d_540 2d cir there must however be sufficient evidence in the record to provide a basis upon which an estimate may be made and to permit us to conclude that a deductible expense rather than a nondeductible personal_expense was paid_or_incurred in at least the amount allowed 245_f2d_559 5th cir 85_tc_731 the record before us is rife with inconsistencies as to nearly every element that would be germane to determining or estimating the amounts of any deductible expenses furthermore business_expenses described in sec_274 are subject_to rules of substantiation that supersede the cohan doctrine 50_tc_823 aff’d 412_f2d_201 2d cir sec_1_274-5t temporary income_tax regs fed reg date sec_274 provides that no deduction shall be allowed for among other things traveling expenses entertainment_expenses gifts and expenses with respect to listed_property as defined in sec_280f and including passenger automobiles computer equipment and property generally used for entertainment recreation or amusement unless the taxpayer substantiates by adequate_records or by sufficient evidence corroborating the taxpayer’s own statement the amount of the expenditure or use the time and place of the expenditure or use or date and description of the gift the business_purpose of the expenditure or use and in the case of entertainment or gifts the business relationship to the taxpayer of the recipients or person entertained sec_274 d in addition to the general business_expense deduction rule_of sec_162 sec_167 authorizes as a depreciation deduction a reasonable allowance for the exhaustion wear_and_tear including a reasonable allowance for obsolescence -- of property_used_in_the_trade_or_business or of property_held_for_the_production_of_income in some limited circumstances capital_asset costs may be expensed rather than capitalized for future expense recovery through depreciation or amortization see sec_179 when applying sec_162 sec_167 and sec_179 in the context of particular items of property the following general framework has emerged through caselaw under those sections the initial question is whether ownership and maintenance of the property is related primarily to business or to personal purposes 55_tc_94 and cases cited thereat see also eg richardson v commissioner tcmemo_1996_368 griffith v commissioner tcmemo_1988_445 the answer to this question determines which of three approaches is appropriate if acquisition and maintenance of the property are primarily associated with profit-motivated purposes and any personal_use is distinctly secondary and incidental_expenses and depreciation are deductible if acquisition and maintenance are motivated primarily by personal considerations deductions are disallowed and if substantial business and personal motives exist allocation becomes necessary 275_f2d_578 7th cir aff’g tcmemo_1958_104 55_tc_94 richardson v commissioner tcmemo_1996_368 griffith v commissioner t c memo kenerly v commissioner tcmemo_1984_117 where the property in question is residential sec_280a provides a further limitation with potential bearing on business-related deductions claimed under sec_162 or sec_167 that statute reads in part as follows sec_280a disallowance of certain expenses in connection with business use of home rental of vacation homes etc a general_rule --except as otherwise provided in this section in the case of a taxpayer who is an individual or an s_corporation no deduction otherwise allowable under this chapter shall be allowed with respect to the use of a dwelling_unit which is used by the taxpayer during the taxable_year as a residence c exceptions for certain business or rental use limitation on deductions for such use -- certain business use --subsection a shall not apply to any item to the extent such item is allocable to a portion of the dwelling_unit which is exclusively used on a regular basis-- a as the principal_place_of_business for any trade_or_business of the taxpayer b as a place of business which is used by patients clients or customers in meeting or dealing with the taxpayer in the normal course of his trade_or_business or c in the case or a separate structure which is not attached to the dwelling_unit in connection with the taxpayer’s trade_or_business in the case of an employee the preceding sentence shall apply only if the exclusive use referred to in the preceding sentence is for the convenience of his employer certain storage use --subsection a shall not apply to any item to the extent such item is allocable to space within the dwelling_unit which is used on a regular basis as a storage unit for the inventory or product samples of the taxpayer held for use in the taxpayer’s trade_or_business of selling products at retail or wholesale but only if the dwelling_unit is the sole fixed location of such trade_or_business rental use -- to support their claimed schedule c expense deductions petitioners produced documents categorized according to the expense headings on schedule c that were stipulated by the parties and admitted into evidence in addition a spreadsheet schedule that mr boring prepared entitled rab biz expenditure sec_2010 xls was provided to respondent to explain petitioners’ claimed deductions and on respondent’s motion without objection by petitioners was admitted into evidence as exhibit 14-r the documents were supplemented by mr boring’s sworn testimony which as to specific expenses was broad in scope with very few if any specific details as to any individual item’s business_purpose or amount on cross-examination mr boring acknowledged that several items listed on exhibit 14-r as schedule c deductible expenses for plant operating_expenses included expenses for various individual credit card bills and other personal items mr boring’s accounting methods and procedures labeled idiosyncratic views by respondent in his brief allegedly treated petitioners’ outside employment wage income as rambor revenue although both petitioners were employees whose wages were reported on forms w-2 and the record does not indicate that rambor had contracted with tecom or the school district to provide either petitioner’s services to his or her employer or that they had employment agreements with rambor b business use of home mr boring characterized his home_office as his principal_place_of_business although he was a full-time_employee of tecom during and was provided with office workspace at tecom he also characterized rambor and his partnership board automation which had earlier in the 2000s contracted with s d engineering a vendor to tecom as his principal businesses consequently it is petitioners’ view that because of their intent to report all income including their employer expense reimbursements through rambor or board automation their home was their principal office for all of their income activities nevertheless whatever the intent petitioners properly reported their wages on line of their form_1040 attached to that was form_8829 expenses for business use of your home petitioners reported that the area of their home regularly and exclusively used for business was square feet out of the home’s total area of big_number square feet thus of their home was they contend used exclusively for business on the basis of these facts they concluded that dollar_figure of their reported dollar_figure of home mortgage interest_expense was properly deductible for the business use of their home they deducted the balance of dollar_figure of the reported home mortgage interest_expense on form_1040 schedule a other than their form_8829 and mr boring’s uncorroborated testimony which we do not accept as correct and credible petitioners did not introduce any evidence substantiating the expenses underlying their home_office expense deduction sec_280a generally prohibits the deduction of certain costs in connection with the business use of a taxpayer’s residence sec_280a however permits a deduction for any on page of their exhibit 8-p there is a floor_plan for their home with a living area breakdown table the table itemizes the square footage and size of each room on the first and second floors it indicates a total of big_number square feet plus a 462-square-foot garage the approximately 400-square-foot variance between the form_8829 information as to total square feet and the floor_plan schematic and table is not explained or addressed by the record the discrepancy does portend some doubts as to petitioners’ credibility but may also be attributed to inconsistently counting the garage space for business use but failing to include its square footage in the home’s total square footage item allocable to a portion of a residence that is regularly and exclusively used as the principal_place_of_business for any of the taxpayer’s trades_or_businesses in deciding whether a residence is the principal_place_of_business we compare the business use of the residence with the business use of all of the other places where business is transacted see 506_us_168 a deduction is allowed only when the residence is the most important or significant place for the business the two primary considerations are the relative importance of the activities performed at each business location and the time spent at each place see id pincite the relative importance of business activities engaged in at the office in the home may be substantially outweighed by business activities engaged in at another location see 113_tc_106 the flush language following sec_280a was liberalized by congress in the taxpayer_relief_act_of_1997 pub_l_no sec_932 sec_111 stat pincite see h_r rept no pincite 1997_4_cb_319 this flush language provides that the term principal_place_of_business includes a place of business which is used by the taxpayer for the administrative or management activities of any trade_or_business of the taxpayer if there is no other fixed location of such trade_or_business where the taxpayer conducts substantial administrative or management activities of such trade_or_business sec_280a see flying hawk v commissioner tcmemo_2015_139 at in the case of a taxpayer who is an employee the home_office must be for the convenience_of_the_employer it cannot just be a place in which the employee chooses to do some of his work sec_280a flush language 82_tc_318 it