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 tege eoeg teb plr-144416-05 date date ----------------------------------------------- ------------------------------------------------------ legend authority state dear ------------------------- this responds to your request for rulings submitted by your authorized representative on behalf of authority that authority qualifies as a political_subdivision of state for purposes of sec_103 of the internal_revenue_code the code and bonds to be issued by a subsidiary of authority will be considered issued on behalf of authority under sec_103 facts and representations you make the following factual representations authority was created pursuant to state legislation as a body corporate and politic constituting a public corporation of state authority was created for the purpose of conserving developing and utilizing the water and energy resources of state to make the benefit of those resources available to state residents and thereby to promote the general welfare and increase commerce to achieve these objectives authority produces transmits and generates electricity in state the governing body of authority the authority board has nine members one member of the authority board serving ex-officio is the secretary of transportation and public works of state six members are appointed by the governor of state and two members are consumer representatives elected through a referendum supervised by state’s department of consumer affairs authority is required to submit annually to the plr-144416-05 state legislature and governor a financial statement and complete report of its business activities authority is authorized under state law to acquire property by exercise of the power of eminent_domain other than the procedural safeguards generally addressing matters such as due process proper venue for the institution of condemnation proceedings and just compensation there are no limitations on authority’s power of eminent_domain authority may initiate eminent_domain actions in its own name authority is also authorized under state law to create and own subsidiaries and affiliates for the purposes among others of developing financing constructing and operating industrial projects and other infrastructures directly related to the maximization of authority’s electric infrastructure authority plans to create a subsidiary the subsidiary for these purposes debt service on any bonds issued by subsidiary will be payable solely out of revenues and receipts from the operation of subsidiary authority will adopt a resolution the authority resolution creating subsidiary as a non-profit corporation or single member limited_liability_company and approving its formation documents under the formation documents the board_of directors of subsidiary will be appointed by the authority board and will serve without compensation the formation documents will provide that no part of the net_earnings of subsidiary will inure to the benefit of any private person further upon dissolution of subsidiary the formation documents will provide that authority or state will acquire title to all property owned by subsidiary you represent that subsidiary will be exempt from state income_taxation and interest on bonds issued by subsidiary will be exempt from state taxes law and analysis political_subdivision the internal_revenue_code does not define the term political_subdivision sec_1_103-1 of the income_tax regulations provides that the term political_subdivision denotes any division of any state_or_local_governmental_unit that is a municipal corporation or that has been delegated the right to exercise part of the sovereign power of the unit as thus defined a political_subdivision of any state_or_local_governmental_unit may or may not for purposes of this section include special assessment districts so created such as road water sewer gas light reclamation drainage irrigation levee school harbor port improvement and similar districts and divisions of these units three generally acknowledged sovereign powers of states are the power to tax the power of eminent_domain and the police power commissioner v 3_tc_131 acq c b aff’d 144_f2d_998 2d cir cert_denied 323_us_792 it is not necessary that all three of these powers be delegated in order to treat an entity as a political_subdivision for purposes of the code however possession of only an insubstantial amount of any or all of the sovereign powers is not sufficient all of the facts and circumstances must be taken into consideration including the public purposes of the entity and its control by a government revrul_77_164 1977_1_cb_20 consideration of these principles as they apply to the facts of this case leads us to conclude that authority is a political_subdivision of state for purposes of sec_1_103-1 authority was created pursuant to state legislation and is controlled by state of the authority board’s nine members one is the secretary of transportation and public works of state six members are appointed by the governor of state and two members are consumer representatives elected through a referendum supervised by state’s department of consumer affairs authority is also required to submit annually to state a financial statement and complete report of its business activities authority’s purpose of conserving developing and utilizing the water and energy resources of state to make the benefit of those resources available to state residents is a wholly public purpose under state law authority is granted powers of eminent_domain to carry out authorized purposes other than certain procedural safeguards authority may initiate eminent_domain actions in its own name without limitation on behalf of issuer sec_103 provides that gross_income does not include interest on any state_or_local_bond sec_1_103-1 provides in part that interest upon obligations of a state territory a possession_of_the_united_states the district of columbia or any political_subdivision thereof hereinafter collectively or individually called state_or_local_government unit is not includable in gross_income sec_1_103-1 provides in part that an obligation issued by or on behalf of any governmental_unit by a constituted_authority empowered to issue such an obligation is the obligation of such a unit revrul_57_187 1957_1_cb_65 holds that bonds issued by an industrial development board formed under a state statute the entity are considered issued on behalf of a political_subdivision of the state where the following conditions are present the entity is formed only after the governing body of the political_subdivision has formally approved the entity’s creation and the form of certificate of incorporation a plr-144416-05 board_of directors of the entity is elected by the governing body of the political_subdivision and serves without compensation the entity may issue bonds to carry out any of its corporate powers which include the power to acquire improve maintain equip and furnish projects to lease such projects and collect rent and to sell and convey any and all of its property whenever the board_of directors find such action to be in furtherance of the purposes for which the entity is established all bonds are payable solely out of revenues and receipts derived from the leasing or sale by the entity of its projects the political_subdivision is not liable for the payment of principal or interest on any of the bonds of the entity the entity is exempt from all state taxation and interest on bonds issued by the entity is exempt from state taxes the entity is a nonprofit organization and none of its net_earnings may inure to the benefit of any private person and upon dissolution of the entity title to all property it owns would vest in and become the property of the state or political_subdivision which creates it applying the criteria of revrul_57_187 to the facts we conclude that subsidiary will qualify as an on behalf of issuer for purposes of sec_1_103-1 subsidiary will be created by the authority a political_subdivision pursuant to state law that specifically provides for its creation the board_of directors of subsidiary will be appointed by the authority board and will serve without compensation as specifically permitted under state law subsidiary will have the power to issue bonds to finance its projects debt service on subsidiary’s bonds will be payable solely out of revenues and receipts derived by subsidiary from its operation subsidiary will be exempt from state income_taxation and interest on bonds issued by subsidiary will be exempt from state taxes subsidiary will be a nonprofit corporation or single member limited_liability_company and no part of the net_earnings of subsidiary will inure to the benefit of any private person upon dissolution of subsidiary authority or state will acquire title to all property owned by subsidiary conclusions based on the information submitted and representations made we conclude that authority is a political_subdivision of state for purposes of sec_103 since authority has been delegated the right to exercise sovereign power and is also controlled by state and is motivated by a wholly public purpose and bonds to be issued by subsidiary will be considered as issued on behalf of authority for purposes of sec_103 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent plr-144416-05 in accordance with a power_of_attorney on file with this office a copy of this letter is being sent to authority’s authorized representative the ruling contained in this letter is based upon information and representations submitted by authority and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the materials submitted in support of the request for a ruling it is subject_to verification upon examination sincerely assistant chief_counsel exempt_organizations employment_taxes government entities by johanna som de cerff senior technician reviewer tax exempt bond branch


