internal_revenue_service number release date index number -------------------------- -------------------------------------------------- ----------------------------- ------------- -------------------------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc intl br1 plr-143508-10 date date ty ------- legend taxpayer -------------------------- country x entity ------------------------------------------------- lp ---------------------- fp --------------------------------------------- date ---------- date ---------- year --------------------------------------------------------- date ----------------------- date --------------------------- date ----------------------- date -------------------------- dear -------------------------- this replies to a letter dated date as supplemented by correspondence dated date date date and date from your authorized representative in which you request an extension of time under sec_301_9100-1 and sec_301_9100-3 to file a form_8848 consent to extend the time to assess the branch_profits_tax under regulations sec_1_884-2t and c taxpayer was a country x entity that was treated as a corporation for u s tax purposes taxpayer held interests in a domestic limited_partnership lp that was engaged in a u s trade_or_business as a consequence taxpayer was engaged in a u s trade_or_business for all years including year lp withheld percent income_tax on taxpayer’s allocable share of effectively_connected_income as required by sec_1446 plr-143508-10 taxpayer’s sole shareholder was fp a country x entity that was classified as a partnership for u s tax purposes on date in year certain of fp’s owners sold all of their interests in fp to third parties pursuant to the purchase agreement taxpayer was required to make an election under sec_301_7701-3 to be classified as an entity disregarded as separate from its owner and to file form_8832 entity classification election effective date of year the close of taxpayer’s year of complete termination pursuant to sec_301_7701-3 as a consequence of the election taxpayer was deemed to have distributed all of its assets and liabilities to fp its single member owner in complete_liquidation taxpayer had three different tax advisors which led to confusion as to which of the advisors was responsible for preparing the tax returns for year taxpayer’s final form 1120-f u s income_tax return of a foreign_corporation for year was due on or before date one of taxpayer’s tax advisors discovered the failure_to_file form f around date on or about date taxpayer remitted to the irs an estimated_tax payment with respect to year taxpayer filed its form 1120-f for year on date taxpayer included a completed but unsigned form_8848 with its return along with a disclosure statement informing the service that it would be seeking relief for its untimely filing of form_8848 under sec_301_9100-1 and sec_301_9100-3 taxpayer now requests that relief taxpayer represents as required by sec_1_884-2t as of date of year taxpayer held no u_s_assets neither taxpayer nor a related corporation within the meaning of sec_1_884-2t used directly or indirectly in the conduct_of_a_trade_or_business in the united_states at any time during the three-year period following date of year a any of taxpayer’s u_s_assets b any property attributable to taxpayer’s u_s_assets or c any property attributable to the effectively_connected_earnings_and_profits of taxpayer for year taxpayer did not have any income that was or was treated as effectively_connected_income during the three-year period following date of year the entities that sold all of their interests in fp to third parties also represent that they did not use directly or indirectly any of the income attributable to the sale of fp in the conduct of a u s trade_or_business at any time during the three-year period following date of year including investing in stock in a domestic_corporation or loaning to a related corporation or used as security for any indebtedness of a related corporation in the conduct of a u s trade_or_business the noncorporate entities further represented that none of the sales proceeds were reinvested directly or indirectly in a u s trade_or_business through a corporation sec_1_884-2 provides that the waiver referred to in sec_1_884-2t must be executed on form_8848 on or before the date including plr-143508-10 extensions prescribed for filing the foreign corporation's income_tax return for the year of complete termination and extend the period of assessment of the branch_profits_tax for the year of complete termination to a date not earlier than the close of the sixth taxable_year following that taxable_year sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the standards set forth in sec_301_9100-3 to make a regulatory election under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines a regulatory election as an election whose due_date is prescribed by a regulation a revenue_ruling revenue_procedure notice or announcement sec_301_9100-3 provides standards for extensions of time for making regulatory elections when the deadline for making the election is other than a due_date prescribed by statute sec_301_9100-3 provides that requests for relief subject_to this section will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government based on the facts and circumstances of this case we conclude that taxpayer satisfies sec_301_9100-3 and is granted an extension of time to file a signed form_8848 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically as provided in sec_301_9100-1 the granting of an extension of time is not a determination that taxpayer is otherwise eligible to file form_8848 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative plr-143508-10 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 sincerely elizabeth u karzon branch chief branch international cc


internal_revenue_service number info release date index number ------------------------- ------------- ------------------------ -------------------------- ------------------------------ department of the treasury washington dc person to contact --------------------------- id no ------------- telephone number --------------------- refer reply to cc psi - genin-167655-03 date date this letter is in response to a letter dated date submitted on -------------------------- taxpayer ----------------------- tax_year ------- in re request to revoke sec_179 election dear ------------ taxpayer’s behalf to the commissioner of internal revenue requesting permission to revoke the election made under sec_179 of the internal_revenue_code on taxpayer’ sec_2002 federal_income_tax return for certain property placed_in_service in taxpayer is a s_corporation in order for us to respond to your specific request you must submit a request for a private_letter_ruling the request must comply with all the requirements of section of revproc_2004_1 2004_1_irb_1 a copy of selected selections of revproc_2004_1 has been enclosed for your reference we hope that you find the following general information to be helpful that section you may find sec_179 of particular interest under sec_179 an election made under sec_179 with respect to a taxable_year beginning in and any specification contained in any such election may not be revoked except with the consent of the commissioner such consent to revoke an election under sec_179 however will be granted only in extraordinary circumstances emphasis added see sec_1_179-5 of the income_tax regulations revproc_2004_1 provides the general procedures the internal_revenue_service follows in issuing private letter rulings and the related instructions for the submission of private_letter_ruling requests by taxpayers in addition taxpayers are required by statute we are enclosing a copy of sec_179 of the code and the regulations under genin-167655-03 to pay user fees for requests for private letter rulings under sec_15 of revproc_2004_1 the user_fee must accompany the request in order to be processed by the service in general the user_fee is dollar_figure for private letter rulings however there is a reduced fee of dollar_figure for a request involving a business-related tax issue from a taxpayer with a gross_income of less than dollar_figure million see appendix a of revproc_2004_1 if you should decide to request a private_letter_ruling section dollar_figure of revproc_2004_1 provides information as to where to send the request also as we have noted above section of revproc_2004_1 provides general instructions for requesting a private_letter_ruling this letter has called your attention to certain general principles of tax law it is intended for informational purposes only and does not constitute a ruling see sections dollar_figure and dollar_figure of revproc_2004_1 we hope the materials enclosed will be helpful to you however if you should have any additional questions or comments please contact our office at letter is being sent to your authorized representative sincerely yours charles b ramsey charles b ramsey chief branch office of associate chief_counsel passthroughs and special industries enclosures in accordance with the power_of_attorney on file with this office a copy of this


internal_revenue_service number release date index number ------------------- -------------------------- ------------------------- --------------------------- in re ------------------------------------------ --------- department of the treasury washington dc person to contact ------------------------ id no ------------ telephone number -------------------- refer reply to cc intl b03 - plr-114582-03 date date ty -------- ty -------- legend taxpayer -------------------------------------------- --------------------------------------- individual a ----------------------- cpa firm -------------------------- tax_year a ------------- ------ tax_year b ------------------- date c ------------------ date d -------------- country x ------------ country y --------------------- country z --------- dear ------------ this is in response to a letter dated date in which taxpayer requests an extension of time under sec_301_9100-3 to file the annual certification described in sec_1_1503-2 in accordance with exhibit a which is attached to and is made part of this ruling letter the annual certification should have plr-114582-03 been attached to taxpayer’s federal_income_tax return for tax_year b which ended on date c the information submitted for consideration is substantially as set forth below the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination cpa firm prepared taxpayer’s united_states federal_income_tax returns for tax_year a and tax_year b for tax_year b taxpayer was required to file an annual certification for the dual consolidated losses dcls as defined in sec_1_1503-2 for its hybrid_entity separate units as defined in sec_1_1503-2 located in country x country y and country z for their tax_year a dcls individual a is a partner with cpa firm and has been providing tax services to taxpayer since date d the affidavit of individual a and the facts submitted shows that individual a subsequent to tax_year b discovered the inadvertent omission of the annual certification for the tax_year a dcls that should have been attached to the taxpayer’s federal_income_tax return for tax_year b the cpa firm recommended that relief under sec_301_9100-3 be sought sec_301_9100-1 provides that an election includes