t c memo united_states tax_court barry g conner and bridget h conner petitioners v commissioner of internal revenue respondent docket no filed date charles e hodges ii and antoinette g ellison for petitioners brianna b taylor john w sheffield iii jason p oppenheim and lawrence d sledz for respondent memorandum findings_of_fact and opinion kerrigan judge respondent determined deficiencies and penalties with respect to petitioners’ federal_income_tax as follows year deficiency dollar_figure big_number penalty sec_6662 dollar_figure big_number unless otherwise indicated all section references are to the internal_revenue_code in effect for the years at issue and all rule references are to the tax_court rules_of_practice and procedure all monetary amounts are rounded to the nearest dollar after concessions the issues for consideration are whether the sale of shoreline drive llc’s shoreline real_property resulted in an ordinary_loss or a capital_loss whether properties owned by shoreline west ahaluna llc west ahaluna barry conner llc bc llc and lumpkin campground road llc lumpkin were held for investment such that deductions for the llcs’ expenses are limited under sec_212 and sec_163 whether petitioners’ losses for shoreline west ahaluna bc llc lumpkin and gainesville market llc gainseville market are limited by sec_469 whether petitioners are entitled to a net_operating_loss_deduction of dollar_figure for tax_year whether petitioners are entitled to a noncash charitable_contribution_deduction of dollar_figure for tax_year whether petitioners are entitled to deduct a loss from america’s home place ahp for tax_year and whether petitioners are liable for accuracy-related_penalties under sec_6662 for tax_year sec_2012 and sec_2013 findings_of_fact some of the facts are stipulated and are so found petitioners resided in georgia when they timely filed their petition i america’s home place petitioner husband was the founder ceo and sole shareholder of ahp an s_corporation ahp was a custom home builder operating throughout the eastern united_states it built custom homes after a customer had selected a floor_plan provided a lot and qualified for a loan through third-party lenders ahp did not own the lots where the homes were built and it did not maintain an inventory of partially or totally completed homes during the tax years at issue ahp’s main source of revenue was from the sale of custom homes ahp owned large tracts of undeveloped land that it 1the parties agree that whether petitioners failed to include state tax refunds in their taxable_income is computational 2the ruling on the admission of exhibit 13-p was reserved and it is admitted purchased for speculative purposes ahp does not hold the land as inventory nor is the land used in ahp’s business operations ahp owned building centers sales centers corporate offices and model homes these centers have extensive furnishing and real_property improvements during tax_year ahp closed and renovated sales centers ahp had approximately employees and divisional presidents during the tax years at issue ahp’s employees oversaw the administrative functions of the several llcs that petitioner husband owned ii petitioners’ real_estate holdings petitioner husband was the sole member of several llcs through which he acquired large tracts of undeveloped land before the tax years at issue these entities were shoreline west ahaluna bc llc and lumpkin collectively conner llcs the conner llcs still own properties except for shoreline which sold all of its properties in bc llc and lumpkin also owned rental properties the connor llcs had no employees or management offices during the tax years at issue gainesville market held property for rental purposes during the tax years at issue petitioner wife initially owned a interest in gainesville market and she purchased an additional in she purchased the remaining in according to petitioners petitioner wife transferred her interest to her husband and petitioner husband was the only member of gainesville market during the tax years at issue for tax_year petitioners filed an election to treat all interests in rental real_estate as a single rental real_estate activity pursuant to sec_469 each of the conner llcs and gainesville market were disregarded entities for federal tax purposes a shoreline in petitioner husband formed shoreline as a single-member llc shoreline purchased acres of undeveloped lakefront property in hall county georgia for dollar_figure shoreline financed the purchase with a dollar_figure loan from wachovia bank wachovia in date shoreline purchased an additional two lots which were adjacent to the land it had previously acquired for dollar_figure shoreline purchased the properties to develop a residential lakeside community between and petitioner husband prepared design plans obtained approval for a 94-lot subdivision from the local_government obtained approval of boat docks from the army corps of engineers and secured water availability for a sewage treatment system he hired a firm to help with the drawing of design plans because of the unavailability of credit in and the development never progressed past the planning stages petitioner husband considered other design plans including a or 6-lot residential community in petitioner husband placed shoreline’s land in a conservation program to lower its property taxes as part of the requirements for conservation use he certified that business would not be conducted on the land in date petitioner husband sold shoreline’s land for dollar_figure to an unrelated party the land was not advertised for sale this unrelated party approached petitioner husband about buying the land at the time of sale shoreline’s land was still held in the conservation program shoreline’ sec_2013 schedule c profit or loss from business reported cost of good sold cogs of dollar_figure and sales of dollar_figure for a total loss of dollar_figure shoreline reported no income for tax_year during the tax years at issue petitioners deducted the following expenses_incurred by shoreline and reported them on their schedule c expense mortgage interest taxes and licenses other expense sec_2012 dollar_figure big_number dollar_figure big_number big_number 1shoreline incurred professional fees of dollar_figure and bank fees of dollar_figure in and bank fees of dollar_figure in respondent disallowed the expenses claimed on petitioners’ schedules c as trade_or_business deductions and allowed certain expenses as deductions on schedules a itemized_deductions and increased investment_expenses and investment miscellaneous expenses subject_to the adjusted_gross_income agi limitation for tax_year respondent recharacterized shoreline’s gross_receipts of dollar_figure reported on schedule c to investment_income reported on schedule a and disallowed shoreline’s cogs deduction of dollar_figure b west ahaluna in petitioner husband formed west ahaluna as a single-member llc through multiple acquisitions in west ahaluna acquired approximately acres of undeveloped land in gainesville hall county georgia west ahaluna’s land is mostly contiguous and located on or around dawsonville highway and the shoreline of lake lanier ahp and bc llc acquired land in the same area as west ahaluna petitioner husband intended to use most of west ahaluna’s land to develop a residential community on the shoreline of lake lanier residential component he planned to develop commercial and retail_space on the portion of land that abutted dawsonville highway commercial component petitioner husband hired a firm to design a plan for development and the first plan was finalized in date for the residential component petitioner husband’s activities included engaging a land surveyor to prepare design plans applying for and receiving boat dock permits and extending the permits from through after they expired in the residential component did not progress past the planning stages after development of the residential component stalled petitioner husband focused on the commercial component around petitioner husband was introduced to a representative of sembler co sembler a florida-based company specializing in retail development petitioner husband proposed to sell the commercial component’s land to sembler sembler and petitioner husband entered into a contract for sembler to purchase acres for dollar_figure an acre in early sembler was in the process of assembling tenants including a national supermarket chain and several national retail outlets sembler had dollar_figure of earnest money in escrow and had spent more than dollar_figure in surveys soil testing and concept plans sembler had pulled out of the deal by late because of financial conditions in the real_estate market the commercial component was not physically altered or improved petitioner husband purchased portions of west ahaluna’s land financed with loans from colonial bank colonial and colonial required ongoing appraisals of west ahaluna’s land a date appraisal noted that the economic conditions restricted the development of west ahaluna’s land for three to five years because of an insufficient demand in the real_estate market the appraisal concluded that the highest_and_best_use of the land was investment holding for low- to medium-density residential use after the appraisal petitioner husband placed west ahaluna’s land in a year conservation program in west ahaluna was subject_to a dollar_figure penalty if the land was removed from the conservation program before the 10-year period expired after the tax years at issue petitioner husband applied for and obtained rezoning and annexation into the city of gainesville georgia for dollar_figure 3colonial closed in and its assets were transferred to branch banking trust co for simplicity we will refer to branch banking trust co as colonial for the years after acres which constitutes west ahaluna’s residential component at the time of trial the residential component was under a sales contract west ahaluna reported no income during the tax years at issue petitioners deducted west ahaluna’s expenses on their schedules c as follows expense mortgage interest other interest real_estate_taxes insurance other expenses amortization dollar_figure big_number big_number big_number big_number dollar_figure big_number big_number --- big_number respondent disallowed these expenses claimed on schedules c as trade_or_business deductions in separate adjustments respondent moved the expenses to schedules a and increased investment_expenses and investment miscellaneous expenses subject_to the agi limitation c bc llc in petitioner husband formed bc llc as a single-member llc from to bc llc acquired approximately acres of improved and unimproved land the improved portion included residential homes and one warehouse in petitioner husband engaged a land developer to prepare design plans for acres of bc llc’s property for residential development in petitioner husband submitted an application to have the acres rezoned and annexed into the city of flowery branch georgia the application