t c no united_states tax_court arlene nussdorf et al petitioners v commissioner of internal revenue respondent docket nos filed date held certain items relating to the purported contributions of certain euro options to evergreen trading llc by its respective members including such members’ respective bases in such options are partnership items as defined in sec_6231 i r c david d aughtry linda s paine and william e buchanan for petitioners william c bogardus for respondent 1cases of the following petitioners are consolidated herewith glenn nussdorf claudine strum docket no and stephen alicia nussdorf docket no opinion chiechi judge these cases are before the court on respon- dent’s respective motions to dismiss for lack of jurisdiction respondent’s respective motions and petitioners’ respective motions to dismiss partnership items and affected items peti- tioners’ respective motions we shall grant respondent’s respective motions and deny petitioners’ respective motions background the record establishes and or the respective parties in these cases do not dispute the following petitioners in these consolidated cases resided in the state of new york at the time they filed their respective petitions during the taxable years and petitioners arlene nussdorf glenn nussdorf and stephen nussdorf through certain flowthrough entities that they respectively owned and that are to be disregarded for federal_income_tax tax purposes flowthrough entities were members of or partner sec_2 in evergreen trading llc evergreen trading an entity subject_to the provisions of sections 2the court’s use of the words members partners and similar words is for convenience only and does not indicate the court’s agreement that such words reflect the substance of what transpired 3all section references are to the internal_revenue_code code in effect at all relevant times on date each of the flowthrough entities purportedly entered into two option trades involving euros with aig international inc aig one of those option trades was the purported purchase from aig on date of an option for a stated volume of euros which petitioners refer to as the purchased euro option the second option trade was the sale to aig on the same date of an option for essentially the same volume of euros but at a different so-called strike or exercise price which petitioners refer to as the sold euro option the two option trades with aig into which petitioners’ respective flowthrough entities purportedly entered on date may be summarized as follows option premium long position short position dollar_figure dollar_figure payoff amount u s dollar_figure equivalent dollar_figure dollar_figure strike_price for convenience we shall sometimes refer collectively to the purported purchased euro option and the purported sold euro option as the euro options on date petitioners’ respective flowthrough entities purportedly contributed their respective euro options and dollar_figure in cash to evergreen trading in exchange for slightly less than a one-third member or partner interest therein during date evergreen trading established two substantially_similar offsetting currency options that were executed on date and that had expiration dates of date and settlement dates of date the costs of the premiums of those currency options were dollar_figure and dollar_figure respectively the combined posi- tions were established so that one position was guaranteed to have a payout equal to the total premiums of both positions while the other position was guaranteed to have a minimal payout the first position created a gain if the czk eur4 was at or above a set exchange rate while the second position created a similar gain if the czk eur was below the same exchange rate the position not incurring a gain and having a minimal payout was settled on date with a loss reported of dollar_figure after a payout of dollar_figure the second position was partially unwound on date for proceeds of dollar_figure and a reported gain of dollar_figure as a result of the above-described currency_transactions evergreen trading reported in its partnership tax_return a total ordinary_loss from currency trades of dollar_figure a portion of such loss totaling dollar_figure was allocated to petitioners’ respective flowthrough entities 4czk eur reflects the exchange rate of czech korunas for euros on date the remaining balance of the second option was unwound resulting in dollar_figure received by evergreen trading with respect to which evergreen trading reported in its partnership tax_return a gain of dollar_figure a portion of such gain totaling dollar_figure was allocated to petitioners’ respective flowthrough entities during the latter part of date petitioners’ respec- tive flowthrough entities withdrew from evergreen trading and paid a 5-percent withdrawal fee of dollar_figure when such entities withdrew from evergreen trading each received a liquidating_distribution of big_number euros with a fair_market_value of dollar_figure no other cash or property was distributed to petition- ers’ respective flowthrough entities or to petitioners in these cases on date respondent issued a notice of begin- ning of administrative_proceeding with respect to evergreen trading for the taxable_year and on date respon- dent issued such a notice with respect to evergreen trading for the taxable_year on date respondent issued a notice of final_partnership_administrative_adjustment fpaa with respect to evergreen trading for the taxable years and in the fpaa that respondent issued with respect to evergreen trading for the taxable years and respondent made the following adjustments it is determined that neither evergreen trading llc nor its purported partners have established the existence of evergreen trading llc as part- nership as a matter of fact even if evergreen trading llc existed as a part- nership the purported partnership was formed and availed of solely for purposes of tax_avoidance by artificially overstating basis in the partnership interests of its purported partners the forma- tion of evergreen trading llc the acquisition of any interest in the purported partnership by the purported partner the purchase of offsetting options the transfer of offsetting options to a partnership in return for a partnership_interest the purchase of assets by the partnership and the distribution of those assets to the purported partners in complete_liquidation of the partner- ship interests and the subsequent sale of those assets to generate at a loss all within a period of less than six months had no business_purpose other than tax_avoidance lacked economic sub- stance and in fact and substance constitutes an economic sham for federal_income_tax purposes accordingly the partnership and the transactions described above shall be disregarded in full and any purported losses resulting from these transac- tions are not allowable as deductions are not allowed for federal_income_tax purposes it is determined that evergreen trading llc was a sham lacked economic_substance and under sec_1_701-2 of the income_tax regulations was formed and availed of in connection with a transaction or transactions in taxable_year a principal purpose of which was to reduce substantially the present_value of its partners’ aggregate federal tax_liability in a manner that is inconsistent with the intent of subchapter_k of the internal_revenue_code it is consequently determined that a the evergreen trading llc is disre- garded and that all transactions engaged in by the purported partnership are treated as engaged in directly by its purported partners this includes the determination that the assets purport- edly acquired by evergreen trading llc including but not limited to foreign_currency options were acquired di- rectly by the purported partners b the foreign_currency option s purport- edly contributed to or assumed by ever- green trading llc are treated as never having been contributed to or assumed by said partnership and any gains or losses purportedly realized by evergreen trad- ing llc on the option s are treated as having been realized by its partners c contributions to evergreen trading llc will be adjusted to reflect clearly the partnership’s or purported partners’ income it is determined that the euro short positions written call options transferred to evergreen trading llc constitute liabilities for purposes of sec_1_752-6t the assumption of which by evergreen trading llc shall reduce the purported partners’ bases in evergreen trad- ing llc in the amounts of dollar_figure for each of the three partners but not below the fair_market_value of the purported partnership_interest it is determined that trading losses of dollar_figure claimed by evergreen trading llc are part of straddle positions as governed by sec_1092 and as such are nondeductible losses in the tax_year limitations imposed by sec_1092 include the limitation that deductible trading losses_incurred as part of straddle positions are limited to only those amounts in excess of unrecognized trading gains it is determined that neither evergreen trading llc nor its purported partners entered into the option s positions or purchase the foreign cur- rency or stock with a profit_motive for purposes of sec_165 it is determined that even if the foreign cur- rency option s are treated as having been con- tributed to evergreen trading llc the amount treated as contributed by the partners under sec_722 of the internal_revenue_code is reduced by the amounts received by the contributing part- ners from the contemporaneous sales of the call option s to the same counter-party thus the basis of the contributed option s is reduced both in the hands of the contributing partners and evergreen trading llc consequently any corre- sponding claimed increases in the outside_basis in evergreen trading llc resulting from the contri- butions of the foreign_currency option s are disallowed it is determined that the adjusted bases of the long call positions purchased call options zero coupon notes and other contributions purportedly contributed by the partners to evergreen trading llc has not been established under sec_723 it is consequently determined that the partners of evergreen trading llc have not established ad- justed bases in their respective partnership in- terests in an amount greater that zero -0- it is further determined that in the case of a sale exchange or liquidation of evergreen trad- ing llc partners’ partnership interests neither the purported partnership nor its purported part- ners have established that the bases of the part- ners’ partnership interests were greater than zero for purposes of determining gain_or_loss to such partners from the sale exchange or liquidation of such partnership_interest accuracy-related_penalties it is determined that the adjustments of partner- ship items of evergreen trading llc are attribut- able to a tax_shelter for which no substantial_authority has been established for the position taken and for which there was no showing of rea- sonable belief by the partnership or its partners that the position taken was more_likely_than_not the correct treatment of the tax_shelter and re- lated transactions in addition all of the underpayments of tax resulting from those adjust- ments of partnership items are attributable to at a minimum substantial understatements of income_tax gross_valuation_misstatement s or negligence or disregarded