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 1-plr-157262-01 date date legend x a b c d trust state a b c date date date date date year plr-157262-01 this responds to a letter dated date submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts according to the information submitted and representations therein x was incorporated under the law of state on date on date the shareholders of x elected to treat x as a subchapter_s_corporation effective date on date a died testate survived by b c and d at the time of a’s death x was owned equally by a b and c each holding a shares of x stock under a’s will b shares of x stock owned by a was to be distributed to trust and the remaining c shares of x stock was to be distributed to d in year the trustees of trust and the shareholders of x realized that an election to qualify trust as an electing_small_business_trust esbt had not been not made causing the termination of x’s s election on date x represents that at all relevant times x and its shareholders treated x as an s_corporation x and its shareholders agree to make any adjustments required by the secretary consistent with the treatment of x as an s_corporation law and analysis sec_1361 defines an s_corporation as a small_business_corporation for which an election under sec_1362 is in effect sec_1361 defines a small_business_corporation as a domestic_corporation which is not an ineligible_corporation which does not a have more than shareholders b have as a shareholder a person other than an estate and other than a_trust described in subsection c who is not an individual c have a nonresident_alien as a shareholder and d have more than class of stock sec_1361 provides that for purposes of sec_1361 trusts that may be shareholders include an electing_small_business_trust sec_1361 provides that an electing_small_business_trust esbt means any trust if i such trust does not have as a beneficiary any person other than an i individual ii an estate or iii an organization described in paragraph or of sec_170 or iv an organization described in sec_170 which holds a contingent_interest in such trust and is not a potential_current_beneficiary ii no interest in such trust was acquired by purchase and iii an election under this subsection applies to such trust sec_1362 provides that an election under sec_1362 shall be plr-157262-01 terminated whenever the corporation ceases to be a small_business_corporation sec_1362 provides that if an election under sec_1362 by any corporation was terminated under sec_1362 the secretary determines that the circumstances resulting in the termination were inadvertent no later than a reasonable period of time after the discovery of the circumstances resulting in the termination steps were taken so that the corporation is a small_business_corporation and the corporation and each person who was a shareholder of the corporation at any time during the period of inadvertent termination of the s election agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the termination the corporation is treated as an s_corporation during the period specified by the secretary the committee reports accompanying the subchapter_s_revision_act_of_1982 explain sec_1362 as follows if the internal_revenue_service determines that a corporation’s subchapter_s_election is inadvertently terminated the service can waive the effect of the terminating event for any period if the corporation timely corrects the event and if the corporation and the shareholders agree to be treated as if the election had been in effect for such period the committee intends that the internal_revenue_service be reasonable in granting waivers so that corporations whose subchapter_s eligibility requirements have been inadvertently violated do not suffer the tax consequences of a termination if no tax_avoidance would result from the continued subchapter_s treatment in granting a waiver it is hoped that taxpayers and the government will work out agreements that protect the revenues without undue_hardship to taxpayers it is expected that the waiver may be made retroactive for all years or retroactive for the period in which the corporation again became eligible for subchapter_s treatment depending on the facts s rep no 97th cong 2d sess 1982_2_cb_718 h_r rep no 97th cong 2d sess 1982_2_cb_730 conclusion based solely on the facts submitted and the representations made we conclude that x’s election to be treated as an s_corporation terminated on date we also conclude that the termination constituted an inadvertent termination within the meaning of sec_1362 under the provisions of sec_1362 x will be treated as continuing to be an s_corporation from date and thereafter and the trustees of trust will be treated as having filed timely an estb election on behalf of trust effective date plr-157262-01 provided that x’s s_corporation_election is not otherwise terminated under sec_1362 and provided further that the trustees of trust file an estb election for trust with the appropriate service_center effective date within days of the date of this letter a copy of this letter should be attached to the election except as specifically provide herein no opinion is expressed or implied as to the federal tax consequences of the facts described above under any other provision of the code in particular no opinion is expressed as to whether x is an s_corporation for federal tax purposes or whether trust is an esbt under sec_1361 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 under a power_of_attorney on file in this office a copy of this letter will be sent to your authorized representative sincerely david r haglund senior technician reviewer branch office of associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom corp plr-116141-99 date date legend distributing distributing controlled_corporation a corporation b corporation c_corporation d corporation e corporation f corporation i x p dear we respond to your letter dated date in which you requested a supplemental ruling to plr issued on date the prior letter_ruling additional information was submitted on date and date the prior letter_ruling states that the business_purpose for the spin-off is to allow controlled to reduce its debt-equity_ratio by making a public offering of its stock in the open market however controlled has now determined that it can raise more capital if the equity offering is made by way of a private_placement accordingly distributing has modified the proposed equity offering to the extent that controlled will now raise the needed capital through a private_placement factual modification in the prior letter_ruling distributing proposed to complete the spin-off of controlled by completing a series of steps one of which included the transfer of the stock of corporation a corporation b corporation c_corporation d corporation f and their x percent stock interest in corporation e to controlled in exchange for stock of controlled the exchange as described in the prior letter_ruling controlled was to transfer p amount of common_stock and two series of voting preferred_stock series a and series b however the exchange has been modified to the extent that controlled will now only issue series a preferred_stock to distributing factual modification the prior letter_ruling states that corporation i will provide certain legal accounting and management consulting services to the controlled_group for a temporary period of time not to exceed months nevertheless distributing and controlled have modified the extent of their continued relationship after the spin-off by entering into an additional agreement that will give distributing the option of leasing certain products from controlled although distributing currently leases such products from unrelated parties and may never need to exercise its option lease the option lease provides distributing with the assurance that it will have sufficient capacity to meet increased demands in the future as its operations grow the option will extend years and once exercised will allow distributing to lease such products for up to years at a price calculated to approximate fair_market_value factual modification as part of the spin-off stock_options to purchase controlled shares will be issued to distributing employees and former employees who hold stock_options to purchase distributing shares in substitution for a portion now held by those persons in accordance with an agreement with one minority shareholder of corporation e who will become a minority shareholder of controlled the controlled options to be issued to the holders of distributing options will be purchased from controlled by distributing prior to the distribution distributing will pay an amount equal to the full share value of each controlled option it acquires however controlled has agreed to refund to distributing the exercise price paid to controlled by the option holders upon exercise of the options factual modification based solely on the information and documentation submitted it is held as follows the factual modifications stated above will have no effect on the validity of the rulings contained in the prior letter_ruling and those rulings will remain in full force and effect we express no opinion about the tax treatment of the transaction under any other provisions of the code or regulations or the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction not specifically covered by the above rulings in particular we express no opinion on the tax treatment of the purchase of the controlled options by distributing and the issuance of the controlled options by distributing to its employees and former employees additionally no opinion is expressed regarding the treatment of the flow of cash in the options transactions described above for federal_income_tax purposes furthermore we do not express any opinion regarding the treatment of the options under sec_83 this ruling supplements the prior letter_ruling sec_6110 provides that it may not be used or cited as precedent each taxpayer involved in the proposed transaction must attach a copy of this letter to its federal_income_tax return for the taxable_year in which the transaction is completed sincerely assistant chief_counsel corporate by christopher schoen assistant to the chief branch