must be used exclusively for the employer’s work and not for personal_use sec_280a 919_f2d_1273 7th cir aff’g tcmemo_1989_356 a taxpayer may have only one principal_place_of_business for each business in which he is engaged see 73_tc_766 to determine the principal_place_of_business within the meaning of sec_280a the court may also ascertain the focal point of a taxpayer’s business activities 76_tc_696 74_tc_105 the fact that the employer provides inadequate office facilities is not dispositive of whether a home_office is for the convenience_of_the_employer see dudley v commissioner tcmemo_1987_607 aff’d without published opinion 860_f2d_1078 6th cir however it is unclear from the record whether mr boring was able to conduct all of his antenna communication technology activities at tecom therefore the court must look to whether mr boring’s home_office is his principal focal point of business and vital to his communications technology engineering efforts although it might in mr boring’s opinion have been less convenient or inadequate tecom did provide mr boring with an office or workplace facilities additionally on the basis of the record the court cannot conduct an accurate comparison of the time mr boring spent working at his home relative to the time he spent working elsewhere or determine that a home_office was vital to his communications technology efforts mr boring’s form_w-2 employment income greatly exceeded his schedule c gross_income and as his work activities with respect to both were interrelated we conclude that his principal_place_of_business for federal_income_tax purposes was tecom petitioners did not show that the home_office was used exclusively for business or was for business storage or that the use was for the convenience of their employers tecom and the school district pictures of the home’s interior included as a part of exhibit 13-p appear to show business documents books work-related devices and allegedly stored items haphazardly distributed in various rooms of the house some of which apparently also served as living areas and access points for other rooms accordingly the court concludes that petitioners have failed to meet the requirements of sec_280a or and are not entitled to a deduction for the expenses of maintaining a home_office therefore the dollar_figure is not allowable as a schedule c deduction see christine v commissioner tcmemo_2010_144 99_tcm_1591 aff’d 475_fedappx_259 9th cir deihl v commissioner tcmemo_2005_ 90_tcm_579 c repairs and maintenance petitioners deducted as a schedule c repairs and maintenance expense dollar_figure all of which respondent disallowed in support of this deduction petitioners provided bills from fisher plumbing for dollar_figure westlake management association annual dues and an electric boat and nonelectric boat dock fees schedule reflecting charges in date of dollar_figure and an invoice from southshore p d a for dollar_figure of annual dues the balance of the reported expense is not explained petitioners have failed to carry their rule a evidentiary burden there is no evidence in the record to show that these expenses were other than personal pleasure recreation or residence expenses all of which are nondeductible as provided by sec_262 sec_262 provides unequivocally that e xcept as otherwise expressly provided in this chapter no deduction shall be allowed for personal living or family_expenses consequently respondent’s determination that the dollar_figure schedule c repairs and maintenance expense deduction is not allowable is upheld by the court d legal and professional respondent disallowed petitioners’ claimed deduction for dollar_figure of legal and professional expenses in support of their claimed sec_162 deduction petitioners submitted three items an architect’s charge apparently for the dollar_figure portion of the total dollar_figure paid before date for design construction engineering homeowner review and approval and governmental agency approval with respect to an addition to and remodeling of their personal_residence their chase bank january through date statement reflecting a date check no payment of dollar_figure which they assert but do not document was paid to the construction contractor dream tree construction in date for its work on their personal_residence and a letter invoice for an additional dollar_figure paid to the architect scott e fajnar in date to pay off the balance of the dollar_figure total charge for his work related to petitioners’ personal_residence in addition to the fact that these charges appear to be capital expenditures which would not be currently deductible pursuant to sec_263 they again constitute personal expenditures which are nondeductible as mandated by sec_262 thus respondent’s disallowance of the claimed dollar_figure schedule c deduction will be upheld e insurance in support of their claimed deduction for a dollar_figure schedule c insurance expense all of which respondent disallowed petitioners provided statements from usaa insurance co these statements were with respect to a balance due of dollar_figure as of date for their valuable personal_property automobile and residential homeowners insurance policies the statements document payments during of dollar_figure and indicate a balance due as of date of dollar_figure the record which does not contain every month’s statement and which includes no statements after date does sec_263 provides in relevant part sec_263 general_rule --no deduction shall be allowed for-- any amount_paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate not explain the discrepancy between the amounts paid and the amount claimed but we need not resolve this discrepancy as explained previously petitioners do not qualify for a home_office expense deduction for use of their residence consequently their personal_property and residential usaa casualty insurance premiums are personal expenses covered by sec_262 that are not allowable as a deduction for federal_income_tax purposes their personal automobile insurance for a ford bronco a nissan pathfinder and a nissan pathfinder is also nondeductible since they also took the usaa automobile insurance charges into account in their computations of deductible car and truck expenses the same expense even if shown to be deductible may not be deducted twice f other expenses petitioners deducted schedule c other expenses of dollar_figure all of which respondent disallowed this amount comprised ip license subscription services of dollar_figure subsystems software components parts travel and supply expenses of dollar_figure rambor m for margaret boring plant operating_expenses of dollar_figure and rambor r for richard boring plant operating_expenses of dollar_figure minus dollar_figure of unexplained adjustments to the claimed expenditures in support of the reported net deduction petitioners submitted two receipts from the california school employees association apparently for sees candy items total cost dollar_figure and six mann theaters tickets total cost dollar_figure plus numerous credit card and bank statements for as was the case with their similarly self-prepared tax returns for years at issue in their earlier tax cases decided by this court’s t c summary opinion the credit card and bank statements appear to consist of an accounting of the payment of petitioners’ normally incurred daily living_expenses exhibit 14-r prepared by petitioners purports to itemize inter alia the reported other expenses as to the dollar_figure of ip license subscription services it and credit card and bank statements indicate for at t open dollar_figure for sprint broadband dollar_figure for adan loc services dollar_figure for verizon cellular i dollar_figure for verizon cellular dollar_figure for time warner dollar_figure and for utilities dollar_figure there was no specific evidence provided as to the actual business use of these communications and utility_services nor any attempt to allocate charges between business and personal_use without more petitioners have failed to meet their burden_of_proof see rule a 290_us_111 normally telephone and cable broadband services and home utility charges would constitute personal expenses which are nondeductible pursuant to sec_262 if there is a true independent business_component it must be established by the case record and the amount thereof determinable from the admitted evidence any contention that all such expenses including the personal living component are deductible is flatly mistaken as to the dollar_figure of reported subsystem component parts travel software and supply expenses consisting of open source engineering duplication expenses they are also not deductible petitioners provided no other information or documentation regarding these expenses looking further through the record for specific evidence as to their business_purpose available payment or supplier information provides no factual or evidentiary help to petitioners thus these expenses too are not sufficiently substantiated and petitioners’ evidentiary burden remains unmet and respondent’s disallowance determination is upheld see rule a 290_us_111 g rambor m and rambor r plant operating_expenses respondent disallowed dollar_figure of reported expenses classified by petitioners as noted above as rambor m or rambor r plant expenses in support of the reported expenses petitioners’ computer-generated exhibit 14-r rab biz expenditure sec_2010 xls lists numerous payments which do not always correlate with amounts on the schedule c the list references such items as multiple s cheevers procurement development services charges costco charges a target charge various chase and hsdc check or credit card payments chevron texaco american express and visa credit card payments petty cash expenditures a usaa insurance payment of dollar_figure tax software store charges of dollar_figure and other miscellaneous items petitioners did not adequately explain these charges or their specific business_purpose use or specific need on cross-examination by respondent’s counsel the following colloquy with mr boring occurred q mr boring as i am looking at this spreadsheet under plant operating_expenses back on page i see a line that says s cheevers procurement services a