department of the treasury internal_revenue_service washington d c date of f i c e of c h i e f c ou n s e l number release date cc ita postf-145857-01 uilc internal_revenue_service national_office field_service_advice memorandum for associate area_counsel from subject cc lm mct associate chief_counsel cc ita meal entertainment refund claim based upon a statistical sample this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent legend taxpayer year year year year year a b c d e issue s whether a taxpayer may prepare a refund claim based on adjustments that are obtained from projecting the results of an analysis of a statistical sampling of meals entertainment expenditures across the total population of sec_274 meals entertainment expense postf-145857-01 conclusion sec_274 provides that no deduction or credit shall be allowed with respect to meals entertainment_expenses unless the taxpayer substantiates by adequate_records or by sufficient evidence corroborating the taxpayer’s own statements the amount date business_purpose and business relationship of each separate expenditure for meals entertainment therefore in order to claim a deduction or credit for meals entertainment_expenses under either sec_162 or sec_212 the taxpayer must maintain and produce such substantiation that is proof of each expenditure for meals entertainment facts during year sec_1 through taxpayer used an accounting system that applied the limitation of sec_274 to its year-end total of the meals entertainment account under the applicable provisions of the code not all meals entertainment_expenses are subject_to the limitation some are fully deductible as ordinary and necessary business_expenses under sec_162 taxpayer believes it improperly posted some fully deductible meals entertainment_expenses to the limitation meals entertainment account taxpayer estimates there were more than big_number meals entertainment items posted to the subject account during year alone for which it reported a deduction for meals entertainment expense of dollar_figurea likewise taxpayer claimed meals entertainment deductions pincite for expenses posted to the subject account of dollar_figureb for year dollar_figurec for year dollar_figured for year and dollar_figuree for year taxpayer contends that individually the items in the account are relatively small in amount and most of the items were in fact properly subject_to the limitation rule under sec_274 notwithstanding that taxpayer claims it understated its meals entertainment_expense_deduction by of all meals entertainment items improperly posted during year sec_1 through taxpayer now wants to amend the affected returns to reflect the correct deduction amount for meals entertainment but the problem presented by its proposed claims involves how to identify the improperly posted items in a cost- effective manner moreover taxpayer believes any adjustments to meals entertainment expense to which it is probably otherwise entitled likely will not justify the cost it would incur if it were to review the entire meals entertainment population and assemble all of the necessary documentation with respect to the meals entertainment items found to be improperly subject_to the limitation postf-145857-01 in light of that dilemma taxpayer has proposed to use a statistical sample of the total population of meals entertainment items for each year to determine a percentage of the items improperly posted then extrapolate that percentage to the entire population for the year to derive at the adjustment to the meals entertainment deduction taxpayer contends the proposed sampling methodology is valid satisfies the requirements of irm and would achieve a confidence level finally the taxpayer relies on lgm tl-97 use of statistical sampling techniques in examination of tax returns as support for_the_use_of sampling in this case specifically taxpayer cites the following statement the validity of statistical sampling as a tool is a twin sided issue both the service and the taxpayer rely on sampling we must be careful in attacking taxpayer use of sampling procedures in general that is as a policy we should be supportive of sampling as a valid measurement of the impact of all similar tax records id at p law and analysis sec_274 imposes strict substantiation requirements for meals and entertainment_expenses the regulations thereunder clarify these stringent substantiation requirements for the taxable years beginning on or after date no deduction or credit shall be allowed with respect to - traveling away from home including meals_and_lodging any activity which is of a type generally considered to constitute entertainment amusement or recreation or with respect to a facility used in connection with such an activity including the items specified in sec_274 gifts defined in sec_274 or any listed_property as defined in sec_280f and temp sec_1_280f-6t b unless the taxpayer substantiates each element of the expenditure or use as described in paragraph b of this section in the manner provided in paragraph c of this section postf-145857-01 temp sec_1_274-5t paragraph b provides that sec_274 and the regulations contemplate that no deduction or credit shall be allowed unless the taxpayer substantiates the requisite elements of each expenditure or use temp sec_1 5t b with respect to meals and entertainment a taxpayer must substantiate each of the following elements the amount of the expense the time and place where it was incurred the business_purpose of the expense and in the case of entertainment the business relationship to the taxpayer of each person entertained temp sec_1_274-5t - paragraph c provides that each element must be substantiated by adequate_records or by sufficient evidence corroborating the taxpayer’s own statement temp sec_1_274-5t the adequate_records standard requires that a taxpayer maintain an account book diary log statement of expense or other similar record in which entries of expenditures are recorded at or near the time of expenditure temp sec_1_274-5t in addition the taxpayer must also supply documentary_evidence such as receipts paid bills or similar evidence which in combination are sufficient to establish each element of an expenditure or use id if a taxpayer is unable to establish that he has at least substantially complied with the adequate_records standard with respect to an element of an expenditure the taxpayer must establish the element by his own statement and other corroborative evidence temp sec_1_274-5t the use of close approximations or estimates to substantiate certain business_expenses was approved in 39_f2d_540 2d cir in cohan the taxpayer was an accomplished playwright director and actor id during the productions of his plays he traveled extensively and often entertained actors employees and dramatic critics id pincite it was apparent that he had paid substantial sums on such expenses but did not maintain any records or accounts on his income_tax returns the taxpayer claimed nearly dollar_figure in travel meals and entertainment expense deductions over a three-year period which the service disallowed although the board_of tax appeal estimated that the taxpayer did incur at least dollar_figure in such expenses it upheld the disallowance due to a lack of substantiation id the appeals court ruled that the board_of tax appeal erred by refusing to allow any part of the deductions holding that absolute certainty in such matters was usually impossible and unnecessary and the board should make as close an approximation as it can bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making id pincite postf-145857-01 in the aftermath of cohan taxpayer abuse of travel entertainment and similar expense accounts increased greatly taxpayers would often overestimate the amount of the expense or assign dubious business purposes to what were essentially personal entertainment or travel expenditures in response congress acted to overrule with respect to such expenses the so-called cohan_rule by narrowing the class of entertainment and travel_expenses deductible under sec_162 and establishing strict substantiation requirements for all such expenses 522_f2d_708 cert_denied 426_us_920 noting h_rep_no 87th cong 2d sess pincite c b pincite s rep no supra pincite c b pincite u s code cong admin news p moreover the regulations make it clear that for purposes of travel including meals_and_lodging entertainment gifts and listed_property the substantiation requirements of sec_274 are strictly applied and expressly prohibit the use of estimates such as that found in cohan temp sec_1_274-5t in dowell one of the first cases to test the new substantiation requirements the court examined the legislative_history and concluded that sec_274 requires taxpayers to substantiate - either through adequate_records or through their own statements corroborated by other evidence - each and every element amount date place business_purpose and business relationship of each and every expenditure in order to claim entertainment and travel_expenses allowed under sec_274 and sec_162 if such substantiation is lacking the deduction is to be disallowed entirely id pincite both emphases added the trial_court in dowell had determined that in light of a virtual blizzard of bills chits and other papers relating to the taxpayer’s expenses that those elements for which adequate_records had not been provided namely the business purposes and relationship of those entertained had been adequately substantiated by his own testimony as corroborated by the oral testimony of some witnesses id the court rejected that determination stating that the trial_court misapprehended the specificity with which a taxpayer must substantiate each expenditure deducted under sec_274 id the court further noted that it was apparent the lower court was snowed under by the volume of paper in evidence and chose not to wade through it to make an expenditure-by-expenditure determination instead making a general determination that the deductions were substantiated yet this is just what sec_274 requires the district_court to do a less stringent examination would echo the approach under the former cohan_rule and clearly defeat the purpose of sec_274 id subsequent cases also have concluded that taxpayers must produce adequate substantiation for each item of travel and entertainment expenditures deducted otherwise it will be disallowed entirely see yoon v comm’r f 3d postf-145857-01 5th cir schedules of credit card charges prepared by accountant were not reliable and did not support treatment of travel and entertainment_expenses as deductible business_expenses 725_f2d_1183 9th cir entertainment expenditures recorded in check registers with supporting papers nevertheless failed to indicate the business_purpose of an expenditure the person entertained and the date of each expense the regulations provide limited exceptions to the strict substantiation requirements of temp sec_274 temp sec_1_274-5t provides an exception for exceptional circumstances ie where the inherent nature of the situation prevents the taxpayer from obtaining adequate_records or other_sufficient_evidence this exception requires corroboration by evidence possessing the highest degree of probative value possible under the circumstances id an exception for loss of records due to circumstances beyond the taxpayer’s control is provided in temp sec_1_274-5t this exception applies to loss of records by fire flood earthquake or similar casualty in that case the taxpayer will be allowed to substantiate a deduction by reasonable reconstruction of his expenditures or use id similarly the taxpayer may be able to use a standard allowance method to account for meals while