department of the treasury employer_identification_number contact person - id number contact telephone number uil internal_revenue_service p o box cincinnati oh release number release date date date legend b program c city d program e program m dollars amount n dollars amount p dollars amount dear you asked for advance approval of your scholarship and educational grant procedures under internal_revenue_code sec_4945 and sec_4945 this approval is required because you are a private_foundation that is exempt from federal_income_tax also awards made under these procedures are scholarship or fellowship grants and are not taxable to the recipients if they use them for qualified_tuition_and_related_expenses subject_to the limitations provide in code sec_117 our determination we approved your procedures for awarding scholarships and educational grants based on the information you submitted and assuming you will conduct your program as proposed we determined that your procedures for awarding scholarships and educational grants meet the requirements of code sec_4945 and sec_4945 as a result expenditures you make under these procedures won't be taxable description of your request g scholarship programs your letter indicates you will operate three scholarship programs the first program is called b the purpose of b is to provide grants to individuals in elementary and high school from low socio economic households in the city of c to be eligible for consideration the applicant must meet the following minimum criteria current or potential applicants to the private_schools participating reside in a low socio-economic c neighborhood as evidenced by proof of residence have a demonstrated financial need as determined by such participating schools are nominated by the schools participating in b and have demonstrated personal motivation and academic potential participating schools will nominate five to ten candidates from the applicants to your board who will ultimately decide the recipients selection of recipients will be based on the following criteria by the selection committee and the participating schools demonstrated financial need as determined by the participating schools standardized and academic test scores and recommendation from teachers or community members each grant will be approximately m dollars per person per year initially you will provide one to three grants per year depending on available_resources grants will not be eligible to be automatically renewed however prior applicants can apply again as long as they meet the eligibility criteria scholarships will be distributed directly to the educational_institution you if a student leaves the school the school will be required to return the funds to you also indicated you will operate a scholarship program called d the purpose of d is to provide financial assistance to students enrolled in a four-year degree-granting college or university admitted or enrolled at a participating college or university on a full-time basis have a demonstrated financial need and have a history of exemplary academic achievements potential recipients will submit an application found at your website along with school transcripts act sat test scores a resume biography and written_statement to be eligible for consideration the applicant must meet the following minimum criteria a screening committee comprised of your officers school representatives of professors business associates and community leaders will make recommendations of the applicants to your board which will ultimately choose the recipients selection of recipients will be based on the following criteria each grant will be will approximately n dollars per person per year grants will be renewed unless the recipient drops out of school low academic performance suspension or engaging in illegal activity in addition the recipient must submit a written narrative progress report transcripts and confirmation there has been no significant change in their financial situation demonstrated academic achievements and financial need leadership abilities potential to make a difference in the world and approach to academic social and spiritual education you will also operate a third scholarship program called e the purpose of e is to provide scholarships to individuals enrolled in vocational schools or educational certification programs the program is for non-traditional students such as ex-offenders previous drug or alcohol addicts or others looking to have a serious and positive life to be eligible for the scholarship applicants must have e e e e ademonstrated financial need been nominated by a participating charitable_organization demonstrated personal motivation and demonstrated a desire to rehabilitate their live as determined by the participating charitable_organization selection of recipients will be determined by your board based on the following criteria e e e e financial need nomination by participating charitable_organization personal motivation and potential to benefit from the job training and improve their lives and community you estimate providing one or two scholarships each year worth approximately p dollars per person per year the number of scholarships may change depending on available_resources grants will be renewed each school year as long as the recipient meets the following e e e e enrolled in the school or program submit a written progress report submit transcripts and confirmation there has been no significant changes in their financial position g internship program your letter indicates that you will operate an educational grant program that supplements your program called d described above the purpose of this program is to provide individuals already receiving the d scholarship a monetary supplement for basic living_expenses while the recipient is working an internship the grants are intended to foster and enhance the recipient’s leadership skills confidence judgement problem solving skills etiquette and professional development while at the internship history of exemplary academic achievements and e e e e admitted or enrolled at a participating college or university on a full-time basis have a demonstrated financial need have a have a summer internship that either pays no compensation or does not pay sufficient compensation_for basic living_expenses a screening committee comprised of your officers school representatives of professors business associates and community leaders will make recommendations of the potential recipients will submit an application found at your website to be eligible for consideration the applicant must meet the following minimum criteria applicants to your board which will ultimately choose the recipients selection of recipients will be based on the following criteria e e e e demonstrated academic achievements and financial need leadership abilities potential to make a difference in the world and approach to academic social and spiritual education children or relatives of your officers directors substantial contributors or selection committee members are not eligible for your scholarships each grant will be will approximately n dollars per person per year grants will be renewed unless the recipient drops out of school has low academic performance is suspended or engaged in illegal activity in addition the recipient must submit a written narrative progress report transcripts and confirmation there has been no significant change in their financial situation children or relatives of your officers directors substantial contributors or selection committee members are not eligible for your scholarships or supplemental awards for all of your programs you represent you will complete the following arrange to receive and review grantee reports annually and upon completion of the purpose for which the grant was awarded investigate diversion of funds from their intended purposes and take all reasonable and appropriate steps to recover the diverted funds ensure other grant funds held by a grantee are used for their intended purposes and withhold further payments to grantees until you obtain grantees’ assurances that future diversions will not occur and that grantees will take extraordinary precautions to prevent future diversions from occurring you represent that you will maintain the following all records relating to individual grants including information obtained to evaluate grantees identify whether a grantee is a disqualified_person establish the amount and purposes of each grant and establish that you undertook the supervision and investigation of grants described above basis for our determination the law imposes certain excise_taxes on the taxable_expenditures of private_foundations code sec_4945 a taxable_expenditure is any amount a private_foundation pays as a grant to an individual for travel study or other similar purposes however a grant that meets all of the following requirements of code sec_4945 is not a taxable_expenditure e e e - the foundation awards the grant on an objective and nondiscriminatory basis the irs approves in advance the procedure for awarding the grant the grant is ascholarship or fellowship subject_to sec_117 and is to be used for study at an educational_organization described in sec_170 or - - a prize or award subject_to the provisions of sec_74 if the recipient of the prize or award is selected from the general_public or to achieve a specific objective produce a report or similar product or improve or enhance a literary artistic musical scientific teaching or other similar skill or talent of the recipient to receive approval of its educational grant procedures sec_53_4945-4 requires that a private_foundation show the grant procedure includes an objective and nondiscriminatory selection process the grant procedure results in the recipients performing the activities the grants were intended to finance the foundation plans to obtain reports to determine whether the recipients have performed the activities that the grants were intended to finance other conditions that apply to this determination this determination only covers the grant program described above this approval will apply to succeeding grant programs only if their standards and procedures don't differ significantly from those described in your original request this determination applies only to you it may not be cited as a precedent you cannot rely on the conclusions in this letter if the facts you provided have changed substantially you must report any significant changes to your program to the cincinnati office of exempt_organizations at internal_revenue_service exempt_organizations determinations p o box cincinnati oh you cannot award grants to your creators officers directors trustees foundation managers or members of selection committees or their relatives all funds distributed to individuals must be made on a charitable basis and further the purposes of your organization you cannot award grants for a purpose that is inconsistent with code sec_170 you should keep adequate_records and case histories so that you can substantiate your grant distributions with the irs if necessary we've sent a copy of this letter to your representative as indicated in your power_of_attorney please keep a copy of this letter in your records lf you have questions please contact the person listed at the top of this letter sincerely stephen a martin director exempt_organizations rulings and agreements