q a q a q right ugs contracts for dollar_figure right that is a payment to your son-in-law is that right say again that is a payment to your son-in-law mrs boring’s child from her previous marriage a q it’s my stepson sorry your stepson my apologies yes and the next line says chase and then it has the numbers a q c c do you see that a yes i do q a q that’s the payment of your credit card correct and as we go down through the rest of this we also see a payment to hsbc that’s also a payment to a credit card a q a okay another payment to chase do you see that sure q so your position is that although this spreadsheet exhibit 4-r that you have provided explaining your expenses includes your credit card bills that these credit card bills in fact are not part of the plant operating_expenses a are not part of-- q your plant operating_expenses the rambor r plant operating_expenses not in total and there is nothing in these documents that shows what a q the rambor r plant operating_expenses might otherwise be a that is correct although mr boring contends that at least some of the charges on his credit card statements were business related he did not adequately substantiate those charges other than by vague general testimony while he specifically referenced hsbcidentityplan com sprint wireless and the adi analog device as business_expenses he presented no further evidence that they were not sec_262 personal expenses he speculated that the starbucks most likely was a meeting with some guys and for business purposes likewise he asserted from memory that tandoree oven in los gatos california that was at the embedded systems conference and the convention center the bob hope airport charges were associated with that business trip such general claims are not sufficient where as here the supposedly deductible items are so intertwined with clearly personal expenses we cannot allow a deduction in such circumstances given the total absence of the records required to meet the previously discussed sec_274 enhanced substantiation provisions consequently none of the reported dollar_figure other expenses are allowable and respondent’s disallowance determination is sustained in fulldollar_figure petitioners’ apparent theory that their personal living costs are ordinary and necessary to permit them to stay healthy work and convert the business intangible assets composed of their knowledge to tangible products and gross_income is simply incorrect under federal tax law see generally sec_61 defining gross_income generally as all income from whatever source derived and sec_262 addressed and quoted above a much stronger factual case was considered by this court in 74_tc_1229 the taxpayer there had a rare ab negative blood type her blood plasma which she could and did sell to users willing to pay her significant amounts for her plasma was the source of her income she like petitioners here sought to deduct her daily living_expenses we explained generally stated the question presented by this case is whether petitioner may offset her taxable_income by the expenses she incurred in obtaining payment for her blood plasma donations the ability to offset income with expenses_incurred either under sec_162 in carrying_on_a_trade_or_business or under sec_212 for the production_of_income requires by definition the existence of related_income id pincite we concluded that only the extraordinary additional living_expenses such as those for special drugs and supplements were deductible normal living_expenses such as her health insurance were not deductible as business_expenses although a portion of the health insurance was allowable as a schedule a itemized medical_expense_deduction we explained that a lthough petitioner attempts to justify the deduction by comparing her body to some insured manufacturing machinery the instant set of facts prevents such a comparison her body is not a replaceable or easily repairable machine maintained solely for the production of blood plasma the unique nature of the manufacturing machinery in this instance makes the personal nature of the health insurance continued h depreciation and sec_179 expenses respondent has disallowed dollar_figure of claimed deductions for depreciation and sec_179 expenses petitioners provided exhibit 8-p in addition to their form_4562 depreciation and amortization filed with their form_1040 to explain and substantiate the expenses underlying these deductions the documents indicate that the claimed deductions emanate entirely from their use of their personal_residence its subsequent structural improvements and their three personal automobiles a ford bronco ii a nissan pathfinder and a nissan pathfinder as the ford bronco was already fully depreciated the claimed deduction was for their home and the two nissan pathfinders we have previously stated that sec_280a tightly restricts business deductions for personal residences petitioners have not shown that any part of the home was used exclusively for business further their calculation of space which they conclude was used exclusively for business include sec_150 square feet in the garage for business parking and square feet for storage the parking was apparently for at any one time one of their three personal cars this is not continued premiums unavoidable insuring against the costs of maintaining petitioner’s health is primarily a personal concern not merely a business concern cf sparkman v commissioner f 2d 9th cir id pincite6 fn refs omitted exclusive business use within the meaning of sec_280a and c and petitioners have similarly failed to prove exclusive business use or business need for any of their reported square feet allegedly devoted to business use in addition to the garage which was not proven to be regularly used for storage as required by sec_280a this space allegedly included two office areas and a bathroom the automobiles are subject_to the strict substantiation rules of sec_274 and petitioners have provided no credible_evidence of any deductible expenses petitioners are mistaken to believe their home is their principal or even a secondary place of business such that their daily trips to their tecom or school locations are deductible business miles rather than commuting expenses consequently respondent’s disallowance of the reported dollar_figure of depreciation expenses for petitioners’ residence and automobiles is sustained i car and truck expenses petitioners reported and respondent disallowed dollar_figure of car and truck expenses for in addition to petitioners’ claimed depreciation expense for cars and trucks of dollar_figure as noted above these expenses related to their three personal automobiles exhibit 8-p offered to substantiate these expenses itemizes expenses for each vehicle and asserts the bronco ii was used the nissan pathfinder and the nissan pathfinder for business as noted the strict substantiation rules of sec_274 apply to these deduction claims petitioners have not provided any records much less contemporary records or their equivalent containing the information required for listed_property as defined in sec_280f which includes passenger automobiles see our discussion supra and sec_1_274-5t and i temporary income_tax regs fed reg date consequently none of their claimed car and truck expenses is allowable and respondent’s disallowance of the reported dollar_figure is sustained in full ii itemized_deductions since we have sustained respondent’s disallowance of deductions for various reported schedule c business_expenses the question arises as to whether any of these expenses are allowable as additional itemized_deductions on schedule a although not explicitly addressed by the parties one such expense stands out it is the dollar_figure portion of their dollar_figure home mortgage interest_expense_deduction claimed on schedule c and disallowed by respondentdollar_figure another item of interest is the dollar_figure tax software store item on page of exhibit 14-r rab biz expenditure sec_2010 xls this could be for an item deductible under sec_212 however the paypal payment references on page of exhibit 12-p and its listing on page of exhibit 14-r do not provide the needed continued sec_163 except as otherwise provided allows a deduction for all interest_paid or accrued within the taxable_year on indebtedness sec_163 provides an exception from the general_rule for personal_interest which is defined as any interest allowable as a deduction under this chapter other than-- inter alia d any qualified_residence_interest sec_163 defines qualified_residence_interest generally as including the interest_paid on the taxpayers’ personal residence’s acquisition_indebtedness up to dollar_figure million and home_equity_indebtedness up to dollar_figure where as here a joint_return was filed the parties have stipulated a substitute form_1098 mortgage interest statement issued by usaa federal savings bank reflecting mortgage interest received by that bank from petitioners during of dollar_figure as this document is required to be filed with the internal_revenue_service it should have been in respondent’s administrative file for petitioners’ taxable_year on audit and in the statutory_notice_of_deficiency respondent allowed the dollar_figure home mortgage interest_deduction claimed on schedule a but disallowed the dollar_figure home mortgage interest_deduction claimed on schedule c as an expense for business use of home however respondent failed to make a correlative continued information as to what was purchased for us to determine that this item is deductible and the record contains no other information about this item adjustment in the same amount to petitioners’ allowable qualified home mortgage interest_deduction neither party specifically addressed this issue at trial or on brief but petitioners have claimed the full dollar_figure amount as a deduction for and have carried their burden of going forward with credible_evidence respondent has not argued and has produced no evidence that the total reported interest_expense of dollar_figure was in any way limited by the dollar_figure million or less acquisition_indebtedness limitation or the dollar_figure home_equity_indebtedness limitation of sec_163 or c ii consequently petitioners will