was approved in petitioner husband did not perform any further development activities for the acres petitioner husband purchased the warehouse property in the property was purchased subject_to a preexisting loan from quantum national bank quantum petitioner husband refinanced the loan in and in a memorandum prepared for quantum's refinance committee bc llc was listed as being in the investment real_estate business in petitioner husband renewed his loan with quantum quantum noted in a memorandum in support of the loan that the property was investment_property petitioners reported rental income from bc llc of dollar_figure and dollar_figure on their and schedules e supplemental income and loss respectively petitioners deducted the following expenses for bc llc on their and schedules e expense advertising mortgage interest depreciation bank fees taxes check reorder fee sec_2012 dollar_figure big_number big_number big_number --- --- dollar_figure big_number big_number big_number respondent disallowed bc llc’s income and expenses reported on petitioners’ schedules e in separate adjustments respondent recharacterized bc llc’s income as investment_income and allowed its expenses as investment_expenses d lumpkin petitioner husband formed lumpkin in as a single-member llc lumpkin purchased approximately acres in dawson county georgia with a dollar_figure loan from colonial the acquired land consisted of timberland and was subject_to a conservation use easement in lumpkin purchased 4petitioners conceded that bc lcc’s activities should not be reported as a rental real_estate business and contend that bc llc’s expenses should be allowed on schedule c approximately additional acres in dawson county for dollar_figure the sellers of the acres financed the purchase lumpkin also owned land in hall county including two rental properties the first rental property had a mobile home that was subject_to a lease dated date the other rental property accommodated mobile homes and two of the mobile homes were leased from date to petitioner husband had two different design plans prepared in for lumpkin’s land in dawson county but he made no further efforts to develop the land colonial noted in a appraisal that development was not financially feasible colonial’ sec_2012 appraisal concluded the best use of the property was investment holding until the market improves petitioners reported rental income from lumpkin of dollar_figure and dollar_figure on their and schedules e respectively in addition petitioners reported the following expenses for lumpkin on their schedules e expense mortgage interest other interest taxes depreciation bank fees amortization dollar_figure big_number big_number big_number big_number --- dollar_figure big_number big_number big_number big_number big_number respondent disallowed lumpkin’s income and expenses reported on schedules e in separate adjustments respondent included lumpkin’s income as investment_income and moved lumpkin’s expenses to schedule a as investment_expenses and investment miscellaneous expenses subject_to the agi limitation iii gainesville market gainesville market owned three contiguous lots in gainesville the first two lots were purchased in for dollar_figure financed by the seller the third lot was purchased in for dollar_figure the three lots make up a strip mall and surrounding parking areas the strip mall’s tenant mix includes a large catholic 5petitioners conceded that lumpkin's activities should not be reported as a rental real_estate business and contend that lumpkin's expenses should be allowed on schedule c church startup churches and small businesses since gainesville market acquired the strip mall it has struggled with low occupancy rates gainesville market has no employees nor an on-site property manager ahp’s employees performed administrative duties such as bookkeeping and payments of expenses keith brown an employee of ahp handled all tenant issues coordinated with repairmen showed prospective tenants retail_space and signed leases gainesville market paid management fees to ahp for mr brown’s services petitioner husband performed some activities pertaining to gainesville market he reviewed approximately different expenses per month during and about to different expenses per month during half of the monthly expenses were for recurring payments ie utilities property taxes and loan payments petitioner husband also approved leases for prospective tenants the leases were usually at set prices and did not involve price negotiations gainesville market reported losses on schedules e for tax_year sec_2012 and sec_2013 of dollar_figure and dollar_figure respectively respondent disallowed the loss deductions for gainesville market pursuant to passive_activity_loss rules under sec_469 iv other business activities of petitioner husband in addition to owning ahp and the conner llcs petitioner husband served as the director ceo cfo secretary or registered agent for the following entities soque llc beachwood crossing property owners association inc christworld inc gainesville pilot services inc hamilton drive office condominium_owners association inc holiday homes financial corp holiday homes inc home jobs worldwide inc home place holding sec_2011 llc lake llc soque llc southeastern grading company the home place mortgage co inc and vision homes inc he also performed duties for other entities during the years at issue including american home builders inc gainesville auto sales llc gainesville pilot services inc and home air inc v loss from ahp petitioner husband’ sec_2013 schedule_k-1 shareholder’s share of income deductions credits etc from ahp reported a sec_1231 loss of dollar_figure petitioners reported the loss on form_4797 sales of business property attached to their income_tax return the loss was reported for depreciable business_assets of ahp respondent disallowed the loss deduction vi net_operating_loss nol on their income_tax return petitioners carried forward a total combined nol consisting of a net_loss of dollar_figure for tax_year and a net_loss of dollar_figure for tax_year respondent disallowed the nol deduction because of passive_activity_loss limitations in date petitioners filed a petition with this court for redetermination of deficiencies that respondent determined for tax_year sec_2010 and sec_2011 in date the parties filed a stipulated decision which provided that there was no deficiency for tax_year vii charitable_contribution_deduction in ahp made a noncash charitable_contribution in the form of a land sale to lanier hills baptist church inc ahp sold the land to the church for dollar_figure the appraised value of the property was dollar_figure ahp’s adjusted_basis was dollar_figure ahp reported a contribution of dollar_figure petitioners reported the dollar_figure contribution on their income_tax return they treated the property as investment_property and as a long-term capital_asset and therefore did not limit the reported amount of the contribution to basis pursuant to sec_170 petitioners did not deduct any amount of the reported contribution because they claimed an overall loss for tax_year after respondent’s adjustments to petitioners’ income the contribution was no longer limited fully respondent allowed a charitable_contribution_deduction of dollar_figure pursuant to the limitation of sec_170 viii preparation of tax returns petitioners do not have any expertise or background in tax starting in and for the tax years at issue they engaged brady ware a public accounting firm to prepare their income_tax returns and to provide a certified financial audit for ahp brady ware had several clients in the real_estate industry including homebuilders brady ware also prepared ahp’s form 1120-s u s income_tax return for an s_corporation thomas marsh was the partner in charge of preparing petitioners’ returns he assigned four certified public accountants c p a s to prepare petitioners’ and ahp’s income_tax returns mr marsh has been a public accountant for over years and represented real_estate professionals he has prepared both individual and corporate tax returns petitioners provided mr marsh with all the necessary information and documentation needed to file their returns for the ahp returns its employees compiled all relevant information and submitted it to brady ware mr marsh relied upon the information ahp’s employees and petitioners provided him to prepare its income_tax returns mr marsh concluded petitioner husband was a real_estate_professional he further concluded that petitioner husband materially participated in the activities of gainesville market bc llc and lumpkin and that these llcs’ activities should be reported on schedules e he concluded that west ahaluna and shoreline should be reported on schedules c mr marsh was in frequent contact with petitioner husband including visits to his office he was aware that no dirt had been moved on any of the land the conner llcs owned mr marsh was aware petitioner husband had not physically developed or excavated any of the land bc llc lumpkin shoreline or west ahaluna held during the tax years at issue opinion i burden_of_proof generally the taxpayer bears the burden of proving the commissioner’s determinations are erroneous rule a 290_us_111 the burden_of_proof may shift to the commissioner if the taxpayer establishes that he or she complied with the requirements of sec_7491 and b to substantiate items to maintain required records and to cooperate fully with the commissioner’s reasonable requests sec_7491 petitioners contend that they meet the requirements of sec_7491 to shift the burden_of_proof to respondent conversely respondent contends the burden has not shifted because petitioners failed to introduce credible_evidence necessary for the burden to shift the resolution of these issues does not depend on which party has the burden_of_proof we resolve these issues on the preponderance of evidence in the record see 131_tc_185 ii capital_loss from the sale of shoreline property shoreline sold all of its property in a single sale at a loss in taxable_year petitioners contend that the character of the loss is ordinary because shoreline held its land in the ordinary course of business respondent contends that the character of the loss is capital because shoreline held its land for investment sec_1221 defines a capital_asset as property held by the taxpayer but does not include property held by the taxpayer primarily_for_sale_to_customers in the ordinary_course_of_his_trade_or_business to determine whether a real_estate asset is a capital_asset the court analyzes the facts and circumstances including factors such as the number extent continuity and substantiality of the sales and the extent of subdividing developing and advertising 417_f2d_905 5th cir no specific factor or combination of factors is controlling 526_f2d_409 5th cir the court_of_appeals for the eleventh circuit to which this case is appealable concluded that frequency and substantiality of sales are highly probative on the issue of holding purpose because the