t c memo united_states tax_court jack r prewitt and shelley prewitt petitioners v commissioner of internal revenue respondent docket no filed date jack r prewitt and shelley prewitt pro sese howard p levine for respondent memorandum findings_of_fact and opinion gerber judge respondent determined deficiencies in and additions to federal_income_tax for petitioners' through taxable years as follows additions to tax sec sec sec sec year deficiency b b b dollar_figure dollar_figure --- --- --- big_number dollar_figure --- --- --- big_number --- dollar_figure dollar_figure big_number --- dollar_figure dollar_figure percent of the interest due on the deficiency the through deficiencies are attributable solely to respondent's determination that no investment tax or business energy credits are allowable for the year and hence none are available to carry back to through the issues remaining for our consideration are whether petitioners are entitled to deduct various expenses paid_by checks drawn on the account of petitioner's s_corporation whether dollar_figure of income received by petitioner in was repaid to a related corporation during and if any amount was repaid whether it results in a deduction for petitioners whether petitioners are liable for additions to tax for fraud under sec_6653 and whether the periods for assessment of income taxes had expired before the notice_of_deficiency was issued findings of fact2 petitioners resided in st petersburg florida at the time their petition was filed petitioners filed joint federal_income_tax returns and amended returns on the following dates year original filed date date date date amended filed date date date date section references are to the internal_revenue_code in effect for the taxable years under consideration rule references are to this court's rules_of_practice and procedure the parties' stipulation of facts and the attached exhibits are incorporated by this reference jack r prewitt maintained his residence in st petersburg florida but at the time the petition was filed he was incarcerated in the federal prison camp located on tyndall air force base which is situated in the state of florida the amended returns for through claimed refunds of tax attributable to the carryback of investment tax and business energy credits from the taxable_year the amended_return sought a refund of tax based on claims to deductions for management fees and investment tax and business energy credits in the amount of dollar_figure each petitioners also amended their return on date to remove investment tax and business energy credits that had originally been carried back from the taxable_year jack r prewitt petitioner took courses at purdue university's school of estate_planning and is knowledgeable in tax matters around petitioner purchased for dollar_figure an insurance agency named u s estate services inc estate from his partner norbert roy roy roy was petitioner's tutor in an estate_planning business in which life_insurance was used to fund the payment of estate_tax petitioner focused his business activity in the area of estate_planning for farm owners he advertised in magazines oriented to farming obtained leads and then proceeded to sell insurance designed to pay the estate_tax on farms illiquid assets his business expanded to the point where eight or nine planners salespeople were involved in the business eventually petitioner's business became the number one such life_insurance agency operating under a large insurance underwriter because the premium on the amount of insurance needed to fund the estate_tax liability for a farm was beyond the means of many farmers petitioner's selling strategy included conversion of whole life policies into universal life or annuity devices farmers with whole life policies were persuaded to surrender the policy and withdraw the cash_surrender_value or some portion thereof to purchase other forms of insurance in larger amounts it was the conversion from one type of insurance to another or to an annuity that generated revenue for petitioner in roy sought to become reaffiliated with petitioner petitioner and roy became loosely affiliated in that they each operated separate insurance agencies and shared some common overhead and administrative expenses during date roy introduced petitioner to dean cooper cooper who along with roy had a plan to acquire a small insurance_company with big_number policyholders named united savings life united of hinsdale illinois on date mid-continent acquisitions corp was organized for the purpose of acquiring insurance_companies and mid-continent marketing corp was organized for the purpose of marketing insurance petitioner was a director and officer of both corporations in order to acquire united new customers were solicited and persuaded to surrender their life_insurance policies and invest the cash_surrender_value in securities shares of stock or debt instruments denoted money multiplier notes issued by the corporations formed by roy cooper and petitioner the money received by the mid-continent corporations from sale of the securities was supposed to be used to purchase united but instead it was paid out to employees and officers as salary and bonuses the corporations did not fund the purchase of united or reinvest the securities proceeds in assets or income-producing entities mid-continent acquisitions attempted to sell dollar_figure of money multiplier notes and mid-continent marketing attempted to sell dollar_figure of money multiplier notes farmers were told that they would receive a guaranteed income of percent from their mid-continent securities investment essentially the farmers had invested their life_insurance cash surrender values in what had evolved into a ponzi scheme of approximately dollar_figure million of the mid-continent corporations' securities sold during and approximately dollar_figure during over dollar_figure million went to petitioner roy and cooper as salaries and bonuses after the mid-continent corporations were organized petitioner continued to operate estate an s_corporation petitioners included dollar_figure of income from the mid- continent corporations on their income_tax return that income was reflected in the category other income as reimbursement of pre-incorporation expenses petitioner did not incur preincorporation expenses in connection with the organization of the mid-continent corporations no documentation concerning said preincorporation expenses was provided to the corporation income_tax_return_preparer j richard home home a certified_public_accountant home required petitioner roy and cooper to sign documents indicating that they each received a total of dollar_figure in reimbursed preincorporation expenses from the mid-continent corporations petitioner in the same document acknowledged a dollar_figure account payable of mid- continent acquisition corp to petitioner home prepared the federal_income_tax returns for the mid-continent corporations and petitioners the preincorporation expenses reported by petitioners and the others were set up on the mid- continent corporations' books as an intangible asset which was to be amortized over months home did the bookkeeping for estate and when petitioner made a payment with business funds that could not be identified as having a business_purpose no deduction for such amount was claimed on the s corporation's return for and dollar_figure and dollar_figure respectively fell into the nondeductible category and home reflected the amounts as loans to shareholders on financial records and tax returns for estate the total amount of loans outstanding as of the end of estate's year was dollar_figure during august and date petitioner received a dollar_figure salary check from each of the two mid-continent corporations withholding_tax had been taken from the salary checks and the payments were recorded in the corporate payroll journals during date following a meeting between petitioner and roy the bookkeeper was told to change the salary entries to management fees and to refund the withholding to petitioner for petitioner received dollar_figure from the mid-continent corporations which was not reported on petitioners' income_tax return petitioner during received dollar_figure in management fees from the mid-continent corporations which he failed to report on petitioners' income_tax return petitioner did not advise home of the management fees received from the mid-continent corporations a criminal investigation of cooper was begun in illinois involving activity similar to that of the mid-continent corporations and he resigned from the corporations thereafter around date the state of indiana where petitioner and the corporations did business issued a cease and desist order based on alleged securities violations against the corporations prohibiting them from selling shares of stock after the court order the mid-continent corporations were for all practical purposes no longer operating petitioner personally continued the business activity of the mid-continent corporations after the cease and desist order obligations of the mid-continent corporations were paid with checks drawn on his s corporation's estate checking account as follows helicopter expense reimbursement to ballinger payments to the mid-continent corporations' customers --- dollar_figure dollar_figure dollar_figure dollar_figure --- legal and accounting --- dollar_figure these payments were made in order to continue petitioner's insurance sales business activity during and after the ruin of the mid-continent corporations after the situation of the mid-continent corporations began to deteriorate roy and petitioner considered purchasing an insurance agency to generate business and to ameliorate their problems home was requested to evaluate the riley insurance agency riley and he supplied a report dated date to roy and petitioner after some negotiations through legal counsel an agreement was reached and roy paid dollar_figure as earnest money or a downpayment sometime during the period september through date on date roy executed a written contract with gwen riley to pay dollar_figure for riley the dollar_figure price had been formulated and agreed upon during the dollar_figure balance of the contract_price was remitted by roy to gwen riley during date roy and petitioner had agreed in to each end up owning one-half of riley and that agreement was committed to writing during date petitioner paid roy dollar_figure for one- half of riley by checks during the spring of petitioner claims a dollar_figure offset against his income for repayment of preincorporation expenses reimbursement received in petitioner and roy agreed to pay dollar_figure per month to the mid-continent corporations from the revenues of riley the agreements were reduced to writings that recited that the mid- continent corporations were to be repaid a total of