rules or regula- tions there has not been a showing by the part- nership or any of its partners that there was a reasonable_cause for any of the resulting under- payments that the partnership or any of its part- ners acted in good_faith or that any other excep- tions to the penalty apply it is therefore de- termined that at a minimum the accuracy-related_penalty under sec_6662 of the internal_revenue_code applies to all underpayments of tax attributable to adjustments of partnership items of evergreen trading llc the penalty shall be imposed on the components of underpayment as fol- lows a b c d a percent penalty shall be imposed on the portion of any underpayment attribut- able to the gross_valuation_misstatement as provided by sec_6662 sec_6662 sec_6662 and sec_6662 of the internal reve- nue code a percent penalty shall be imposed on the portion of the underpayment attribut- able to negligence or disregard of rules and regulations as provided by sec_6662 sec_6662 sec_6662 of the inter- nal revenue code a percent penalty shall be imposed on the underpayment attributable to the sub- stantial understatement of income_tax as provided by sec_6662 sec_6662 and sec_6662 of the internal_revenue_code a percent penalty shall be imposed on the underpayment attributable to the sub- stantial valuation misstatement as provided by sec_6662 sec_6662 and sec_6662 of the internal_revenue_code reproduced literally on date respondent issued respective notices of deficiency to petitioners in these cases for the taxable years and in those respective notices respondent made the following determinations the dollar_figure and dollar_figure grantor_trust losses for and flowed from evergreen trading to the arlene nussdorf trust then to your 1040s interest_income in the amounts of dollar_figure and dollar_figure for and flowed from ever- green trading to the arlene nussdorf trust then to your 1040s investment_interest of dollar_figure and dollar_figure for and flowed from evergreen trading to the arlene nussdorf trust then to your 1040s short term capital_gain of dollar_figure for flowed from evergreen trading to the arlene nussdorf trust then to your all of these items are disallowed because you have failed to establish that the purported loss was sus- tained in any amount by either you or any entity in which you held an interest that the trans- action purportedly generating the loss in question was entered into for profit within the meaning of sec_165 or that any portion of the loss in question is allowable as a deduc- tion under any other provision of the internal_revenue_code you have also failed to establish that even if loss was sustained and would other- wise be deductible any deduction relating to the loss is not specifically limited or disallowed by any provision of the internal_revenue_code in- cluding without limitation sec_165 sec_183 sec_212 sec_704 sec_1366 or sec_465 it is further determined that to the extent the loss in question is attributable to an investment in offsetting options the loss is disallowed because the transactions were entered into for purposes of tax_avoidance the transactions giv- ing rise to the loss including the formation of the purported partnership arlene nussdorf trust’s acquisition of an interest in the partnership the purchase of the offsetting options the subsequent 5for convenience we quote from the notice_of_deficiency that respondent issued to petitioner arlene nussdorf in the case at docket no that notice_of_deficiency is virtually the same as the respective notices of deficiency that respondent issued to petitioners in the cases at docket nos and transfer of the options by the arlene nussforf trust to a partnership in return for a partnership_interest the purchase of assets by the partner- ship and the distribution of those assets to the arlene nussdorf trust in complete_liquidation of it’s partnership_interest and the subsequent sale of those assets to generate at a loss all within a period of less than months had no business_purpose other than tax_avoidance lacked economic_substance and in fact and substance constitutes an economic sham for federal_income_tax purposes as such any loss incurred in connection with the transactions in question are not deductible it is further determined that the loss deduction claimed on your and federal_income_tax return is disallowed because the evergreen trading partnership with reference to which you determined basis in the euros sold is a sham and should not be recognized for federal_income_tax purposes it is further determined that the deductions re- ferred to under claimed as a loss for tax years and are disallowed because you have failed to establish the basis in the partnership interests in evergreen trading held by the arlene nussdorf trust was greater than zero you have failed to establish the basis in the euros sold or disposed of was greater than zero dollar_figure for pur- poses of determining the amount of the purported loss under sec_165 it is further determined that the deduction for the loss claimed is disallowed to the extent that the provisions of chapter subchapter_k of the internal_revenue_code were used to calculate basis in the property sold evergreen trading was formed_or_availed_of in connection with a transac- tion or transactions in taxable years and a principal purpose of which was to reduce substantially the present_value of your federal tax_liability in a manner that is inconsistent with the intent of subchapter_k of the internal_revenue_code the manner in which you and ever- green trading accounted for the foreign_currency option transactions in question violated the in- tent of subchapter_k accordingly the parties’ accounting for the transactions should be adjusted pursuant to the authority contained in sec_1_701-2 to achieve results that are consistent with the intent of subchapter_k by ignoring the existence of the partnership or treating transactions purportedly engaged in by the partnership as engaged in directly by the purported partners it is further determined in the alternative that the loss claimed on your and federal_income_tax returns should be decreased by the items listed under in the amount of dollar_figure and dollar_figure to reflect the limitation on arlene nussdorf trust’s adjusted_basis in it’s partnership interests resulting from it’s contri- bution of it’s position s in the option transac- tion s to the partnerships pursuant to sec_1 752-06t it is further determined in the alternative that the loss claimed on your and federal_income_tax return should be decreased in the amount of dollar_figure and dollar_figure to limit any loss incurred by you and the partnership in con- nection with the option transaction to the amount actually at risk in the transaction pursuant to sec_465 it is further determined in the alternative that the loss claimed on your and federal_income_tax return should be decreased by the amount of dollar_figure and dollar_figure to reflect the fact that the amount invested in the option transaction purportedly generating the losses claimed represents a single unitary investment of dollar_figure in a single option position rather than a net investment in the same amount in off- setting option positions it is further determined that no deduction is allowed for any legal accounting consulting and advisory fees claimed since you failed to estab- lish that such expenditures were incurred and if incurred are deductible under any provision of the internal_revenue_code including but not lim- ited to sec_183 and sec_212 the partnership’s primary purpose was for the creation of tax losses the tax losses reported in the tax_year are straddle transactions as defined by sec_1092 as such the losses are sub- ject to offsetting of the unrecognized gains re- ported in the tax_year additionally the partnership is disregarded for federal tax pur- poses with all transactions being reversed and previously reported inflated basis if the partners relating to contribution of offsetting long and short currency positions are disregarded along with reported capital losses investment_interest expense distributed property and capital contri- butions reversed in their entirety and all trans- actions are treated as having been engaged in by the partners directly reproduced literally petitioners in these cases timely filed petitions in re- sponse to the respective notices of deficiency that respondent issued to them in those respective petitions petitioners alleged in pertinent part that petitioners invoked the jurisdic- tion of this court primarily for the purpose of confirming that the notice_of_deficiency is invalid and no jurisdiction exists and that the adjustments and penalties in the notice of defi- ciency constitute partnership and or affected items under code sec_6221 and sec_6231 petitioners further alleged in pertinent part in the respective petitions in these cases e f no partnership proceeding has yet been commenced under sec_6226 much less concluded on the same day respondent issued the 6for convenience we quote from the petition filed in the case at docket no that petition is virtually the same as the respective petitions filed in the cases at docket nos and notice date respondent also issued a notice of final partner- ship administrative adjustment fpaa to evergreen trading g consistent with the precedent of this court in inter alia maxwell supra the ostensible notice is a nullity around date petitioners glenn nussdorf and claudine strum in the case at docket no filed on behalf of gn investments llc a partner other than the tax_matters_partner of evergreen trading a complaint in the united_states court of federal claims that alleges error in the adjustments made in the fpaa issued with respect to evergreen trading for the taxable years and that case is still pending in that court discussion in respondent’s respective motions respondent asks the court to dismiss these cases for lack of jurisdiction on the ground that the respective notices of deficiency for the taxable years and that respondent issued to petitioners in these cases are invalid that is because according to respon- dent those notices contain only determinations that constitute partnership items as defined in sec_6231 or affected items as defined in sec_6231 relating to evergreen 7gn investments llc is a flowthrough entity that peti- tioner glenn nussdorf used in order to become a member of or partner in evergreen trading trading in petitioners’ respective motions petitioners ask the court to dismiss these cases for lack of jurisdiction as to all the determinations in the respective notices of deficiency for the taxable years and that respondent issued to them except the determination set forth in paragraph of those notices that paragraph stated it is further determined in the alternative that the loss claimed on your and federal_income_tax return should be decreased by the amount of dollar_figure and dollar_figure to reflect the fact that the amount invested in the option transaction purportedly generat- ing the losses claimed represents a single unitary investment of dollar_figure in a single option position rather than a net investment in the same amount in offsetting option positions in support of petitioners’ position in petitioners’ respec- tive motions that the court has jurisdiction over the above- quoted determination petitioners argue 8with respect to the affected items