traveling away from home in lieu of substantiating the actual costs of meals temp sec_1_274-5 however the taxpayer will not be relieved of the requirement to substantiate the actual cost of other travel_expenses as well as the time place and business_purpose of the travel id finally an undue burden on the taxpayer in meeting sec_274 substantiation requirements is not an exception see eg 762_f2d_638 8th cir rev’d on other grounds in upholding the disallowance of travel_expenses under sec_274 the court rejected the taxpayer’s argument that it would have been an undue burden for him to record the exact amount of each item turning to the instant case we do not believe a statistical sampling approach to substantiate meals and entertainment expenditures satisfies the strict substantiation requirements of sec_274 irrespective of the actual validity of the proposed methodology sampling is nonetheless a form of a close approximation the application of which is expressly prohibited by the regulations there is no debate that sampling is used to make a general determination as to the whole population based on a review of a small_group within the population however the specificity with which the taxpayer must substantiate each and every item covered under sec_274 requires an expenditure-by-expenditure determination and not a general determination that the deduction was substantiated see dowell supra likewise the fact that the taxpayer cannot justify the costs it would incur to meet the strict requirements of sec_274 is not an exception contemplated under the statute or the regulations postf-145857-01 we believe that statistical sampling of meals and entertainment_expenses as a means to estimate a claim_for_refund in light of the strict substantiation requirements of sec_274 and the regulations thereunder is not permissible further we believe a court would apply the reasoning outlined in dowell supra in the government’s favor in our view irrespective of the sampling methodology proposed the substantiation requirements of sec_274 are statutory and must be met with respect to each and every expenditure claimed it is appropriate for the service to expect that the taxpayer will maintain and produce substantiation as will constitute clear proof of each and every expenditure for meals and entertainment this writing may contain privileged information any unauthorized disclosure of this writing may have an adverse effect on privileges such as the attorney client privilege if disclosure becomes necessary please contact this office for our views case development hazards and other considerations in light of the fact that exam does not seem to be questioning the substantiation of the taxpayer’s items included in the sec_274 account it appears that the taxpayer is only trying to prove that a certain percentage of the account is not governed by sec_274 the sec_274 substantiation requirements do not apply to those items which are specifically excepted from sec_274 under sec_274 including expenses described in sec_274 relating to food and beverages for employees sec_274 relating to expenses treated as compensation sec_274 relating to items available to the public and sec_274 relating to entertainment sold to customers and expenses described in sec_274 relating to recreational etc expenses for employees temp sec_1_274-5t ii if the taxpayer is proposing to use statistical sampling not to substantiate the actual expense but only to prove what percentage of the entries in the meals and entertainment account are excepted from sec_274 then statistical sampling in this particular instance does not seem prohibited by the code or its corresponding regulations however in general on a case by case basis it is within the discretion of the service to determine whether or not a taxpayer should be allowed to use statistical sampling techniques the irm states that every examiner must determine the appropriate amount of evidence to accumulate and establish the proper depth of the examination this decision is a matter of judgment and important because of the prohibitive cost of examining and evaluating all available 1note that the regulation has not yet been updated to reflect the renumbered paragraphs in sec_274 postf-145857-01 evidence i r m the irm further states that the depth of the examination of the taxpayer’s books_and_records can be expanded or contracted as the examination progresses and should include sampling techniques when there are voluminous records i r m thus the service has discretion to determine the extent of the examination that will be conducted on the taxpayer’s supporting documents and the extent of the evidence needed to be provided by the taxpayer in order to support the taxpayer’s claims therefore it is within the discretion of the service to determine whether or not a taxpayer should be allowed to use statistical sampling techniques taxpayer’s reliance on lgm tl-97 regarding the use of statistical sampling techniques in examination or auditing of tax returns is misplaced in lgm tl-97 the service advised that the validity of statistical sampling methods employed in the audit of tax returns would be upheld in court in that context sampling is used only as an audit procedure or tool to examine or review a group of accounting entries or transactions where the totality of all such transactions is prohibitive in terms of time and resources the use of statistical sampling as an audit procedure with respect to income_tax returns is analogous to using statistical sampling in the context of auditing financial statements as such a brief review of the nature and purpose of audit sampling in the financial statement context may be illustrative statement on auditing standards sas no audit sampling provides guidance on the use of sampling statistical and non statistical in an audit of financial statements aicpa audit and accounting guide vol audit sampling aag- sam p big_number dollar_figure under sas no audit sampling is the application of an audit procedure to less than percent of the items within an account balance or class of transactions for the purpose of evaluating some characteristic of the balance or class and generally functions as a means to gather audit evidence id at p the use of sampling in accounting populations differs from other populations because before the auditor’s testing begins the data have been accumulated compiled and summarized as such rather than using the sample to estimate an unknown the auditor’s objective is generally to corroborate the accuracy of certain client data such as data about account balances or classes of transactions id at pp the audit process is generally an evaluation of whether an amount is substantially correct rather than a determination of original amounts id regarding the use of statistical sampling in general the service has already demonstrated its support for_the_use_of statistical sampling through its own reliance on statistical sampling in large case examinations to reduce the financial and time burdens of examining voluminous accounting data postf-145857-01 even if the service allows certain large taxpayers to use statistical sampling the service should always review the taxpayer’s statistical sampling techniques and challenge a particular sampling technique if the technique is not accurate appropriate or reliable if the service should decide to allow taxpayers to use statistical sampling in the preparation of tax returns in general the service should also require the taxpayer to follow the same statistical sampling requirements that the service is required to follow by i r m and the i r m requirements will help to ensure the accuracy of the taxpayer’s statistical sampling technique if the service allows large taxpayers to use statistical sampling the service needs to clarify with the large taxpayers using statistical sampling that statistical sampling would not affect any of the record keeping requirements within the code taxpayers would still be required to fully maintain all records statistical sampling would only affect the number of records required to be analyzed in order to verify the taxpayer’s tax_liability finally there may be an issue whether taxpayer’s proposed treatment to reflect the proper account balances previously recorded for its meals and entertainment ie by filing a claim_for_refund is an impermissible retroactive change in accounting_method a detailed discussion of this issue is outside the scope of this fsa please call if you have any further questions heather c maloy associate chief_counsel income_tax and accounting by gerald m horan senior technical reviewer cc ita b06


t c memo united_states tax_court blonde grayson hall and neal e hall petitioners v commissioner of internal revenue respondent docket no 25701-08l filed date blonde grayson hall and neal e hall pro sese harry j negro for respondent memorandum findings_of_fact and opinion ruwe judge this proceeding was commenced in response to notices of determination concerning collection action s under sec_6320 and or 1all section references are to the internal_revenue_code code in effect at all relevant times and all rule references are to the tax_court rules_of_practice and continued the first notice_of_determination dated date sustained the filing of a notice_of_federal_tax_lien for blonde grayson hall for her tax_liabilities for the taxable years and the second notice_of_determination dated date sustained the filing of a notice_of_federal_tax_lien for the joint liabilities of blonde grayson hall and neal hall for the taxable_year sec_2002 and one of the issues raised by blonde grayson hall for the taxable years and is whether an agreement she signed that allowed the assessment of tax for those years prevents her from contesting the amounts of those liabilities in this proceeding petitioner contends that the agreement is invalid because it was signed under duress on date respondent moved pursuant to rule b that the court bifurcate this proceeding so that the upcoming trial be restricted to the issue of whether blonde grayson hall is precluded from challenging her underlying liabilities for the taxable years and because she previously agreed to the assessment of those liabilities by signing form_4549 income_tax examination changes by order dated date we granted respondent’ sec_1 continued procedure unless otherwise indicated motion thus the issue before us is whether blonde grayson hall should be relieved of her agreement in the form_4549 because it was signed under duress findings_of_fact at the time the petition was filed petitioner resided in pennsylvania petitioner’s husband neal hall is listed as a petitioner on the petition since the only issue currently before the court is whether blonde grayson hall signed the form_4549 under duress we will refer to blonde grayson hall as petitioner petitioner attended the university of michigan law school and was admitted to practice law in petitioner was the chief_executive_officer of hall associates llc a law firm in philadelphia pennsylvania from to prior criminal proceeding in the internal_revenue_service commenced a criminal investigation of petitioner for failing to file federal_income_tax returns since on date petitioner and her husband were convicted of willful failure_to_file tax returns pursuant to a plea agreement in the u s district_court for the eastern district of pennsylvania they agreed to plead guilty to three counts of willful failure_to_file tax returns under sec_7203 for the tax years and as part of the plea agreement petitioner agreed to properly execute and deliver to the irs examination_division irs form_4549 or irs form_870 for the years through prior to her sentencing petitioner