presence of frequent sales ordinarily belies the contention that property is being held for ‘investment’ rather than for ‘sale ’ 615_f2d_171 5th cir shoreline had a single sale over the course of eight years a single sale stands in contrast to cases where the taxpayer held land in the ordinary course of business id pincite at least sales over years boree v commissioner tcmemo_2014_85 at about sales over five years aff’d in part and rev’d 6we follow the relevant precedent of the court_of_appeals to which an appeal would lie see 54_tc_742 aff’d 445_f2d_985 10th cir the court_of_appeals for the eleventh circuit has adopted as binding decisions of the former court_of_appeals for the fifth circuit handed down on or before date see 661_f2d_1206 11th cir see also 837_f3d_1093 11th cir aff’g in part and rev’g in part on other grounds t c memo in part on other grounds 837_f3d_1093 11th cir garrison v commissioner tcmemo_2010_261 slip op pincite at least sales over three years petitioner husband made no effort to sell shoreline’s property during the tax years at issue or during any of the preceding years petitioner husband never advertised shoreline’s property listed shoreline’s property with brokers maintained a sales office or employed a sales force the sale occurred after a third party made an unsolicited offer to petitioner husband shoreline held its property for multiple years without engaging in development-related activities from to petitioner husband secured permits and prepared design plans however from to petitioner husband did nothing to further the development of shoreline’s property the length of time that shoreline’s property sat idle supports capital_loss treatment see boree v commissioner f 3d pincite all the evidence supports the isolated nature of the transaction rather than an ongoing real_estate business shoreline’s expenses consisted of holding costs such as mortgage interest and property taxes in petitioner husband placed shoreline’s land in a conservation program which prohibited development of shoreline’s property accordingly petitioners incurred a capital_loss from the shoreline transaction iii expenses for conner llcs deductions are a matter of legislative grace and a taxpayer must prove his or her entitlement to a deduction 503_us_79 292_us_435 sec_162 and sec_212 allow a deduction for all ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business or for the production_of_income see sec_162 sec_212 miscellaneous deductions under sec_162 are subject_to the floor in sec_67 sec_162 allows a taxpayer to deduct all ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business an ordinary_expense is one that commonly or frequently occurs in the taxpayer’s business 308_us_488 and a necessary expense is one that is appropriate and helpful in carrying on the taxpayer’s business welch v helvering u s pincite the expense must directly connect with or pertain to the taxpayer’s business sec_1_162-1 income_tax regs sec_212 provides in relevant part that an individual taxpayer can deduct all the ordinary and necessary expenses paid_or_incurred for the production_or_collection_of_income or for the management_conservation_or_maintenance_of_property_held_for_the_production_of_income sec_212 and sec_212 applies to income-producing activities that are not a trade_or_business 397_us_572 n 372_us_39 in general sec_163 allows a deduction for all interest_paid or accrued within the taxable_year on indebtedness there is an exception to this general_rule sec_163 provides that in the case of a taxpayer other than a corporation no deduction shall be allowed for personal_interest which is paid_or_accrued during the tax_year personal_interest does not include interest allocable to a trade_or_business or investment_interest sec_163 the amount allowed as a deduction for investment_interest for any_tax year shall not exceed the net_investment_income of the taxpayer for the taxable_year sec_163 petitioners contend that the expenses of the conner llcs are deductible under sec_162 as trade_or_business_expenses respondent contends that the expenses of the conner llcs are not deductible under sec_162 but are deductible investment_expenses under sec_212 and subject_to the limitations of sec_163 petitioners contend that all the activities of the conner llcs and of ahp constitute a single activity for purposes of sec_162 petitioners further contend that all the land the conner llcs held was for development and that the great recession delayed development respondent argues that the llcs are separate and distinct entities for purposes of sec_162 we address each of the parties’ arguments below and conclude that under either approach petitioners’ deductions are limited under sec_212 and sec_163 activity relating to undeveloped real_property is subject_to a facts_and_circumstances_test to determine whether the taxpayer-owner engaged in a trade_or_business under sec_162 91_tc_660 it is not a trade_or_business where development activities are in the exploratory or formative stages christian v commissioner tcmemo_1995_12 among the tests that the courts have come to rely on in determining the nature of the taxpayer’s activities with respect to real_estate are the following the nature and purpose of the acquisition of the property and the duration of the ownership the continuity of sales or sales-related activity over a period of time the volume and frequency of sales the extent to which the taxpayer or his agents have engaged in sales activities by developing or improving the property soliciting customers and advertising and the substantiality of sales when compared to other sources of taxpayer’s income polakis v commissioner t c pincite a conner llcs individually shoreline petitioner husband did not advertise shoreline property or attempt to attract customers shoreline never subdivided graded or improved its land its property remained in the condition it was in on the date of purchase see christian v commissioner tcmemo_1995_12 shoreline had only one sale and that was for the property in its entirety shoreline’s sales activity was neither regular nor continuous for purposes of sec_162 see polakis v commissioner t c pincite its expenses during the years at issue consisted of holding costs petitioner husband placed shoreline’s land in a conservation program in to reduce property taxes the conservation program prohibited development placing land in a conservation program is consistent with an intent of an investor to reduce the property’s carrying cost while waiting for capital appreciation id pincite we conclude that shoreline’s property was held for investment during the tax years at issue see id pincite accordingly petitioners cannot deduct shoreline’s expenses under sec_162 and shoreline’s expenses are deductible subject_to sec_212 and sec_163 west ahaluna west ahaluna’s development never progressed past the exploratory or formative stage petitioner husband had design plans prepared and secured boat slip permits for west ahaluna’s property however he never executed these plans and west ahaluna’s property remained undeveloped during the years at issue west ahaluna never subdivided graded or otherwise improved its properties no sales were ever made petitioner husband made no effort to sell west ahaluna’s property during the tax years at issue although he attempted to sell a portion of west ahaluna’s property to sembler in the sale was ultimately unsuccessful by west ahaluna had held its property for approximately nine years west ahaluna did not incur day-to-day operating_expenses its expenses consisted of holding costs such as mortgage interest and property taxes an appraisal concluded that the best use of the land was holding for investment to reduce holding costs petitioner husband placed west ahaluna’s property in a 10-year conservation program in which further demonstrates that west ahaluna held land for investment see polakis v commissioner t c pincite we conclude that west ahaluna’s property was held for investment during the tax years at issue see id pincite accordingly petitioners cannot deduct west ahaluna’s expenses under sec_162 and its expenses are deductible subject_to sec_212 and sec_163 bc llc bc llc held multiple properties but did not subdivide grade or otherwise prepare them for resale petitioner husband prepared preliminary development plans for a portion of bc llc’s property petitioner husband never executed the plans and the development stalled in the exploratory or formative stage he did not prepare development plans for most of bc llc’s property bank documents list property held by bc llc as investment_property in bc llc had a portion of its property rezoned and annexed into the city of flowery branch the rezoning and annexation occurred after the tax years at issue bc llc made no sales and petitioner husband made no effort to sell bc llc property during the tax years at issue its expenses consisted of holding costs such as mortgage interest and property taxes we conclude that bc llc’s property was held for investment see polakis v commissioner t c pincite accordingly petitioners cannot deduct bc llc’s expenses under sec_162 and its expenses are deductible subject_to sec_212 and sec_163 lumpkin in petitioner husband engaged a land surveyor to prepare preliminary development plans for a portion of lumpkin’s property petitioner husband never subdivided or otherwise improved lumpkin’s property lumpkin did not incur day-to-day development expenses its expenses consisted entirely of holding costs such as mortgage interest and property taxes lumpkin never made any sales and petitioner husband never attempted to sell lumpkin’s property during the years at issue a appraisal concluded the best use of the land was holding for investment we conclude that lumpkin’s property was held for investment see polakis v commissioner t c pincite accordingly petitioners cannot deduct lumpkin’s expenses under sec_162 and its expenses are deductible subject_to sec_212 and sec_163 b conner llcs combined petitioners contend that the conner llcs constitute a single development business and that its development activities rise to the level of an active trade_or_business for purposes of sec_162 they contend that all the land was to be developed as part of a master_plan the total sales during the tax years at issue demonstrate that the conner llcs held property for investment see suburban realty co f 2d pincite petitioner husband sold one parcel of real_estate during the years at issue ie the shoreline sale petitioner husband made no effort to sell any of the conner llcs’ property during the years at issue he never advertised the properties or listed them for sale the lack of development of the properties indicates that the conner llcs held land for investment petitioner husband never subdivided or otherwise improved any property the development of each property stalled in the planning stage and petitioner husband never executed any development plan each property remained in the condition it was in on the date of purchase carrying_on_a_trade_or_business