respondent points out that the partnership proceeding for the taxable years and with respect to evergreen trading is currently pending in the united_states court of federal claims 9with the exception of the determination set forth in para- graph of the respective notices of deficiency in question petitioners agree with respondent that the determinations in those notices constitute partnership items as defined in sec_6231 or affected items as defined in sec_6231 relating to evergreen trading 10see supra note 11for convenience we quote from petitioner’s motion in the case at docket no that motion is virtually the same continued the determination of the cost_basis of the purchased euro option in the hands of petitioner is a pure nonpartnership item that must be determined in this individual proceeding although that cost_basis along with the cash contributed becomes the basis of the partner’s partnership_interest in ever- green trading the later contribution does not convert a nonpartnership issue into a partnership_item just as if ms nussdorf petitioner in the case at docket no had purchased a partnership_interest from an outsider the determination of ms nussdorf’s cost_basis in her purchased euro option is irrelevant to any other partner and cannot be determined by examining the partnership books the cost_basis of the purchased euro option in the hands of ms nussdorf must be determined by looking to sec_1012 and the authorities thereunder an issue concerning the cost_basis of prop- erty in the hands of the taxpayer pre-contribution inevitably turns on law and facts unique to the tax- payer and the particular property in question which are the hallmark of nonpartnership_items to consider issues peculiar to a single partner as partnership items even those relating to partnership gains or losses would blur or erase the distinc- tion between proceedings involving partnership items and those involving nonpartnership_items and would be contrary to the system of separate treatment of part- nership and nonpartnership issues congress established by enacting tefra reproduced literally citations omitted respondent counters continued as petitioners’ respective motions in the cases at docket nos and 12for convenience we quote from respondent’s response to petitioner’s motion in the case at docket no that response is virtually the same as respondent’s respective re- sponses to petitioners’ respective motions in the cases at docket nos and the petitioner contends the explanatory lan- guage in paragraph eight allows the court in this proceeding to determine the pre-contribution cost_basis of a purchased euro option in the hands of petitioner they contend that the basis of the purchased euro option before its contribution to the partnership is a nonpartnership item that must be determined in this partner-level proceeding and that such basis should be determined without considering the effect on the basis of the offsetting sold euro option in effect peti- tioner contends the offsetting options should not be integrated petitioner’s contentions are wrong the statutory_notice_of_deficiency including paragraph number eight challenge s the so-called son of boss transaction that involve s purported contribution of an option spread to a partnership this contribution was an integral and vital part of the transaction petitioner used the contribution to inflate her basis in the partnership petitioner then attached this inflated basis to the assets distributed to petitioner by the partnership see sec_732 sec_6231 provides that the term partnership_item includes any item required to be taken into account for the partnership’s taxable_year under subtitle a to the extent provided by the regula- tions the purported partnership here was re- quired under subtitle a of the code to determine the partners’ basis in the contributed options see sec_723 partnership receives carryover_basis from part- ner sec_301_6231_a_3_-1 makes this carryover_basis a partnership_item under sec_6231 sec_6221 requires such partnership_item to be determined in a partnership proceeding rather than in a deficiency proceeding contrary to petitioner’s contention the status of an item as a partnership_item depends solely on whether the partner- ship must determine the item under subtitle a and whether the regulations make such an item a partnership_item not on where the partnership has to look to find 13respondent indicates in respondent’s respective motions that the determination set forth in paragraph of the respective notices of deficiency in question is commonly referred to as the integration argument such information in determining its basis in the contributed options the purported partnership was required to take into account the amount and character of the contribu- tion which included the fair_market_value and basis of the contribution whether the obligation leg was a liability assumed by the partnership and whether the legs of the options needed to be aggregated citations omitted we agree with respondent sec_6231 defines the term partnership_item to mean with respect to a partnership any item required to be taken into account for the partnership’s taxable_year under any provision of subtitle a to the extent regula- tions prescribed by the secretary provide that for purposes of this subtitle such item is more appropri- ately determined at the partnership level than at the partner level sec_6231 defines the term nonpartnership item to mean an item which is or is treated as not a partnership_item sec_6231 defines the term affected_item to mean any item to the extent such item is affected by a partnership_item sec_723 provides in pertinent part that the basis_of_property contributed to a partnership by a partner is the ad- justed basis of such property to the contributing_partner at the time of the contributiondollar_figure thus in order for a partnership to sec_1_723-1 income_tax regs promulgated under sec_723 further provides in pertinent part continued determine as required by sec_723 its basis in the property that a partner contributed to it the partnership is required to determine the basis of such partner in such property in making those determinations the partnership is required inter alia to determine the character of any property received by the partner- ship such as whether it is a contribution or a loan in the instant cases in order for evergreen trading to determine as required by sec_723 its respective bases in the properties that its partners purportedly contributed to it evergreen trading was required to determine the respective bases of such partners in such properties in making those determina- tions evergreen trading was required inter alia to determine the character of any property that evergreen trading received from each member such as whether it was a contribution or a loan and whether any such property received from each member should be aggregated with other_property received from each such member the following regulations promulgated under sec_6231 which defines the term partnership_item provide that the above-described items relating to the purported contri- butions of certain properties to evergreen trading by its respec- continued since such property contributed to the partnership by a partner has the same basis in the hands of the partnership as it had in the hands of the contributing_partner the holding_period of such property for the partnership includes the period during which it was held by the partner tive members with respect to which evergreen trading was re- quired make certain determinations are partnership items sec_301_6231_a_3_-1 proced admin regs states that the following items inter alia which are required to be taken into account under subtitle a of the code are more appro- priately determined at the partnership level than at the partner level and therefore are partnership items the partnership aggregate and each partner’s share of each of the following v partnership liabilities including determinations with respect to the amount of the liabilities whether the liabilities are nonrecourse and changes from the preceding_taxable_year items relating to the following transactions to the extent that a determination of such items can be made from determinations that the partnership is re- quired to make with respect to an amount the character of an amount or the percentage interest of a partner in the partnership for purposes of the partnership books_and_records or for purposes of furnishing infor- mation to a partner i contributions to the partnership sec_301_6231_a_3_-1 proced admin regs further provides b factors that affect the determination of partnership items -- the term partnership_item in- cludes the accounting practices and the legal and factual determinations that underlie the determination of the amount timing and characterization of items of income credit gain loss deduction etc sec_301_6231_a_3_-1 proced admin regs which provides illustrations of sec_301_6231_a_3_-1 proced admin regs states in pertinent part c illustrations -- in general -- this para- graph c illustrates the provisions of paragraph a of this section a -1 the deter- minations illustrated in this paragraph c that the partnership is required to make are not exhaustive there may be additional determinations that the part- nership is required to make which relate to a transac- tion listed in paragraph a of this section the critical element is that the partnership needs to make a determination with respect to a matter for the pur- poses stated failure by the partnership actually to make a determination for example because it does not maintain proper books_and_records does not prevent an item from being a partnership_item contributions -- for purposes of its books_and_records or for purposes of furnishing information to a partner the partnership needs to determine i the character of the amount re- ceived from a partner for example whether it is a contribution a loan or a repayment of a loan iv the basis to the partnership of contributed_property including necessary preliminary determinations such as the part- ner’s basis in the contributed_property to the extent that a determination of an item relating to a contribution can be made from these and similar determinations that the partnership is required to make therefore that item is a partnership_item to the extent that the determination requires other infor- mation however that item is not a partnership_item for example it may be necessary to determine whether contribution of the property causes recapture by the contributing_partner of the investment_credit under sec_47 in certain circumstances in which that determination is irrelevant to the partnership we conclude that the following determinations of certain items relating to the purported contributions of the euro options in question to evergreen trading by its respective members can be made from determinations that evergreen trading was required to make for purposes of evergreen trading’s books_and_records or for purposes of furnishing information to each member the character of any property that evergreen trading received from each member such as whether any such property received from each member was a contribution or a loan16 and whether any such property should be aggregated with other_property received from each such member and the basis to evergreen trading of any property contributed to it by