signed the plea agreement in date and signed the form_4549 in date form_4549 lists adjustments to taxable_income and the corrected tax_liability and balance due form_4549 reflects a taxpayer’s consent to the commissioner’s immediate_assessment and collection of the taxes penalties and interest included therein see 122_tc_384 gilmer v commissioner tcmemo_2009_296 tax ct memo lexis at n in pertinent part form_4549 states consent to assessment and collection -- i do not wish to exercise my appeal rights with the internal_revenue_service or to contest in the united_states tax_court the findings in this report therefore i give my consent to the immediate_assessment and collection of any increase in tax and penalties and accept any decrease in tax and penalties shown above plus additional interest as provided by law before accepting petitioner’s guilty plea and plea agreement the district_court was required to determine that the guilty plea and plea agreement were voluntary see fed r crim p b see also 515_f3d_186 3d cir accordingly on date u s district judge paul s diamond held a plea hearing to determine whether petitioner’s guilty plea and 2neither petitioner nor respondent offered the form_4549 into evidence respondent stated to the court that the form_4549 was sealed by the district_court there is no question that petitioner signed the form_4549 plea agreement were voluntary petitioner was sworn under oath and judge diamond informed her that she would be subject_to perjury penalties if she did not tell the truth there followed this colloquy the district_court you’ve been a practicing lawyer for how long petitioner since to sic about years the district_court and what kind of law did you practice petitioner real_estate finance and general corporate the district_court at the university of michigan law school did you study constitutional law criminal_law criminal procedure petitioner not criminal procedure but the prior to sic yes the district_court constitutional law petitioner yes the district_court you understand that you don’t have to plead guilty to this information do you not petitioner yes the district_court you’re doing this voluntarily petitioner yes your honor the district_court you’re doing it on advice of counsel because you think its in your own best interest to do so petitioner yes your honor the district_court h as anyone made any threat or promise or assurance to you of any kind other than what is set forth in the plea agreement to convince or induce you to plead guilty in this case petitioner no judge diamond confirmed with petitioner that she had read the plea agreement and had reviewed it with her attorney judge diamond confirmed with petitioner’s attorney nicholas nastasi sr and assistant united_states attorney karen grigsby that petitioner’s willingness to plead guilty was voluntary the district_court do you understand that by pleading guilty and by waiving the rights i have discussed with you you cannot later come to any court and claim that you were not guilty or that your rights have been violated petitioner yes judge diamond accepted petitioner’s guilty plea and found that her plea was voluntary on date judge diamond held a sentencing hearing for petitioner and her husband at allocution petitioner stated to the district_court that she was greatly apologetic and very regretful that -- to the government and to the court -- that i have violated the tax laws petitioner’s husband stated to the district_court i assure you petitioner and i have taken the necessary steps to make sure we never come before this court or any court regarding these matters judge diamond sentenced petitioner and her husband to months imprisonment an additional months of supervised release and imposed a fine of dollar_figure judge diamond advised petitioner of her rights to appeal the sentence and she confirmed that she understood her rights petitioner did not appeal her conviction or sentence petitioner’s husband appealed his conviction and sentence hall f 3d pincite the conviction and sentence were affirmed id pincite procedural history on date petitioner made advance_payments of her tax deficiencies for the taxable years and on date respondent assessed taxes penalties and interest for the taxable years and petitioner’s advance_payments were for the full amounts of her tax deficiencies for the taxable years and however petitioner did not make any payments for the interest and penalties assessed by respondent on date respondent filed a notice_of_federal_tax_lien regarding petitioner’s unpaid interest and penalties for the taxable years and respondent sent petitioner a letter notice_of_federal_tax_lien filing and your right to a hearing under sec_6320 dated date advising petitioner that a notice_of_federal_tax_lien had been filed with respect to her unpaid liabilities for the taxable years and and that she could request a hearing with respondent’s office of appeals petitioner timely submitted a form request for a collection_due_process or equivalent_hearing in which she requested an installment_agreement and that all fraud penalties be abated the settlement officer scheduled a telephonic collection_due_process cdp hearing for date at the hearing petitioner claimed that she had signed the form_4549 under duress respondent issued petitioner a notice_of_determination concerning collection action s under sec_6320 and or dated date determining that respondent had followed all legal and procedural requirements in the filing of the notice_of_federal_tax_lien and that the filing was appropriate the notice_of_determination stated that petitioner’s balance due was dollar_figure for the taxable years and petitioner timely filed a petition with this court by order dated date we remanded this case to respondent’s office of appeals for a further hearing on the issue of whether petitioner had signed the form_4549 under duress and if so whether the form_4549 is invalid due to such duress respondent issued petitioner a supplemental notice_of_determination concerning collection action s under sec_6320 and or dated date determining that petitioner did not sign the form_4549 under duress and sustaining the filing of the notice_of_federal_tax_lien opinion sec_6321 provides that if any person liable to pay any_tax neglects or refuses to do so after demand the amount shall be a lien in favor of the united_states upon all property and rights to property whether real or personal belonging to such person sec_6323 authorizes the commissioner to file a notice_of_federal_tax_lien pursuant to sec_6320 the commissioner must provide the taxpayer with notice of and an opportunity for an administrative review of the propriety of the filing see 115_tc_329 if a taxpayer requests a cdp hearing she may raise at that hearing any relevant issue relating to the unpaid tax or the lien sec_6330 the court reviews administrative determinations by the commissioner’s office of appeals regarding nonliability issues for abuse_of_discretion 131_tc_197 114_tc_176 the determination of the office of appeals must take into consideration the verification that the requirements of applicable law and administrative procedure have been met issues raised by the taxpayer and whether any proposed collection action balances the need for the efficient collection_of_taxes with the legitimate concern of the person that any collection be no more intrusive than necessary sec_6320 sec_6330 see also 117_tc_183 if a taxpayer’s underlying liability is properly at issue the court reviews any determination regarding the underlying liability de novo goza v commissioner t c pincite a taxpayer may challenge the existence or amount of the underlying tax_liabilities if the taxpayer did not receive any statutory_notice_of_deficiency for such tax_liabilities or did not otherwise have an opportunity to dispute such tax_liabilities sec_6330 a taxpayer who waives her right to challenge the proposed assessments is deemed to have had the opportunity to dispute the underlying tax_liabilities and is thereby precluded from challenging those tax_liabilities in the cdp hearing or before this court see 117_tc_324 coleman v commissioner tcmemo_2007_263 tax ct memo lexi sec_264 at by signing form_4549 a taxpayer waives her right to raise the issue of her underlying liabilities in this court see aguirre v commissioner t c pincite coleman v commissioner tax ct memo lexi sec_264 at petitioner signed the form_4549 consequently petitioner’s challenge to the amounts of her liabilities listed in the form_4549 will not properly be before the court unless she signed the form_4549 under duress see shireman v commissioner tcmemo_2004_155 tax ct memo lexis at petitioner bears the burden of proving that the form_4549 is invalid because she signed it under duress see rule a see also jarvis v commissioner tcmemo_1980_381 tax ct memo lexis at robertson v commissioner tcmemo_1973_205 tax ct memo lexi sec_81 at it is now well settled that if an act of one party deprives another of his freedom of will to do or not to do a specific act the party so coerced becomes subject_to the will of the other there is duress and in such a situation no act of the coerced person is voluntary and contracts made in such circumstances are void because there has been no voluntary meeting of the minds of the parties 18_bta_353 we have defined duress as actions by one party which deprive another of his freedom of will to do or not to do a specific act price v commissioner tcmemo_1981_693 tax ct memo lexi sec_47 at aff’d without published opinion 742_f2d_1460 7th cir however actions that deprive another of her freedom of will are distinguishable from legally authorized actions that merely limit another to choose between options that are not desirable every person is always legally bound to comply with the law--but is not thereby under duress george v commissioner t c ___ ___ slip op pincite date the threat of judicial contempt for not complying with a court order to sign form_8332 release of claim to exemption for child of divorced or separated parents does not constitute duress it is not duress on the part of respondent however to notify the taxpayer that he intends to use all lawful means to assess and collect the tax price v commissioner tax ct memo lexi sec_47 at the assertion by the commissioner of an intention to pursue a legal remedy is not ordinarily considered duress especially when the taxpayer has a lawyer and there is ample time for deliberation see 274_fsupp_1002 e d mo aff’d 411_f2d_1164 8th cir we have held that duress does not exist when the commissioner threatens to take legally authorized actions if a taxpayer does not sign form_4549 see shireman v commissioner tax ct memo lexis at citing ballard v commissioner tcmemo_1987_471 tax ct memo lexi sec_467 at aff’d without published opinion 851_f2d_359 5th cir if the commissioner’s actions leading up to the taxpayer signing form_4549 were authorized by law then those actions do not give rise to duress or coercion see 124_tc_223 aff’d 652_f3d_1042 9th cir petitioner and her husband pled guilty to willful failure_to_file tax returns pursuant to a plea agreement before the district_court petitioner agreed to sign the form_4549 for the taxable years through because it was a condition of the plea agreement offered by the government and accepted by petitioner the requirement that petitioner sign the form_4549 stems from the government’s efforts to prosecute her for admittedly criminal conduct and to collect taxes and penalties no doubt given the circumstances these efforts were zealous and disadvantageous to petitioner however every criminal defendant who is offered a plea agreement faces an equally unpalatable decision--accept a