requires more than just preliminary planning and permitting christian v commissioner tcmemo_1995_12 none of the conner llcs incurred day-to-day operating_expenses related to an ongoing development business the conner llcs incurred costs related to holding property for investment to reduce holding costs petitioner husband placed portions of shoreline and west ahaluna property in conservation programs actions indicative of holding land for investment see polakis v commissioner t c pincite bank appraisals treated the land as being held for investment petitioners argue that the activities of ahp the conner llcs and petitioner husband in his individual capacity constitute a single integrated real_estate business however t he determination of whether an entity is actively engaged in a trade_or_business must be made by viewing the entity in a standalone capacity and not in conjunction with other entities 137_tc_46 aff’d 727_f3d_621 6th cir ahp is an s_corporation and therefore it is a separate_entity for tax purposes see id finding that the activities of a taxpayer’s wholly owned s_corporation could not be attributed to the taxpayer’s wholly owned llc which was a disregarded_entity we will not attribute ahp’s real_estate activities to the conner llcs or to petitioner husband the activities of the conner llcs as grouped together are not a trade_or_business petitioners cannot claim expenses for these entities as deductions under sec_162 petitioners’ expense deductions for the conner llcs are subject_to the limitations of sec_212 and sec_163 iv sec_469 passive_activity_loss limitations taxpayers are allowed deductions for certain business and investment_expenses under sec_162 and sec_212 however if the taxpayer is an individual sec_469 generally disallows any passive_activity_loss for the taxable_year and treats it as a deduction allocable to the same activity for the next taxable_year sec_469 and b a passive_activity_loss is defined as the excess of the aggregate losses from all passive activities for the taxable_year over the aggregate income from all passive activities for that year sec_469 a passive_activity is any trade_or_business in which the taxpayer does not materially participate sec_469 a trade_or_business includes any activity for which expenses are allowable as a deduction under section sec_212 sec_469 a taxpayer is treated as materially participating in an activity only if his or her involvement in the operations of the activity is regular continuous and substantial sec_469 rental_activity is generally treated as a per se passive_activity regardless of whether the taxpayer materially participates sec_469 sec_469 provides an exception to the rule that a rental_activity is per se passive the rental activities of a taxpayer in a real_property_trade_or_business who meets certain designated requirements a real_estate_professional are not subject_to the per se rule_of sec_469 sec_469 see kosonen v commissioner tcmemo_2000_107 slip op pincite sec_1_469-9 c income_tax regs rather the rental activities of a real_estate_professional are subject_to the material_participation requirements of sec_469 see sec_1_469-9 income_tax regs a taxpayer qualifies as a real_estate_professional if more than one-half of the personal services performed in trades and businesses by the taxpayer during the taxable_year are performed in real_property trades_or_businesses in which the taxpayer materially participates and the taxpayer performs more than hours of services during the taxable_year in real_property trades_or_businesses in which the taxpayer materially participates sec_469 and ii mere financing of or investing in real_property is not included in the definition of real_property_trade_or_business see sec_469 see also coastal heart med grp inc v commissioner tcmemo_2015_84 in the case of a joint_return the above requirements are satisfied if either spouse separately satisfies these requirements sec_469 for the purposes of determining whether a taxpayer is a real_estate_professional a taxpayer’s material_participation is considered separately with respect to each rental property unless the taxpayer makes an election to treat all interests in rental real_estate as a single rental real_estate activity sec_469 sec_1_469-9 income_tax regs a taxpayer makes the election by filing a statement with the taxpayer’s original income_tax return for the taxable_year sec_1_469-9 income_tax regs petitioners filed a statement with their income_tax return electing to treat all of their interests in rental real_estate as a single rental real_estate activity since petitioners concede that bc llc and lumpkin were not real_estate activities during the tax years at issue there is only one rental property and the election does not apply a material_participation in gainesville market petitioners contend that petitioner husband was a real_estate_professional first we must determine whether petitioner husband participated in a real_property_trade_or_business real_property_trade_or_business means any real_property development redevelopment construction reconstruction acquisition conversion rental operation management leasing or brokerage trade_or_business sec_469 petitioner husband participated in the operations of gainesville market which is a rental business second we must determine whether petitioner husband materially participated in the business of gainesville market a taxpayer is considered to have materially participated in a particular rental trade_or_business if one of seven tests set forth in the regulations is met sec_1_469-5t temporary income_tax regs fed reg date sec_1_469-9 income_tax regs petitioners argue that petitioner husband satisfied the following tests from sec_1_469-5t temporary income_tax regs supra the individual’s participation in the activity for the taxable_year constitutes substantially_all of the participation in such activity of all individuals including individuals who are not owners of interests in the activity for such year the individual participates in the activity for more than hours during the taxable_year and such individual’s participation in the activity for the taxable_year is not less than the participation in the activity of any other individual including individuals who are not owners of interests in the activity for such year the individual materially participated in the activity determined without regard to this paragraph a for any five taxable years whether or not consecutive during the ten taxable years that immediately precede the taxable_year based on all of the facts and circumstances the individual participates in the activity on a regular continuous and substantial basis during such year a taxpayer may establish hours of participation by any reasonable means sec_1_469-5t temporary income_tax regs fed reg date contemporaneous daily reports are not required if the taxpayer can establish participation by other reasonable means id reasonable means include appointment books calendars or narrative summaries that identify the services performed and the approximate number of hours spent performing such services id we have noted previously that we are not required to accept a postevent ballpark guesstimate or the unverified undocumented testimony of taxpayers see eg 135_tc_365 lum v commissioner tcmemo_2012_103 estate of stangeland v commissioner tcmemo_2010_185 petitioners did not provide the exact number of hours that petitioner husband spent on the operations of gainesville market during the tax years at issue petitioner husband failed to provide contemporaneous time records such as appointment books calendars or time logs contemporaneous daily time reports logs or similar documents are not required if other reasonable means of establishing a taxpayer’s participation exist sec_1_469-5t temporary income_tax regs supra petitioner husband contends that he spent more time than any other person on the operations of gainesville market he contends that he spent more than hours each year and that no individual performed more work than he did for gainesville market mr brown handled the day-to-day operations of gainesville market such as dealing with tenants and repairmen tenants testified that mr brown was the property manager because he was their contact other ahp employees performed administrative duties for gainesville market such as bookkeeping and collecting rent without quantification of the work performed by mr brown and the other ahp employees we cannot determine whether petitioner husband’s participation constitutes substantially_all of the participation with respect to any particular property see shiekh v commissioner tcmemo_2010_126 slip op pincite stating that the taxpayer did not satisfy substantially_all test where tenants were responsible for the maintenance of that property therefore petitioner husband has not satisfied the test under sec_1_469-5t temporary income_tax regs supra petitioners contend that petitioner husband spent more than hours per year on the operations of gainesville market petitioner husband claimed that he spent time reviewing and approving invoices making decisions regarding tenant issues approving and negotiating leases and renegotiating outstanding loans petitioners did not provide sufficient documentation to substantiate the time petitioner husband allocated to these activities gainesville market incurred few expenses and half of its expenses were for recurring payments petitioner husband testified that the lease terms were non- negotiable petitioners also failed to provide specific evidence regarding how much time petitioner husband spent on negotiating loans although petitioners provided the loan agreements they did not provide emails letters draft loan agreements or other evidence that establishes the time petitioner husband spent negotiating loans petitioners also provided checks and bills for gainesville market these records provide no information regarding how many hours petitioner husband spent on a given day on the operations of gainesville market the records merely reflect a postevent ballpark guesstimate which does not meet the requirements of sec_1_469-5t temporary income_tax regs supra petitioner husband contends that his activities for gainesville market have been the same for the last years petitioners failed to introduce sufficient evidence to establish petitioner husband’s material_participation in gainesville market for any of the preceding_taxable_years petitioner husband does not meet the test under sec_1_469-5t temporary income_tax regs supra petitioners contend that petitioner husband materially participated under the facts_and_circumstances_test to satisfy the facts_and_circumstances_test under sec_1_469-5t temporary income_tax regs supra a taxpayer must participate in an activity for more than hours during the taxable_year sec_1_469-5t temporary income_tax regs fed reg feb we concluded previously that petitioner husband did not establish that he participated for more than hours in the operations of gainesville market even if the 100-hour