an application_for relief in respect of tax and defines a regulatory election as an election whose due_date is prescribed by a regulation a revenue_ruling revenue_procedure notice or announcement sec_301_9100-1 provides that the commissioner has discretion to grant a taxpayer a reasonable extension of time under the rules set forth in sec_301_9100-3 to make a regulatory election under all subtitles on the internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides that requests for relief subject_to this section will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government in the present situation the certification described in sec_1_1503-2 is a regulatory election as defined in sec_301_9100-1 therefore the commissioner has the discretionary authority under sec_301_9100-1 to plr-114582-03 grant an extension of time provided that the taxpayer satisfies the rules set forth in sec_301_9100-3 based upon the facts and circumstances submitted we conclude that taxpayer satisfies sec_301_9100-3 accordingly taxpayer is granted an extension of time of days from the date of this ruling letter to file the annual certification in accordance with exhibit a that should have been included in the taxpayer’s federal_income_tax return for tax_year b ending on date c the granting of an extension of time is not a determination that taxpayer is otherwise eligible to file the certifications see sec_301_9100-1 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent a copy of this letter should be attached to any income_tax return to which it is relevant pursuant to a power_of_attorney on file in this office a copy of this letter is being furnished to the taxpayer sincerely allen goldstein reviewer office of associate chief_counsel international enclosure copy for purposes cc -------------------------- ---------------------------- --------------------------------------------------- -------------------------------------- -------------------------------------- plr-114582-03 ----------------------------------- ----------------------------- ----------------------------------------------------------------- ---------------------------------------- -------------------------- exhibit a extension of time requested to file annual certifications described in sec_1_1503-2 for the following dcls name of hybrid_entity_separate_unit tax_year dcls incurred incurring dcls ------------------------------------------------tax year a ---------------------------------------------------tax year a ------------------------------------------------------tax year a


internal_revenue_service number release date index number ------------------------------------------------------------ ------------------------------------------ ---------------------------------------- -------------------------------- ---------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------------- id no ------------ telephone number ------------------- refer reply to cc psi b01 plr-144673-12 date february legend x ---------------------------------------------- ------------------------------------------------------ ----------------------------------------------------------------------------------------- country d ------- ---------------------- dear ---------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a disregarded_entity for federal tax purposes facts according to the information submitted x was organized under the laws of country on d x failed to timely file form_8832 entity classification election to be treated as a disregarded_entity for federal tax purposes effective d x represents that it acted reasonably and in good_faith x also represents that granting the relief requested will not prejudice the interests of the government finally x represents that no hindsight is involved in seeking the relief requested law and analysis plr-144673-12 sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with at least two members can elect to be classified as either an association or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association if all members have limited_liability unless the entity makes an election to be treated otherwise a foreign eligible_entity with a single member having limited_liability may elect to be treated as a disregarded_entity pursuant to the rules of sec_301_7701-3 sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date the form is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to make an election to be treated as a disregarded_entity for federal tax purposes effective d x should make the election by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the form this ruling is contingent on the owners of x filing within days of this letter all required returns including amended returns for all open years consistent with the requested relief these returns may include but are not limited to the following forms plr-144673-12 i forms information_return of u s persons with respect to certain foreign_corporations ii forms return of u s persons with respect to certain foreign_partnerships and iii forms information_return of u s persons with respect to disregarded entities such that these forms reflect the consequences of the relief granted in this letter a copy of this letter should be attached to any such returns except as specifically set forth above we express no opinion concerning the federal tax consequences of the facts described above under any other provision of the internal_revenue_code this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely associate chief_counsel passthroughs special industries by laura c fields laura c fields senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes


t c memo united_states tax_court pizza industries inc domino's pizza petitioner v commissioner of internal revenue respondent docket no filed date paul w rowe and kevin m bagley for petitioner gretchen a kindel for respondent memorandum opinion armen special_trial_judge this matter is before the court on petitioner's motion for an award of administrative and litigation costs under sec_7430 and rules through ' unless otherwise indicated all sec references are to the internal_revenue_code in effect for the taxable years in after concessions by the parties ’ the sole issue for decision is whether respondent has established that respondent's position was substantially justified in the administrative and court proceedings we hold that respondent has not neither party requested an evidentiary hearing and the court concludes that such a hearing is not necessary for the proper disposition of petitioner's motion see rule a we therefore decide the matter before us based on the record that has been developed to date background petitioner is a california corporation owned percent by pizza park corporation an s_corporation pizza park and percent by michael brown mr brown pizza park is wholly owned issue however all references to sec_7430 are to such section in effect at the time that the petition was filed all rule references are to the tax_court rules_of_practice and procedure respondent concedes petitioner exhausted its administrative remedies see sec_7430 petitioner did not unreasonably protract the proceedings see sec_7430 petitioner substantially prevailed see sec_7430 a and petitioner satisfied the applicable net_worth requirement see sec_7430 a initially there was an issue as to the reasonableness of the claimed costs however petitioner has substantiated the expenses contested by respondent and has conceded that attorney's_fees are recoverable only to the extent of dollar_figure per hour plus any allowable increases for the cost of living see sec_7430 b c b because of petitioner's concession regarding the rate of recovery for attorney's_fees the claimed costs have been reduced from dollar_figure to dollar_figure hours for at the rate of dollar_figure per hour and hours for at the rate of dollar_figure per hour cost of living adjusted plus dollar_figure in expenses respondent does not contest the reasonableness of the dollar_figure amount by michael paul mr paul mr paul has a certain level of expertise in developing restaurants because of mr paul's expertise domino's pizza inc domino's entered into an agreement the area agreement with pizza park on date giving pizza park the exclusive right to develop including marketing advertising and public relations domino's franchises within san diego county california pizza park agreed to develop a minimum of restaurants within years or risk losing its territorial protection the area agreement provided pizza park with compensation_for the development of the domino's restaurants during the period of its territorial protection pizza park was entitled to receive percent of the royalty fees the compensation that domino's received from each restaurant excluding the restaurant with the highest volume of royalty sales domino's was not obligated to pay the compensation under certain circumstances including if pizza park violated the area agreement in any way further upon termination of the area agreement for any reason pizza park would no longer be entitled to the compensation_for sales after the effective termination_date of the agreement we may interchangeably refer to a franchise as a restaurant or a store the area agreement further provided that unless permitted by domino's the area agreement would be nonassignable however a corporation actively managed and wholly owned and controlled by pizza park conducting no business other than the operation of stores could be allowed to operate domino's franchises the rights and responsibilities of a franchisee would be defined under the terms of a standard franchise agreement the franchise agreements the franchise agreements provided that each franchisee was required to pay domino's a royalty fee of percent based on the store's weekly royalty sales pursuant to the area agreement mr paul initiated the development of the domino's franchise in the san diego area developing franchise stores pizza park owned such franchises petitioner although not a wholly owned subsidiary of pizza park was allowed to own franchise stores petitioner's shareholders mr brown and mr paul as the sole shareholder of pizza park executed the franchise agreements for the stores owned by petitioner during the years in issue petitioner operated the franchise store with the highest volume in royalty sales within the san diego area for that store petitioner paid percent of the there are no pertinent differences between the franchise agreements here at issue we therefore refer to the franchise agreements in the collective royalty fees directly to domino's as for the other stores petitioner paid percent of the royalty fees due or dollar_figure percent of the royalty sales to domino's and the other percent of the royalty fees due or the other dollar_figure percent of the royalty sales to mr paul as the sole owner of pizza park the royalty payments to mr paul were reported by petitioner on forms on each of petitioner's corporate_income_tax returns for through taxable years petitioner claimed a royalty expense deduction_equivalent to the royalty fees paid to domino's and mr paul or percent of petitioner's royalty sales respondent conducted an examination of petitioner's through taxable years during the administrative audit petitioner was represented by paul w rowe mr rowe mr rowe provided respondent with copies of the area agreement and the