each member including necessary preliminary determina- tions such as the basis of each such member in such property see sec_301_6231_a_3_-1 -1 c proced admin regs we further conclude that none of such determinations relating to the purported contributions of the euro options in question to evergreen trading by its respective members required information other than the information that evergreen trading was required to use in making such determinations that it was required to make for purposes of its books_and_records or for purposes of furnish- ing information to a member see id 16in determining whether any property that evergreen trading received from each member was a contribution or a liability evergreen trading was required to determine whether the so-called obligation leg ie the short position of the euro options in question was a liability that evergreen assumed we hold that the determination set forth in paragraph of the respective notices of deficiency that respondent issued to petitioners in these cases relates to certain partnership items described above we further hold that we do not have jurisdic- tion over those items e g 95_tc_560 87_tc_783 we also hold and respondent and petitioners agree that we do not have jurisdiction over the remaining determinations set forth in those respective notices because those remaining determinations relate to partnership items eg trost v commissioner supra maxwell v commissioner supra or affected items eg 114_tc_519 n c f energy part- ners v commissio89_tc_741 we have considered all of the contentions and arguments of petitioners that are not discussed herein and we find them to be without merit and or irrelevant to reflect the foregoing orders granting respondent’s respective motions and denying petitioners’ respective motions and dismissing these cases for lack of jurisdiction will be entered


department of the treasury internal_revenue_service attn mandatory review mc dal commerce street dallas tx tax_exempt_and_government_entities_division number release date legend org - organization name xx - date address - address org address date date employer_identification_number person to contact id number contact numbers telephone fax certified mail - return receipt requested dear in a determination_letter dated october 19xx you were held to be exempt from federal_income_tax under sec_501 of the internal_revenue_code the code based on recent information received we have determined you have not operated in accordance with the provisions of sec_501 of the code accordingly your exemption from federal_income_tax is revoked effective january 20xx this is a final adverse determination_letter with regard to your status under sec_501 of the code we previously provided you a report of examination explaining why we believe revocation of your exempt status is necessary at that time we informed you of your appeal rights on july 20xx you signed form 6018-a consent to proposed action agreeing to the revocation of your exempt status under sec_501 of the code you have filed taxable returns on form_1120 u s_corporation income_tax return for the years ended date and december 20xx with us periods you are required to file form_1120 with the appropriate service_center indicated in the instructions for the return for future you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please contact the person whose name and telephone number are shown at the beginning of this letter sincerely nanette m downing director eo examinations date date org address dear internal_revenue_service department of the treasury tax_exempt_and_government_entities_division exempt_organizations examinations causeway street room boston ma taxpayer_identification_number person to contact id number id number contact numbers telephone fax based on our review of the f990 f990-t tax forms we are proposing revocation of the sec_501 tax exemption for building association inc effective 20xx you may choose to agree or disagree with this proposal for revocation if you agree please sign and return form 6018-a consent to proposed action and form_5701 notice of proposed_adjustment if you disagree please sign form_5701 and indicate in the checkbox if you will formally appeal or submit a request for a decision under the fast track program please submit this information by 20xx if you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you this letter and attachments are also sent to your representative we have on file thank you for your cooperation sincerely enclosures form 886-a - explanation of proposed revocation form_5701 - notice of proposed_adjustment form_6018 - consent to proposed action publication - fast track mediation publication - your appeals right trinh nguyen revenue_agent schedule number or exhibit form 886-a rev date name of taxpayer org explanations of items tax identification_number ein year period ended 20xx legend org - organization name xx - date issue whether the org may continue to qualify for exemption under sec_501 when its investment_income consistently exceeds the thirty five percent limitation of total income facts the org hereafter refers to as eo has reported the following figures on its f990 for the year 20xx 20xx and 20xx 20xx interest on savings and temporary 20xx 20xx cash investments investment_income total revenue on f990 percentage of investment_income over total revenue see attachments of the eo’s f990 page for the aforementioned years applicable law s sec_501 c of the code irc defines an exempt_organization under this section as one that is organized for the pleasure recreation and other nonprofit purposes for its members sec_1_501_c_7_-1 of the income_tax regulations provides that in general the exemption extends to social and recreation clubs which are supported by membership fees dues and assessments however a club which engages in business such as making its social and recreational facilities available to the general_public is not organized and operated exclusively for pleasure recreation and other nonprofitable purposes and is not exempt under sec_501 public law defines gross_receipts as those receipts from normal and usual activities of a club including charges admissions membership fees dues assessments investment_income and normal recurring capital_gains on investments but excluding initiation fees and capital contributions public law also states that it is intended that social clubs should be permitted to receive up to percent of their gross_receipts including investment_income from sources outside of their membership without losing their exempt status within thi sec_35 percent amount not more than percent of the gross_receipts should be derived from the use of the social club's facilities or services by the public thus a social_club may receive investment_income form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service schedule number or exhibit form 886-a rev date explanations of items name of taxpayer org up to the full percent amount of gross_receipts if a club receives unusual amounts of income such as from the sale of its clubhouse or similar facility that income is not to be included in the percent formula that is unusual income is not to be included in the gross_receipts of the club tax identification_number ein year period ended 20xx revrul_66_149 1966_1_cb_146 holds that a social_club is not exempt from federal_income_tax as an organization described in sec_501 of the code where it regularly derives a substantial part of its income from nonmember sources such as for example dividends and interest on investments which it owns government position income from investments - a social_club is not exempt from federal_income_tax under sec_501 of the code where it regularly derives a substantial part of its income from nonmember sources such as dividends and interest on investments that it owns org does not qualify for exemption under sec_501 under the year of examination taxpayer’s position to be determined conclusion the org may not continue to qualify for exemption under sec_501 when its investment_income consistently exceeds the thirty five percent limitation of total income we are proposing revocation of the sec_501 tax exemption for the eo effective 20xx form 886-a catalog number 20810w page publish no irs gov department of the treasury-internal revenue service


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 ita b05 plr-111686-09 date date internal_revenue_service number release date index number ---------------------- ------------- ----------------------------------- ------------------------------------- -------------------------------- legend taxpayer -------------------------------------- -------------------------------------- year ------- year ------- date ---------- date ------------------ date ------------------- dear ------------- this is in reference to a form_1128 application to adopt change or retain a tax_year submitted on behalf of the above-named taxpayer requesting permission to change its accounting_period for federal_income_tax purposes from a taxable_year ending date to a taxable_year ending date effective date year the taxpayer has requested that the form_1128 be considered timely filed under the authority contained in of the procedure and administration regulations the taxpayer’s form_1128 requesting a change in accounting_period to a tax_year ending date was due on or before date year but was not timely filed the information furnished indicates that the taxpayer intended to make the change in a timely manner but that due to error or misunderstanding the form was not timely filed the error was not due to any lack of due diligence or prompt action on the part of the taxpayer sec_301 a of the regulations provides that requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 automatic extensions such as the instant case must be made under the rules of plr-111686-09 sec_301_9100-3 requests for relief subject_to 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 the granting of relief will not prejudice the interests of the government based on the facts and information submitted and the representations made it is held that the taxpayer has acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government accordingly the requirements of the regulations for the granting of relief have been satisfied in this case and the taxpayer’s late-filed form_1128 requesting permission to change to a tax_year ending date effective for the tax_year ending date year will be considered timely filed a copy of this letter_ruling taxpayer’s form_1128 and other relevant documents are being forwarded to the service_center where the taxpayer files its federal_income_tax returns with instructions that the form_1128 be considered timely filed and processed in accordance with established procedures under revproc_2006_45 the ruling contained in this letter is based upon facts and representations furnished by the taxpayer and is limited to the filing of form_1128 except as specifically addressed herein no opinion is expressed as to whether the taxpayer qualified for the automatic consent procedure or regarding the tax treatment of the subject transaction under the provisions of any other section of the internal_revenue_code or income_tax regulations that may be applicable thereto this office has not verified any of the materials submitted in support of the requested ruling verification of factual information representations and other data is within the examination jurisdiction of the taxpayer’s irs industry director copies of this letter_ruling are being provided to the taxpayer’s authorized representative this ruling is directed only to the taxpayer that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent sincerely yours s william a jackson william a jackson chief branch office of associate chief_counsel income_tax accounting enclosures copy for sec_6110 purposes copy of this letter_ruling