requirement was met petitioner husband would not meet the requirements of the facts_and_circumstances_test a taxpayer’s management activities are not taken into account under the facts_and_circumstances_test if another person receives compensation_for management services relating to the activity or if another person spends more time on management services relating to the activity of the taxpayer sec_1_469-5t and b temporary income_tax regs supra in gainesville market paid ahp for the management services of mr brown and he participated more than petitioner husband in the operations of gainesville market we conclude that the evidence shows that petitioner husband did not materially participate in a real_estate activity during the tax years at issue for gainesville market for the tax years at issue petitioner husband does not meet the requirement of sec_469 sec_469 applies to the deduction of losses with respect to gainesville market b material_participation in the conner llcs petitioners contend that petitioner husband materially participated in the conner llcs they conceded that none of these properties were rental properties petitioner husband was the sole member for each conner llc none of the conner llcs had employees petitioner husband contends that he spent more than hours performing services for each entity each year mr conner testified that he worked long hours and weekends not only did he have the responsibility of ahp he was involved in numerous other entities an employee of ahp had the accounting and bookkeeping responsibilities of the conner llcs petitioner husband hired a land surveyor to design plans for the properties that the conner llcs held the evidence does not show that petitioner husband participated more than anyone else in the activities of the conner llcs petitioners failed to provide contemporaneous time records or any other credible_evidence to support the time petitioner husband allocated to each conner llc petitioner husband failed to provide sufficient evidence of material_participation in the conner llcs for any of the seven tests under sec_1 5t a temporary income_tax regs supra we conclude the evidence shows that petitioner husband did not materially participate in the activities of the conner llcs for the tax years at issue sec_469 applies to the loss deductions claimed for each of the conner llcs v net_operating_loss sec_172 permits a deduction for the full amount of allowable nol carrybacks from subsequent years and carryovers from previous years as long as taxable_income for the current_year is not less than zero sec_172 b as with all deductions taxpayers are required to maintain adequate_records substantiating a claimed nol deduction sec_6001 see 115_tc_605 scharringhausen v commissioner tcmemo_2012_ at in petitioners sustained an nol which they carried forward to the parties previously settled petitioners’ deficiency for tax_year in the case at docket no in that settlement the parties agreed that petitioners had no deficiency for tax_year and the court entered a stipulated decision in this case petitioners argue that the doctrine_of res_judicata precludes respondent from disallowing the nol carryforward for tax_year according to rule a party shall set forth in the pleadings an affirmative defense including res_judicata if an affirmative defense is not pleaded it is deemed to be waived 50_tc_963 petitioners did not raise res_judicata in their original or amended petition and therefore have waived a res_judicata argument even though the res_judicata defense is barred res_judicata does not apply in this case because the previous case did not involve the same issues 561_f3d_1275 11th cir the settlement did not address whether there was any loss in that could be carried over respondent contends petitioners did not offer any evidence to support the nol carryforward petitioners contend that they have shown that petitioner husband materially participated in rental activities for and that is enough to substantiate the loss petitioners’ evidence does not show the amount of the loss to be carried forward from previous tax years we sustain respondent’s determination with respect to the nol carryforward vi bargain sale the amount of any charitable_contribution of property otherwise taken into account for the deduction under sec_170 must be reduced by the amount of gain that would not have been long-term_capital_gain ie by the amount of gain that would have been ordinary gain if the property contributed had been sold by the taxpayer at its fair_market_value sec_170 129_tc_146 aff’d 560_f3d_1196 10th cir in ahp sold undeveloped land in a bargain sale to lanier hills baptist church petitioners claimed a charitable_contribution_deduction for the difference between the sale price and the land’s fair_market_value petitioners contend that ahp held the land for investment respondent contends ahp held the land as an ordinary asset and therefore petitioners’ charitable_contribution_deduction is limited under sec_170 petitioners’ contribution is limited to the difference between the sale price and ahp’s cost_basis if we find that ahp held the land in the ordinary course of business see id conversely petitioners’ contribution is the difference between the sale price and the land’s fair_market_value if we find that ahp held the land as a long-term capital_asset see id ahp acquired the land in and sold it to lanier hills baptist church in ahp held all its land for investment and did not sell land in the ordinary course of business see polakis v commissioner t c pincite ahp held the land as a long-term capital_asset at the time of sale and therefore sec_170 does not apply vii losses from ahp sec_1231 provides rules for the treatment of gains and losses for property used in a trade_or_business and involuntary_conversion petitioner husband’s schedule_k-1 from ahp for tax_year shows a net sec_1231 loss of dollar_figure petitioners contend that the loss is for the disposition of depreciable assets petitioners claimed a loss deduction from ahp of dollar_figure for tax_year ahp closed two sales centers and renovated model homes in petitioners contend that these losses pertain to the disposition of depreciable business_assets petitioners’ c p a mr marsh testified about the preparation of the schedule_k-1 and ahp’s income_tax return he explained how the amount of the loss was reached and how depreciation schedules were maintained the assets ahp disposed of were in sales centers and model homes these assets were depreciable_property we conclude that petitioners are entitled to a deduction for the loss of dollar_figure viii accuracy-related_penalties respondent determined for each of the tax years in issue that petitioners are liable for an accuracy-related_penalty pursuant to sec_6662 respondent contends that petitioners are liable for the accuracy-related_penalty for each year on alternative grounds the underpayment is attributable to negligence or disregard of rules or regulations within the meaning of sec_6662 or it is attributable to a substantial_understatement_of_income_tax within the meaning of sec_6662 an understatement is substantial if it exceeds the greater of dollar_figure or of the income_tax required to be shown on the return for the taxable_year sec_6662 only one accuracy-related_penalty may be applied with respect to any given portion of an underpayment even if that portion is subject_to the penalty on more than one of the grounds set out in sec_6662 sec_1_6662-2 income_tax regs the commissioner bears the burden of production with respect to this penalty see sec_7491 once the commissioner has met this burden the taxpayer must provide persuasive evidence that the commissioner’s determination was incorrect see rule a 116_tc_438 the sec_6662 penalty does not apply with respect to any portion of the underpayment for which it is shown that the taxpayer had reasonable_cause and acted in good_faith sec_6664 assuming without finding that respondent has met the burden of production for the sec_6662 penalty on both alternative grounds we consider whether petitioners had reasonable_cause and acted in good_faith to determine whether a taxpayer acted with reasonable_cause and in good_faith all of the pertinent facts and circumstances are taken into account sec_1_6664-4 income_tax regs for purposes of sec_6664 a taxpayer may be able to establish reasonable_cause and good_faith by showing reliance on professional advice see id see also sec_1_6664-4 income_tax regs to establish good_faith and reasonable_cause through reliance on professional advice the taxpayer must prove by a preponderance_of_the_evidence that t he adviser was a competent professional who had sufficient expertise to justify reliance the taxpayer provided necessary and accurate information to the adviser and the taxpayer actually relied in good_faith on the adviser’s judgment 115_tc_43 aff’d 299_f3d_221 3d cir brady ware prepared petitioners’ and income_tax returns it is a public accounting firm that has clients in the real_estate industry brady ware advised petitioners to report the expenses for shoreline and west ahaluna on schedules c and to report the sale of shoreline’s property as an ordinary_loss it also advised petitioners to report the income and expenses of bc llc and lumpkin on schedules e mr marsh was in charge of preparing petitioners’ income_tax returns and ahp’s income_tax returns he testified that petitioners were relying upon him to prepare an accurate return and he decided which forms should be used for the reporting of various entities mr marsh was a competent professional who had sufficient expertise to justify reliance petitioners provided complete and accurate records to brady ware and relied on brady ware to properly prepare their returns mr marsh testified that he had all the necessary information to prepare petitioners’ income_tax returns petitioners relied on brady ware’s advice and took positions on their returns consistent with its advice because of the complexity of petitioners’ income_tax returns and the experience of mr marsh and brady ware it was reasonable for petitioners to rely upon their advice we find that petitioners are not liable for the accuracy-related_penalties under sec_6662 we have considered all arguments the parties made and to the extent we did not mention them above we conclude they are moot irrelevant or without merit to reflect the foregoing decision will be entered under rule