be allowed an additional dollar_figure deduction for schedule a itemized home mortgage interest iii accuracy-related_penalty the statutory_notice_of_deficiency unfortunately determines a penalty here on a shotgun basis for one or more or all of the reasons set out in sec_6662 without any specificity on brief at last respondent has clarified the issue and now contends the penalty applies because of an underpayment due to negligence and or intentional disregard of rules or regulations and because there is a substantial_understatement_of_income_tax sec_6662 imposes an accuracy-related_penalty equal to of the portion of the underpayment to which sec_6662 applies sec_6662 applies to the portion of any underpayment which is attributable to inter alia negligence or disregard of rules or regulations sec_6662 or a substantial_understatement_of_income_tax sec_6662 negligence is defined in sec_6662 as any failure to make a reasonable attempt to comply with the provisions of this title and disregard as any careless reckless or intentional disregard caselaw similarly states that n egligence is a lack of due care or the failure to do what a reasonable and ordinarily prudent person would do under the circumstances 89_tc_849 quoting marcello v commissioner 380_f2d_499 5th cir aff’g on this issue 43_tc_168 and t c memo aff’d 904_f2d_1011 5th cir aff’d 501_us_868 pursuant to regulations ‘ n egligence’ also includes any failure by the taxpayer to keep adequate books_and_records or to substantiate items properly sec_1_6662-3 income_tax regs in the instance of individuals there is a substantial_understatement_of_income_tax for any taxable_year if the amount of the understatement exceeds the greater of of the tax required to be shown on the return for the taxable_year or dollar_figure sec_6662 the understatement for the taxable_year comes within the definition of a substantial_understatement petitioners had reported no income_tax_liability on their filed income_tax return for an exception to the sec_6662 penalty is set forth in sec_6664 which provides no penalty shall be imposed under this part which includes sec_6662 and sec_6663 with respect to any portion of an underpayment if it is shown that there was a reasonable_cause for such portion and that the taxpayer acted in good_faith with respect to such portion regulations interpreting sec_6664 provide the determination of whether a taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all pertinent facts and circumstances generally the most important factor is the extent of the taxpayer’s effort to assess the taxpayer’s proper tax_liability sec_1_6664-4 income_tax regs we conclude that respondent has met the sec_7491 burden of production with respect to the negligence_penalty the evidence adduced in this case reveals a serious dearth of adequate_records and substantiation for reported items with this threshold showing the burden shifts to petitioners to establish that they acted with reasonable_cause and in good_faith as to the claimed items see 116_tc_438 other than their incorrect substantive position that they were entitled to the deductions they reported as discussed previously petitioners have introduced no evidence to excuse them from the accuracy-related_penalty on these facts petitioners have failed to establish that they met each and every requirement necessary for a successful reasonable_cause defense petitioners are liable for the sec_6662 accuracy-related_penalty iv discretionary penalty by motion filed date respondent has moved the court to impose a sec_6673 penalty of dollar_figure for petitioners’ conduct in pursuing this case primarily to delay collection of their proper income_tax respondent also asserts that petitioners know or should know that their position is groundless to be certain these are good grounds for respondent’s motion given petitioners’ history in this court previously described nevertheless there is a problem with respondent’s request as noted above in denying petitioners their claimed dollar_figure schedule c home mortgage interest_expense_deduction respondent inexplicably failed to make the needed correlative_adjustment to petitioners’ claimed deduction for dollar_figure of home mortgage interest on schedule a given respondent’s omission we cannot conclude that this case was maintained primarily for delay or that petitioners’ positions were entirely frivolous consequently the court will not impose a sec_6673 penalty in this case we warn petitioners however that their conduct is in material noncompliance with federal tax law our opinions here and in t c summary opinion are tailored to explain what the law requires petitioners have been fairly warned consequently any further conduct in the same vein as that considered here and in our previous cases addressing their tax_liabilities and tax_payments may well under present law result in the application of a sec_6673 penalty in an amount of up to dollar_figure to reflect the foregoing and to account for the increased deduction for schedule a home mortgage interest an order denying respondent’s motion will be issued and decision will be entered under rule


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi br - plr-117112-00 date date legend x state d1 this responds to your authorized representative’s letter dated date submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts x began doing business under state law on d1 the shareholder of x intended that x elect to be treated as an s_corporation effective d1 however the election to be treated as an s_corporation was not timely filed law and analysis sec_1362 provides that a small_business_corporation can elect to be treated as an s_corporation sec_1362 provides when an s election becomes effective if an s election is made within the first two and one-half months of a corporation’s taxable_year then that corporation will be treated as an s_corporation for the year in which the election was made if an election is made after the first two and one-half months of a corporation’s taxable_year then the corporation will generally not be treated as an s_corporation until the following taxable_year however sec_1362 provides that if no election is made pursuant to sec_1362 or if the election is made after the date prescribed for making such an plr-117112-00 election and the secretary determines reasonable_cause existed for the failure to timely make the election then the secretary can treat such an election as timely made for that taxable_year and effective as of the first day of that taxable_year in the present case x failed to timely elect s_corporation treatment effective d1 however x has established reasonable_cause for not making a timely election and is thus entitled to relief under sec_1362 conclusion based solely on the facts submitted and representations made and provided that x otherwise qualifies as a subchapter_s_corporation we conclude that x will be recognized as an s_corporation effective d1 within days from the date of this letter x should submit a properly completed form_2553 with a copy of this letter attached to the relevant service_center except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer s requesting it sec_6110 of the 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 senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


office_of_chief_counsel department of the treasury internal_revenue_service washington d c date number release date cc intl br5 tl-n-3888-00 uilc memorandum for from internal_revenue_service national_office field_service_advice acting associate area_counsel cc lm mct was attn karen chandler jeffrey dorfman chief branch cc intl br5 subject this chief_counsel_advice responds to your memorandum dated date in accordance with i r c ' k this chief_counsel_advice should not be cited as precedent legend parent sub target promoter lenders country a date date date date date date amount amount amount amount amount tl-n-3888-00 amount amount amount a b period m period n year year year year x transaction s t u issue sec_1 whether the transaction in which parent purchased through a prepaid purchase agreement a security issued by its country a subsidiary to two unrelated foreign banks may be recharacterized for federal_income_tax purposes whether the service is estopped from challenging the transaction in the current audit when in an audit of prior years the service did not challenge the transaction conclusion sec_1 the transaction may be bifurcated into a loan from the banks to sub and an equity contribution from parent to sub the service is not estopped from challenging the transaction in the current audit facts sub is a wholly owned country a subsidiary of parent a u s_corporation on date sub acquired target a country a corporation sub s acquisition of target was originally financed by a loan from parent which had obtained the funds through a series of short term loans from unrelated persons that same month promoter made an initial presentation to parent soliciting its interest in a particular transaction that promoter called the x transaction promoter had marketed this transaction to other companies prior to approaching parent according to promoter s marketing material the proposed x transaction consisted of two transactions executed simultaneously the issuance of a note with no fixed maturity a perpetual debt_instrument by a country a subsidiary to foreign banks and a purchase contract between the banks and the u s parent under which the banks were obligated to transfer the note to the u s parent after period n in exchange for amount paid on the date the x transaction was entered into the marketing material described the note as treated as equity for u s tax purposes after the transfer to the u s parent awith the result that the us bifurcates the transaction for tax-analysis purposes promoter identified two aexit strategies after the u s parent acquired the note from its u k subsidiary first the parent could redeem the note with no country a corporate or withholding tl-n-3888-00 taxes the gain from the redemption would be treated as a dividend to the parent if the country a subsidiary had earnings_and_profits which would not be subject_to u s tax if sufficient foreign tax_credits were available second the u s