department of the treasury washington dc person to contact ------------------ id no ------------- telephone number --------------------- refer reply to cc psi b04 - plr-126584-03 date date internal_revenue_service number release date index number ---------------------- ----------------------- ------------------------------- - re ---------------------- re ---------------------- legend husband ---------------------------- --------------------------------- wife ---------------------- --------------------------- trust ---------------------------------- -------------------------- date -------------------------- date -------------------------- date ------------------------- year ------- year ------- year ------- year ------- year ------- year ------- year ------- year ------- year ------- amount ----- amount ------------ amount ------------ amount ----------- amount ----------- amount ----------- amount ----------- amount ----------- amount ----------- amount ----------- amount ----------- attorney ------------------ cpa ------------- cpa ------------------ cpa ---------------------------------- dear ----------------- requesting an extension of time under sec_301 of the procedure and administration regulations to make an allocation of generation-skipping_transfer gst tax exemption this is in response to a letter from your authorized representative dated april the facts and representations submitted are summarized as follows husband and wife reside in a community_property_state husband and wife together referred to as taxpayers established an irrevocable_trust trust under an agreement dated date for the benefit of their children and grandchildren son was named as the initial trustee and continues to serve in that capacity under trust’s terms the trustee has the discretion to pay income and principal to the beneficiaries as the trustee deems necessary for the health education maintenance and support of the beneficiaries provided trust does not terminate as a result of such discretionary distributions trust will continue until the death of the last to die of two of taxpayers’ children or for the maximum period allowed by law on termination all principal and income is to be distributed to taxpayers’ grandchildren pursuant to trust’s terms whenever a contribution is made to trust by husband or wife certain beneficiaries are granted a right to withdraw the contribution trust was initially funded with amount when created on date on date husband and wife each contributed closely-held stock to trust valued at amount for a total contribution of amount for the year calendar_year attorney prepared and taxpayers timely filed separate form sec_709 united_states gift and generation-skipping_transfer_tax return for husband and wife the year returns allocated amount of husband’s available gst_exemption to trust and amount of wife’s available gst_exemption to trust after year attorney was not engaged to prepare tax returns for taxpayers in year trust purchased a second-to-die life_insurance_policy on the joint lives of husband and wife the policy was purchased on the advice of a life_insurance representative and taxpayers did not seek separate tax_advice regarding the purchase taxpayers intended to make cash contributions to trust to pay the premiums the policy provided flexibility in the amounts and timing of premium payments from year through year taxpayers made cash contributions to trust and the trustee used the funds to pay the insurance premiums total contributions for the various years were year amount year - amount year - amount year - amount year - amount year - amount year amount and year - amount beginning in year taxpayers had several accountants as a result of miscommunications among taxpayers and the various accountants incorrect amounts were reported on gift_tax returns gift_tax returns for several years were not filed and gst tax exemption allocation errors were made in year cpa discovered that no gift_tax returns were filed for year or year late gift_tax returns for those years were filed on date however the amount_of_the_gift for year was incorrectly calculated by taxpayers for the years year through year taxpayers engaged cpa to prepare their returns the year gift_tax returns incorrectly reflected the total amount of cash gifts to trust and erroneously reported an outright gift to taxpayer’s grandchildren as a gift to trust for year and year cpa was not aware of any gifts to trust and no gift_tax returns were filed for year or year in year taxpayers engaged cpa to prepare their tax returns cpa discovered the above-referenced errors to date no taxable_distributions taxable terminations or any other events have occurred with respect to trust that would give rise to a gst liability on the part of trust or any of its beneficiaries husband and wife had and still have sufficient gst tax exemption remaining and available to allocate sufficient gst tax exemption to trust in order for trust to have an inclusion_ratio of zero sec_2601 imposes a tax on every generation-skipping_transfer a generation- skipping transfer is defined under ' a as a taxable_distribution a taxable_termination and a direct_skip sec_2602 provides that the amount of the tax is the taxable_amount multiplied by the applicable_rate sec_2641 defines aapplicable rate as the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer sec_2631 as in effect for the tax years at issue provided that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure adjusted for inflation under ' c 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 ' a once made shall be irrevocable sec_2632 provides that any allocation by an individual of his or her gst_exemption under ' a 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 other than in a direct_skip is made on form_709 under ' a the inclusion_ratio with respect to any property transferred in a generation-skipping_transfer is generally defined as the excess of over the aapplicable fraction the applicable_fraction as defined in ' a is a fraction the numerator of which is the amount of the gst_exemption allocated to the trust or to property transferred in a direct_skip and the denominator is the value of the property transferred to the trust or involved in the direct_skip sec_2642 provides that except as provided in ' f 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 ' b for such transfer or is deemed to be made under ' b or c the value of such property for purposes of ' a shall be its value as finally determined for purposes of chapter within the meaning of ' f or in the case of an allocation deemed to have been made at the close of an estate_tax_inclusion_period its value at the time of the close of the estate_tax_inclusion_period and such allocation shall be effective on and after the date of such transfer or in the case of an allocation deemed to have been made at the close of an estate_tax_inclusion_period on and after the close of such estate_tax_inclusion_period 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 ' b or and an election under ' b or c such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of this paragraph sec_2642 provides that in determining whether to grant relief under this paragraph 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 under this paragraph 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 ' g b 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_transfer_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 ' b or b or an election described in ' b or c under the provisions of ' requests for relief under ' 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 sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose date is prescribed by a regulation and not expressly provided by statute in accordance with ' g b and notice_2001_50 taxpayers may seek an extension of time to make an allocation described in ' b or b or an election described in ' b or c under the provisions of ' based on the facts submitted and the representations made we conclude that the requirements of ' have been satisfied therefore wife is granted an extension of time of days from the date of this letter to make an allocation of wife’s available gst tax exemption with respect to wife s transfers to trust in year and to allocate additional gst_exemption with respect to wife s transfers to trust in year year and year the allocations will be effective as of the respective dates of the transfers to trust and the inclusion_ratio of trust will be determined based on the value of the transfers to trust as determined for federal gift_tax purposes and the amount of exemption allocated to the trust the deemed_allocation rules in sec_2632 are applicable to transfers made after date and therefore no extension of time is necessary for the transfers to trust in year these allocations should be made on supplemental form sec_709 in the case of allocations for year year and year and on original returns in the case of allocations for year and filed with the cincinnati service_center at the following address internal_revenue_service cincinnati service_center - stop cincinnati oh a copy of this letter should be attached to the supplemental form sec_709 for year year and year and to the original return for year 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 tax consequences of the transaction under the cited provisions or under any other provisions of the code except as specifically ruled herein we express or imply no opinion on the federal this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely enclosures copy for sec_6110 purposes copy of this letter heather c maloy associate chief_counsel passthroughs and special industries cc