dollar_figure which roy and petitioner had received as reimbursements of preincorporation expenses during a date meeting home was advised by petitioner that petitioner and roy had purchased riley and they had given their interests in riley to the mid-continent corporations to repay a portion of the reimbursement of preincorporation expenses that had been paid to petitioner and roy in earlier years petitioner and roy were not on good terms and had an acrimonious relationship in a date letter investors of the mid-continent corporations were advised that riley had been purchased roy advised policyholders of his company american planning associates inc that his company had purchased riley petitioner who was president of international financial consultants inc international by a date letter to his policyholders advised that international had purchased riley riley had about big_number active and inactive client files and the clients' identities were essential to its business the clients of riley an indiana insurance agency were split between roy a through k and petitioner l through z petitioner advised home that he purchased the interest in riley during date and sold it to the mid-continent corporations during date petitioner on his income_tax return reported that he purchased riley during date for dollar_figure and that he sold it during date for dollar_figure home reviewed this transaction before reporting it on petitioners' return and reached the conclusion that the sale to the mid- continent corporations occurred during home believed that the downpayment was low but that it was an installment_sale that occurred during in subsequent research home discovered a revenue_ruling rev_rul c b that permitted for tax purposes installment_sales of intangibles home prepared petitioners' income_tax return and relied on representations of petitioner in preparing the return petitioner for advised home that he had made repayments of amounts received from the mid-continent corporations and home claimed dollar_figure as repayment of the reimbursement of preincorporation expenses the dollar_figure was one-half of the claimed value of riley that roy and petitioner placed in the mid- continent corporations petitioner also advised home that he had incurred expenses during on behalf of the mid-continent corporations that could be considered repayment of amounts received from the corporations home however did not include them on the return because petitioner did not provide the details or specifics for the expenditures the state of indiana did not pursue the securities charges on which the cease and desist order had been based however the federal government ultimately prosecuted convicted and sentenced to prison petitioner cooper and roy petitioner was indicted on date on numerous counts including one count of conspiracy to commit fraud and numerous counts of mail fraud and for filing a false income_tax return in violation of sec_7206 the indictment among other charges alleged that petitioner on or about date filed a materially false income_tax return by failing to report a substantial amount of income in addition to that stated on the income_tax return at the hearing under rule of the federal rules of criminal procedure petitioner admitted that he received and willfully failed to report a dollar_figure management fee on date petitioner pled guilty to filing a materially false income_tax return under sec_7206 and he was sentenced to concurrent 3-year terms of imprisonment along with the condition that he make restitution to the crime victims opinion this case is factually convoluted because of the maze of entities principals and transactions involved the primary factual pattern involves petitioner's odyssey from being a successful insurance salesman to his involvement in a ponzi scheme and ultimately to his incarceration initially petitioner successfully sold insurance to farmers until he became reinvolved with his insurance_business mentor roy roy in turn introduced dean cooper to petitioner with the introduction of roy and cooper petitioner's business activity became complicated in addition to an s_corporation through which petitioner operated his life_insurance agency roy's insurance agency became affiliated with petitioner through and in combination with the mid-continent corporations those corporations were intended to generate capital for the purchase of an insurance_company but evolved into shells for a ponzi scheme petitioners have agreed that they failed to report dollar_figure of income for petitioners however contend that they are entitled to deduct expenses of the mid-continent corporations that were paid during and after the corporations ceased operation to the extent those amounts were paid payment was made with checks from petitioner's s_corporation and petitioners seek to deduct the amounts on their individual income_tax return finally petitioners contend that they are entitled to a dollar_figure deduction for their tax_year in connection with the purchase and disposal of riley this amount has been characterized as a refund or repayment to the mid-continent corporations of the preincorporation payments petitioner had received during we address each of these matters separately payments of the mid-continent corporations' expenses-- petitioner admits that he failed to report dollar_figure dollar_figure plus dollar_figure of income from the mid-continent corporations for but contends that he paid corporate expenses which more than offset the dollar_figure of unreported income no deduction for such expenses was reported or claimed on his return first it must be noted that the payments proven by petitioners total about dollar_figure in that regard about dollar_figure of the payments were made by checks dated in and about dollar_figure of the payments were made by checks dated in petitioners' individual return was filed on a calendar_year basis and accordingly the payments dollar_figure would not be deductible for the taxable_year ordinarily for a payment to be deductible under sec_162 it must be made by the taxpayer as an ordinary_and_necessary_expense of the taxpayer's own business 802_f2d_365 9th cir affg in part and revg in part tcmemo_1984_264 91_tc_713 affd 905_f2d_241 8th cir 48_tc_679 the initial obligation for the dollar_figure of payments in reimbursement of salesmen's expenses of dollar_figure and helicopter expense of dollar_figure was that of the mid-continent corporations the payments however were made by checks drawn on the checking account of petitioner's s_corporation at a time when the mid- continent corporations had ceased operations and were under a court order not to operate in order to continue the sale of insurance and his flow of income petitioner had to see to the payment of the outstanding obligations of the mid-continent corporations to salespeople and suppliers of goods and services although he was no longer involved in the ponzi type activity petitioner continued to exploit the customer lists from riley and in general to sell term_insurance to farmers there is no suggestion that petitioner had other choices or means of continuing income-producing activity generally expenditures by a substantial_shareholder for the benefit of his corporation are deemed capital and are not deductible due to a lack of connection with the shareholder taxpayer's own trade_or_business 308_us_488 however where a taxpayer makes expenditures to protect or promote his own business the expenditure may be deductible even though the transaction giving rise to the expenditures originated with another person and would have been deductible by that person if payment had been made by him lohrke v commissioner supra pincite and cases cited therein in this case the expenditures were made to protect and promote petitioner's insurance_business here the income- producing asset consisted of the names of clients and potential clients following the cease and desist order the clients could no longer be sold securities of the mid-continent corporations and petitioner pursued the sale of insurance because riley's assets had been intermingled within the mid-continent corporations' assets the mid-continent corporations' obligations were associated with riley's client list and its use payment of the corporations' obligations was necessary to protect petitioners' own insurance_business accordingly the expenditures pass the lohrke test the question remains however whether petitioner is entitled to the deduction even though payment was made with checks drawn on the account of his s_corporation a review of the s corporation's returns for the fiscal years ended date and does not reflect that expenses in similar categories were claimed in amounts approaching those claimed by petitioners regarding the mid-continent corporations for example no amount was claimed for the helicopter for the fiscal_year and dollar_figure was claimed for the fiscal_year whereas the amount_paid for the helicopter during and claimed by petitioners is dollar_figure in addition it was the practice of home the accountant to classify expenditures of petitioner which were not estate's business_expenses as loans to shareholders in that connection for and dollar_figure and dollar_figure fell into the nondeductible category and home reflected the amounts as shareholder loans on financial records and tax returns for estate the total loans outstanding as of the end of estate's year were dollar_figure under these circumstances we find that petitioner has shown that the amounts being claimed have not been deducted in connection with petitioner's s_corporation and that the expenditures although made by the s_corporation were made on petitioner's behalf because petitioners report income and expenses on a calendar_year basis they are entitled to deduct only those payments made during the year--dollar_figure the dollar_figure riley transaction--petitioner during had received dollar_figure from the mid-continent corporations for alleged reimbursement of preincorporation expenses petitioner did not actually incur preincorporation expenses but reported the dollar_figure as income on petitioners' joint federal_income_tax return for petitioners claimed a dollar_figure repayment to the mid-continent corporations of the preincorporation expenses the amount is reflected on schedule d by an entry that reported a sale of petitioner's interest in riley during date for dollar_figure and a purchase of the interest during date for dollar_figure a short-term_capital_gain of dollar_figure is reported for the transaction in another part of petitioners' return the dollar_figure is reflected as a