parent could contribute the note as equity to the country a subsidiary which also would have no u s or country a tax consequences according to promoter s marketing material the transaction s benefit arose from the asymmetrical u s and country a tax treatment of the perpetual debt_instrument specifically ain the form of annual deductions for payments of principal and a redemption gain either free of tax in the us and country a if contributed or sheltered by sufficient foreign tax_credits if redeemed parent sub and promoter executed a letter of understanding dated date setting forth some of the terms of the transaction such as the amount aggregate principal_amount of sub s notes and promoter s fee which was a of the principal_amount of the notes after promoter made a second presentation and provided additional materials to parent the board_of directors of parent approved parent s guarantee of amount in connection with the x transaction on date according to the minutes of the meeting the purpose of the x transaction was to afinance the acquisition of target and to partially fund anticipated capital expenditures in country a promoter subsequently solicited potential lenders to participate in the transaction with taxpayer and sub included in the marketing materials was a cash_flow summary that indicated that the investor bank would loan amount which consisted of the amount prepayment plus a loan of amount each of the payments made by sub to the bank during period m contained an interest element and a principal element so that by the turnover date the bank would receive amount of interest and repayment of the amount principal_amount after factoring in transaction costs the bank would earn a projected b return two foreign banks lenders agreed to participate in the x transaction on date the directors of sub formally authorized it to execute the x transaction which occurred nine days later according to the transaction documents sub issued two unsecured notes a asecurities with no fixed maturity to lenders the principal_amount of each security was amount equal to half of amount for period m when each security is outstanding ie the period in which the securities are held by lenders the securities have certain characteristics of debt for u s tax purposes although they have no maturity_date during period m sub must make two purported interest payments to each lender annually which are guaranteed by parent these amounts are payable unconditionally with any failure to pay being a default that will trigger traditional creditors rights eg the rights to repayment of par plus unpaid interest sue for payment of a matured claim and join with other creditors to force sub into bankruptcy the securities also rank senior to all claims of unsubordinated creditors of sub and junior to all secured_obligations of sub sub is not required to redeem nor has the option of redeeming the securities during this period and lenders do not have any right to put the securities to sub at any time the only circumstance under which sub may redeem the securities is in the event that due to a change in law occurring after the securities are issued a foreign withholding_tax is imposed on payments on the securities to lenders in such case or in the event that the securities are repaid following default by sub prior to the turnover date lenders must pay parent an amount equal to the redemption or repayment proceeds of the securities less the present_value of the remaining payments up to the turnover date in the event that certain events affecting lenders credit ratings occur prior to the turnover date parent has the right to accelerate lenders obligation to deliver the securities to parent in exchange for payment of an amount equal to the present_value of the remaining payments up to the turnover date tl-n-3888-00 on the same date as the securities were issued aissue date parent entered into a forward purchase agreement with lenders to purchase the securities with a combined nominal principal_amount of amount under this agreement lenders were obligated to deliver the securities to parent after period m expired ie on the aturnover date and in exchange parent paid lenders amount on the issue_date parent financed its prepayment through commercial paper financing on the turnover date the lenders are obligated to transfer ownership of the securities to parent also on the turnover date the terms of the securities will change resulting in more equity characteristics stated_interest will only be payable to the extent that immediately after such payment sub would remain solvent and sub will not be required to make payments of stated_interest if it has not declared or paid dividends on any class of its share capital stated_interest payments not made as a result of such limitations will accumulate and become payable when such limitations cease to apply but failure of sub to make payments as a result of such limitations will not give holders of the securities any traditional creditors rights also on the turnover date the securities will no longer rank senior to all unsubordinated claims and will rank junior to all senior and secured claims of creditors payments on the securities during this period are not guaranteed in the event of the winding-up of sub the holder of the securities ie parent will rank as if the securities had been converted into a notional class of preference shares ranking ahead of all issued shares on the day before the winding-up commences in the event lenders default on their obligation to deliver the securities to parent parent may assign its rights under the forward purchase agreement to sub in consideration for sub agreeing to make payments to parent as if parent were the holder of the securities by doing so sub would not need to make such payments to lenders because under country a law sub s rights under the forward purchase agreement would offset sub s obligation to make payments to lenders sub would thereafter make payments to parent rather than lenders notwithstanding the fact that lenders continue to hold the securities two law firms and an accounting firm had reviewed and provided written opinions on the proposed transaction for u s and country a tax purposes and u s and country a accounting purposes s provided an opinion dated date of the u s tax consequences of the proposed transaction the opinion stated that for u s tax purposes the issuance of the securities and lenders simultaneous obligation to transfer the securities to parent under the forward purchase agreement should be integrated and treated as the issuance by sub of two separate securities the front-end security under which sub makes payments to lenders during period m and the back-end security obligating sub under certain conditions to make payments to parent after the turnover date accordingly for u s tax purposes the opinion concluded that prior to the turnover date the instrument would be characterized as debt so that payments by sub to lenders during period m would be treated as interest and not as dividends parent would be entitled to deduct interest or original_issue_discount accrued on the debt it incurred to make the prepayment on the forward purchase agreement parent would not be required to include in income any payments with respect to the securities in these years after the turnover date the securities would be characterized as equity so that to the extent payments are made by sub to parent such payments will be foreign source dividends that potentially entitle parent to indirect foreign tax_credits t a country a law firm provided promoter two opinions both dated date of the country a tax consequences of the proposed transaction it concluded that for country a purposes the tl-n-3888-00 securities would be treated as perpetual debt while lenders hold the securities ie until the turnover date the periodic_payments on the securities would be deductible as interest for country a tax purposes however to the extent sub makes subsequent payments on the securities after the turnover date these payments would be treated as nondeductible equity distributions for country a tax purposes rather than interest because these amounts were paid to a holder parent that is not subject_to country a tax on such payments according to a memo dated the same month as t s date memoranda u an accounting firm reviewed the transaction and concluded that it was acceptable for parent to net in consolidation its asset ie the amount it prepaid on the forward purchase agreement to lenders against sub s liability to lenders on the notes and to account for this net liability aas if it were the principal on an amortizing notes the payments of which are the interest payments made during years prior to the turnover date in the years at issue year and year for country a tax purposes sub deducted interest accrued on the amount principal_amount of the securities for u s gaap financial consolidated reporting purposes taxpayer did not show amount as outstanding third party debt because it netted the amount prepayment amount against amount as a result under gaap taxpayer booked interest_income of approximately amount as a u s financial reporting consolidation entry in each of these years the year amount of book interest_income flowed through line of schedule m and was the subject of a schedule m-1 adjustment in year but the year amount was reported in the tax_return in retained earnings which did not require a schedule m-1 adjustment for u s tax purposes however parent reported no interest_income it treated the amount payment as having no u s tax consequences since it characterized the forward purchase agreement as any other forward or option contract for the purchase of securities by a non-dealer parent asserts that the securities should be treated as equity as of the turnover date under notice_94_47 1994_1_cb_357 because the securities have no maturity_date the holder of the securities on the turnover date ie parent has no traditional creditors rights interest payments are made only to the extent that immediately after such payment sub would remain solvent the securities do not require interest payments unless sub declared or paid dividends the securities are subordinated and unsecured and they will be held