t c memo united_states tax_court kevin f foley and shula k foley petitioners v commissioner of internal revenue respondent docket no 11602-06l filed date mark a pridgeon for petitioners trent d usitalo for respondent memorandum opinion swift judge this matter is before us under rule on the parties’ cross-motions for summary_judgment the underlying issue in this collection case is whether respondent’s appeals_office abused its discretion in sustaining respondent’s proposed levy action against petitioners’ residence unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure at the time of filing the petition petitioners resided in background afton minnesota in petitioners earned dollar_figure in short-term_capital_gains on date petitioners purchased a new residence for dollar_figure with a dollar_figure cash down payment and a contract_for_deed for the balance with a balloon payment due on date on or about date petitioners filed late their joint federal_income_tax return showing a tax_liability of dollar_figure petitioners included no payment with the return and in petitioners paid no withholding taxes and no estimated_taxes on or about date respondent assessed the above dollar_figure tax_liability reported on petitioners’ federal_income_tax return along with interest and penalties and mailed to petitioners a notice_and_demand for payment on or about date respondent mailed to petitioners a notice_of_intent_to_levy relating to petitioners’ federal income taxes plus penalties and interest in the total amount of dollar_figure on date respondent filed a federal_tax_lien in washington county minnesota relating to petitioners’ outstanding federal income taxes on or about date petitioners timely requested an appeals_office hearing seeking to avoid or at least to postpone respondent’s proposed levy in their appeals_office hearing petitioners requested that respondent designate their outstanding federal income taxes as currently not collectible petitioners also represented that because of the balloon payment due on their contract_for_deed in june of they intended to sell or refinance their residence and that funds therefrom would be used by petitioners to pay their outstanding federal income taxes petitioners also represented that they had several business deals that at some point might provide funds to pay their federal income taxes in the appeals_office hearing petitioners did not challenge their underlying federal_income_tax liability per respondent’s request petitioners filed form 433-a indicating that petitioners’ monthly living_expenses exceeded their monthly earned_income and showing their residence as their only significant asset on or about date respondent’s appeals officer advised petitioners’ representative that the proposed levy action was sustained and that petitioners should consider either refinancing or selling their residence to pay their federal income taxes the appeals officer further determined that it was not appropriate to levy on petitioners’ bank accounts because petitioners had no funds in their bank accounts the appeals officer on his own initiative considered other collection alternatives in particular the appeals officer determined that an installment_agreement would not be appropriate because petitioners’ monthly necessary living_expenses exceeded their monthly income the appeals officer further determined that an offer-in-compromise would not be appropriate because of the amount of equity in petitioners’ residence the appeals officer determined that it was appropriate to levy on petitioners’ residence because there was sufficient equity in the residence to satisfy petitioners’ entire outstanding tax_liability on or about date respondent’s notice_of_determination was mailed to petitioners sustaining respondent’s proposed levy in the notice_of_determination the appeals officer determined and petitioners do not dispute that as of date 1the record does not explain what disposition petitioners made of the dollar_figure in short-term_capital_gains they realized in petitioners had a balance due on the contract_for_deed relating to their residence of dollar_figure and petitioners’ residence had a fair_market_value of approximately dollar_figure on date petitioners timely filed a petition with this court in their petition petitioners alleged only the following error the respondent erred in determining that a short-term extension of time to date for the petitioners to refinance or sell their home pursuant to a balloon payment on their contract_for_deed and thereby raise the funds to pay the liabilities was not an appropriate collection alternative discussion summary_judgment is appropriate where the pleadings answers to interrogatories depositions admissions and other material show there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law rule b 122_tc_184 under sec_6330 where a taxpayer’s underlying tax_liability is not at issue we generally review respondent’s appeals_office notice_of_determination for an abuse_of_discretion 114_tc_604 in an appeals_office hearing generally respondent is required to consider issues raised by a taxpayer including collection alternatives and challenges to the appropriateness of the collection action sec_6330 a taxpayer may request that his federal_income_tax liability be designated as currently not collectible such status may be available where based on the taxpayer’s assets equity income and expenses the taxpayer has no apparent ability to make payments on the outstanding tax_liability administration internal_revenue_manual cch sec_5 at big_number see also willis v commissioner tcmemo_2003_302 in a number of situations courts have held that it will not be regarded as an abuse_of_discretion where an appeals officer refuses to delay a proposed collection action to allow a taxpayer to sell an asset see castillo v commissioner tcmemo_2004_ clawson v commissioner tcmemo_2004_106 325_fsupp2d_1064 c d cal herein the record establishes that respondent’s appeals officer did not abuse his discretion in sustaining the proposed levy the appeals officer considered petitioners’ request to designate their liability as currently not collectible and correctly determined that it was not merited because of the equity in petitioners’ residence further the appeals officer did not abuse his discretion in rejecting petitioners’ request to postpone the levy until after date to allow petitioners to refinance or sell their residence we note that petitioners purchased a new residence with dollar_figure in cash at a time when they owed a substantial tax_liability see steinberg v commissioner tcmemo_2006_217 no abuse_of_discretion in rejecting an offer-in-compromise where taxpayers spent dollar_figure on a residence down payment we are not aware of any reason why petitioners did not attempt to refinance or to sell their residence before date as recommended by respondent’s appeals officer to pay their outstanding federal_income_tax liability if respondent’s tax_lien inhibited petitioners from refinancing or selling their residence petitioners could have requested respondent to subordinate the tax_lien under sec_6325 to facilitate the refinancing or sale there is no indication that petitioners made such a request for the first time in their summary_judgment motion petitioners allege that respondent’s appeals officer abused his discretion by failing to properly balance the need for efficient collection_of_taxes with the concern that a collection action be no more intrusive than necessary petitioners’ argument fails as stated petitioners never requested an installment_agreement nor did they make an offer-in-compromise yet the appeals officer considered these collection alternatives and correctly concluded that a levy on petitioners’ residence was the only viable alternative petitioners contend that the filing of respondent’s tax_lien alone was sufficient to protect respondent’s interest the lien itself however does not collect taxes owed but simply enhances respondent’s priority position vis-a-vis other creditors regardless of our opinion herein petitioners effectively obtained much of what they wanted--namely--a postponement of respondent’s levy until by requesting an appeal with respondent’s appeals_office and subsequently filing a petition with this court respondent was temporarily stayed from levying on petitioners’ residence sec_6330 115_tc_35 we hold that respondent’s appeals_office did not abuse its discretion we will deny petitioners’ motion for summary_judgment and we will grant respondent’s motion for summary_judgment our opinion here does not necessarily mean that respondent may in fact levy on petitioners’ residence pursuant to sec_6334 a taxpayer’s principal_residence is exempt from levy absent the written approval of a federal district_court judge or magistrate we note that in connection with a proposed levy on a taxpayer’s residence our jurisdiction under sec_6330 to consider whether an appeals officer properly has balanced the need for efficient collection_of_taxes with the concern that a collection action be no more intrusive than necessary would appear to be somewhat duplicative of the federal district courts’ jurisdiction under sec_6334 also to review and approve respondent’s levy on a taxpayer’s residence to reflect the foregoing an appropriate order and decision will be entered for respondent


tcmemo_2009_219 united_states tax_court ernest a gralia jr and rose m gralia petitioners v commissioner of internal revenue respondent docket no filed date peter l banis for petitioners nina p ching for respondent memorandum opinion halpern judge by notice_of_deficiency the notice respondent determined deficiencies of dollar_figure and dollar_figure in petitioners’ federal_income_tax for taxable calendar years and respectively unless otherwise stated section references are to the internal_revenue_code in effect for the years in issue and rule references are to the tax_court rules_of_practice and procedure the parties submitted this case fully stipulated under rule the stipulated facts are so found and the stipulation of facts with accompanying exhibits is incorporated herein by this reference respondent has conceded one issue we must decide only whether petitioners’ deduction of a dollar_figure settlement the settlement is a miscellaneous itemized_deduction and petitioners may deduct dollar_figure in related legal fees the legal fees petitioners bear the burden_of_proof see rule a background petitioners are husband and wife who made joint returns of income for the years in issue at the time they filed the petition they resided in florida 1respondent made other adjustments in the notice that are purely computational and that we need not discuss further sec_7491 provides that if a taxpayer offers credible_evidence with respect to an issue the burden_of_proof with respect to the issue is on the commissioner see also rule a sec_7491 applies only if the taxpayer complies with the relevant substantiation requirements in the internal_revenue_code maintains all required records and cooperates with the commissioner with respect to witnesses information documents meetings and interviews sec_7491 and b the taxpayer bears the burden of proving compliance with the conditions of sec_7491 and b e g ruckriegel v commissioner tcmemo_2006_78 petitioners neither propose facts to support their compliance with the conditions of sec_7491 and b nor argue that respondent bears the burden_of_proof on any issue because of sec_7491 we therefore conclude that sec_7491 does not apply to this case petitioner’s business ernest a gralia jr petitioner was a general contractor involved in the construction of residential and commercial buildings and was the owner and principal officer of an s_corporation e a gralia construction co gralia construction charles f maurer jr mr maurer was the son of the owner of a site development business which petitioner sometimes hired as a subcontractor on construction projects in when mr maurer graduated from high school petitioner hired him as a laborer in petitioner asked mr maurer if he would like to work in the company office instead of the field and mr maurer accepted over the next few years as mr maurer began his college education in business and finance petitioner increasingly depended on him to manage the office eastmont and the partnerships in petitioner became interested in undertaking government-subsidized housing projects in late two men asked petitioner to quote a price for the construction of a proposed subsidized project pheasant hill village the two men were the sole general partners of pheasant hill village associates pheasant hill in date petitioner