legally authorized plea agreement that will include terms disadvantageous to the criminal defendant or go to trial which may result in significantly worse consequences for the criminal defendant this unpalatable decision does not constitute duress or involuntariness see 397_us_742 a plea of guilty is not involuntary merely because it was entered to avoid the possibility of a death penalty petitioner has not presented any evidence that the government’s efforts went beyond what the law prescribes in fact there is substantial evidence that petitioner’s decision to sign the form_4549 as part of her plea agreement was in fact voluntary rule b of the federal rules of criminal procedure requires that before a court can accept a plea of guilty or nolo contendere the court must address the defendant personally in open court and determine that the plea is voluntary and did not result from force threats or promises other than promises in a plea agreement on date judge diamond held a plea hearing and extensively questioned petitioner before he concluded that her plea of guilty is voluntary and not the result of force or threats or promises apart from the plea agreement disclosed on this record petitioner’s attorney nicholas nastasi sr who represented her in the criminal proceeding confirmed to judge diamond that petitioner’s willingness to plead guilty was voluntary judge diamond noted that petitioner and her husband did not wish to lose the benefits of their plea agreement and so were most willing to plead guilty hall f 3d pincite n 3we note that petitioner did not call mr nastasi as a witness we note that petitioner unlike her husband did not appeal her conviction or sentence petitioner’s husband appealed his guilty plea to the court_of_appeals for the third circuit arguing that the district_court did not exercise special care in determining whether his plea which was tied to petitioner’s plea was voluntary id pincite in his appeal petitioner’s husband argued that his plea agreement was involuntary because his plea agreement benefited petitioner more than him id pincite the court rejected petitioner husband’s argument and held that there was no error in the district court’s acceptance of his plea id pincite we however reject as a matter of law a conclusion that a defendant who pleads guilty with his or her jointly charged defendant whether or not his or her spouse merely by entering that plea no matter how much it benefits the other defendant and how little it benefits the defendant challenging the plea has acted involuntarily petitioner relies on robertson v commissioner tax ct memo lexi sec_81 to argue that she was under duress however petitioner’s factual situation is different in robertson the court noted that the taxpayers were honest forthright and candid witnesses who had employed an attorney to file their federal_income_tax return which was filed early id at additionally the court found that the commissioner had harassed the taxpayers id at on the other hand we find that petitioner did not file federal_income_tax returns for the taxable years and we also find that petitioner’s testimony that she was under duress is directly contradicted by her more contemporaneous testimony in the district_court furthermore petitioner consulted with her criminal defense attorney prior to signing the form_4549 see martin f_supp pincite6 in short we find that petitioner’s testimony regarding duress lacks credibility in larson v commissioner tcmemo_1994_302 tax ct memo lexi sec_305 aff’d without published opinion 60_f3d_830 8th cir the taxpayer entered into a plea agreement in which he pled guilty to criminal_tax_evasion under sec_7201 id at the taxpayer argued that he was under duress when he pled guilty and that the plea agreement should not be used against him id at the court noted that the criminal judgment transcript and related documents do not reflect duress and are regular on their face id at as a result the court declined to find that the taxpayer was under duress when he agreed to plead guilty id at similarly petitioner’s plea hearing sentencing hearing and related documents reflect that she was not under duress and in fact voluntarily entered into the plea agreement because she benefited from the plea agreement accordingly we hold that petitioner was not under duress when she signed the form_4549 consequently petitioner may not dispute the amounts of the underlying liabilities reflected in the form_4549 in reaching our decision we have considered all arguments made by the parties and to the extent not mentioned or addressed they are irrelevant or without merit to reflect the foregoing an appropriate order will be issued 4in larson v commissioner tcmemo_1994_302 tax ct memo lexi sec_305 at aff’d without published opinion 60_f3d_830 8th cir the court also noted that if the taxpayer did not plead guilty of his own free will that could constitute a fraud upon the u s district_court a matter which the taxpayer should attempt to remedy in that forum in the plea hearing petitioner was under oath when she confirmed to judge diamond that no one had made any threat or promise or assurance to her other than the plea agreement and that she was entering her guilty plea voluntarily


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi b01-plr-114454-00 date date x country entity entity date date this letter responds to a letter dated date written on behalf of x requesting a ruling that x be granted 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 partnership for federal tax purposes facts according to the information submitted x was converted from a country entity to a country entity on date x intended to elect to be treated as a partnership for federal tax purposes as of date however x failed to timely elect partnership status law and analysis 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_taxable_as_a_corporation if all members have limited_liability unless the entity makes an election to be treated otherwise if a foreign eligible_entity has more than one owner it may elect to be taxable as a partnership pursuant to the rules in 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 on which 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 code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose deadline is prescribed by a regulation published in the internal_revenue_bulletin plr-114454-00 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_9100-1 sec_301_9100-2 provides automatic_extension 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 section will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301 a conclusion based solely on the facts submitted and the representations made the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time to elect to be treated as a partnership for federal tax purposes effective date the election should be made by following the procedure for filing form_8832 within days following the date of this letter a copy of this letter should be attached to the election except as specifically set forth above no opinion is expressed or implied as to the federal_income_tax consequences of the transactions described above under any other provision of the code specifically we express no opinion about the u s tax consequences of the conversion of x from entity to entity or about the tax consequences of making an election for x to become a partnership this ruling is directed only to the taxpayer on whose behalf it was requested sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to your two listed authorized representatives sincerely yours paul f kugler associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi b1-plr-164986-01 date date legend x d1 this responds to your letter dated date in which you requested relief under sec_1362 of the internal_revenue_code on behalf of x facts x was incorporated on d1 the shareholders of x intended it to be treated as an s_corporation effective on d1 however the election to be treated as an s_corporation was not timely filed law and analysis sec_1362 allows a small_business_corporation to elect to be treated as an s_corporation sec_1362 provides the rules as to when such an election will become effective sec_1362 states in relevant part that if an s election is made within the first two and one-half months of a corporation’s taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made under sec_1362 however if an s election is made after the first two and one-half months of a corporation’s taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is filed sec_1362 b provides that if no election is made pursuant to sec_1362 or if the election is made after the date prescribed for making such an election and the secretary determines that there was reasonable_cause for the failure to timely make the election then the secretary may treat such an election as timely made for such taxable_year and effective as of the first day of that year x did not timely file an election to be treated as an s_corporation under sec_1362 x has however established reasonable_cause for not making a timely s cc psi b1-plr-164986-01 election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and the representations made and provided that x otherwise qualifies as an s_corporation we conclude that x will be treated as an s_corporation effective d1 within days from the date of the letter x should submit a properly completed form_2553 with a copy of this letter attached to the relevant service_center except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent pursuant to power_of_attorney on file with this office a copy of this letter is being sent to your authorized tax representative sincerely carolyn gray acting assistant branch chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc


’ internal_revenue_service index nos b department oft an washington dc person to contact telephone number refer to ob tb bby ly date ug s legend taxpayer a taxpayer b date date ira x company w sum y dear this is in response to the correspondence submitted by your authorized representative as supplemented by correspondence dated in which you through your representative request several letter rulings under sec_408 following facts and representations support your ruling_request of the internal_revenue_code the taxpayer a died on date prior to attaining age at the time of his death taxpayer a was married to taxpayer b whose date of birth was date has not attained age survived taxpayer a taxpayer b who at his death taxpayer a maintained ira x with company the value of ira x at taxpayer jp2 w a's death was approximately sum yy received any distributions from ira x prior to his death taxpayer a had not taxpayer a named his estate as the beneficiary of ira taxpayer b was named the sole personal representative of x the estate of taxpayer a article iii of taxpayer a‘s last will and testament will provides in pertinent part residue and remainder of taxpayer a’s estate shall be distributed to his wife taxpayer b otherwise this bequest shall lapse that one-half of the rest if she survives him article x of taxpayer a’s will in pertinent part gives his personal representative the power to allocate any real or personal_property not specifically bequeathed to and among his residuary legatees taxpayer b as personal representative of the estate of as such furthermore she is entitled to receive distributions taxpayer a intends to direct company w to reflect on its records that the estate of taxpayer a is the beneficiary of tra x and from ira x as personal representative of the estate of taxpayer a then intends to direct the trustee of ira x to transfer ira x proceeds sufficient to satisfy taxpayer b's bequest under article iii of taxpayer