by sub s sole shareholder law and analysis a partial recast of the x transaction as equity the substance of a transaction and not the form controls especially where the parties to the transaction are jointly controlled 407_f2d_1121 4th cir where related entities occupy both sides of the bargaining table the form and labels do not necessarily correspond to economic reality because the parties can mold the transaction at their will 398_f2d_694 3d cir form and labels lose their significance particularly where a shareholder who advances funds to a corporation can treat those funds as corporate obligations instead of contributions to capital without affecting his proportionate equity_interest id in determining whether the x transaction constitutes debt or equity the particular facts and circumstances must be examined no single uniform approach has been adopted by the courts in analyzing this particular issue the tax_court looks to whether there was a agenuine intention to create a debt with a reasonable expectation of repayment and whether that intention tl-n-3888-00 comport s with the economic reality of creating a debtor-creditor relationship nestle holdings inc v commissioner tcmemo_1995_441 70_tcm_682 vacated and remanded on another issue 152_f3d_83 2d cir quoting 61_tc_367 in addition to intent the courts have enumerated several other factors to consider in resolving a debt-equity issue while no single factor is determinative john kelley co v commissioner 362_us_521 and the following list is not exclusive the courts generally look to the name and presence of a written_agreement demonstrating indebtedness the presence of a fixed maturity_date the source of payments eg whether there is anticipated cash_flow to cover payments the right to enforce payment increased participation in management as the result of the advance subordination thinness of the capital structure in relation to debt the identity of interest between creditor and stockholder the source of interest payments eg from earnings the ability of the corporation to obtain credit from outside sources the use of funds for capital assets or risk involved in making the advances and the failure of the debtor to repay see 464_f2d_394 5th cir laidlaw transportation inc v commissioner tcmemo_1998_232 nestle holdings inc v commissioner t c m pincite 512_fsupp_1178 s d n y see also sec_385 listing debt-equity factors which may be taken into account in regulations based on the facts presented the securities may be recharacterized as in part a net loan of amount from lenders to sub that sub repays with respect to principal and interest during period m and in part an equity contribution of amount from parent to sub on the issue_date facts supporting the treatment of lenders advance to sub as a loan are a written_agreement relating to an amount loan between each lender and sub a cash_flow summary included in promoter s marketing materials for potential lenders indicated that the lenders would make a net loan to sub of an amount notional_principal_amount less the parent s amount payment that sub would repay by the turnover date sub was unconditionally obligated to make payments to lenders parent guaranteed sub s payments to lenders in period m lenders had traditional creditors rights to enforce payment and the securities during period m ranked senior to the claims of sub s unsubordinated creditors tl-n-3888-00 facts supporting the characterization of parent s prepayment as an equity contribution are the securities have no fixed maturity_date parent is not entitled to nor receives any economic return from sub in the form of interest or otherwise during period m parent is entitled to payment after period m only subject_to the solvency and dividend payment conditions described above parent lacks traditional creditor rights to enforcement payment the securities are subordinated and unsecured parent has the right to assign its interest in the securities with the result that in the event lenders defaulted on their obligation to deliver the securities sub would make payment to parent instead of lenders and parent the sole shareholder of sub holds the securities characterizing parent s interest in the securities as equity is consistent with the opinion issued by s we disagree however that parent does not have an equity_interest until the turnover date the facts indicate that in substance parent made an amount equity contribution on the issue_date parent was effectively guaranteed to receive the securities on the turnover date lenders were obligated to deliver the securities to parent on the turnover date if not earlier in the event of bank insolvency the chance of sub s default on the securities was remote because of parent s guarantee and parent s interest in the securities was recorded on sub s books at or around the issue_date beginning with sub s first payment on the notes to lenders in year sub reduced its earnings_and_profits by an amount equal to the deductible_interest it paid on the amount notional_principal_amount of the securities as a result of recharacterizing a portion of the transaction amount as equity and not debt sub s earnings_and_profits should be adjusted to reflect that a corresponding amount of sub s claimed interest deductions should be treated as nondeductible distributions to parent b issue of estoppel we understand that the examination for year the year the transaction was entered and year the first year in which sub purportedly paid interest was closed without challenging this transaction it is well-settled that the service s failure to make an assessment upon a prior audit does not estop the service from making an otherwise appropriate assessment at some later date see 783_f2d_69 7th cir service s failure to assess the wagering tax against taxpayer in two earlier audits in and does not prevent assessment of tax in following audit that found such assessment appropriate 713_f2d_347 8th cir the service is not estopped from changing an earlier interpretation of law even if the taxpayer detrimentally relied in good_faith on the service s erroneous position in the prior year 465_us_330 381_us_68 accordingly although the service did not challenge the x transaction during an earlier audit the service is not estopped from challenging the x transaction in the current audit that includes year and year tl-n-3888-00 case development hazards and other considerations under sec_482 since parent and sub are aowned or controlled directly or indirectly by the same interests the service may allocate gross_income between parent and sub to prevent evasion of taxes or clearly to reflect the income of these entities thus it may be possible to allocate a fee from sub to parent for guaranteeing sub s payments to lenders on the note this allocation should reflect an arm s length charge for parent s provision of a guarantee of sub s payments to lenders whether the controlled_transaction produces an arm s length result is evaluated by comparing the results of those transactions to results realized by uncontrolled taxpayers engaged in comparable transactions under comparable circumstances see '1 d accordingly sec_482 may provide another basis for challenging the x transaction if supported by additional factual development this writing may contain privileged information any unauthorized disclosure of this writing may have an adverse effect on privileges such as the attorney client privilege if disclosure becomes necessary please contact this office for our views please call if you have any further questions by john staples associate chief_counsel international jeffrey dorfman chief branch office of associate chief_counsel international


tcmemo_2008_32 united_states tax_court paul n rogers petitioner v commissioner of internal revenue respondent docket no filed date larry d harvey for petitioner randall l preheim for respondent memorandum opinion vasquez judge this case is before the court on respondent’s motion for summary_judgment pursuant to rule unless otherwise indicated all rule references are to the tax_court rules_of_practice and procedure and all section references are to the internal_revenue_code in effect for the year in issue after a concession the sole issue for decision is whether petitioner can exclude from income wages earned during from working in antarctica background at the time he filed the petition petitioner resided in clark fork idaho during petitioner performed services at mcmurdo station in ross island antarctica on his federal_income_tax return petitioner excluded wage income earned and received during for services performed in antarctica i summary_judgment discussion rule a provides that either party may move for summary_judgment upon all or any part of the legal issues in controversy full or partial summary_judgment may be granted only if it is demonstrated that no genuine issue exists as to any material fact and that the legal issues presented by the motion may be decided as a matter of law see rule b 98_tc_518 affd 17_f3d_965 7th cir we conclude that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law respondent concedes that no penalty pursuant to sec_6662 is due from petitioner for ii in general sec_61 provides that gross_income means all income from whatever source derived accordingly citizens of the united_states generally are taxed on income earned outside the geographical boundaries of the united_states unless the income is specifically excluded from gross_income 117_tc_95 affd sub nom 68_fedappx_44 9th cir affd sub nom 357_f3d_1108 10th cir exclusions from income are construed narrowly and taxpayers must bring themselves within the clear scope of the exclusion id iii sec_911 in 126_tc_89 473_f3d_790 7th cir arnett ii we addressed the arguments made by the parties herein regarding sec_911 the u s court_of_appeals for the seventh circuit agreed with our analysis of sec_911 and affirmed our conclusion that antarctica is not a foreign_country pursuant to sec_911 and the regulations thereunder arnett v commissioner f 3d pincite we shall not repeat our analysis from arnett i herein we follow our analysis and holding in arnett i and the analysis and holding of the court_of_appeals in arnett ii in 126_tc_89 affd 473_f3d_790 7th cir we concluded