acquired a 55-percent general_partnership interest in pheasant hill thereby replacing one of the general partners and became managing general_partner of that partnership one month later petitioner’s lawyer formed eastmont development corp eastmont petitioner was its president mr maurer its treasurer and petitioner’s lawyer its clerk the same men were its three directors petitioner transferred a 45-percent general_partnership interest in pheasant hill to eastmont and eastmont replaced petitioner as managing general_partner eastmont issued stock to petitioner and to no one else mr maurer understood himself to be entitled to one-third of eastmont’s stock petitioner became involved in three other partnerships together with pheasant hill the partnerships in the first two partnerships petitioner and eastmont or its wholly owned subsidiary were general partners in the third partnership chestnut street limited_partnership chestnut house petitioner was both general_partner and a limited_partner in date mr maurer left his positions at gralia construction and eastmont at that time he asked petitioner for his share of eastmont’s stock petitioner demurred the state court case in date mr maurer commenced a civil_action against petitioner and others in the superior court of hampden county massachusetts the state court case and the superior court respectively among other things mr maurer sought to recover his share of eastmont’s stock and any associated dividends or other_benefits the superior court bifurcated the action addressing liability first and damages second in date the superior court issued a memorandum the first state court ruling holding that mr maurer was a one-third owner of eastmont in date the superior court issued its findings rulings and order for judgment the second state court ruling together with the first state court ruling the state court rulings the superior court prefaced its discussion with its understanding of the nature of mr maurer’s claims this is not a stockholders’ derivative action in which the plaintiff seeks damages on behalf of the corporation for monies improperly expended by it in this case the plaintiff is seeking to recover his proportionate share of monies or other_benefits which petitioner may have taken from the corporation in the nature of dividends he is seeking to enforce the fiduciary duty which petitioner as majority shareholder owed to him as minority shareholder as defined in donahue v rodd electrotype co of new england mass n e 2d rather than recompense for any loss alleged to have been caused to the corporation by petitioner’s actions see bessette v bessette mass n e 2d the effort therefore was to identify those payments or direct benefits which petitioner had received from eastmont development_corporation since its formation the superior court found among other facts that petitioner had been improperly claiming eastmont’s share of the partnership losses petitioner apparently has used his position of control to usurp a much larger proportion of the equity ownership than that to which he is entitled on the record before me it is not possible to right the wrong that has been done to eastmont except by ordering petitioner to amend his tax returns for the years in question to reflect the true division of ownership the superior court also ordered petitioner to pay mr maurer approximately dollar_figure for causing eastmont to pay the premiums on petitioner’s life_insurance_policy petitioner appealed and in date the massachusetts appeals court the appeals court affirmed most of the state court rulings the district_court case in date mr maurer commenced a civil_action against petitioner and others in the u s district_court for the district of massachusetts the district_court case and the district_court respectively mr maurer amended his complaint three times and for purposes of this case we consider only the third amended complaint and jury demand the third amended complaint in date mr maurer agreed to the dismissal of his action against the defendants in the district_court case in return for dollar_figure a single law firm represented the defendants in the district_court case that law firm billed the gralia group for its services and in gralia construction paid the law firm dollar_figure ie the legal fees petitioners’ returns petitioners filed a form_1040 u s individual_income_tax_return for they attached thereto a schedule c profit or loss from business which showed petitioner as the proprietor of a business described as consulting-director on that schedule c petitioners claimed deductions for the settlement and the 3the appeals court vacated that part of the second state court ruling that required petitioner to amend his personal income_tax returns 4although mr maurer lodged a fourth amended complaint the case was settled before the district_court ruled on his motion for leave to file a fourth amended complaint legal fees which caused them to have a net_loss on schedule c of dollar_figure in date petitioners filed form_1045 application_for tentative refund claiming a carryback net_operating_loss for as a result of the schedule c loss claimed on their form_1040 in date petitioners filed form sec_1040x amended u s individual_income_tax_return for and the notice in an attachment to the notice respondent set forth his adjustments giving rise to the deficiencies in issue he explained that he was disallowing the deduction for the settlement on the ground that the settlement was not an ordinary and necessary business_expense as per sec_162 of the internal_revenue_code he explained that he was disallowing the deduction for the legal fees on the ground among others that petitioner had not paid them the disallowance of the carryback to followed from the disallowance of deductions for the settlement and the legal fees discussion i respondent’s concession on brief respondent concedes p etitioners are entitled to deduct the settlement on schedule a of their return as a miscellaneous expense subject_to the limitations under sec_67 specifically respondent concedes that petitioners may deduct the settlement as either an employee_business_expense under sec_162 or an expense related to petitioner’s investment in eastmont under sec_212 respondent’s concession however does not help petitioners much because of the alternative_minimum_tax any miscellaneous itemized_deduction will have only a limited effect if any on petitioners’ tax_liabilities see sec_56 b a i d ii miscellaneous_itemized_deductions a introduction sec_162 allows a deduction for all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business sec_212 allows a deduction for certain expenses related to investments ie expenses_for_the_management_conservation_or_maintenance_of_property_held_for_the_production_of_income most sec_162 expenses related to the performance of services as an employee and sec_212 expenses related to stock ownership are deductible only as itemized_deductions here if the settlement 5petitioners apparently accept respondent’s concession that they may deduct the settlement under sec_162 we assume they do so because that is the section they argue applies they object however to respondent’s concession under sec_212 asserting that they are surprised and prejudiced by this new and confusing claim even if respondent’s concession were a new_matter raised on brief however that would not make it an impermissible argument as petitioners assert rather respondent would simply bear the burden of proving it see rule a yet petitioners do not seek to shift the burden_of_proof which is understandable since respondent has conceded something to petitioners--ie that they do have a ground for deducting the settlement something respondent denied altogether in the notice a deduction under sec_212 may not be the concession petitioners would have liked but it is a concession nonetheless is such an employment- or shareholder-related expense then it is a miscellaneous itemized_deduction see sec_67 b respondent’s argument respondent argues that petitioner paid the settlement neither in connection with his trade_or_business as a self- employed consultant nor in connection with his trade_or_business as a real_estate developer rather respondent argues petitioner paid the settlement in connection with either his employment by eastmont or his status as an eastmont shareholder according to respondent in both cases the result is the same petitioners may deduct the settlement only as a miscellaneous itemized_deduction under sec_67 respondent also denies that petitioner himself paid the legal fees asserting that petitioner’s lawyers issued bills to the gralia group ie all the defendants in the district_court case and that gralia construction paid those bills c petitioners’ argument petitioners assert that mr maurer’s claims in the district_court case were against petitioner directly for business opportunities petitioner personally usurped from eastmont petitioners argue that petitioner settled a claim against himself as a real_estate developer and not any claim against himself as a mere officer or shareholder of a real_estate developer first petitioners argue that because in the state court case mr maurer did not make any derivative claim as a shareholder of eastmont res_judicata claim preclusion barred him in the district_court case from making any similar claim second petitioners argue that mr maurer’s claim for his share of the benefits of stock ownership in eastmont fails to state a damage claim because eastmont never made any dividends profits or distributions because mr maurer made only those two claims petitioners argue that to understand the reason petitioner settled we must look through the stated claims to determine the essence of mauer’s sic claim petitioners find the true substance of mauer’s sic claim in paragraph of the third amended complaint petitioner has ignored the corporate form and engaged in self-dealing by usurping corporate opportunities rightfully belonging to eastmont according to petitioners there is no money in the claims of mauer sic against petitioner other than those which can be traced to the partnership equity thus the claim petitioner settled for dollar_figure was a claim against himself personally for the benefits ie partnership equity petitioner obtained at mauer’s sic expense petitioners assert that although gralia construction paid the legal fees in gralia construction issued petitioner a schedule_k-1 shareholder’s share of income credits deductions etc causing petitioners to report as income the legal fees gralia construction paid on petitioner’s behalf d analysi sec_1 the settlement we agree with respondent that petitioner has failed to show that he paid the settlement in connection with his trade_or_business as a real_estate developer in effect petitioners argue that although mr maurer failed to state a valid claim in the district_court case petitioner settled because mr maurer could have made a valid claim petitioners suggest that because of the laxity of notice_pleading petitioner did not bother to move for summary_judgment but rather after almost two decades of litigation preemptively settled the plausibility of their argument notwithstanding petitioners have failed to show that mr maurer had any claim against petitioner personally other than to enforce the fiduciary duty that the superior court had concluded that petitioner as a majority shareholder owed to