a’s last will into an ira set up and maintained in the name of taxpayer b said transaction will take the form of a trustee-to-trustee transfer distributed to taxpayer b prior to being placed in an ira maintained in the name of taxpayer b no ira x amounts will be based on the above facts and representations you through your authorized representative request the following letter rulings that to the extent ira x is used to satisfy the bequest to taxpayer b under article iii of taxpayer a’s last will and testament ira x term is defined in code sec_408 d c i and is not an inherited ira as that to the extent that the ira x distribution is transferred to an ira set up and maintained in the name of taxpayer b said transferred amount will not be included in taxpayer b's gross_income for the year in which transferred with respect to your ruling requests code sec_408 provides that except as otherwise provided in this subsection any amount_paid or distributed out of an individual_retirement_plan shall be included in gross_income by the payee or distributee as the case may be manner provided under sec_72 in the code sec_408 provides that sec_408 d does not apply to a rollover_contribution if such contribution satisfies the requirements of sec_408 d a and d b bos code sec_408 a i provides that sec_408 does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the account is maintained if the entire amount received including money and any other_property is paid into an ira other than an endowment_contract for the benefit of such individual not later than the 60th day after the day on which he receives the payment or distribution code sec_408 c i provides in pertinent in the case of an inherited ira section part that d shall not apply to any amount received by an individual from such account and no amount transferred from such account to another ira shall be excluded from income by reason of such transfer and such inherited account shall not be treated as an ira for purposes of determining whether any other amount is a rollover_contribution code sec_408 d c ii provides that an ira shall be treated as inherited if the individual for whose benefit the account is maintained acquired such account by reason of the death of another individual and such individual was not the surviving_spouse of such other individual c from and by reason of the death of her husband may elect to treat those ira proceeds as her own and roll them over into her own ira a surviving_spouse who acquires ira proceeds thus pursuant to code sec_408 d if sec_1_408-8 of the proposed income_tax regulations q a a-4 further provides in q a a-4 provides that a surviving_spouse is the only individual who may elect to treat a beneficiary’s interest in an ira as the beneficiary's own account a surviving_spouse makes such an election the spouse’s interest in the account would then be subject_to the distribution_requirements of sec_401 a rather than those of sec_401 b pertinent part that an election will be considered to have been made by a surviving_spouse if either of the following occurs any required amounts in the account including any amounts that have been rolled over or transferred in accordance with the requirements of sec_408 da a i into an ira for the benefit of such surviving_spouse have not been distributed within the appropriate time period applicable to the decedent under sec_401 a b or to the account or annuity to which the surviving_spouse has rolled such amounts over which are subject or deemed to be subject_to the distribution_requirements of sec_401 a a or any additional_amounts are contributed to the account as described in above - the bw result of such an election is that the surviving_spouse shall then be considered the individual for whose benefit the trust is maintained q a a-6 of sec_1_408-8 of the proposed_regulations provides that if a surviving_spouse of an employee rolls over a distribution from a qualified_plan such surviving_spouse may elect to treat the ira as the spouse's own ira in accordance with the provisions in a-4 q a a-4 of sec_1_408-8 of the proposed_regulations provides that a surviving_spouse may elect to treat an ira of her deceased spouse as her own which a surviving_spouse makes said election a-4 does not provide the exclusive methods by which a surviving_spouse so elects q a a-4 lists actions by however q a generally if the proceeds of a decedent’s ira are payable to an estate are made payable to the personal representative of the estate and then are transferred by direction of the representative to an ira set up and maintained in the name of the decedent's surviving_spouse beneficiary of the residuary bequest under the decedent's will said surviving_spouse shall be treated as having received the ira proceeds from the estate and not from the decedent generally not be eligible to roll over or have transferred said distributed ira proceeds into her own ira however in a case where a surviving_spouse is the sole accordingly such surviving_spouse shall personal representative of the decedent's_estate with the authority to allocate estate property between and among bequests under a decedent’s will the surviving_spouse as personal representative allocates a portion or all of decedent's ira to the residuary bequest under his will and the surviving_spouse is the sole beneficiary of a portion of said residuary bequest the surviving_spouse will be treated as having received the ira proceeds to the extent used to satisfy her portion of the residuary bequest under the will from the decedent and not from his estate thus under the facts stated above taxpayer b is to be treated as having received the ira xx proceeds to the extent they satisfy her residuary bequest under taxpayer a’s will from taxpayer a and accordingly is to be treated as the payee and beneficiary of ira x for purposes of code sec_408 and d therefore with respect to your ruling requests we conclude as follows that to the extent ira x is used to satisfy the bequest to taxpayer b under article iii of taxpayer a’s last will and testament ira x term is defined in code sec_408 is not an inherited ira as that c i and to the extent that the ira x distribution is transferred to an ira set up and maintained in the name of taxpayer b said transferred amounts will not be included in taxpayer b’s gross_income for the year in which transferred this ruling letter assumes that ira x either is or was qualified under code sec_408 at all times relevant thereto it also assumes that the ira to be set up by taxpayer b which will hold the amounts transferred from ira x will also meet the requirements of code sec_408 at all times relevant thereto this ruling is directed solely to the taxpayer who requested it it may not be used or cited by others as precedent sec_6110 of the code provides that pursuant to a power_of_attorney on file in this office copies of this letter_ruling are being sent to your authorized representative s sincerely yours y biily ft cee frances v sloan chief employee_plans technical branch _ enclosures deleted copy of letter_ruling form_437 dov


internal_revenue_service national_office technical_advice_memorandum date number release date third party contact index uil no case mis no tam-108938-99 cc dom p si b3 district_director taxpayer’s name taxpayer’s address taxpayer’s identification no years involved date of conference legend company shareholders tenant issues is company’s activity of providing property as described below a rental_activity within the meaning of sec_469 tam-108938-99 assuming company’s activity of providing property constitutes a rental_activity for purposes of sec_469 may company group the rental_activity with its trade_or_business activity for the years in issue conclusions company’s activity of providing property is a rental_activity within the meaning of sec_469 company may not group the rental_activity with its trade_or_business activity for the and tax years company may group the rental_activity with its trade_or_business activity for the tax_year facts company a subchapter_s_corporation is in the business of selling petroleum products during the years at issue company also leased parcels of property from its shareholders on which were located full service stations credit card only fuel outlets and convenience stores selling fuel at issue presently are the properties on which the convenience stores were located company did not enter into written lease agreements with its shareholders rather under oral leases company was entitled to use the properties in return for payment of all of the shareholders’ out of pocket expenses associated with the properties in turn company subleased the relevant parcels to an unrelated third party tenant which had an established convenience store line_of_business tenant then constructed the convenience stores which under the terms of the leases would remain the property of tenant and would be demolished at the end of the lease the sublease agreements provided for both a base rent and a supply agreement under the supply agreement company would supply all of the gasoline sold at the convenience store locations and tenant would remit to company its costs and half of the gasoline sales profits the examining agent has argued that company is engaged in two separate activities the trade_or_business activity of selling petroleum products and a rental_activity associated with its leasing of these convenience store properties because company’s costs in renting these properties exceed the revenues generated from the base rents the examining agent has indicated that the rental_activity is generating a loss which should be treated as a passive_activity_loss to company’s shareholders in response company asserts that it could appropriately group its rental and trade_or_business activities company claims that its rental and sales activities constitute an appropriate economic unit company further asserts that in the years in issue the gross_income generated by its rental activities represents less than percent of its tam-108938-99 overall gross_income the examining agent has not contested this figure but maintains that the properties have required five times as much capital_investment as the nonrental activities after a conference of right on the grouping issue company raised an alternative theory that it was involved in a joint_venture with tenant and that its provision of property for use in the joint_venture would not be considered a rental_activity by virtue of sec_1 1t e ii f and sec_1_469-1t company and tenant have never filed a partnership return law and analysis sec_469 of the code disallows deductions for passive_activity_losses for the taxable_year for individuals estates trusts closely-held c corporations and personal_service_corporations sec_469 for the tax years in question defined the term passive_activity as any activity that involves the conduct of any trade_or_business in which the taxpayer does not materially participate and any rental_activity issue one sec_469 defines rental_activity as any activity where payments are principally for_the_use_of tangible_property sec_469 and indicate that for the years in issue a rental_activity is treated as a passive_activity regardless of whether a taxpayer materially participates in the activity sec_1_469-1t of the temporary regulations provides in general that an activity is a rental_activity for a taxable_year if a during the taxable_year tangible_property held in connection with the activity is used by customers or held for use by customers and b the gross_income attributable to the conduct of the activity during the taxable_year represents amounts paid principally for_the_use_of the tangible_property without regard