repayment of reimbursed preincorporation expenses and used to reduce other income petitioner explains the schedule d reporting of this transaction was intended to reflect a contribution of riley to the mid-continent corporations the riley scenario is convoluted initially the dollar_figure was taken from the mid- continent corporations as reimbursement for preincorporation expenses when none was actually incurred we surmise that this approach was used to provide some tax_benefit the contribution of riley by petitioner and roy which was characterized as a refund of the reimbursement is without substance petitioner and roy each divided the big_number or so customers of riley and proceeded to earn income from selling insurance to riley customers the only asset of riley with any value was its customer list accordingly the contribution of the remaining shell after removal of the customer list was a mere gesture without substance petitioner's and roy's promise to pay some or all of the proceeds from the receipts due to use of the customer lists is but a promise and does not constitute an event for which a deduction is allowable the mid-continent corporations were controlled by petitioner and roy moreover petitioner has not shown that payments were made to the mid-continent corporations that would entitle petitioners to a deduction for repayment of reimbursed preincorporation expenses for their taxable_year accordingly petitioners are not entitled to any part of the dollar_figure claimed and disallowed by respondent in addition because we have found that no value was in fact transferred to the mid-continent corporations in the form of riley petitioners are not required to report the short-term_capital_gain attributable to that transaction additions to tax for fraud--respondent determined that underpayments on petitioners' returns for and were due to fraud within the meaning of sec_6653 fraud is defined as an intentional wrongdoing designed to evade tax believed to be owing 94_tc_316 citing 252_f2d_56 9th cir respondent has the burden of proving by clear_and_convincing evidence that an underpayment exists for each of the years at issue and that some portion of the underpayment is due to fraud sec_7454 rule b to meet this burden respondent must show that petitioners intended to evade taxes known to be owing by conduct intended to conceal mislead or otherwise prevent the collection_of_taxes 398_f2d_1002 3d cir 394_f2d_366 5th cir affg tcmemo_1966_81 80_tc_1111 respondent need not prove the precise amount of the underpayment resulting from fraud--only that some part of the underpayment_of_tax for each year at issue is attributable to fraud 466_f2d_11 5th cir 465_f2d_299 7th cir affg tcmemo_1970_274 petitioners concede that there was unreported income for each year at issue we accordingly must decide whether any part of the underpayments was due to fraud 81_tc_640 the existence of fraud is a question of fact to be resolved upon consideration of the entire record 67_tc_181 affd without published opinion 578_f2d_1383 8th cir 69_tc_391 fraud is not to be imputed or presumed but rather must be established by some independent evidence of fraudulent intent 55_tc_85 53_tc_96 fraud may not be found under circumstances which at the most create only suspicion 184_f2d_86 10th cir 92_tc_661 however fraud may be proved by circumstantial evidence and reasonably inferred from the facts because direct proof of the taxpayer's intent is rarely available 317_us_492 rowlee v commissioner supra 79_tc_995 affd 748_f2d_331 6th cir a taxpayer's entire course of conduct may establish the requisite fraudulent intent 56_tc_213 otsuki v commissioner supra pincite the intent to conceal or mislead may be inferred from a pattern of conduct see spies v united_states supra pincite courts have relied on several indicia of fraud when considering the sec_6653 addition_to_tax although no single factor may conclusively establish fraud the existence of several indicia may be persuasive circumstantial evidence of such 732_f2d_1459 6th cir affg per curiam tcmemo_1982_603 beaver v commissioner supra pincite circumstantial evidence that may give rise to a finding of fraudulent intent includes understating income keeping inadequate or no records failing to file tax returns maintaining implausible or inconsistent explanations of behavior concealing assets failing to cooperate with tax authorities filing false forms w-4 failing to make estimated_tax payments dealing in cash engaging in illegal activity and attempting to conceal an illegal activity 796_f2d_303 9th cir affg tcmemo_1984_601 see 899_f2d_164 2d cir these badges_of_fraud are nonexclusive miller v commissioner supra pincite both the taxpayer's background and the context of the events in question may be considered as circumstantial evidence of fraud 290_us_389 spies v united_states supra pincite plunkett v commissioner supra pincite respondent argues that petitioners knowingly failed to report dollar_figure dollar_figure plus dollar_figure for and that petitioner pled guilty to violating sec_7206 with respect to the dollar_figure item although petitioner pled guilty to violation of sec_7206 he is not estopped to deny that his tax_return was fraudulent within the meaning of sec_6653 84_tc_636 petitioner however is estopped to deny that he filed a materially false return under sec_7206 id petitioners do not deny that the dollar_figure was omitted however they assert that they failed to claim more than dollar_figure of deductions on their return the dollar_figure omission is probative evidence petitioners' contention that they were entitled to unclaimed and offsetting deductions for does not lessen the impact of petitioners' intentional failure to report income we have found that the amount allowable for totals dollar_figure several other indicia of fraud are extant here there was some concealment and deception petitioner's records were to some extent inadequate or intentionally misstated petitioner was not an innocent bystander in the events that ultimately caused his incarceration he was involved in fraudulent activity concerning the mid-continent corporations and he failed to report dollar_figure of so-called reimbursed preincorporation expenses which he knew was includable in income from his reporting of the dollar_figure amount we have also considered petitioner's background and level of sophistication in taxation respondent has clearly and convincingly proven that petitioners' joint federal_income_tax return was fraudulent within the meaning of sec_6653 in this regard the entire underpayment is due to fraud respondent also determined an addition for fraud for each of the years through however no evidence was offered at trial or arguments made on brief in support of that determination accordingly we hold that respondent has not shown that petitioners' and returns were fraudulent period for assessment--respondent's notice_of_deficiency for the taxable years through was mailed date petitioners have placed in issue whether the period for assessment has expired with respect to the years before the court the last of the returns for the years in question was filed on date accordingly the normal 3-year period for assessment would have expired prior to respondent's issuance of the date notice_of_deficiency sec_6501 with respect to the taxable_year respondent has proven that the return was fraudulent within the meaning of sec_6653 and accordingly sec_6501 would apply that section provides that tax may be assessed at any time in the case of a fraudulent return filed with intent to evade tax accordingly the period for assessment had not expired with respect to the taxable_year at the time respondent issued the notice_of_deficiency to petitioners with respect to through we have found that the addition_to_tax for fraud is not applicable the through taxable years are in issue solely due to the carryback of credits from the taxable_year petitioners have conceded that they are not entitled to the disallowed credits and but for the expiration of the assessment_period respondent's determination would be sustained sec_6501 however provides that deficiencies attributable to a credit_carryback may be assessed at any time before the expiration of the period for assessing a deficiency for the taxable_year from which the credit emanates accordingly we find that the period for assessment had not expired for the through taxable years at the time respondent issued the notice_of_deficiency to petitioners to reflect the foregoing decision will be entered under rule


internal_revenue_service department of the treasury number release date index numbers washington dc person to contact telephone number refer reply to cc corp b05--plr-111277-00 date date legend parent sub sub sub purchaser holding sub x seller target plr-111277-00 company officials tax professionals outside tax professional business a business b date a date b date c date d this is in response to your letter dated date requesting an extension of time under sec_301_9100-1 through of the procedure and administration regulations to file an election parent as the common parent of the consolidated_group of which sub the united_states_shareholder of purchaser the foreign purchasing_corporation is a member is requesting the extension of time to file a sec_338 election under sec_338 of the internal_revenue_code and sec_1 d and g of the income_tax regulations with respect to purchaser’s acquisition of the stock of target sometimes hereinafter referred to as the election on date b all citations in this letter to regulations under sec_338 are to the regulations as in effect on date b additional information was received in letters dated july and date the material information submitted for consideration is summarized below parent is the common parent of a consolidated_group that has a taxable_year ending on september and that uses the accrual_method of accounting purchaser is a wholly subsidiary of sub which is a wholly owned subsidiary of sub which is a wholly owned subsidiary of sub which is a wholly owned subsidiary of parent sub plr-111277-00 sub and sub are domestic corporations and purchaser is a foreign_corporation purchaser was not required under sec_1_6012-2 to file a united_states income_tax return for its taxable_year that includes date b sub sub sub and purchaser are included in parent’s consolidated_return ie the foreign_corporation by being listed on form_5471 information_return of u s persons with respect to certain foreign_corporations parent and its subsidiaries are engaged in business a holding is the common parent of a consolidated_group prior to