our opinion with a continued iv conclusion accordingly for the reasons stated in arnett i arnett ii and herein we conclude that petitioner cannot exclude from gross_income wages earned during from working in antarctica to reflect the foregoing an appropriate order and decision will be entered continued citation of sec_863 suggesting that sec_863 provided an additional reason to rule against the taxpayer id pincite see also sec_863 providing that income earned in antarctica by a u_s_person is sourced in the united_states in arnett v commissioner f 3d pincite the u s court_of_appeals for the seventh circuit addressed sec_863 in greater detail stating at the outset we think that it is important to note that considering antarctica not to be a foreign_country is compatible with the general statutory scheme notably sec_911 is found under subtitle a chapter subchapter_n of the irc which is designated tax based on income from sources within or without the united_states part i of this subchapter entitled source_rules and other general rules relating to foreign_income deems any activity in antarctica to be space_or_ocean_activity in turn the united_states is designated the source country of income from such activity when earned by a citizen_of_the_united_states sec_863 although this provision does not provide a definitive answer as to whether antarctica is a foreign_country it supports the conclusion that sec_911 is not intended to apply to income earned for services provided in antarctica we take this opportunity to state our agreement with the court of appeals’ conclusion set forth above see also 450_us_1


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-103094-11 date date re ------------------------------------------------ ------------------------------------------------------------ legend taxpayer trust date x y z spouse year year year accountant year dear ----------- --------------------------------------------- ---------------------------------------------------------------------- ----------------------- -------------------------- ----------- ----------- ----------- ---------------------------------------------------------- ------- ------- ------- ------------------------------------ ------- this letter responds to the letter dated date submitted by your authorized representatives 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 make an allocation of generation-skipping_transfer gst_exemption with respect to certain transfers to trust facts on date taxpayer created an irrevocable_trust trust for the benefit of his descendants on the same date taxpayer transferred dollar_figurex to trust year transfer in year sec_2 and taxpayer made additional transfers to trust of dollar_figurey in property and dollar_figurez respectively plr-103094-11 taxpayer retained accountant to prepare taxpayer’s and spouse’s respective form sec_709 united_states gift and generation-skipping_transfer_tax returns to report the year sec_1 through transfers to trust taxpayer and spouse each timely filed their respective form sec_709 and consented under sec_2513 to treat taxpayer’s transfers to trust for year year and year as made one-half by spouse accountant reported the value of the year sec_1 through transfers on the form sec_709 accountant allocated taxpayer’s and spouse’s available gst exemptions to the year and year transfers to trust however accountant failed to allocate taxpayer’s and spouse’s available gst_exemption to the year transfer to trust subsequently in year on the advice of accountant taxpayer filed supplemental form sec_709 for year sec_1 and in order to claim the annual exclusion for gift_tax purposes the supplemental form sec_709 for year and year did not reflect the allocation of taxpayer’s and spouse’s gst_exemption made on the original form sec_709 for those years taxpayer and spouse are no longer married taxpayer requests the following rulings an extension of time to allocate his gst_exemption to the year transfer to trust pursuant to sec_2642 and sec_301_9100-3 the gift_tax value of the year transfer shall be used to determine the amount of gst_exemption allocated and the allocation of taxpayer’s gst_exemption to the year sec_1 and transfers to trust remain in effect law and analysis sec_2513 provides generally that for gift_tax purposes if the parties consent a gift made by one spouse to any person other than his or her spouse shall for gift_tax purposes be considered as made one-half by the donor spouse and one-half by his or her spouse sec_2601 imposes a tax on every generation-skipping_transfer gst made by a transferor to a skip_person a generation-skipping_transfer is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2602 provides that the amount of the gst tax is determined by multiplying the taxable_amount by the applicable_rate sec_2641 provides that the term applicable_rate means with respect to any gst transfer the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer plr-103094-11 under sec_2642 the inclusion_ratio with respect to any property transferred in a generation-skipping_transfer is generally defined as the excess of over the applicable_fraction the applicable_fraction as defined in sec_2642 is a fraction the numerator of which is the amount of gst_exemption under sec_2631 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 sec_2631 as in effect for the tax years at issue provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure 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 shall be irrevocable sec_2632 provides that any allocation by an individual of his or her gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual’s estate determined with regard to extensions regardless of whether such a return is required to be filed sec_26_2632-1 of the generation-skipping_transfer_tax regulations provides that an allocation of gst_exemption to property transferred during the transferor’s lifetime is made on form_709 sec_26_2632-1 example provides as follows on date t transfers dollar_figure to an irrevocable gst_trust described in sec_2632 the transfer to the trust is not a direct_skip the date prescribed for filing the gift_tax_return reporting the taxable gift is date on date t files a form_709 on which t properly elects out of the automatic allocation rules contained in sec_2632 with respect to the transfer in accordance with paragraph b iii of this section and allocates dollar_figure of gst_exemption to the trust on april 13th of the same year t files an additional form_709 on which t confirms the election out of the automatic allocation rules contained in sec_2632 and allocates dollar_figure of gst_exemption to the trust in a manner that clearly indicates the intention to modify and supersede the prior allocation with respect to the transfer on date t files a form_709 attempting to reduce the earlier allocation the allocation made on the april return supersedes the prior allocation because it is made on a timely-filed form_709 that clearly identifies the trust and the nature and extent of the modification of gst_exemption allocation the allocation of dollar_figure of gst_exemption to the trust is effective as of date however the return filed on date is not a timely filed return the dollar_figure gst_exemption allocated to the trust as amended on date remains in effect because an allocation once made is irrevocable and may not be modified by the taxpayer after the last date on which a timely filed form_709 may be filed plr-103094-11 sec_2652 and sec_26_2652-1 provide that if under sec_2513 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 the individual then for purposes of the gst tax each spouse is treated as the transferor of one-half of the entire value of the property transferred by the donor spouse regardless of the interest the electing spouse is actually deemed to have transferred under sec_2513 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 gift_tax_return filed on or before the date prescribed by sec_6075 for such transfer the value of such property for purposes of determining the inclusion_ratio under sec_2642 shall be its value as finally determined for purposes of chapter within the meaning of sec_2001 sec_2642 provides that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 or and an election under sec_2632 or c such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of sec_2642 sec_2642 provides that in determining whether to grant relief under sec_2642 the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief the time for making the allocation or election shall be treated as if not expressly prescribed by statute notice_2001_50 2001_2_cb_189 provides that under sec_2642 the time for allocating the gst_exemption to lifetime transfers and transfers at death the time for electing out of the automatic allocation rules and the time for electing to treat any trust as a generation-skipping_trust are to be treated as if not expressly prescribed by statute the notice further provides that taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c 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 code except subtitles e g h and i plr-103094-11 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 in accordance with sec_2642 and notice_2001_50 taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c 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 taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government under sec_301_9100-3 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 representations made we conclude that the requirements of sec_301_9100-3 are satisfied therefore taxpayer is granted an extension of time of days from the date of this letter to allocate taxpayer’s available gst_exemption to the year transfer to trust the allocations will be effective as of the date of the year transfer to trust and the gift_tax value of the transfer to trust will be used in determining the inclusion_ratio with respect to trust further we conclude that the original allocations of taxpayer’s gst_exemption to the year and year transfers to trust remain in effect this situation is similar to example of sec_26 b iii in which the taxpayer’s allocations of gst_exemption made on a timely filed return may not subsequently be modified on a form_709 that is not timely filed the allocations should be made on supplemental form sec_709 for the appropriate calendar_year and filed with the internal_revenue_service cincinnati service_center - stop cincinnati ohio a copy of this letter should be attached to each supplemental form_709 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-103094-11 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 associate chief_counsel passthroughs special industries by lorraine e gardner senior counsel branch office of associate chief_counsel passthroughs special industries enclosures copy for sec_6110 purposes copy of this letter