franchise agreements further mr rowe provided respondent with a letter from domino's explaining the reason why payments had been made to both mr paul and domino's the purpose of this practice was to ease the administrative burden on domino's by eliminating the need for it to issue checks---in effect eliminating the middleman with respect to those payments after considering the area agreement the franchise agreements and the letter of explanation from domino's respondent determined that petitioner was not entitled to a royalty expense deduction for the portion of the royalty fees paid to mr paul the contested payments at the time respondent's theory for disallowing the deduction was not clear respondent issued a notice_of_deficiency for the taxable years through on date petitioner filed its petition in this case on date subsequently on date the court served notice that this case would be called for trial in san diego california on date shortly before that date on date kevin m bagley entered his appearance as petitioner's co-counsel two days later on date the parties placed a telephone conference call to domino's counsel during this call mr bagley asked domino's counsel regarding the consequences if petitioner failed to make the contested payments to mr paul domino's counsel advised the parties that domino's would be entitled to sue petitioner to recover the unpaid royalty pursuant to this conversation respondent conceded the deductibility of the contested payments on date by executing a stipulated decision which was entered by the court on date thereafter on date petitioner respondent made certain other adjustments that are only computational that result from the disallowance of the royalty expense deduction for the contested payments submitted its motion for an award of administrative and litigation costs two days later on date the court vacated its decision recharacterized the form of decision as a stipulation of settlement and filed petitioner's motion for an award of costs discussion we apply sec_7430 as amended by the taxpayer bill of right sec_2 tbor publaw_104_168 secs 110_stat_1452 the amendments made by tbor2 apply in the case of proceedings commenced after date see tbor2 sec_701 sec_702 sec_703 and sec_704 sec_110 stat inasmuch as the petition herein was filed on date the amendments made by tbor2 apply in the present case a requirements for a judgment under sec_7430 a judgment for administrative costs incurred in connection congress has amended sec_7430 twice since the taxpayer bill of right sec_2 publaw_104_168 110_stat_1452 first congress amended sec_7430 in the taxpayer_relief_act_of_1997 tra publaw_105_34 secs 111_stat_788 second congress amended sec_7430 in the irs restructuring and reform act of rra publaw_105_206 112_stat_685 however the amendments made by tra do not apply in the case of proceedings commenced before date and the amendments made by rra apply only to costs incurred more than days after date the petition herein was filed on date and petitioner has not claimed costs incurred more than days after date the amendments made by tra and rra therefore do not apply in the present case with an administrative_proceeding may only be awarded under sec_7430 if a taxpayer is the prevailing_party and did not unreasonably protract the administrative_proceeding see sec_7430 and b similarly a judgment for litigation costs incurred in connection with a court_proceeding may only be awarded if a taxpayer is the prevailing_party has exhausted his or her administrative remedies within the irs and did not unreasonably protract the court_proceeding see sec_7430 b a taxpayer must satisfy each of the respective requirements in order to be entitled to an award of litigation or administrative costs under sec_7430 see rule e upon satisfaction of these requirements a taxpayer may be entitled to reasonable costs incurred in connection with the administrative or court_proceeding see sec_7430 and c to be a prevailing_party the taxpayer must substantially prevail with respect to either the amount in controversy or the most significant issue or set of issues presented and satisfy the applicable net_worth reguirement see sec_7430 a respondent concedes that petitioner has satisfied the requirements of sec_7430 a petitioner will nevertheless fail to qualify as the prevailing_party if respondent can establish that respondent's position in the court and administrative proceedings was substantially justified see sec_7430 b b substantial justification the commissioner may establish that a position is substantially justified if based on all of the facts and circumstances and the legal precedents relating to the case the commissioner acted reasonably see 487_us_552 89_tc_79 affd 861_f2d_131 5th cir a position is substantially justified if the position is justified to a degree that could satisfy a reasonable person pierce v underwood supra pincite construing similar language in eaja thus the commissioner's position may even be incorrect but substantially justified if a reasonable person could think it correct magqie management co v commissioner 108_tc_430 the relevant inguiry is whether the commissioner knew or should have known that his position was invalid at the onset 55_f3d_189 5th cir affg tcmemo_1994_182 we look to whether the commissioner's position was reasonable given the available facts and circumstances at the time that the commissioner takes his position see maggie management co v commissioner supra pincite 85_tc_927 the fact that the commissioner eventually loses or concedes a case does not establish an unreasonable position see 36_f3d_1361 5th cir revg on other grounds tcmemo_1993_510 931_f2d_1044 5th cir 92_tc_760 however the commissioner's concession does remain a factor to be considered see 100_tc_457 affd in part revd in part and remanded on another issue 43_f3d_172 5th cir as relevant herein the position_of_the_united_states that must be examined against the substantial justification standard with respect to the recovery_of administrative costs is the position taken by respondent as of the date of the notice_of_deficiency see sec_7430 b the position_of_the_united_states that must be examined against the substantial justification standard with respect to the recovery_of litigation costs is the position taken by respondent in the answer to the petition see 930_f2d_759 9th cir affg an unpublished decision of the tax_court 861_f2d_131 5th cir affg 89_tc_79 ordinarily we consider the reasonableness of each of these positions separately see huffman v commissioner 978_f2d_1139 9th cir affg in part revg in part and remanding on other issues tcmemo_1991_144 in the present case however we need not consider two separate positions because there is no indication that respondent's position changed or that respondent became aware of any additional facts that rendered his position any more or less justified between the issuance of the notice_of_deficiency and the filing of the answer to the petition respondent determined in the notice_of_deficiency that petitioner was not entitled to a royalty expense deduction for the contested payments as we understand respondent's position respondent would not have disallowed the deduction if petitioner had directly paid the contested payments to domino's respondent disallowed the royalty expense deduction based on the conduct of the parties ie the fact that petitioner made the contested payments to mr paul and respondent's interpretation of the area agreement the deduction was disallowed because respondent determined that petitioner was the implied assignee of the area agreement and therefore possessed a fixed and unconditional right to reimbursement for the contested payments under that agreement finally respondent concluded that any payments made to mr paul were simply constructive dividends even in light of the fact that petitioner made the contested payments to mr paul we are not convinced that respondent reasonably interpreted the area agreement to deny petitioner a deduction for the contested payments in arriving at this conclusion we have considered the rights and obligations of the parties as set forth in the area agreement and the franchise agreements including under the area agreement pizza park was the party with the right to receive the compensation petitioner was not a party to the area agreement petitioner was not wholly owned by pizza park or mr paul but wa sec_49 percent owned by another individual even pizza park's right to receive the compensation was conditional petitioner's obligation to pay percent of its royalty sales as a royalty fee was unconditional and finally petitioner in fact satisfied this obligation petitioner's obligation to domino's for the royalty fees arose under the franchise agreements pursuant to the franchise agreements each store operated by petitioner was unconditionally required to pay percent of its royalty sales proceeds to domino's as a royalty respondent did not have any indication that petitioner was relieved of this obligation although petitioner did not pay the entire percent royalty fee to domino's respondent was provided with a letter from domino's counsel explaining the reason for this albeit informal arrangement a corporation is not precluded from deducting an otherwise deductible royalty expense because the fee is paid to a shareholder as opposed to a third party cf podd v commissioner tcmemo_1998_231 taxpayer entitled to deduct a royalty fee paid to a shareholder to the extent the royalty fee was reasonable supplemented by tcmemo_1998_418 respondent contends that it was reasonable for respondent to treat petitioner as the implied assignee of the area agreement because domino's ignored the separate identity of petitioner from pizza park for certain purposes specifically respondent refers to the fact that in determining the store with the highest volume in sales all stores owned by both petitioner and pizza park were pooled respondent surmised therefore that for the stores owned by petitioner petitioner was entitled to receive the contested payments as reimbursement because a taxpayer is not entitled to deduct an expense for which there is a fixed and unconditional right to reimbursement respondent disallowed the loss however respondent's position ignores the terms of the parties' agreements first we are not persuaded that respondent reasonably determined petitioner to be the implied assignee of the area agreement and therefore entitled to the compensation petitioner was never a party to the area agreement that provided for the compensation petitioner was only a party to the franchise agreements under which petitioner operated its stores and was required to pay a 5-percent royalty fee it is not clear that the fact that domino's a third party chose to treat petitioner and pizza park as members of one group ---the paul group --for one purpose otherwise affected the rights and obligations of petitioner and its shareholders and pizza park and its shareholder for other purposes petitioner was a separate corporate entity possessing a different identity from pizza park and mr paul petitioner was not solely owned by pizza park or mr paul but was also owned by mr brown a percent shareholder there was no reason for respondent to conclude that mr brown would be willing to allow petitioner to pay dividends to mr paul without making appropriate adjustments on its corporate