mr maurer as a minority shareholder 6we note that the allegation in which petitioners find the true substance of mr maurer’s claim ie that petitioner engaged in self-dealing by usurping corporate opportunities rightfully belonging to eastmont is a classic ground for a derivative claim see eg 662_f2d_371 5th cir holding that the corporation was entitled to profits defendant stockholders made by improperly seizing a corporate opportunity 7we have set forth supra the relevant part of the second state court ruling in which the superior court in defining petitioner’s duty to mr maurer cited donahue v rodd electrotype co of new england n e 2d mass in that case the supreme judicial court of massachusetts treated the plaintiff’s complaint although in part presenting a derivative action as in substance one presenting a proper continued petitioners argue the following petitioner usurped corporate opportunities of eastmont mr maurer in his own right had a claim to those corporate opportunities therefore petitioner settled the claim with mr maurer petitioners imply that because petitioner improperly took corporate opportunities in which mr mauer had a right to participate and petitioner personally profited therefrom mr maurer for that reason and for no other reason had a direct claim against petitioner petitioners are mistaken to prove that mr maurer had a claim against petitioner personally for the usurpation of joint opportunities petitioners must show that mr maurer was personally entitled to participate in the usurped corporate opportunities petitioners must show that mr maurer and petitioner were partners or coadventurers and that petitioner took for himself something belonging to the joint_venture see generally meinhard v salmon n e n y that is petitioners must show that mr maurer had a claim that did not derive from his one-third ownership of eastmont except obliquely petitioners do not even suggest mr maurer had any right to participate in the partnerships petitioners come closest to making that averment in the conclusion of their reply brief petitioner and mr maurer specifically contemplated partnership equity ownership in their names petitioners however offer no evidence that mr maurer continued cause of suit in the personal right of the plaintiff id pincite n had any right to participate in the partnerships or any other usurped corporate opportunities which petitioners fail to specify except through eastmont in conclusion petitioners have failed to show that mr maurer was entitled to recover against petitioner personally on a claim of usurpation of any joint opportunity they have failed to show that petitioner settled any claim other than a claim mr maurer had as a one-third owner of eastmont on the evidence considered so far they have failed to show that the settlement was deductible as other than an employment-related sec_162 expense or a shareholder-related sec_212 expense they have therefore failed to show that it is deductible as other than a miscellaneous itemized_deduction the legal fees although petitioners assert that they reported as income the legal fees gralia construction paid on petitioner’s behalf they have failed to satisfy their burden_of_proof petitioners have provided no schedule_k-1 received from gralia construction and the schedule e supplemental income and loss attached to their form_1040 reports only a loss from gralia construction although schedule b interest and ordinary dividends reports a dollar_figure ordinary dividend from gralia construction petitioners have failed to establish any connection between the legal fees and that ordinary dividend dollar_figure more than the legal fees nevertheless on brief respondent appears to concede that petitioners may deduct the legal fees as a miscellaneous itemized_deduction we accept that concession and so hold e conclusion on the evidence considered so far petitioners may deduct the settlement and the legal fees only as miscellaneous_itemized_deductions iii the claim_of_right_doctrine and sec_1341 a introduction petitioners make an alternative argument with respect to the settlement that avoids its classification as a miscellaneous itemized_deduction they argue that they may deduct the settlement under sec_1341 as the restoration of an amount received under a so-called claim of right sec_67 excludes from the definition of miscellaneous_itemized_deductions the deduction under sec_1341 b sec_1341 sec_1341 addresses the computation of tax where a taxpayer restores a substantial amount held under a claim of right in pertinent part sec_1341 provides sec_1341 general_rule --if-- an item was included in gross_income for a prior taxable_year because it appeared that the taxpayer had an unrestricted right to such item a deduction is allowable for the taxable_year because it was established after the close of such prior taxable_year that the taxpayer did not have an unrestricted right to such item or to a portion of such item and the amount of such deduction exceeds dollar_figure then the tax imposed shall be the lesser_of the tax computed with such deduction sec_1341 or the tax for the year without the deduction reduced by the amount the taxes were increased in the year of receipt because the item in dispute was included in gross_income sec_1341 c respondent’s argument with respect to the settlement respondent concedes that petitioners satisfy the requirements in paragraphs and of sec_1341 ie respondent concedes that petitioners may deduct the settlement and that the deduction exceeds dollar_figure respondent contends only that petitioners have failed to prove that they included any item in gross_income for a prior taxable_year because it appeared that they had an unrestricted right to that item respondent argues that petitioners have not provided any explanation or evidence to support that they reported items of income under a claim of right respondent disputes that petitioners could have reasonably believed that they had an unrestricted right to income from the partnerships after date when the appeals court entered its order affirming the holding of the superior court that mr maurer was entitled to a one-third interest in eastmont d petitioners’ argument petitioners argue that they can and do demonstrate the necessary income inclusion and income inclusion in an amount 8further appellate review was denied date see maurer v e a gralia constr co n e 2d mass sufficient to dispose_of this matter by two taxable years and petitioners then detail the income they reported from the partnerships in those years dividing the total by to reflect the value of the one-third interest in the overall ‘partnership’ between petitioner and mr maurer that petitioners allege the superior court found because one-third of the income petitioners included from the partnerships in those years exceeds the settlement petitioners claim they have demonstrated that they included in a prior year an item_of_income corresponding to the settlement for that reason petitioners assert they have satisfied the three requirements of sec_1341 e analysis we agree with respondent even if we agreed with petitioners that they have shown they included in gross_income items corresponding to the settlement which we do not10 9petitioners advance that argument in their opening brief in their reply brief petitioners argue that considering only the income they reported from chestnut house some quick math ie dividing that reported income by gets you pretty close to dollar_figure 10petitioners’ simple division by of the income they reported from the partnerships in and does not accurately reflect the amount to which mr maurer was entitled as a one-third owner of eastmont petitioners state that the superior court granted mr maurer a one-third interest in an overall ‘partnership’ between him and petitioner yet that manifestly is not what the state court rulings hold petitioner was a general_partner of the partnerships mr maurer was not and was not entitled to be mr maurer participated in three partnerships only indirectly through eastmont and did not participate in chestnut house at all mr maurer thus had no claim whatsoever to any chestnut house profits for that reason alone petitioners’ second argument see supra note has no merit the problem for petitioners is that the lion’s share of continued petitioners have nonetheless failed to explain how they could have reasonably believed they had an unrestricted right to income from the partnerships after the conclusion of the state court case petitioners have failed to satisfy their burden_of_proof with respect to sec_1341 sec_1_1341-1 income_tax regs provides in part for the purpose of this section ‘income included under a claim of right’ means an item included in gross_income because it appeared from all the facts available in the year of inclusion that the taxpayer had an unrestricted right to such item petitioners assert that in and they included in gross_income items from the partnerships under a claim of right yet petitioners do not explain how they could have reasonably continued the income from the partnerships was the result of the sale of chestnut house in indeed that sale was the source of more than percent of the income petitioners reported from the partnerships in and thus petitioners’ arithmetic is not an accurate or even a rough estimate of the amount to which mr maurer was entitled we assume petitioners rely on and to make their argument because in few if any other years did they receive such large amounts of income according to the appeals court much of the value of the general_partnership interests in the years in question through was in the form of losses maurer v e a gralia constr co n e 2d mass app ct although those losses had real value and could by themselves have been grounds for the settlement a settlement for deductions improperly claimed can never qualify for the tax benefits of sec_1341 further petitioner likely had many reasons for settling the case indeed to save himself the costs and fees associated with another trial petitioner may well have agreed to pay mr maurer more than he was strictly entitled to receive in short petitioners have failed to show that the settlement represented anything other than the value of losses improperly deducted and litigation costs and attorney’s fees saved petitioners thus have failed to show that they included in gross_income items corresponding to the settlement believed in the light of all the facts available in those years that they had an unrestricted right to those items indeed petitioners undermine their own argument if as they argue the superior court granted mr maurer a one-third interest in an overall ‘partnership’ between petitioner and mr maurer then petitioners knowingly misappropriated the items they claim are associated with the settlement petitioners are thus not entitled to the tax benefits of sec_1341 see eg 991_f2d_292 6th cir furthermore sec_1341 does not apply to a taxpayer who has embezzled or otherwise knowingly misappropriated funds which he is later required to return because the taxpayer never had an unrestricted right to the money so obtained f conclusion with respect to the settlement petitioners are not entitled to the tax benefits of sec_1341 sec_67 therefore does not apply iv conclusion petitioners may deduct the settlement and the legal fees only as miscellaneous_itemized_deductions decision will be entered under rule