to whether the use of the property by customers is pursuant to a lease or pursuant to a service_contract or other arrangement that is not denominated a lease sec_1_469-1t provides instances where an activity involving the use of tangible_property will not constitute a rental_activity if company’s activity meets any of the tests under sec_1_469-1t then the activity is deemed a trade_or_business activity and is not a rental_activity in particular sec_1_469-1t indicates that the provision of property for use in an activity conducted by a partnership s_corporation or joint_venture in which the taxpayer owns an interest is not treated as a rental_activity under sec_1_469-1t sec_1_469-1t states that if a taxpayer owns an interest in a partnership s_corporation or joint_venture conducting an activity other than a rental_activity and the taxpayer provides property for use in the activity in the taxpayer’s capacity as an owner of an interest in such partnership s_corporation or joint_venture the provision of such property is not a rental_activity thus if a partner contributes the use of property to a partnership none of the partner’s distributive_share tam-108938-99 of partnership income is income from a rental_activity unless the partnership is engaged in a rental_activity in addition a partner’s gross_income attributable to a payment described in sec_707 is not income from a rental_activity under any circumstances see sec_1_469-2t the determination of whether property used in an activity is provided by the taxpayer in the taxpayer’s capacity as an owner of an interest in a partnership s_corporation or joint_venture shall be made on the basis of all of the facts and circumstances this exception is illustrated in sec_1_469-1t example where a taxpayer makes farmland available to a tenant farmer pursuant to an arrangement designated a crop-share lease under the arrangement the tenant is required to use the tenant’s best efforts to farm the land and produce marketable crops the taxpayer is obligated to pay percent of the costs incurred in the activity without regard to whether any crops are successfully produced or marketed and is entitled to percent of the crops produced or percent of the proceeds from marketing the crops despite their characterization of the arrangement as a crop-share lease the taxpayer and the tenant farmer have actually entered into a joint_venture therefore the taxpayer in the example will not be treated as participating in a rental_activity company claims that it was providing the convenience store properties for use in a joint_venture and that such activity does not constitute a rental_activity within the meaning of sec_1_469-1t company claims that while company and tenant formalized their arrangement as a lease they were not in a landlord tenant relationship but rather were involved in a joint_venture to sell petroleum products company contends that the base rents provided for by the lease agreements were actually sec_707 guaranteed payments it is necessary then to determine whether the relationship between company and tenant was that of co-venturers or lessor lessee based on the facts presented it appears that the dominant nature of the relationship was that of lessor and lessee sec_761 and sec_7701 of the code provide that the term partnership includes a syndicate group pool joint_venture or other unincorporated organization through or by means of which any business financial operation or venture is carried on and which is not within the meaning of this title a corporation or a_trust or estate under sec_1_761-1 and sec_301_7701-2 the term partnership is broader in scope than the common meaning of partnership and may include groups not commonly called partnerships in 337_us_733 the supreme court stated that a partnership exists for federal tax purposes when considering all the facts -- the agreement the conduct of the parties in execution of its provisions their statements the testimony of disinterested persons the relationship of the parties their respective abilities and tam-108938-99 capital contributions the actual control of income and the purposes for which it is used and any other facts throwing light on their true intent -- the parties in good_faith and acting with a business_purpose intended to join together in the present conduct of the enterprise id pincite in 55_tc_429 the tax_court stated that the elements of a joint_venture are a a contract express or implied showing that it was the intent of the parties that a business venture be established b an agreement for joint control and proprietorship c a contribution of money property and or services by the prospective joint venturers and d a sharing of profits but not necessarily of losses id pincite under the lease agreements in the present situation company would supply the petroleum products sold at the convenience store properties tenant would reimburse company for all costs associated with supplying the petroleum products and all profit would be divided equally between tenant and company these facts are consistent with the existence of a joint_venture to sell petroleum products however these facts must also be viewed in the context of the complete relationship between tenant and company the lease agreements between company and tenant primarily detail tenant’s desire to lease property for use in its convenience store activity the agreements concerning the supply of petroleum products and the division of the profits were contained in a subsection of the lease documents and are specifically identified as further consideration for the lease tenant had an established line_of_business operating convenience stores and tenant used the property in that line_of_business company did not share in the costs of constructing or operating the convenience stores nor was there a mechanism for company to share in any profits of the convenience stores the facts of the present situation are distinct from the facts of sec_1_469-1t example where there was a complete sharing of costs and profits thus it does not appear that the parties intended as required under culbertson to form a joint_venture with regard to the convenience store operations therefore company was not providing property for use in its joint_venture but rather company was leasing property to tenant that tenant then used in its own business activity company’s activity of providing property to tenant constitutes a rental_activity under sec_1_469-1t and the exception under sec_1_469-1t and sec_1 1t e vii does not apply issue two tam-108938-99 company has asserted in the alternative that if it was engaged in a rental_activity that it would be proper for company to group the rental_activity with its trade_or_business activity of petroleum_product sales under the general rules of sec_1_469-4 activities may be treated as a single activity if they constitute an appropriate economic unit for the measurement of gain_or_loss for purposes of sec_469 whether activities constitute an appropriate economic unit depends on all the relevant facts and circumstances in addition sec_1_469-4 indicates that even where a trade_or_business activity and a rental_activity constitute an appropriate economic unit they may be grouped together only under limited circumstances in the present case in order for company to group its rental and non-rental activities the two activities must constitute an appropriate economic unit and the grouping must satisfy the requirements of sec_1_469-4 b or c sec_1_469-4 lists five nonexclusive factors which are to be given the greatest weight in determining whether activities constitute an appropriate economic unit i similarities and differences in types of trades_or_businesses ii the extent of common_control iii the extent of common ownership iv geographical location and v interdependencies between or among the activities based on these factors the petroleum sales and the rental activities appear to constitute an appropriate economic unit because the two activities are undertaken within the same s_corporation there is common_control and ownership under the lease agreements tenant is also a customer of the wholesaling activity therefore there is a high degree of interdependency as well as a common location the two activities appear to be dissimilar but sec_1_469-4 example indicates that dissimilar activities may constitute an appropriate economic unit where common_control and sufficient interdependencies exist in the example a taxpayer’s wholesaling and trucking businesses constituted an appropriate economic unit where they were under common_control and the predominate portion of the trucking business was transporting goods for the wholesaling activity and the taxpayer was not involved in any other trucking business similarly in the present case the two activities are under common_control and rental_activity is in furtherance of the wholesaling activity based on these factors it appears that the two activities sales and leasing constitute an appropriate economic unit for purposes of sec_1_469-4 sec_1_469-4 provides that even where a rental_activity and a trade_or_business activity constitute an appropriate economic unit they may be grouped together only if a the rental_activity is insubstantial in relation to the trade_or_business activity b the trade_or_business activity is insubstantial in relation to the rental_activity or c each owner of the trade_or_business activity has the same proportionate ownership in the rental_activity in which case the portion of the rental_activity that involves the rental of items of property for use in the trade_or_business activity may be grouped with the trade_or_business activity the third exception requires that the rental_activity involve the rental tam-108938-99 of property for use in the trade_or_business activity with the same ownership and so is not applicable here where the property is provided for use in tenant’s convenience store activity therefore company may group the two activities together only if one activity is insubstantial to the other thus company must rely on the insubstantial rule_of sec_1_469-4 or b presently there is no bright-line_test as to what constitutes insubstantial under a similar rule in the original temporary regulations nonrental and rental operations could be grouped together if less than percent of the combined undertaking’s gross_income was attributable to either the nonrental or rental operations sec_1_469-4t and iii under sec_1_469-11 and b a taxpayer may apply the standards of the temporary regulations to the first taxable_year that ends after date but begins on or before that date company reports on the calendar_year and so its first taxable_year ending after date began on date therefore for the tax_year company may group its rental and nonrental undertakings because the rental undertaking would be treated as insubstantial under sec_1_469-4t however as the preamble to the final regulations indicates the term insubstantial as used in sec_1_469-4 and b refers to factors other than gross_income t d 1994_2_cb_81 pincite therefore for the and tax years the reference to gross_income will not be conclusive in determining whether one activity is insubstantial to the other while gross_income is a logical starting point for the analysis of insubstantiality the regulatory change in represents an awareness that the single standard of gross_income does not always produce an appropriate result for instance a rental_activity might appear insubstantial when compared to a trade_or_business activity that has high gross_income and little net_income similarly in this instance while the rental_activity appears to be insubstantial under the gross_income_test the rental_activity actually required a greater capital_investment and has greater value thus in this case the rental_activity cannot be considered to be insubstantial within the meaning of sec_1 d i a also because the business activity generates over percent of company’s gross_income it cannot be considered insubstantial within the meaning of sec_1_469-4 therefore because neither activity may be treated as insubstantial to the other it is inappropriate to treat the two activities as a single activity for purposes of sec_469 a copy of this technical_advice_memorandum is to be given to the taxpayer s sec_6110 of the code provides that it may not be used or cited as precedent