the subject acquisition target was a wholly owned subsidiary of seller which was a wholly owned subsidiary of sub x which was a wholly owned subsidiary of holding sub x is a domestic_corporation and seller and target are foreign_corporations target is engaged in business b and does not have any subsidiaries on date a parent and holding entered into an asset purchase agreement that provided parent and its subsidiaries would acquire certain assets of holding and its subsidiaries including inter alia all of seller’s stock of target on date b pursuant to the asset purchase agreement purchaser acquired all of the stock of target from seller for cash in a fully taxable transaction it is represented that purchaser’s acquisition of seller’s target stock qualified as a qualified_stock_purchase as defined in sec_338 and that parent was not related to holding within the meaning of sec_338 following the acquisition target was included in parent’s consolidated_return by being listed on form_5471 parent intended to file the election the election was due on date c however for various reasons the election was not filed on date d which is after the due_date for the election some of company officials tax professionals and outside tax professional discovered that election had not been filed subsequently this request was submitted under sec_301_9100-1 for an extension of time to file the election the period of limitations on assessments under sec_6501 has not expired for the taxable_year in which the acquisition occurred the taxable_year in which the election should have been filed or for any taxable years that would have been affected by the election had it been timely filed sec_338 permits certain stock purchases to be treated as asset purchases if the purchasing_corporation makes or is treated as having made a sec_338 election under sec_338 and the acquisition is a qualified_stock_purchase sec_338 defines a qualified_stock_purchase as any transaction or series of transactions in which stock meeting the requirements of sec_1504 of one corporation is acquired by another corporation by purchase during the month acquisition period sec_1_338-2 provides that if an election under sec_338 is made for target old target is deemed to sell target’s assets and new target is deemed to acquire those assets plr-111277-00 sec_338 provides that the term purchase means any acquisition of stock but only if i the basis of the stock in the hands of the purchasing_corporation is not determined i in whole or in part by reference to the adjusted_basis of such stock in the hands of the person from whom acquired or ii under sec_1014 relating to property_acquired_from_a_decedent ii the stock is not acquired in an exchange to which sec_351 sec_354 sec_355 or sec_356 applies and is not acquired in any other transaction described in regulations in which the transferor does not recognize the entire amount of the gain_or_loss realized on the transaction and iii the stock is not acquired from a person the ownership of whose stock would under sec_318 be attributed to the person acquiring such stock sec_1_338-1 provides that a purchasing_corporation makes a sec_338 election for target by filing a statement of sec_338 election on form_8023 in accordance with the instructions on the form the sec_338 election must be filed no later than the 15th day of the ninth month beginning after the month in which the acquisition_date occurs a sec_338 election is irrevocable sec_1_338-1 provides that a united_states_shareholder as defined in sec_951 of a foreign purchasing_corporation that is a controlled_foreign_corporation as defined in sec_957 taking into account sec_953 may file a statement of sec_338 election on behalf of the purchasing_corporation if the purchasing_corporation is not required under sec_1_6012-2 other than sec_1_6012-2 to file a united_states income_tax return for its taxable_year that includes the acquisition_date form_8023 must be filed as described in the form and its instructions and also must be attached to form_5471 filed with respect to the purchasing_corporation by each united_states_shareholder for the purchasing corporation’s taxable_year that includes the acquisition_date sec_1_1502-77 provides that the common parent for all purposes other than for several purposes not relevant here shall be the sole agent for each subsidiary in the group duly authorized to act in its own name in all matters relating to the tax_liability for the consolidated_return_year see also form_8023 and the instructions thereto under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation revenue_ruling revenue_procedure notice or announcement sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 plr-111277-00 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making regulatory elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 in this case the time for filing the election is fixed by regulation ie sec_1 d therefore the commissioner has discretionary authority under sec_301_9100-1 to grant an extension of time for parent as the common parent of the consolidated_group of which sub the united_states_shareholder of purchaser the foreign purchasing_corporation is a member to file the election provided parent shows that it acted reasonably and in good_faith the requirements of sec_301_9100-1 through are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by parent company officials tax professionals and outside tax professional explain the circumstances that resulted in the failure_to_file the election the information establishes that competent tax professionals were responsible for the election and they were aware of all relevant facts that parent relied on the tax professionals to make the election and that the interests of the government will not be prejudiced if relief is granted see sec_301_9100-3 based on the facts and information submitted including the representations made we conclude that parent has shown that it acted reasonably and in good_faith in failing to file the election the requirements of sec_301_9100-1 through have been satisfied and that granting relief will not prejudice the interests of the government accordingly an extension of time is granted under sec_301_9100-1 until days from the date_of_issuance of this letter for parent to file the election with respect to the acquisition of the stock of target as described above the above extension of time is conditioned on the taxpayers' ie parent’s consolidated group’s tax_liability if any being not lower in the aggregate for all years to which the election applies than it would have been if the election had been timely filed taking into account the time_value_of_money no opinion is expressed as to the taxpayers' tax_liability for the years involved a determination thereof will be made by the district director's office upon audit or examination of the federal_income_tax returns involved further no opinion is expressed as to the federal_income_tax effect if any if it is determined that taxpayers’ liability is lower sec_301_9100-3 parent should file the election in accordance with sec_1_338-1 ie a new election on form_8023 must be executed on or after the date of this letter which grants an extension and filed in accordance with the instructions to the form a copy of this letter should be attached to the election form parent and target must report the plr-111277-00 transaction as a sec_338 transaction on their applicable returns including the applicable separate_return for target if they have not already filed accordingly and they must attach to such returns or amend the applicable returns if they have already filed accordingly to attach a copy of the election form and a copy of this letter we express no opinion regarding whether the acquisition of the stock of target qualifies as qualified_stock_purchase under sec_338 whether the acquisition of the stock of target qualifies for sec_338 treatment or if the acquisition of the stock of target qualifies for sec_338 treatment as to the amount of gain_or_loss if any recognized by target on the deemed asset sale in addition we express no opinion as to the tax treatment or consequences of filing the election late under the provisions of any other section of the code and regulations or the tax treatment of any conditions existing at the time of or effects resulting from filing the election late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-1 we relied on certain statements and representations made by the taxpayer and its employees however the district_director should verify all essential facts and computations moreover notwithstanding that an extension is granted under sec_301_9100-1 to file the election any penalties and interest that would otherwise be applicable shall still apply this ruling letter is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours associate chief_counsel corporate by ken cohen acting chief branch


t c summary opinion united_states tax_court morgain mary mcgovern petitioner v commissioner of internal revenue respondent docket no 8632-12s filed date morgain mary mcgovern pro_se mayah solh and christopher richmond for respondent summary opinion cohen judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case respondent determined a dollar_figure deficiency in petitioner’s federal_income_tax for the deficiency resulted from disallowance of deductions petitioner claimed for employee business_expenses the issue for decision is whether petitioner has substantiated any expenses in excess of the dollar_figure standard_deduction allowed in the statutory notice all section references are to the internal_revenue_code in effect for and all rule references are to the tax_court rules_of_practice and procedure background petitioner resided in california when she filed her petition during petitioner was an actress a writer and a college student she was a stand-in for a character known as garcia on the television show criminal minds she earned wages of dollar_figure from this employment she also received dollar_figure in taxable unemployment_compensation during in petitioner began writing a book about her experiences growing up during she traveled to little rock arkansas new orleans louisiana and austin and houston texas to visit and to interview her parents and her sisters in relation to her book respondent concedes that petitioner’s writing activity is a business on her form_1040 u s individual_income_tax_return petitioner claimed total itemized_deductions of dollar_figure including dollar_figure on form_2106 employee business_expenses relating to her occupation as an actress the amounts claimed included dollar_figure