books nor was there any indication that petitioner's corporate identity was in any manner ignored finally petitioner appropriately filed forms reporting the payments made to mr paul therefore respondent has failed to establish that respondent reasonably determined petitioner to be the implied assignee of the area agreement second even if petitioner impliedly become an assignee of the area agreement the right to receive the compensation was not a fixed or unconditional right to receive reimbursement whereas under the area agreement the right to receive the compensation was conditional and revokable the obligation of a franchise owner such as petitioner under a franchise agreement to pay the 5-percent royalty fee was unconditional therefore there appears to be no fixed or unconditional right to receive reimbursement for the contested payments based on the forgoing we are not convinced that respondent reasonably determined that petitioner was entitled to a fixed or unconditional right to receive reimbursement as an implied assignee of the area agreement finally we have considered that respondent conceded this case based on a single telephone conversation with domino's counsel upon being informed by domino's counsel that domino's would be entitled to sue petitioner for recovery if petitioner failed to make the contested payments to mr paul respondent immediately conceded the deficiencies we do not understand why respondent did not seek to make this inquiry before issuing a notice_of_deficiency respondent was not precluded from contacting domino's a third party to confirm respondent's theory before issuing a notice_of_deficiency respondent was aware of the basis for disallowing the deduction and should have taken minimal steps to confirm or negate respondent's theory before issuing a notice_of_deficiency respondent claims that it was petitioner's burden to prove that it was entitled to the deduction however petitioner provided respondent with copies of the agreements at issue respondent's determination was simply based on respondent's interpretation of those agreements at the time respondent's theory for disallowing the deduction was not completely clear and hence petitioner could do nothing further to substantiate the claimed deduction in light of the foregoing respondent has failed to establish that respondent's position in the administrative and court proceedings was substantially justified to reflect our disposition of the disputed issues and the parties' concessions an appropriate order and decision will be entered


t c memo united_states tax_court tim sheridan petitioner v commissioner of internal revenue respondent docket no filed date tim sheridan pro_se kirsten e brimer for respondent memorandum opinion lauber judge with respect to petitioner’s federal_income_tax for and the internal_revenue_service irs or respondent determined deficiencies and accuracy-related_penalties under sec_6662 in the - - following amounts year deficiency dollar_figure big_number big_number penalty sec_6662 dollar_figure big_number big_number for each year at issue petitioner claimed a deduction of dollar_figure million under sec_165 for a loss arising from theft he contends that these theft losses occurred when pirates stole the intellectual_property underlying a patent that he holds respondent disallowed these deductions because there was no evidence that patent infringement had occurred or that petitioner had incurred actual damages re- spondent has moved for summary_judgment under rule contending that there are no disputed issues of material fact and that he is entitled to judgment as a mat- ter of law we agree and accordingly will grant the motion unless otherwise indicated all statutory references are to the internal_revenue_code code in effect for the tax years at issue and all rule references are to the tax_court rules_of_practice and procedure we round all monetary amounts to the nearest dollar background petitioner is an inventor and an entrepreneur he is the holder of u s patent no big_number filed in for a smokeless_tobacco vaporizer certain other patents which also involve a mechanism for heating materials so that they can be vaporized and inhaled through a tube predate petitioner’s patent his patent like those other patents precedes by almost a decade the recent rise to popularity of e-cigarettes following a long period of disappointing sales petitioner began to view each roadblock in his vaporizer’s path to success as evidence of multiple con- spiracies to prevent him from enjoying the fruits of his labor he alleges among other things that internet search engines have intentionally demoted his product that social media platforms have conspired to diminish his product’s visibility that the u s postal service has intentionally misspelled the name of his business that a telecommunications firm has prevented him from sending crucial emails that his computer has been continuously hacked to prevent him from retrieving important information and that wikipedia has improperly removed edits he sought to make to an internet article discussing vaporizers he contends that these perceived wrongs have enabled other companies to use his intellectual_property and make vaporizer sales that his business would otherwise have made petitioner contends that these conspiracies have resulted in thefts that have caused him losses ranging from dollar_figure million to dollar_figure million annually in calculating these losses petitioner begins with his estimate of the total market for vaporizers worldwide which he believes to be dollar_figure billion from this figure he derives his damages by applying various formulas of his own creation which apply estimates and randomly assigned multipliers to geographic populations internet traffic total market competitors’ sales and other items inputs to these formulas include petitioner’s estimates of smokers as a percentage of the popu- lation smokers who use alternative smoking devices smokers who actually quit annually smokers who virtually quit annually and use replacements an- nual sales of vaporizers to customers lured away by alleged market persecution of his product and internet traffic lost to his business because of inappropriate throttling of online search results in petitioner filed suit in the u s district_court for the eastern district of pennsylvania seeking to enjoin irs actions against him to obtain a judicial acknowledgment of the losses he had calculated and to compel the irs to return to him as damages taxes that alleged patent infringers had paid on their ill-gotten gains the district_court granted the united states’ motion to dismiss the case under sec_7421 which prohibits taxpayers from bringing suit for the purpose of restraining the assessment or collection of any_tax see sheridan v united_states wl at e d pa quoting anti- injunction act sec_7421 aff’d 553_fedappx_187 3d cir petitioner appealed that dismissal to the u s court_of_appeals for the third circuit which affirmed the district court’s ruling see 553_fedappx_187 the court_of_appeals termed nonsensical petitioner’s claim that he was entitled to a refund of dollar_figure billion on account of losses he had suffered over the life of his patent petitioner filed federal_income_tax returns for and that included respective schedules c profit and loss from business on each schedule c petitioner claimed a deduction of dollar_figure million for other expenses during the irs examination of these returns he attempted to justify these deductions as theft losses asserting that he had claimed a small amount of loss to prevent further victimization the irs disallowed the claimed theft_loss deductions made other minor adjustments to his returns and timely mailed petitioner a notice_of_deficiency he respondent determined that petitioner had additional income of dollar_figure in from ordinary dividends and royalties determined that petitioner had additional schedule c gross_receipts of dollar_figure for and made certain compu- tational adjustments petitioner does not dispute these adjustments timely sought review in this court residing in pennsylvania at the time of his petition respondent filed a motion for summary_judgment on date to which petitioner responded on date in his petition and in his response to the motion petitioner addressed only the disallowance of his claimed theft_loss deductions all other adjustments set forth in the notice_of_deficiency are thus deemed conceded see rule sec_34 sec_121 a summary_judgment standard discussion the purpose of summary_judgment is to expedite litigation and avoid costly time-consuming and unnecessary trials fla peach corp v commissioner 90_tc_678 under rule b the court may grant summary_judgment when there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law 98_tc_518 aff’d 17_f3d_965 7th cir rule d provides that where the moving party properly makes and supports a motion for summary_judgment an adverse_party may not rest upon the mere allegations or denials of such party’s pleading but rather must set forth specific facts by affidavits or otherwise showing that there is a genuine dispute for trial in light of respondent’s motion his supporting affidavit and petitioner’s response which alleges no dispute as to any material fact we conclude that this case may be adjudicated summarily b theft losses sec_162 allows a taxpayer to deduct all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade or busi- ness sec_165 permits a deduction for any loss sustained during the tax- able year and not_compensated_for_by_insurance_or_otherwise sec_165 provides for purposes of subsection a any loss arising from theft shall be treated as sustained during the taxable_year in which the taxpayer discovers such loss in all cases the deduction is allowable only if the loss is bona_fide sec_1_165-1 income_tax regs the term theft is broadly defined to include larceny embezzlement and robbery sec_1_165-8 income_tax regs see also 61_tc_354 aff’d 540_f2d_448 9th cir normally a loss will be regarded as arising from theft only if there is a criminal element to the appropria- tion of the taxpayer’s property see 232_f2d_107 5th cir johnson v commissioner tcmemo_2001_97 81_tcm_1538 to substantiate a theft_loss deduction the taxpayer must prove both that a theft actually occurred under the law of the relevant state or under an applicable federal criminal statute and the amount of the loss see 43_tc_842 alioto v commissioner tcmemo_2011_151 slip op pincite aff’d 699_f3d_948 6th cir on the basis of the pleadings filed petitioner cannot satisfy any aspect of the sec_165 requirements for demonstrating a theft_loss first he has iden- tified no genuine issue for trial as to whether a theft occurred under the law of any relevant jurisdiction his assertion that his intellectual_property has been stolen is based on his unsupported belief that criminal conspiracies are the only possible explanation for his vaporizer business’ relative lack of success he has alleged no facts to show that an infringement of his patent has occurred much less that a crime has been committed under state or federal_law although patent no big_number belongs to him the mere existence of this patent is not sufficient to prove patent infringement in any event this is not the proper forum in which to litigate such a claim see u s c sec_281 a patentee shall have remedy by civil_action for