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc dom corp 2-plr-100247-00 date date legend distributing distributing controlled sub a sub b sub c date h date i state x business y business z r s t u dear this is in response to a letter dated date requesting a ruling as to the federal_income_tax consequences of a transaction additional information was submitted in letters dated march april may may and date the information submitted for consideration is substantially as set forth below distributing a state x corporation is the common parent_corporation of an affiliated_group filing a consolidated_return for federal_income_tax purposes that includes distributing distributing controlled and other affiliated corporations the distributing group distributing is a public company whose stock is widely held and traded on nasdaq distributing a state x corporation is a wholly owned subsidiary of distributing controlled was incorporated on date a under the laws of state x to facilitate the transactions described herein prior to the initial_public_offering ipo described herein controlled was wholly owned by distributing subsequent to the ipo distributing retained ownership of at least of controlled’s outstanding_stock the distributing group is principally engaged in business y and business z the expressed business_purpose for the transactions is to facilitate controlled’s raising of equity_capital on a substantially more cost effective basis than would be possible through i an offering of additional stock by distributing or ii an offering of stock by controlled not made in connection with the separation of controlled from distributing controlled raised such capital with an ipo for less than of its outstanding_stock on date b controlled needed to raise additional capital to pay off debt fund capital expenditures and for working_capital needs summary of transaction step sec_1 through have already been consummated step sec_5 and will be consummated within one year of date h on date g distributing formed a single member state x limited_liability_company llc the only interest in which was issued to distributing distributing transferred certain assets to the llc on date h distributing transferred to controlled all the stock of sub a sub b sub c the llc assets and certain other assets in exchange for approximately r of cash and the assumption_of_liabilities in the approximate amount of s the first transfer distributing used the cash to satisfy third party creditors simultaneously with the first transfer controlled consummated an ipo of the common_stock of controlled in an amount less than of controlled’s total outstanding common_stock on date h controlled contributed the llc assets and other assets received from distributing in the first transfer to sub a in exchange for the assumption_of_liabilities in the approximate amount of s the assets transferred to sub a represent a de_minimis amount of the assets distributing transferred to controlled in the first transfer as set forth in the ipo prospectus pursuant to one overall plan_of_reorganization that includes the first transfer no later than one year following the ipo distributing will distribute all of its stock of controlled to distributing the first distribution immediately after the first distribution distributing will distribute all of its controlled stock pro_rata to its shareholders individually the second distribution together with the first distribution the distributions financial information has been received that reflects that distributing and distributing have each had gross_receipts and operating_expenses representative of the active_conduct_of_a_trade_or_business for each of the past five years in distribution no fractional shares of controlled will be distributed in lieu of receiving fractional shares each distributing shareholder’s fractional shares will be aggregated and sold on the open market or to distributing by a distribution agent as soon as practicable after distribution the holders entitled to fractional share interests will receive their pro_rata share of the cash proceeds from the sale in connection with the first transfer and the distributions the following representations are made a no part of the consideration to be distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of distributing b no part of the consideration to be distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of distributing c the five years of financial information submitted on behalf of distributing is representative of the corporation’s present operation and with regard to such corporation there has not been and will not have been any substantial operational changes since the date of the last financial statements submitted d following the transaction the distributing distributing and controlled corporations will each continue independently and with its separate employees the active_conduct of its share of all the integrated activities of the business conducted by the distributing_corporation prior to the consummation of the transaction e immediately after the distributions at least five percent of sub a sub b and sub c's gross assets will be active trade_or_business assets as defined in sec_355 f the five years of financial information submitted on behalf of sub a sub b and sub c is representative of what their operations will be at the time of the distributions and with regard to each corporation there has not been and will not have been any substantial operational changes since the date of the last financial statement submitted g immediately after the distributions at least percent of the fair_market_value of the gross assets of distributing will consist of the stock and securities of distributing h immediately after the distributions at least percent of the fair_market_value of the gross assets of controlled will consist of the stock_or_securities of sub a sub b and sub c i following the distributions distributing distributing and controlled will continue the active_conduct of its business independently and with separate employees j the distributions are being carried out in whole or substantial part for the following corporate business_purpose controlled raised equity_capital in the ipo on a basis that raised significantly more funds per share net of transaction costs than would have been possible in the stock offering without the planned distributions k the payment of cash in lieu of fractional shares of controlled is solely for the purpose of avoiding the expense and inconvenience of issuing fractional shares and does not represent separately bargained for consideration the method used for handling fractional shares is designed to limit the amount of cash received by any one shareholder to less than the value of one full share of controlled stock the total amount of cash paid in lieu of fractional shares will not exceed one percent of the fair_market_value of controlled stock distributed to distributing 2's shareholders in the second distribution l except for the receipt of cash in lieu of fractional shares there is no plan or intention by any shareholder who owns five percent or more of the stock of distributing and the management of distributing to the best of its knowledge is not aware of any plan or intention on the part of any particular remaining shareholder of distributing to sell exchange transfer by gift or otherwise dispose_of any of their stock in either distributing or controlled after the distributions m there is no plan or intention by either distributing distributing or controlled directly or through any subsidiary_corporation to purchase any of its outstanding_stock after the transaction other than through stock purchases meeting the requirements of sec_4 b of revproc_96_30 n there is no plan or intention to liquidate either distributing distributing or controlled to merge either corporation with any other corporation or to sell or otherwise dispose_of their assets after the distributions except in the ordinary course of business o the total adjusted bases and the fair_market_value of the assets transferred to controlled by distributing equals or exceeds the sum of any liabilities assumed by controlled p the liabilities assumed by controlled in the first transfer were incurred in the ordinary course of business and are associated with the assets being transferred q distributing and distributing neither accumulated their receivables nor made extraordinary payments of their payables in anticipation of the transaction r immediately before the second distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations see sec_1_1502-13 and sec_1 of the income_tax regulations as in effect before the publication of t d 1995_2_cb_147 and as currently in effect sec_1_1502-13 as published in t d further distributing 2's excess_loss_account if any with respect to its controlled stock or controlled’s excess_loss_account if any with respect to the stock of any consolidated subsidiary will be included in income immediately before the second distribution sec_1_1502-19 s other than obligations incurred in the ordinary course of business no intercorporate debt will exist between distributing distributing and controlled at the time of or subsequent to the distribution t except as in connection with a tax_allocation_agreement payments made in connection with all continuing transactions between distributing distributing and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm's-length the parties have agreed that distributing will provide controlled and its subs with various services until the completion of the distributions controlled may upon notice to distributing extend the agreement for up to one year following the ipo controlled is required to use all commercially reasonable efforts to obtain these services from a source other than distributing prior to the completion of the distributions however if controlled is unable to obtain these services from another source and such services are necessary for controlled to operate its business then distributing will continue to provide these services for an additional period not to exceed months u no two parties to the transaction are investment companies as defined in sec_368 and iv of the internal_revenue_code v each distribution is not part of a plan or series of related transactions within the meaning of sec_355 pursuant to which one or more persons will acquire directly or indirectly stock possessing percent or more of the total combined voting power of all classes of stock of either distributing distributing or controlled entitled to vote or stock possessing percent or more of the total value of all classes of stock of either distributing or controlled w less than percent of the total combined voting power of all classes of distributing and distributing stock entitled to vote and less than percent of the total value of shares of all classes of distributing and distributing stock will have been acquired by purchase under sec_355 or during the five-year period ending on the date of the