in vehicle expenses dollar_figure in travel_expenses dollar_figure in cellular telephone expenses dollar_figure in meals and entertainment_expenses reduced by to dollar_figure dollar_figure for admissions to theaters and dollar_figure for computer expenses petitioner did not maintain records of the time place and business_purpose of the foregoing expenses some of the vehicle expenses were reimbursed by her employer petitioner also claimed other expenses as employee_expenses but they were actually related to her occupation as a writer petitioner did not keep records separating the employee_expenses from her other business_expenses petitioner also claimed as business_expenses items including makeup and beauty expenses wardrobe expenses and laundry and cleaning expenses she claims that these expenses were necessary because of the unique dress and makeup of the character garcia the record does not allow a finding as to whether and what amount of expenses were for items not suitable for personal_use as well as business use petitioner claimed union dues head shots acting and dancing lesson expenses and promotion and development expenses --all potentially deductible employee business_expenses however the amount of substantiated expenses is much less than dollar_figure the standard_deduction for that was allowed in the statutory notice on her tax_return petitioner claimed dollar_figure as a refundable education credit under sec_25a that credit was allowed in the statutory notice discussion the first time this case was set for trial it was continued so that petitioner could collect and produce records substantiating the deductions that she claimed on the form_2106 attached to her tax_return when the case was called for trial over three months later petitioner appeared and produced hundreds of disorganized documents that she had not previously presented to respondent some of the records she produced indicated that she had been reimbursed by her employer for vehicle and travel_expenses she included medical records but they are not relevant to any deduction claimed on the tax_return some of the expenditures reflected in the records are inherently_personal many were for years other than some appear duplicative and some directly contradict each other they do not satisfy applicable rules at the court’s direction respondent filed a posttrial brief discussing the deductibility of the various items and the adequacy of the offered substantiation respondent concluded that any deductible items were in total less than the standard_deduction that petitioner had been allowed petitioner was directed to file an answering brief addressing specific categories of deductions instead of relating particular exhibits to particular deductible categories in her brief she repeated her claims that all of the disputed expenses were related to her employment and supported by the disorganized documents she did not respond to respondent’s specific analysis of the documents and explanation of the applicable code sections overall petitioner argues that she should be given special leeway because she obviously incurred deductible expenses and the amount of the deficiency is small the rules for substantiation however apply to all taxpayers we reiterate the applicable rules for her benefit in reporting her correct_tax liabilities in future years petitioner has the burden of establishing her entitlement to deductions see rule a 292_us_435 512_f2d_882 9th cir aff’g tcmemo_1972_133 petitioner has not satisfied the conditions for shifting the burden to respondent under sec_7491 see sec_7491 and b providing that a taxpayer must comply with the substantiation and recordkeeping requirements of the internal_revenue_code as well as cooperate with reasonable requests by the commissioner for witnesses information documents meetings and interviews generally a taxpayer must keep records sufficient to establish the amounts of the items reported on her federal_income_tax return sec_6001 sec_1 a e income_tax regs personal expenses are not deductible sec_262 neither the irs nor the court can reasonably be expected to comb through disorganized records and guess which relate to the deductions claimed on petitioner’s tax_return see patterson v commissioner tcmemo_1979_362 39_tcm_82 disapproving the shoebox method of recordkeeping a taxpayer may deduct unreimbursed employee_expenses as an ordinary and necessary business_expense under sec_162 79_tc_1 the expenses must be directly or proximately related to the taxpayer’s trade_or_business 308_us_488 sec_1_162-1 income_tax regs an employee’s trade_or_business would be the earning of her compensation and generally only those expenses that are related to the continuation of employment are deductible 269_f2d_108 4th cir aff’g tcmemo_1958_60 a trade_or_business expense deduction is not allowable to an employee to the extent that the employee is entitled to reimbursement from an employer 788_f2d_1406 9th cir aff’g tcmemo_1984_533 along with other miscellaneous_itemized_deductions unreimbursed employee_expenses are subject_to the limitation of sec_67 deductions with respect to listed_property described in sec_280f such as vehicles computers and cellular telephones during are subject_to special substantiation rules under sec_274 records must be maintained to allocate business and personal_use petitioner admits that she made no effort to allocate among her employment her writing and her other activities professional and personal because it was all the same to her to deduct expenses_incurred for travel including meals_and_lodging while away from home and for entertainment a taxpayer must satisfy the heightened and strict substantiation requirements of sec_274 sec_274 disallows deductions for traveling expenses including meals_and_lodging unless the taxpayer substantiates by adequate_records or by sufficient evidence corroborating the taxpayer’s own statement the amount of such expense the time and place such expense was incurred and the business_purpose for which such expense was incurred see sec_1_274-5t temporary income_tax regs fed reg date adequate_records must be prepared or maintained such that a record of each element of an expenditure or use that must be substantiated is made at or near the time of the expenditure or use when the taxpayer has full present knowledge of each element see sec_1 5t c ii c temporary income_tax regs fed reg date in the alternative each element of an expenditure or use must be established by the taxpayer’s own written or oral statement containing specific information in detail as to such element combined with corroborative evidence to establish such element sec_1_274-5t temporary income_tax regs fed reg date for expenses subject_to the heightened requirements of sec_274 neither a taxpayer nor the court may estimate otherwise permissible deductions see 50_tc_823 aff’d per curiam 412_f2d_201 2d cir petitioner failed to satisfy these standards her generalized claim of business-related travel does not entitle her to unsubstantiated deductions entertainment_expenses must be shown to relate directly to the taxpayer’s business sec_274 a direct relationship requires more than a general expectation of deriving some income or other specific trade_or_business benefit at some indefinite future time sec_1_274-2 income_tax regs petitioner has failed to explain how her expenditures_for theater tickets meals and entertainment and netflix satisfy this standard expenses relating to clothing dry cleaning and personal beauty items are deductible only if they are not suitable for general or personal wear and not so worn 30_tc_757 neither petitioner’s records nor her testimony tied specific items of expense to the type of clothing and related items that would not be suitable for everyday wear to the extent that items cannot be tied to petitioner’s job with criminal minds her arguments about the uniqueness of garcia are not persuasive with respect to other business_expenses in the absence of reliable records we may approximate the amount of deductible expense see 39_f2d_540 2d cir however we must have sufficient evidence upon which to make a reasonable estimate see 85_tc_731 in an attempt to identify potentially deductible items respondent carefully reviewed the records petitioner produced even assuming that some were deductible the total is less than the standard_deduction that petitioner was allowed petitioner failed to substantiate any deductions that would otherwise be allowed as business_expenses relating to her writing activity and not subject_to the limitation at trial petitioner argued that she should be entitled to deduct the cost of her college courses and related expenses and some of the records she produced suggest that she had claimed those expenses as employee business_expenses education expenses are considered ordinary and necessary business_expenses only if the education maintains or improves skills required by the taxpayer in her employment or meets the express requirements of the taxpayer’s employer imposed as a condition for the taxpayer’s continued employment status or rate of compensation sec_1_162-5 income_tax regs petitioner testified that she attended a community college three-quarters or possibly full time took online courses and hoped to get into ucla her testimony suggests that these expenses related to a general and nondeductible education see eg 52_tc_1106 aff’d per curiam 443_f2d_29 9th cir she did not show that these expenses were ordinary or necessary business_expenses petitioner claimed and was allowed a sec_25a credit attributable to tuition and other education expenses sec_222 relating to deduction of qualified_tuition_and_related_expenses specifically provides sec_222 qualified_tuition_and_related_expenses c no double benefit -- in general --no deduction shall be allowed under subsection a for any expense for which a deduction is allowed to the taxpayer under any other provision of this chapter coordination with other education incentives -- a denial of deduction if credit elected --no deduction shall be allowed under subsection a for a taxable_year with respect to the qualified_tuition_and_related_expenses with respect to an individual if the taxpayer or any other person elects to have sec_25a apply with respect to such individual for such year even if payment of such expenses had been substantiated petitioner would not be entitled to a double benefit for them for the reasons explained above petitioner is not entitled to any deductions in excess of the dollar_figure standard_deduction that she has been allowed to reflect the foregoing decision will be entered for respondent