infringement of his patent u s c sec a the district courts shall have original jurisdiction of any civil_action arising under any act of congress relating to patents second petitioner has raised no genuine issue for trial concerning his ability to substantiate the amount of his supposed loss taxpayers are required to keep permanent records sufficient to substantiate the amount of any claimed deduction see 116_tc_438 sec_1 a income_tax regs to substantiate a theft_loss a taxpayer must prove at a minimum the fair_market_value of the stolen property before the theft and the adjusted_basis of the property see griggs v commissioner tcmemo_2008_ 96_tcm_248 sec_1_165-8 income_tax regs providing that the amount of a theft_loss deduction shall be determined consistently with the manner prescribed in sec_1_165-7 for determining the amount of casualty_loss sec_1_165-7 income_tax regs providing that amount deductible as a casualty_loss is determined by reference to fair_market_value or adjusted_basis of damaged property petitioner has supplied no evidence concerning the fair_market_value of his patent before the alleged theft or the patent’s adjusted_basis his calculation of loss has nothing to do with the ex ante value of his patent but is based on his unsupported estimate of the portion of the worldwide vaporizer market to which he believes himself entitled a taxpayer claiming a theft_loss must supply sufficient evidence for the court to make a reasonable estimate of the property’s value see lockett v commissioner tcmemo_2008_5 95_tcm_1029 aff’d 306_fedappx_464 11th cir petitioner has failed to set forth specific facts showing there is a genuine dispute for trial concerning his ability to do this see rule d finally a taxpayer must claim a theft_loss deduction for the taxable_year in which the taxpayer discovers the loss sec_1_165-8 see 411_f2d_13 3d cir aff’g tcmemo_1968_155 petitioner claimed a theft_loss deduction of dollar_figure million for each of and he has set forth no specific facts tending to show that he discovered the supposed theft in one of these years as opposed to some prior year after his patent was filed in indeed petitioner has informed the irs that he intends to claim similar deductions on his tax returns through the year petitioner clearly is not claiming a loss deduction for theft but for alleged damage to his business from supposed anticompetitive behavior such damages if they can be proved are not deductible as theft losses under sec_165 alternatively petitioner contends that he is entitled to his dollar_figure million deductions under sec_186 sec_186 provides that i f a compensatory_amount which is included in gross_income is received for a compensable_injury a deduction is allowed equal to the lesser_of the compensable amount or the unrecovered_losses sustained as a result of such compensable_injury sec_186 defines a compensable_injury to include injuries sustained as a result of an infringement of a patent issued by the united_states even if petitioner could establish patent infringement which he has not done he has not alleged that he received or included in gross_income for or any compensatory_amount see sec_186 defining compensatory_amount to mean an amount received as damages as a result of an award in or in settlement of a civil_action for recovery for a compensable_injury sec_186 has no possible application here c accuracy-related_penalty the code imposes a accuracy-related_penalty on any underpayment attributable to any substantial_understatement_of_income_tax see sec_6662 b an understatement is substantial if it exceeds the greater of dollar_figure or of the tax required to be shown on the return sec_6662 the tax deficiencies determined in the notice_of_deficiency which we have sustained in full reflect understatements that exceed dollar_figure and of the total_tax required to be shown on petitioner’s and returns respondent has thus carried his burden of production by demonstrating a substantial_understatement_of_income_tax see sec_6662 sec_7491 sec_6664 provides that the accuracy-related_penalty shall not be imposed with respect to any portion of an underpayment if it is shown that there was a reasonable_cause for such portion and that the taxpayer acted in good_faith with respect to it once the commissioner has carried his burden of production the taxpayer bears the burden of proving reasonable_cause and good_faith higbee v commissioner t c pincite the decision as to whether the taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all pertinent facts and circumstances see sec_1_6664-4 income_tax regs circumstances that may signal reasonable_cause and good_faith include an honest misunder- standing of fact or law that is reasonable in light of all of the facts and circum- stances including the experience knowledge and education of the taxpayer ibid reasonable_cause may also be shown by demonstrating reliance on the advice of a competent tax professional id para c petitioner had no colorable basis for claiming dollar_figure million theft_loss deduc- tions for and he has set forth no specific facts to show that there is a genuine dispute for trial in this regard his claiming these deductions reflects not a genuine effort to ascertain his tax_liabilities correctly but a misguided effort to recoup from the irs profits that he thinks pirates have taken from him he has set forth no specific facts showing there is a genuine dispute as to whether he used the services of a tax_return_preparer or that he otherwise relied on professional tax_advice we accordingly sustain respondent’s imposition of an accuracy-related_penalty for each year at issue to reflect the foregoing an appropriate order and decision for respondent will be entered


internal_revenue_service number release date index number ------------------ ---------------- --------------------------------------------------------------- ------------------------- -------------------- -------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------- id no ----------------- telephone number --------------------- refer reply to cc ita b06 plr-105897-12 date date in re request for extension of time to file form_3115 application_for change in method_of_accounting parent ---------------------------------------------------------------- ----------------------- subsidiary ------------------------------------------------ --------------------------------------------------------------------------------- subsidiary -------------------------------------------------- --------------------------------------------------------------------------------- subsidiary -------------------------------------------------- --------------------------------------------------------------------------------- subsidiary subsidiary subsidiary subsidiary --------------------------------------------------------------------------------- ----------------------- --------------------------------------------------------------------------------- ----------------------- --------------------------------------------------------------------------------- ----------------------- --------------------------------------------------------------------------------- ----------------------- plr-105897-12 subsidiary -------------------------------------------------- --------------------------------------------------------------------------------- subsidiary -------------------------------------------------- --------------------------------------------------------------------------------- subsidiary subsidiary subsidiary subsidiary ------------------------------------------------------------------ --------------------- ----------------------- -------------------------------------------------------------------- ---------------- ----------------------- -------------------------------------------------------------------- ------------------ ----------------------- ------------------------------------------------------------------------------ ----------------------- subsidiary ----------------------------------------------------------- --------------------------------------------------------------------------------- subsidiary subsidiary subsidiary -------------------------------------------------------------------------------- ------------------ ----------------------- ---------------------------------------------------------------------- ------------------ ----------------------- -------------------------------------------------------------- --------------------------- ----------------------- subsidiary -------------------------------------------------- --------------------------------------------------------------------------------- subsidiary -------------------------------------------------- --------------------------------------------------------------------------------- subsidiary -------------------------------------------------- --------------------------------------------------------------------------------- plr-105897-12 subsidiary -------------------------------------------------- --------------------------------------------------------------------------------- courier date date dear ------------ --------------------------------------------------------- ---------------------- --------------------------- this letter responds to a letter dated date requesting an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations for parent and subsidiary through hereinafter collectively referred to as taxpayer to file a form_3115 application_for change in method_of_accounting to change their method_of_accounting for lessee improvements abandoned at the termination of a lease beginning with the taxable_year beginning date and ending date year_of_change facts parent represents that the facts are as follows parent and subsidiary through are members of an affiliated_group_of_corporations that file a consolidated federal_income_tax return headed by parent taxpayer did not timely file the form_3115 under the provisions of revproc_97_27 1997_1_cb_680 for the year_of_change on date courier picked up the form_3115 at parent’s office parent instructed courier to mail the form_3115 by certified mail on date courier failed to mail the form_3115 on date ruling requested taxpayer requests an extension of time pursuant to sec_301_9100-3 to file the form_3115 to change their method_of_accounting for lessee improvements abandoned at the termination of a lease beginning with the year_of_change law and analysis revproc_97_27 1997_1_cb_680 provides the general procedures under sec_446 of the internal_revenue_code and sec_1_446-1 of the income_tax regulations for obtaining the consent of the commissioner of internal revenue to change a method_of_accounting for federal_income_tax purposes plr-105897-12 sec_5 a of revproc_97_27 provides that a taxpayer changing a method_of_accounting pursuant to revproc_97_27 must file its form_3115 during the year_of_change under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusions based solely on the facts and representations submitted we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied accordingly taxpayer is granted calendar days from the date of this letter to file the form_3115 to change their method_of_accounting for lessee improvements abandoned at the termination of a lease beginning with the year_of_change the ruling contained in this letter is based upon information and representations submitted by taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the materials submitted in support of the letter_ruling request such material is subject_to verification on examination except as specifically set forth above no opinion is expressed or implied concerning the federal tax consequences of any aspect of the facts described above under any other provisions of the code specifically no opinion is expressed or implied as to whether the commissioner will grant consent to taxpayer to make its change in accounting_method in accordance with the power_of_attorney we are sending a copy of this letter to taxpayer’s authorized representatives we are also sending a copy of this letter to the appropriate operating division director plr-105897-12 this letter_ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely yours kathleen reed kathleen reed chief branch office of associate chief_counsel income_tax accounting enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service department of the treasury index number washington dc person to contact telephone number refer reply to cc dom p si 4-plr-108084-99 date date number release date re legend grantor son company trust state local court bank daughter-in-law grandchild grandchild grandchild grandchild grandchild grandchild date1 this letter is in response to a letter dated date and prior correspondence from your authorized representative requesting rulings on the gift estate and generation-skipping_transfer_tax consequences resulting from a court order construing and modifying a_trust in grantor who was domiciled in state executed a revocable_trust agreement and transferred stock of company and other assets to trust a bank in state was appointed trustee of trust paragraph of the trust instrument directs the trustee to pay all of the net_income to grantor during his life paragraph provides that after grantor’s death the trust’s income shall be paid to son during his life paragraph provides that after the death of son the income shall be divided and paid one-half to grantor’s daughter-in-law daughter-in-law and one-half to or for the benefit of grantor's grandchildren grandchild grandchild grandchild grandchild grandchild and grandchild during their lives in addition paragraph provides that the share of any deceased grandchild shall be paid to that grandchild's issue paragraph provides that trust or any trust created pursuant to the trust agreement shall terminate upon the death of the last survivor of son's children who are alive at grantor's death and certain named individuals when the trust terminates the trustee shall distribute the trust property among the beneficiaries who are receiving income the property is to be distributed in the proportion in which the respective beneficiary is receiving income paragraph authorizes the trustee to pay corpus to or for the benefit of any beneficiary who at the time is entitled to receive income for hospital nursing and medical_expenses of any such beneficiary and also such amounts as may be considered advisable for the maintenance support and welfare of any such beneficiary the amount of any payment is to be determined by the trustee in its sole discretion under paragraph k the laws of state govern the administration of the trust paragraph provides that if at any time the beneficiaries entitled to receive two- thirds of the income from the trust property shall become dissatisfied with any trustee the beneficiaries may remove the trustee and appoint a successor trustee if the trustee that has been removed is a corporate trustee the successor shall be a corporate trustee if the trustee removed is an individual the successor shall be an individual paragraph provides that if there is a vacancy in the office of one of the co- trustees beneficiaries entitled to receive two-thirds of the income from the trust may fill the vacancy that exists in grantor died and trust became irrevocable son died on date grandchild and bank are currently acting as co-trustees of the trust on date state enacted f s a sec_737 fla laws ch sec_3 under f s a sec_737 a any fiduciary power conferred upon a trustee to make discretionary distributions of either principal or income to or for the trustee's own benefit cannot be exercised by the trustee except to provide for that trustee's health education maintenance or support as described under sec_2041 and sec_2514 of the internal_revenue_code the statute applies inter alia to any trust created under a document executed before date however with respect to irrevocable trusts that were executed before date the statute does not apply if all parties_in_interest elect affirmatively not to be subject_to the application of the statute f s a sec_737 b with respect to trust this election had to be made on or before date this election was not made with respect to trust further the statute does not apply to any distribution made pursuant to the exercise of a power referred to in f s a sec_737 a if the power was exercised prior to date in letter_ruling the internal_revenue_service addressed certain gift estate and generation-skipping_transfer_tax issues pertaining to the application of f s a sec_737 to trust and the beneficiaries of trust on date the trustees filed a motion for summary judgement requesting that local court reform the instrument by removing the word welfare from section of the trust effective as of date the trustee argued that the term welfare in section was a scrivener’s error because at the time the instrument was executed use of the term welfare as a standard for invasion could have caused the trust to be subject_to inclusion in the gross_estate of a trustee-beneficiary the motion argued that it was grantor’s intent that the trust not be subject_to estate_tax with respect to succeeding generations the motion contained more than supporting affidavits documents and exhibits these items included statements from a business_associate of grantor indicating that grantor believed that trust would operate to ensure the company passed to his descendants and a statement of an attorney at the firm involved in drafting the instrument admitting that there was an error in drafting the instrument on date the local court granted the trustee’s motion to reform the instrument after examining the items put forth the court determined that there was clear_and_convincing evidence that grantor did not intend to include the term welfare in section of the trust agreement the trustees of trust the executor of son’s estate daughter-in-law grandchild grandchild grandchild grandchild grandchild and grandchild hereinafter referred to as the beneficiaries have requested the following rulings the reformation will not cause the trust or any distributions from the trust to be subject_to the generation-skipping_transfer_tax neither son nor the other beneficiaries of the trust made a taxable gift_for federal gift_tax purposes as a result of the reformation the reformation will not cause any part of the value of any property of the trust to be included in the gross_estate of son or any of the other beneficiaries for federal estate_tax purposes issue sec_2601 imposes a tax on each generation-skipping_transfer sec_2611 defines a generation-skipping_transfer to mean a taxable_distribution a taxable_termination or a direct_skip section a of the tax_reform_act_of_1986 tra of provides that except as provided in b the generation-skipping_transfer_tax applies to generation- skipping transfers made after date section b a of the tra of provides that the generation-skipping_transfer_tax does not apply to transfers under a_trust that was irrevocable on date but only to the extent that the transfer is not made out of corpus added to the trust after date sec_26_2601-1 of the generation-skipping_transfer_tax regulations provides that a_trust qualifies for transitional rule relief from the provisions of chapter of the code if the trust was irrevocable on date and no addition actual or constructive was made to the trust after that date under sec_26_2601-1 any trust in existence on date will be considered an irrevocable_trust except as provided in sec_26_2601-1 or c relating to property includible in a grantor's gross_estate under sec_2038 and sec_2042 in general any modification of a_trust instrument that changes the quality value or timing of any powers beneficial interests rights or expectancies originally provided for under the terms of the trust instrument will cause the trust to lose exempt status for generation-skipping_transfer_tax purposes in 387_us_456 the court considered whether a state trial court's characterization of property rights conclusively binds a federal court or agency in a federal estate_tax controversy the court concluded that the decision of a state trial_court as to an underlying issue of state law should not be controlling when applied to a federal statute rather the highest court of the state is the best authority on the underlying substantive rule_of state law to be applied in the federal matter if there is no decision by that court then the federal authority must apply what it finds to be state law after giving proper regard to the state trial court’s determination and to relevant rulings of other courts of the state in this respect the federal_agency may be said in effect to be sitting as a state court generally if due to a mistake in drafting the instrument does not contain the terms of the trust that the settlor and trustee intended the settlor or other interested_party may maintain a suit in equity to have the instrument reformed so that it will contain the terms that were actually agreed upon bogert bogert the law of trusts and trustees sec_991 revised 2d ed the law in state recognizes that instruments may be reformed if the written_agreement does not express the intent of the parties jacobs v parodi fla the evidence of the mistake however must be clear_and_convincing ayers v thompson so 2d fla 3rd dca in this case the court determined that there was clear_and_convincing evidence that grantor did not intend to include the term welfare in section of the trust agreement accordingly trust was reformed by removing the word welfare from section effective as of date based on the facts submitted and the representations made we conclude that the reformation of trust is consistent with applicable state law as it would be applied by the highest court of state thus the reformation based on scrivener’s error does not change any powers beneficial interests rights or expectancies provided for under the terms of the trust instrument accordingly the reformation will not cause the trust or any distributions from the trust to be subject_to the generation-skipping_transfer_tax issue sec_2 and sec_2501 imposes a tax on the transfer of property by gift by an individual sec_2511 provides that the tax imposed by sec_2501 shall apply whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_2512 provides that where property is transferred for less than adequate_and_full_consideration in money_or_money's_worth the amount by which the value of the property exceeds the value of the consideration is deemed a gift sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states under sec_2031 the decedent's gross_estate includes the value of all property to the extent provided for in sec_2033 through sec_2033 states that the value of a decedent's gross_estate includes the value of all property to the extent of the interest therein of the decedent at the time of his death as discussed above we have concluded that the reformation based on scrivener’s error was consistent with applicable state law and did not change any beneficial_interest otherwise provided for under the trust instrument therefore based on the facts submitted and the representations made we conclude that neither son nor any of the other beneficiaries made a taxable gift as a result of the reformation and that the reformation will not cause any part of the value of the trust to be included in the gross_estate of son or any of the other beneficiaries this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent 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 sincerely yours assistant chief_counsel passthroughs and special industries by george masnik chief branch