internal_revenue_service number release date index number -------------------- ---------------- -------------------- ----------------------- ---------------------------------- in re -------------------- 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 bo1 plr-134011-10 date date parent ---------------------------------------------------------------------------- ------------------------------------------------------------------- --------------------------- entity x ------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------ subsidiary y business a date date note note --------------------------------- ----------------------------------------------------- ------------------------- -------------------------- ------------------------------------------------ ------------------------------- new note sec_1 --------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------- ----------------------------------------------------------------- loan loan note note --------------------------------------- ------------------------------------------------ ---------------------------------- ---------------------------------- plr-134011-10 new note sec_2 ------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------- dear -------------- we respond to your authorized representatives’ letter dated date requesting certain rulings relating to the application of sec_382 of the internal_revenue_code to a completed transaction summary of facts parent is the common parent of a consolidated_group parent consolidated_group engaged in business a on date parent and entity x a disregarded_entity of subsidiary y filed for bankruptcy protection under chapter of the bankruptcy code the subsidiaries of parent other than entity x including subsidiary y did not file for bankruptcy protection on date the bankruptcy plan_of_reorganization the plan which had been approved by the bankruptcy court became effective the following are material features of the plan i each electing holder of an allowed claim arising under a note or any holder of an allowed claim arising under a note received its pro_rata share of new note sec_1 and a specified percentage of parent’s new common_stock ii each non-electing holder of an allowed claim arising under a note had its current claim reinstated and retained its current note iii each holder of an allowed claim arising under a loan or a loan received its pro_rata share of new note sec_1 and a specified percentage of parent’s new common_stock iv each holder of an allowed claim arising under a note or a note received its pro_rata share of a specified percentage of parent’s new common_stock plus contingent value rights v each holder of certain notes issued by entity x received its pro_rata share of new note sec_2 issued by entity x and guaranteed by parent plr-134011-10 vi holders of equity interests in parent had those interests cancelled terminated and extinguished however holders of parent’s preferred_stock received contingent value rights the only debt of the parent consolidated_group that was exchanged for stock was debt of parent representations parent makes the following representations in connection with the proposed transaction a on date parent emerged from protection under chapter of the bankruptcy code pursuant to a bankruptcy plan_of_reorganization that resulted in an ownership_change within the meaning of sec_382 b parent was under_the_jurisdiction_of_the_bankruptcy_court in a title_11_case immediately before date c the bankruptcy plan_of_reorganization was approved by the bankruptcy court d immediately after date at least percent of the value and voting power of the common_stock of parent was owned by qualified creditors within the meaning of sec_382 and sec_1_382-9 of the income_tax regulations of parent as a result of being creditors of parent immediately before the ownership_change e parent is the common parent of an affiliated_group_of_corporations that file a consolidated federal_income_tax return and this affiliated_group is a loss group within the meaning of sec_1_1502-91 f all members of the parent consolidated_group were eligible to be included in the determination of whether the loss group has a net_unrealized_built-in_loss nubil under sec_1_1502-91 on date rulings based on the facts and representations set forth in this letter we rule as follows unless the parent consolidated_group elects to apply sec_382 under sec_382 there is no sec_382 limitation on pre-change losses or built- in losses of the parent consolidated_group and each of its members as a result of the ownership_change on date alternatively if the parent consolidated_group elects to apply sec_382 to the ownership_change on date in computing its sec_382 plr-134011-10 limitation the parent consolidated_group takes into account the increase in the value of parent resulting from the surrender or cancellation of parent’s creditors’ claims in the transaction under the rules provided in sec_1_382-9 if the parent consolidated_group applies sec_382 to the ownership_change on date in applying notice_2003_65 to the calculation of net_unrealized_built-in_gain or loss except as otherwise modified by notice_2003_65 the parent consolidated_group may apply the principles for computing and allocating the aggregate deemed sale price under sec_1_338-4 and sec_1_338-6 to determine its amount_realized on the hypothetical sale of all of its assets to a third party that assumed all of its liabilities liabilities immediately before the ownership_change should be taken into account at their adjusted_issue_price regardless of whether they were subsequently discharged in whole or in part during the recognition_period which includes the change_date or thereafter amounts realized should be allocated to the stock and obligations of members of the parent consolidated_group notwithstanding that gain_or_loss might not be taken into account under sec_1_1502-91 caveats we express no opinion concerning the federal tax consequences of the proposed transactions under any other provision of the code or regulations or concerning any conditions existing at the time of or effects resulting from the proposed transactions that are not specifically covered by the above rulings this letter_ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent each taxpayer involved in the transaction should attach a copy of this ruling letter to the taxpayer's federal_income_tax return for the taxable_year in which the transaction covered by this letter is completed 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 this ruling letter pursuant to a power_of_attorney on file with this office copies of this letter will be sent to your authorized representatives sincerely _____________________________ mark s jennings chief branch office of associate chief_counsel corporate


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 b03 plr-120710-13 date july legend ------------------------------------------------------------------------------------------------- ---------------------------------------------- --------------- -------------------------- x state date dear --------------------- this letter responds to a letter dated date and additional correspondence submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code facts x was incorporated under state law on date x intended to be an s_corporation effective date however x’s form_2553 election by a small_business_corporation was not timely filed x requests a ruling that it will be recognized as an s_corporation effective date law and analysis sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation plr-120710-13 sec_1362 provides that an election under sec_1362 may be made by a small_business_corporation for any taxable_year a at any time during the preceding_taxable_year or b at any time during the taxable_year and on or before the 15th day of the third month of the taxable_year sec_1362 provides that if a a small_business_corporation makes an election under sec_1362 for any taxable_year and b the election is made after the 15th day of the third month of the taxable_year and on or before the 15th day of the third month of the following taxable_year then the election is treated as made for the following taxable_year sec_1362 provides that if a an election under sec_1362 is made for any taxable_year determined without regard to sec_1362 after the date prescribed by sec_1362 for making the election for the taxable_year or no sec_1362 election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make the election the secretary may treat the election as timely made for the taxable_year and sec_1362 shall not apply conclusion based solely on the facts submitted and representations made we conclude that x has established reasonable_cause for failing to timely make an s_corporation_election effective date thus we conclude that x is eligible for relief under sec_1362 accordingly if x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective date within days following the date of this letter then such election will be treated as timely made a copy of this letter should be attached to the form_2553 filed with the service_center a copy is enclosed for that purpose except as expressly provided herein we express or imply no opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion as to whether x is otherwise eligible to be an s_corporation for federal tax purposes this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative plr-120710-13 the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination sincerely richard t probst senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures a copy of this letter a copy for sec_6110 purposes