distributions determined after applying sec_355 x neither distributing nor controlled was a u s real_property_holding_company within the meaning of sec_897 at any time during the five-year period ending on the date of the second distribution y neither distributing nor controlled was a u s real_property_holding_company within the meaning of sec_897 at any time during the five-year period ending on the date of the first distribution z sub b was a controlled_foreign_corporation cfc within the meaning of sec_957 immediately before distributing 1's transfer of sub b's stock to controlled in the first transfer and was a cfc immediately after the first transfer aa sub c was a cfc within the meaning of sec_957 immediately before distributing 1's transfer of sub c stock to controlled in the first transfer and was a cfc immediately after the first transfer in connection with the second transfer the following representations are made bb no stock_or_securities will be issued for services rendered to or for the benefit of the transferee in connection with the second transfer no stock_or_securities will be issued for indebtedness of the transferee that is not evidenced by a security or for an interest on indebtedness which accrued on or after the beginning of the holding_period of the transferor for the debt cc the proceeds received in collection of the income items will be included in ordinary_income in computing the income of the transferee dd the transfer is not the result of the solicitation by a promoter broker or investment house ee the transferor will not retain any rights in the property transferred to the transferee ff there is no indebtedness between the transferor and the transferee and there will be no indebtedness created in favor of the transferor as a result of the second transfer gg the adjusted_basis and the fair_market_value of the assets to be transferred by the transferor to the transferee will in each instance equal or exceed the sum of the liabilities assumed by the transferee hh the liabilities of the transferor to be assumed by the transferee were incurred in the ordinary course of business and are associated with the assets to be transferred ii the transfers and exchanges occurred under a plan agreed upon before the transaction in which the rights of the parties are defined jj taking into account any issuance of additional shares of the transferee stock any issuances for services the exercise of any transferee stock_rights warrants or subscriptions a public offering of transferee stock and the sale exchange transfer by gift or other_disposition of any of the stock of the transferee to be received in the second transfer the transferor will be in control of the transferee within the meaning of sec_368 kk the transferor received in constructive exchange stock securities or other_property approximately equal to the fair_market_value of the property transferred to the transferee or for services rendered or to be rendered for the benefit of the transferee ll all exchanges occurred on approximately the same date mm there is no plan or intention on the part of the transferee to redeem or otherwise reacquire any stock or indebtedness to be issued in the second transfer nn the transferee will remain in existence and retain and use the property transferred to it in a trade_or_business oo there is no plan or intention by the transferee to dispose_of the transferred property other than in the normal course of operations pp each of the parties to the second transfer paid its own expenses if any in connection with the second transfer qq the transferee will not be an investment_company within the meaning of sec_1 c ii of the regulations rr the transferor is not under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 and the stock_or_securities received in the exchange will not be used to satisfy the indebtedness of such debtor ss the transferee will not be not a personal_service_corporation within the meaning of sec_269a of the code based solely on the information submitted and the representations set forth above we rule as follows distributing 1's transfer of all the stock of sub a sub b sub c the llc assets and certain other assets in constructive exchange for additional shares of the common_stock of controlled cash in the approximate amount of r and controlled’s assumption_of_liabilities followed by distributing 1's distribution of all of its controlled stock to distributing constituted a reorganization within the meaning of sec_368 of the code distributing and controlled will each be a_party_to_a_reorganization within the meaning of sec_368 no gain_or_loss is recognized by distributing upon its constructive receipt of controlled stock r cash and controlled’s assumption_of_liabilities in exchange for the assets received in the first transfer provided that the r cash is paid to distributing 1's creditors as described above sec_357 sec_361 and sec_361 no gain_or_loss is recognized by distributing upon the distribution of controlled stock pursuant to the first distribution sec_361 no gain_or_loss is recognized by controlled upon the receipt of assets from distributing in constructive exchange for its issuance of shares of controlled stock sec_1032 the basis of each asset received by controlled from distributing is equal to the basis of such assets in the hands of distributing immediately prior to the transfer sec_362 the holding_period of each asset received by controlled from distributing includes the period during which distributing held such asset sec_1223 as provided in sec_312 proper allocation of earnings_and_profits between distributing and controlled will be made in accordance with sec_1_312-10 and sec_1_1502-33 no gain_or_loss will be recognized to and no amount will be included in the income of distributing upon the receipt of controlled stock pursuant to the first distribution as described above sec_355 the basis of the controlled stock and the distributing stock in the hands of distributing after the first distribution will be the same as the aggregate basis of the distributing stock held by distributing immediately before the first distribution allocated in proportion to the fair_market_value of each in accordance with sec_1_358-2 sec_358 and sec_358 the holding_period of the controlled common_stock received by distributing will include the holding_period of the distributing common_stock on which the distributions will be made provided such stock is held as a capital_asset on the date of the distribution sec_1223 no gain_or_loss will be recognized to and no amounts will be included in the income of the shareholders of distributing upon their receipt of controlled stock including any fractional share interests to which they may be entitled as described above sec_355 sec_1_355-1 the basis of the stock including any fractional share interest to which they may be entitled of distributing and controlled in the hands of the shareholders of distributing after the second distribution will collectively be the same as the aggregate basis of the distributing stock held immediately before the second distribution and such basis will be allocated between the distributing stock and controlled stock in proportion to their relative fair market values at the time of the second distribution in accordance with sec_1_358-2 sec_358 and sec_358 the holding_period of the controlled stock received by the shareholders of distributing will in each instance include the holding_period of the distributing stock with respect to which the second distribution will be made provided that the distributing stock is held as a capital_asset by the respective shareholders of distributing on the date of the second distribution sec_1223 no gain_or_loss will be recognized by distributing upon the distribution of all of its controlled stock to its shareholders sec_355 as provided in sec_312 proper allocation of earnings_and_profits between distributing and controlled will be made in accordance with sec_1_312-10 and sec_1_1502-33 if cash is received by a distributing shareholder as a result of a sale of a fractional share of controlled stock by the distribution agent the shareholder will have gain_or_loss measured by the difference between the basis of the fractional share as determined in ruling above and the amount of cash received if the controlled stock is held by the shareholder as a capital_asset at such time the gain_or_loss will be capital_gain or loss subject_to the provisions and limitations of subchapter_p of chapter of the code sec_1221 and sec_1222 immediately before the second distribution items of income gain loss deduction and credit will be taken into account as required by the applicable intercompany_transaction regulations sec_1_1502-13 and sec_1 as in effect before the publication of t d 1995_32_irb_6 and as currently in effect sec_1_1502-13 as published by t d further distributing 2's excess_loss_account if any with respect to the controlled stock or any consolidated subsidiary of controlled will be included in income immediately before the distribution sec_1_1502-19 no gain_or_loss is recognized by controlled upon the transfer of the llc assets and other assets received in the first transfer along with t of ipo proceeds to sub a in constructive exchange for additional sub a stock and the assumption_of_liabilities as described above sec_351 and sec_357 the basis of each asset received by sub a in the second transfer will equal the basis of that asset in the hands of controlled immediately before the second transfer sec_362 the holding_period of each asset received by sub a in the second transfer included the holding_period of that asset in the hands of controlled sec_1223 no gain_or_loss is recognized by sub a upon the receipt of assets from controlled in the second transfer in constructive exchange for its issuance of shares of sub a stock sec_1032 the earnings_and_profits of sub b to the extent attributable to such stock under sec_1_1248-2 or treas reg whichever is applicable which were accumulated in taxable years of such foreign_corporation after date during the period distributing held the sub b stock or was considered as holding it by reason of the application of sec_1223 while sub b was a controlled_foreign_corporation will be attributable to such stock held by controlled sec_1_1248-1 the earnings_and_profits of sub c to the extent attributable to such stock under sec_1_1248-2 or treas reg whichever is applicable which were accumulated in taxable years of such foreign_corporation after date during the period distributing held the sub c stock or was considered as holding it by reason of the application of sec_1223 while sub c was a controlled_foreign_corporation will be attributable to such stock held by controlled sec_1_1248-1 no opinion is expressed whether any or all of the above-referenced foreign_corporations are passive foreign investment companies within the meaning of sec_1297 of the code and regulations to be promulgated thereunder if it is determined that any or all of the above-described foreign_corporations are passive foreign_corporations no opinion is expressed with respect to the application of sec_1291 through to the proposed transactions in particular in a transaction in which gain is not otherwise recognized regulations under sec_1291 may require gain recognition notwithstanding other provisions of the code 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 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 a copy of this letter must be attached to any income_tax return to which it is relevant this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely assistant chief_counsel corporate by lewis k brickates assistant to chief branch