number release date id office uilc cca_2011051708500243 -------------- from -------------- sent tuesday date am to ----------------- cc ---------------------- subject fw re-examination question conducting an examination of the taxpayer regarding the payments totaling over dollar_figure---------------does not constitute a prohibited second_examination as to year ------- under sec_7605 because the actions taken with respect to the sfr assessment do not constitute an examination as such there would be no prohibition under sec_7605 because the examination of the payments would be the first examination of the taxpayer for ------- sec_7602 empowers the service to examine any books papers records or other data which may be relevant for four specific purposes one of them being the making of a return where none has been made sec_7605 prohibits unnecessary examination s and more than one inspection of a taxpayer's books of account for the same taxable_period unless necessary and pursuant to certain procedures although the code does not define examination nor are we aware of any meaningful official agency or judicial definition we believe it necessarily involves the service examining a taxpayer's books papers records or other data the service's determination of a liability made without examining books_and_records or the like is not an examination revproc_2005_32 wl provides agency guidance on what does not constitute an examination preparing a missing return from records or information items that are already in the service's possession is not an examination inspection or reopening revproc_2005_32 sec_4 b because the asfr program does not and would not involve an examination of a taxpayer's books_and_records other than potentially a very limited review of supporting records that a taxpayer voluntarily submits in response to a discrepancy or similar inquiry operation of the program is not an examination for purposes of sec_7602 and sec_7605 even a review of voluntarily submitted records in these circumstances--assuming it's a relatively simple review--does not rise to the level of an examination see revproc_2005_32 sec_4 c please do not hesitate to contact me with any questions or concerns --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -------------------


office_of_chief_counsel internal_revenue_service memorandum number release date cc tege eoeg et1 lmdonis postn-101157-11 uilc date date to jason d laseter attorney tax exempt government entities from paul carlino acting chief employment_tax branch exempt_organizations employment_tax government entities tax exempt government entities subject accountable_plan business connection requirement wage recharacterization this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent issue whether a reimbursement or other expense allowance arrangement meets the business connection requirement of an accountable_plan where an employer pays an amount to its employee regardless of whether an expense is paid_or_incurred or reasonably expected to be paid_or_incurred by the employee in the performance of services for the employer conclusion a reimbursement or other expense allowance arrangement that pays an amount regardless of whether an expense is paid_or_incurred or reasonably expected to be paid_or_incurred by the employee in performing services for the employer violates the business connection requirement of an accountable_plan specifically such an arrangement violates the business connection’s reimbursement requirement under sec_1_62-2 accordingly payments made under the arrangement are treated as made under a nonaccountable_plan amounts treated as paid under a postn-101157-11 nonaccountable_plan must be included in the employee’s gross_income for the taxable_year are subject_to_withholding and payment of employment_taxes and must be reported as wages or other compensation on the employee’s form_w-2 facts for purposes of providing advice to the internal_revenue_service in examination activity you have asked about the standard for determining whether a tool plan satisfies the business connection requirement of an accountable_plan you have not asked us to separately address the substantiation and return of excess requirements of an accountable_plan in the facts you’ve seen an employer participates in a tool plan administered by a third party the tool plan is intended to reimburse the employer’s employees for_the_use_of their tools and equipment under the tool plan tool payments are made to employees as purported nontaxable reimbursement for the cost of the tools they are required to provide as a condition_of_employment however neither the employer nor the plan_administrator verifies that the tools being claimed by the employees are actually required in the performance of services for the employer prior to enrolling in the tool plan an employer compensates its employees on an hourly wage basis with no specific amount attributed to the provision of tools or equipment once an employer and its employees enroll in the tool plan the employees’ hourly wages are split into two components a reduced hourly wage and a tool plan payment which is calculated as a set percentage of the employee’s hourly wage under the tool plan an employer issues its employees one check for the reduced hourly wage amount the employer also issues a second check for the tool plan payment which is treated as not subject_to employment_taxes the employer’s employees continue to receive essentially the same amount per hour under the tool plan as they did before implementation of the tool plan but under the tool plan the amount is split into two portions one treated as wages and the other treated as nontaxable reimbursement for tool expenses and the tool plan’s administrative fee once an employee has received an amount equal to the total amount to be reimbursed under the tool plan ie the value or estimated cost of the employee’s tool and equipment inventory the employee stops receiving tool plan payments and returns to his or her regular pay at the hourly wage rate earned prior to implementation of the tool plan the amount to be reimbursed is determined by taking an inventory of each employee’s tools and equipment the tool pan administrator asks each employee for a list of their tools and equipment and for any available receipts the inventory includes tools or equipment the employee acquired prior to being employed with his or her current employer if an employee does not have receipts to establish cost the initial inventory of tools is valued using estimates valuation publications or current price lists the tool we note that tool plans may vary in how they determine the value of an employee’s tool and equipment inventory for example tool plans may use vendor catalogs or valuation publications to determine postn-101157-11 plan did not obtain information regarding any previous depreciation taken by the employee for the tools in inventory or prior reimbursements which is necessary to determine the expenses actually incurred by the employee in performing services for the employer purchases made after implementation of the tool plan are generally determined at actual cost and require receipts law and analysis sec_61 of the internal_revenue_code defines gross_income as all income from whatever source derived sec_62 defines adjusted_gross_income as gross_income minus certain deductions sec_62 provides that for purposes of determining adjusted_gross_income an employee may deduct certain business_expenses paid_by the employee in_connection_with_the_performance_of_services as an employee of the employer under a reimbursement or other expense allowance arrangement sec_62 provides that for purposes of sec_62 an arrangement will not be treated as a reimbursement or other expense allowance arrangement if the arrangement does not require the employee to substantiate the expenses covered by the arrangement to the person providing the reimbursement or the arrangement provides the employee the right to retain any amount in excess of the substantiated expenses covered under the arrangement sec_1_62-2 of the income_tax regulations provides that a reimbursement or other expense allowance arrangement satisfies the requirements of sec_62 if it meets the requirements of business connection substantiation and returning amounts in excess of substantiated expenses if an arrangement meets these requirements all amounts paid under the arrangement are treated as paid under an accountable_plan see sec_1_62-2 amounts treated a paid under an accountable_plan are excluded from the employee’s gross_income are exempt from withholding and payment of employment_taxes and are not reported as wages on the employee’s form_w-2 see sec_1_62-2 if the arrangement fails any one of these requirements amounts paid under the arrangement are treated as paid under a nonaccountable_plan amounts treated as paid under a nonaccountable_plan must be included in the employee’s gross_income for the taxable_year are subject_to_withholding and payment of employment_taxes and must be reported as wages or other compensation on the employee’s form_w-2 see sec_1_62-2 and sec_1_62-2 provides that an arrangement satisfies the business connection requirement if it provides advances allowances or reimbursements only for business_expenses that are allowable as deductions by part vi subchapter_b chapter of the code and that are paid_or_incurred by the employee in_connection_with_the_performance_of_services as an employee of the employer thus not only must an employee pay or incur a deductible business_expense but the expense must arise in connection with the employment current replacement value or base estimated cost on factors such as the type of tool or equipment its useful_life and geographic location of the worker postn-101157-11 if as in the above described factual scenario an employer reimburses a deductible tool expense that the employee paid_or_incurred prior to employment the reimbursement arrangement does not meet the business connection requirement further if amounts are paid regardless of whether the employee pays or incurs or is reasonably expected to pay or incur expenses or if an employer pays an advance or allowance based on an approximation of value or hypothetical expenses regardless of whether the employee incurs or is reasonably expected to incur deductible business_expenses the arrangement does not meet the business connection requirement because the initial tool inventory_amount is determined using estimates or current replacement value