office_of_chief_counsel internal_revenue_service memorandum number release date cc psi clangley preno-133522-10 uilc date date to holly mccann chief excise_tax program from frank boland chief cc psi subject sales of taxable_fuel to state and local governments resales to other state and local governments this memorandum responds to your date request for assistance regarding certain fuel sales to state and local governments states this advice may not be used or cited as precedent generally the internal_revenue_code code allows a credit refund or payment except for the amount attributable to the leaking underground storage tank tax which is excluded from this discussion related to gasoline diesel_fuel or kerosene taxable_fuel that has been taxed and that is sold to a state for the state’s exclusive use this system is generally administered through claims by registered ultimate vendors uv that sell taxable_fuel to states at a tax-excluded price and registered credit card issuers that bill states at a tax-excluded price on the state’s purchase of taxable_fuel with their credit cards typically a uv will sell taxed taxable_fuel to a state at a tax-excluded price and make the claim itself alternatively a state will purchase taxable_fuel using a credit card the credit card issuer will bill the state for the taxable_fuel at a tax-excluded price and make the claim itself the service has become aware of situations where one state purchases taxable_fuel at a tax-excluded price because it is for its exclusive use and then resells it to another state for the latter state’s exclusive use for example a state-to-state sale happens when a county and a city want to consolidate resources the county purchases enough taxable_fuel for its own use as well as that of the city then sells taxable_fuel to the city for the city’s exclusive use or allows a city employee to purchase taxable_fuel with a preno-133522-10 credit card issued to the city at county facilities which will also be for the city’s exclusive use you asked the following questions regarding the validity of claims when states sell the taxable_fuel to other states will this resale of taxable_fuel from the first state to the second state change the character of the first sale as being for the exclusive use of a state if the answer to question is no is the initial state required to obtain a nontaxable_use certificate or other similar certificate on the sales of taxable_fuel to the subsequent state similarly does the initial state become a uv which would require it to register as uv buy the taxable_fuel probably at a tax-included price and then make its own uv claim when it sells the taxable_fuel to another state for purposes of the form_8849 claim_for_refund of excise_tax schedule sales by registered ultimate vendors which requires the uv to list the name and taxpayer_identification_number of the state to which the uv sold taxable_fuel must the uv list the first state or the state that actually used the taxable_fuel may the state that purchased the taxable_fuel by certifying that the fuel will be used for the exclusive use of a state sell such fuel to a federal_agency without violating the terms of the certificate sec_4081 imposes a tax on certain removals entries and sales of taxable_fuel nothing in the code exempts these transactions from tax simply because the person otherwise liable for tax or that person’s buyer is a state rather the code allows relief from the amount of the tax by certain credits refunds and payments which under prescribed conditions are available to registered credit card issues registered ultimate vendors or the state itself the type of claim that a uv or a credit card issuer may make varies depending on the identity of the claimant and the type of taxable_fuel upon which the claimant is making the claim however there are certain conditions that are required by each type of claim first the claimant must be registered under sec_4101 second sec_4081 must have imposed tax prior to the sale of the taxable_fuel to the state third the sale to the state must be made for the exclusive use of a state fourth the state must sign a certificate under penalties of perjury certifying that the taxable_fuel is for the exclusive use of the state and the claimant must have no reason to believe that any information in the certificate is false fifth the claimant generally must have borne the burden of the tax or received the state’s written consent to the allowance of the claim preno-133522-10 in revrul_68_141 1968_1_cb_483 a municipality purchased gasoline tax free for its exclusive use but resold some of the gasoline to a county for use by its sheriff’s department the ruling holds that the resale of gasoline to the county is a disposition for the exclusive use of state_or_local_government and is not taxable in example of revrul_94_81 1994_2_cb_412 the tribal government of a federally recognized indian_tribe which is treated like a state in this example purchased gasoline and diesel_fuel for resale at a retail service station located on indian lands the ruling holds that there is no exemption that would allow a state or an indian_tribal_government to purchase fuel tax free for resale to consumers therefore fuel could not be sold tax free to the tribal government for resale to consumers and no one could claim a credit or payment equal to the tax previously imposed although revrul_68_141 was issued before the gasoline taxing structure was changed to its present form the general holding of the ruling is still valid under current law that is the sale of gasoline from one state to another state for that state’s exclusive use does not change the character of the original sale as being one for the exclusive use of a state_or_local_government thus claims by a registered uv or registered credit card issuer are not invalid simply because their state customer is going to resell the taxable_fuel in question to another state for that state’s exclusive use conversely if a potential claimant knows that its state customer will resell the taxable_fuel to a person that is not a state such as a federal_agency then the potential claimant knows that some information in the certificate is false and it could not make a valid claim because the character of the initial sale does not change when a state sells taxable_fuel to another state the first state is not required to obtain a formal nontaxable_use certificate from the second state similarly the first state does not become a uv by selling taxable_fuel to a second state therefore the first state is neither required to register as a uv nor required to reimburse the actual uv for the amount of the tax and subsequently make its own uv claim for that amount however it is incumbent upon both states to maintain sufficient records to demonstrate that the taxable_fuel was used exclusively for_the_use_of a state accordingly if a state purchases taxable_fuel for its exclusive use certifying as such to either a uv or credit card issuer and then subsequently resells the fuel to another state for that state’s exclusive use the answers to your questions are as follows the resale of taxable_fuel from the first state to the second state for the second state’s exclusive use does not change the character of the first sale because the fuel is for the exclusive use of a state because the character of the initial sale does not change the first state does not need to obtain a formal nontaxable_use certificate from the second state and it does not become a uv preno-133522-10 for purposes of the form_8849 schedule the uv should list the state to which it initially sold the fuel the state that purchased the taxable_fuel by certifying that the fuel will be used for the exclusive use of a state may not sell such fuel to a federal_agency without violating the terms of the certificate federal agencies are not states and therefore such fuel would not be going for the exclusive use of a state see revrul_94_81 please call charles j langley jr at if you have any further questions


number release date id office uilc cca_2011022810433726 -------------- from ---------------------------- sent monday date am to -------------------- cc ------------------------------------------ subject fw poa question -------- -- this e-mail follows up on our earlier conversation as we discussed a husband can be a poa for a wife courts are loath to deny a person the representative of their choice that said the husband as poa has an obligation under circular_230 to cooperate with exam and pass information on to his wife if husband is not cooperating including delaying the procedures the agent should consider whether the by-pass procedures outlined in the irm may be used if there is any question as to the truthfulness of the information being provided by the husband the agent has the ability to summons the wife and have her personally testify to the matters at issue due to potential conflict of interest between the husband and wife with regard to certain of their business ventures you also asked whether we could insist on the wife signing a waiver of the conflict of interest as a poa the husband is bound by circular_230 and the conflict of interest provisions thereunder the agent can ask the husband if he has received informed consent and ask for it in writing but only if there is an actual conflict not the potential for a conflict ------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ----------------- please let me know if you have any further questions --------------------------------------------------------------------------------------------------------------------- ------------------------------------- ------------- ---------------------


department of the treasury internal_revenue_service washington d c uniform issue list apr - tax_exempt_and_government_entities_division legend taxpayer a amount a amount b amount c amount d amount e ira x ira y financial_institution m dear this is in response to a letter dated date submitted on your behalf by your authorized representative in which you request a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code the code the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a age iras x and y totaling amount e from financial_institution m taxpayer a asserts that her failure to accomplish a rollover within the 60-day period prescribed by sec_408 was due to the failure of a representative of financial_institution m to follow her instructions taxpayer a represents that amount e has not been used for any other purpose taxpayer a met with a representative of financial_institution m on october e which was received on october intending to into a rollover ira amount e was the sum of amount a minus federal_income_tax _ represents that taxpayer a received a distribution from deposit amount ----------- - 2q0u727uz3 page withholding in amount b from ira x and amount c minus withholding in amount d from ira y however the financial_institution m representative erred and deposited amount e into a non-ira account during date financial_institution m learned of the error and deposited amount e date financial_institution m wrote a because of a misunderstanding the funds were deposited into a non-ira account into an ira on letter acknowledging that based on the facts and representations you request a ruling that the internal_revenue_service waive the 60-day rollover requirement with respect to the distribution of amount e contained in sec_408 of the code the code’ sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that the rollover provisions of sec_408 do not apply to any amount required to be distributed under sec_408 sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or - ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 page sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the rollover provisions of sec_408 do not apply to any amount required to be distributed under sec_408 sec_408 of the code provides that the secretary may waive the day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 of the code revproc_2003_16 2003_4_irb_359 date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization ‘incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and documentation submitted by taxpayer a is consistent with her assertion that her failure to accomplish a rollover of amount e within the 60-day period prescribed by sec_408 was due to the failure of a representative of financial_institution m to follow her instructions therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution to taxpayer a of amount e provided all other requirements of code sec_408 except the 60-day requirement are met with respect to such ira contribution the rollover of amount e to the ira established by taxpayer a with financial_institution m will be considered a rollover_contribution within the meaning of code sec_408 this ruling does not authorize the rollover of amounts that are required to be distributed by sec_401 of the code no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto page pursuant to a power_of_attorney on file with this office a copy of this letter_ruling is being sent to your authorized representative this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent if you wish to inquire about this ruling please contact please address all correspondence to se t ep ra t3 sincerely yours frances v sloan manager employee_plans technical group enclosures deleted copy of letter_ruling notice of intention to disclose


internal_revenue_service number release date index number -------------------------------------------- -------------------------------------------------------- -------------------------- ---------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------------ telephone number -------- ------ ------- refer reply to cc psi plr-133224-15 date date -------------------------------------------- x ------------------------------------------ -------------- state ------------------- d1 ---------------------------- d2 a -------------------- dear ------------------ this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to make an election under sec_754 of the internal_revenue_code code facts the information submitted states that x is a state limited_liability_company that is classified as a partnership for federal tax purposes a a member of x died on d1 x inadvertently failed to make a timely election under sec_754 for its taxable_year ended d2 x represents that it has acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government law sec_743 provides in pertinent part that in the case of a transfer of an interest in a partnership by sale_or_exchange or upon the death of a partner a partnership with respect to which an election provided in sec_754 is in effect will increase the adjusted_basis of the partnership property by the excess of the basis to the plr-133224-15 transferee partner of his interest in the partnership over his proportionate share of the adjusted_basis of the partnership property or decrease the adjusted_basis of the partnership property by the excess of the transferee partner's proportionate share of the adjusted_basis of the partnership property over the basis of his interest in the partnership sec_743 further provides that such increase or decrease shall constitute an adjustment to the basis of partnership property with respect to the transferee partner only sec_754 provides in part that if a partnership files an election in accordance with the regulations prescribed by the secretary the basis of the partnership property is adjusted in the case of a transfer of a partnership_interest in the manner provided in sec_743 such an election shall apply with respect to all distributions of property by the partnership and to all transfers of interests in the partnership during the taxable_year with respect to which the election was filed and all subsequent taxable years sec_1_754-1 of the income_tax regulations provides in part that an election under sec_754 to adjust the basis of partnership property under sec_743 with respect to a transfer of an interest in a partnership shall be made in a written_statement filed with the partnership return for the taxable_year during which the transfer occurs for the election to be valid the return must be filed not later than the time prescribed by sec_1 e including extensions thereof for filing the return for the taxable_year sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based solely on the information submitted and the representations made we plr-133224-15 conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to make an election under sec_754 effective for its taxable_year ended d2 and thereafter the election should be made in a written_statement filed with the appropriate service_center for association with x’s return for its taxable_year ended d2 a copy of this letter should be attached to the election except as specifically set forth above we express or imply no opinion concerning the federal tax consequences of the facts described above under any other provision of the code and the regulations thereunder this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination in accordance with the power_of_attorney on file with this office we are sending a copy of this letter to x's authorized representatives sincerely associate chief_counsel passthroughs and special industries by _______________ mary beth carchia senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number ----------------------------- --------------------------------------- ------------------------ in re ----------------- --------------------------------------- ---------------------------------------- department of the treasury washington dc person to contact --------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 - plr-142860-03 date september ----------------- --------------------------- --------------------------- x -------------------------------------------------- date date dear -------------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts shareholders of x desired that x elect s_corporation treatment effective on date but the election to be treated as an s_corporation was not timely filed accordingly x requests a ruling that it will be treated as an s_corporation effective date law and analysis corporation x was incorporated on date and began doing business date the sec_1362 provides that a small_business_corporation may elect to be an s sec_1362 provides the rule on when an s election will be effective sec_1362 provides that if no sec_1362 election is made for any plr-142860-03 sec_1362 provides 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 taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply x did not 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 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 date within days from the date of this letter x should submit a properly completed form_2553 effective date with a copy of this letter attached to the relevant service_center the federal_income_tax consequences of the transaction described above under any other provision of the code specifically no opinion is expressed concerning whether x is in fact an s_corporation for federal tax purposes the code provides that it may not be used or cited as precedent letter is being sent to the taxpayer dianna k miosi this ruling is directed only to the taxpayer s requesting it sec_6110 of except as specifically set forth above no opinion is expressed or implied as to in accordance with the power_of_attorney on file with this office a copy of this dianna k miosi chief branch sincerely plr-142860-03 enclosures copy of this letter copy for sec_6110 purposes office of the associate chief_counsel passthroughs and special industries plr-142860-03 ---------------------------------- ------------------------- ------------------------------------------------ ------------------------------------------------- ------------------------------------------------------------------------ --------------------------------------------------------- ------------------------------------------


tax_exempt_and_government_entities_division department of the treasury internal_revenue_service washington d c release number release date date date vil dear employer_identification_number person to contact and id number contact telephone number fax number this is in response to your request dated date for rulings as to whether your establishment of a central counterparty structure pursuant to which you will become the central counterparty to transactions that take place in the markets you administer will affect your status as an organization described in sec_501 of the internal_revenue_code the code or will give rise to income from an unrelated_trade_or_business within the meaning of sec_513 facts you are recognized as an organization exempt from federal_income_tax under sec_501 you are organized and operated exclusively for the purpose of lessening the burdens of government within the meaning of sec_1_501_c_3_-1 of the income_tax regulations the regulations you were formed as the independent system operator iso and are authorized by the federal energy regulatory commission ferc for that jurisdiction you were created electric service in to ensure low-cost and reliable ferc is responsible for regulating the transmission and wholesale sale of electric energy in interstate commerce to ensure reliability of electric service nondiscriminatory access to transmission facilities and that rates charged are reasonable prior to your creation ferc integrated utilities that owned generation transmission and distribution facilities body directly regulated the vertically as part of the process of deregulation and the introduction of market competition into the wholesale electricity market ferc independent open and fair access to electricity transmission systems facilitating market-based wholesale electricity rates and ensuring the effective and reliable management and operation of the bulk power system in your state charged you with providing in furtherance of that responsibility you administer markets for the wholesale purchase and sale of electric energy and related products and services in order to cover your operating_expenses you collect fees from the producers and wholesale purchasers of electric power in your region these fees as well as the rules and procedures for the electricity markets you administer are set forth in your tariffs which must be approved by ferc the contracts agreements or transactions offered under your ferc-approved tariffs are for the purchase and sale of electric energy and related products and services including related financial transactions which do not involve physical delivery of electricity currently the transactions