the tool plan does not determine what expenses if any were incurred in the performance of services for the employer as a consequence tool plan payments are made regardless of whether an employee has incurred deductible business_expenses in the performance of services for the employer sec_1_62-2 states that the business connection requirement will not be satisfied where a payor pays an amount to an employee regardless of whether the employee incurs or is reasonably expected to incur deductible business_expenses or other bona_fide expenses related to the employer’s business a payor arranges to pay an amount to an employee regardless of whether the employee is reasonably expected to incur bona_fide business_expenses by supplementing the wages of those employees not receiving the reimbursement so that the same gross amount is paid regardless of the reasonable expectation to incur expenses by reducing the wage payment in light of expenses_incurred or reasonably expected to be incurred only to then increase the wage payment again after the expenses have been reimbursed or by routinely paying a reimbursement allowance to an employee who has not incurred bona_fide business_expenses sec_1_62-2 example illustrates a violation of the sec_1_62-2 requirement that a reimbursement be paid only when expenses are incurred or reasonably expected to be incurred the example provides that employer s pays its engineers dollar_figure a day on those days that an engineer travels away from home on business for employer s employer s designates dollar_figure of the dollar_figure as nontaxable reimbursement for the engineer's travel_expenses on all other days the engineer receives the full as taxable wages because employer s would pay an engineer dollar_figure a day regardless of whether the engineer was traveling away from home the arrangement does not satisfy the reimbursement requirement of paragraph sec_1 d i thus no part of the dollar_figure employer s designated as a reimbursement is treated as paid under an accountable_plan rather all payments under the arrangement are treated as paid under a nonaccountable_plan employer s must report the entire dollar_figure as wages or other compensation on the employees' form_w-2 and must withhold and pay employment_taxes on the entire dollar_figure when paid where a plan serves to recharacterize amounts as a reimbursement allowance that would otherwise be paid if there were no expenses reasonably expected to be incurred postn-101157-11 for the employer amounts paid under the plan will not be treated as paid under an accountable_plan further although an employer may prospectively alter its compensation structure to include reimbursement of substantiated expenses under an accountable_plan an employer may not structure its compensation arrangement so as to avoid the payment of employment_taxes by substituting reimbursements and expense allowances for amounts that would otherwise be paid as wages as illustrated by a temporary reduction in an hourly wage amount only for as long as the tool rate amount is paid such recharacterization violates the business connection requirement of sec_1_62-2 because the employee receives the same amount regardless of whether expenses were incurred or reasonably expected to be incurred the legislative_history behind sec_62 as implemented by the regulations specifically sec_1_62-2 indicates that a taxpayer should not be able to recharacterize an amount that would have been paid as wages just to avoid the limits of the two percent floor under sec_67 when congress passed the tax_reform_act_of_1986 it significantly changed the procedures for deduction of employee business_expenses it converted most of these expenses into itemized_deductions which the taxpayer could only deduct if the aggregate of such expenses exceeded two percent of adjusted_gross_income however the act left in place the above-the-line deduction permitted by sec_62 for employee business_expenses incurred by the taxpayer as part of a reimbursement or allowance arrangement with his employer pursuant to sec_1_162-17 the employee was permitted to forego reporting the income and claiming a deduction if the expenses and the reimbursements were equal and if the employee made an adequate_accounting to the employer a article on this topic concluded that employers and employees could benefit from restructuring compensation arrangements to make greater use of these reimbursement or allowance arrangements blake d rubin tunneling under the two percent floor tax note sec_177 date the article suggested that restructuring compensation packages to make use of reimbursement and expense allowance arrangements to convert a portion of an employee’s compensation into a reimbursement amount would permit both the employer and the employee to be better off by reducing the employer’s after-tax compensation cost and increasing the employee’s after-tax compensation the legislative_history to sec_62 indicates that it was enacted to prevent such tunneling under the two percent floor by mandating that a reimbursement or other expense allowance arrangement require employees to substantiate their expenses to the person providing the arrangement and return any amount in excess of substantiated expenses family support act of h_r 100th cong sec_702 in other words under sec_62 an above-the-line deduction would be permitted only for expenses reimbursed under what became termed an accountable_plan in legislative_history important to the wage recharacterization issue the legislative_history explains that a true reimbursement arrangement or an accountable_plan is one where the expenditure is made out of the earnings_of the employer’s business the employer has an incentive to require sufficient substantiation to ensure that the allowance to the postn-101157-11 employee is limited to actual business expenditure incurred on the employer’s behalf and for the employer’s benefit congress viewed an employer’s agreement to reimburse certain expenditures pursuant to such an arrangement as evidence that the item was a bona_fide ordinary_and_necessary_expense of the employer’s business and that in effect the employee was acting as an agent of the employer in paying for the item h_r rep no pincite 100th cong 2nd sess date accordingly congress concluded that if an above-the-line deduction is allowed for expenses_incurred pursuant to a nonaccountable_plan the two percent floor enacted in the act could be circumvented solely by restructuring the form of the employee’s compensation so that the salary amount is decreased but the employee receives an equivalent nonaccountable expense allowance id pincite following this legislative_history the regulations under sec_62 clarified that wages could not be recharacterized as part of an accountable_plan the preamble to treasury_decision fr 1991_1_cb_20 states as follows some practitioners have asked whether a portion of an employee’s salary may be recharacterized as being paid under a reimbursement arrangement the final regulations clarify that if a payor arranges to pay an amount to an employee regardless of whether the employee incurs or is reasonably expected to incur deductible business_expenses or other bona_fide expenses related to the employer’s business that are not deductible the arrangement does not meet the business connection requirement of sec_1_62-2 of the regulations and all amounts paid under the arrangement are treated as paid under a nonaccountable_plan these amounts are subject_to_withholding and payment of employment_taxes when paid thus no part of an employee’s salary may be recharacterized as being paid under a reimbursement arrangement or other expense allowance arrangement emphasis added the preamble in the treasury_decision made clear the intent of the regulations employers are not allowed to recharacterize wages as a means of minimizing their employment_taxes by making accountable plans require a reimbursement payment in addition to amounts otherwise paid as wages the employer has incentive to require good substantiation if the employer was going to pay the same amount either as wages or alternatively as a combination of wages and tool reimbursement then the employer would have no real incentive to require valid substantiation before making a reimbursement and ensuring expenses were ordinary and necessary to its business in 269_f3d_969 9th cir the united_states court_of_appeals for the ninth circuit affirmed in part and reversed in part the district court’s decision which upheld the internal revenue service’s assessment of more than dollar_figure in delinquent employment_taxes plus interest and penalties the court agreed with the district court’s determination that shotgun’s expense reimbursement arrangement with its employees was not an accountable_plan within the meaning of postn-101157-11 sec_1_62-2 and that the contested payments should have been treated as wages and taxed as such in shotgun the plaintiff provided courier services it charged customers an amount called a tag rate that was based on distance time required for delivery waiting time and weight the employees used their own vehicles for deliveries and were paid of the tag rate the couriers were compensated with two separate checks the first check was a wage check which paid the couriers an hourly amount the second check was for reimbursement of expenses lease fee and equaled of the tag rate minus the amount_paid on the wage check thus couriers were always paid of the tag rate the court found the arrangement was not an accountable_plan because it failed to meet the business connection requirement the court stated that the evidence suggests that the plan’s primary purpose was to treat the least amount possible of the driver’s commission as taxable wages and concluded that as shotgun’s reimbursement arrangement had no logical correlation to actual expenses_incurred it was an abuse of sec_62 and was therefore a nonaccountable_plan the reasoning used by the court in shotgun where a portion of the employee’s commission was designated as an expense reimbursement but the amount had no logical connection to the expenses_incurred applies here under tool plans two employees who have the same inventory of tools but who pay or incur very different expenses for the taxpayer for example due to their different history of tool acquisitions past reimbursements or depreciation would nonetheless receive the same total amount through tool plan payments the tool plan payments lack a logical connection to expenses_incurred or reasonably expected to be incurred during employment for the employer mirror a reduction in hourly wages to be followed by a return to the former hourly wages and are thus being paid without regard to whether the employee incurs or is reasonably expected to incur expenses for the employer therefore the tool plan fails the business connection requirement because you requested that we address only the business connection requirement we did not discuss the substantiation and return of excess requirements but note that the facts summarized above suggest that the tool plan fails these requirements as well case developments hazards and other considerations all three requirements of an accountable_plan should be developed and addressed in any examination this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call ligeia donis at if you have any further questions