you administer are not structured as direct bilateral contracts e individual purchase and sale contracts between a particular seller and a particular purchaser rather you administer central markets for the benefit of market participants each market participant has established a settlement account with you and you settle the various positions of the market participants on an aggregate basis while you act as the administrator of the markets clearing and settling purchases and sales by market participants you do not take title to the electric energy and related products and services purchased and sold in the markets ferc monitors the credit practices of the wholesale electric markets in its order no credit reforms in organized wholesale electric markets date ferc j big_number and its order no 741-a credit reforms in organized wholesale electric markets date ferc big_number ferc raised a question about the ability of an iso or a regional transmission organization rto in the event of the bankruptcy of a market participant to set off or net the market positions of the bankrupt market participant you state that ferc’s concern is that an iso or rto might not satisfy the mutuality requirement for setoff when those obligations are based upon different purchase and sale transactions because there is potential ambiguity as to the role of the iso or rto in the transactions ferc therefore directed you as well as other isos and rtos to submit a compliance filing with a proposed tariff revision that includes one of the following options establish yourself as a central counterparty to transactions with market participants require market participants to provide a security_interest in their transactions in order to establish collateral requirements based on net exposure propose another alternative which provides the same degree of protection as the two above-mentioned methods or choose none of the three above alternatives and instead establish credit requirements for market participants based on their gross obligations in response to the specific ferc orders above you intend to pursue option tariff amendments proposing to establish yourself as the central counterparty to all transactions that take place in the markets you administer specifically you will take title to the electric energy and related products and services purchased and sold in the markets is the best balance between fostering market liquidity and efficiency and minimizing the risk of defaults all transactions in which you engage will be pursuant to a ferc-approved tariff the revisions to the tariff establishing you as central counterparty will be filed with ferc and will go into effect only if approved by ferc you concluded that option you have represented that your activities as the central counterparty to transactions in the markets you administer will not require an amendment to any of your organizing documents or any change to your organization will require only minor revisions to your ferc-approved tariff will result in no net_profit_or_loss to you and will not affect market clearing prices for electric energy and related products and services in the wholesale electric markets you administer rulings requested your establishment and implementation of a central counterparty structure pursuant to which you will become the central counterparty to transactions consummated through the markets you administer will not adversely affect your status as an organization exempt from federal_income_tax under sec_501 of the code the revenues you receive by virtue of being the central counterparty to transactions consummated through the markets you administer will not be classified as income from an unrelated_trade_or_business within the meaning of sec_513 law sec_501 of the code exempts from federal_income_tax a corporation organized and operated exclusively for charitable educational and other purposes provided that no part of its net_earnings inures to the benefit of any private_shareholder_or_individual sec_511 of the code imposes a tax on the unrelated_business_taxable_income of organizations described in sec_501 sec_512 of the code states that the term unrelated_business_taxable_income means the gross_income derived by any organization from any unrelated_trade_or_business as defined in sec_513 regularly carried on by it less the applicable deductions and computed with the modifications in sec_512 sec_513 of the code provides that the term unrelated_trade_or_business means in the case of any organization subject_to the tax imposed by sec_511 any trade_or_business the conduct of which is not substantially related aside from the need of such organization for income or funds or the use it makes of the profits derived to the exercise or performance by such organization of the purpose or function constituting the basis for its exemption under sec_501 sec_1_501_c_3_-1 of the regulations provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such purposes described in sec_501 of the code an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 of the regulations provides that an organization may be recognized as exempt under sec_501 of the code if it is operated exclusively for one or more of the following purposes religious charitable scientific testing for public safety literary educational or prevention of cruelty to children or animals sec_1_501_c_3_-1 of the regulations provides that the term charitable is used in sec_501 of the code in its generally accepted legal sense this term includes relief of the poor and distressed or of the underprivileged the erection of public buildings monuments or works and lessening the burdens of government it also includes the promotion of social welfare by relieving the poor and distressed or the underprivileged combating community deterioration lessening neighborhood tensions and eliminating prejudice and discrimination sec_1_513-1 of the regulations provides that gross_income derives from unrelated_trade_or_business within the meaning of sec_513 of the code if the conduct of the trade_or_business which produces the income is not substantially related other than through the production of funds to the purposes for which exemption is granted sec_1_513-1 of the regulations provides that a trade_or_business is related to exempt purposes only where the conduct of the business activities has causal relationship to the achievement of exempt purposes other than through the production_of_income a trade_or_business is substantially related only if the causal relationship is a substantial one thus for the conduct of trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of the services from which the gross_income is derived must contribute importantly to the accomplish of those purposes revrul_85_1 1985_1_cb_178 and revrul_85_2 1985_1_cb_178 set out a two-part test for determining whether an organization's activities are lessening the burdens of government first it is necessary to determine whether the governmental_unit considers the organization's activities to be its burden the second part of the test is whether these activities actually lessen the burdens of the government an activity is a burden of the government if there is an objective manifestation by the governmental_unit that it considers the activities of the organization to be its burden the interrelationship between the governmental_unit and the organization may provide evidence that the governmental_unit considers the activity to be its burden whether the organization is actually lessening the burdens of government is determined by considering all relevant facts and circumstances in 326_us_279 66_sct_112 90_led_67 c b the court stated that the presence of a single nonexempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes ruling analysis as the iso for administering the market-based regulation of the wholesale electricity market a responsibility you lessen the burdens of government by being responsible for that ferc mandate of ensuring the provision of reliable electric service at reasonable rates have passed to you in order to fulfill their your establishment and implementation of a central counterparty structure pursuant to which you will become the central counterparty to transactions in the markets you administer is a response to credit reforms mandated in ferc order nos and 741-a your activities as the central counterparty will not require an amendment to any of your organizing documents though certain revisions to your ferc-approved tariff will be required for implementation of the central counterparty structure these revisions must be approved by ferc as central counterparty you will take title for a brief period of time to the electric energy and related products that are the subject matter of those transactions your role as a central counterparty will not affect the clearing price because the prices you pay to providers will exactly match the prices you receive from the sellers apart from taking title to electric energy and related products in your capacity as central counterparty your market administration activities will remain essentially the same your activities as the central counterparty will result in no net_profit_or_loss to you by mandating that isos and rtos revise their tariffs to implement enhanced credit practices ferc has established how you must conduct your market administration activities to provide for the nondiscriminatory and efficient transmission of electric energy a default by one or more market participants could lead to a larger default in the market disrupting services and the flow of electricity as well as raising the costs of doing business in the electricity market and a corresponding increase in rates paid offset the obligations of a defaulting participant against payments owed to that participant reducing the impact of one participant’s default on the operations of other participants the market participants are not able to do this themselves because of the clearing price system you use and the lack of contract privity with the defaulting party your sole purpose in acting as a central counterparty is to reduce the disruptions caused by a participant's default and in turn facilitate reliable electric service at reasonable rates in line with your exempt_purpose within the meaning of sec_1_501_c_3_-1 of the regulations and revrul_85_1 supra and revrul_85_2 supra you will not generate any net_income from the activity by acting as the central counterparty you will be able to accordingly the implementation of the central counterparty structure and your activities as the central counterparty to each transaction in the markets you administer will not adversely affect your status as an exempt_organization described in sec_501 of the code as compared to your previous operations ruling sec_513 of the code defines the term unrelated_trade_or_business as any trade_or_business which is not substantially related to the performance of an organization’s exempt_purpose sec_1_513-1 of the regulations states that a trade_or_business is substantially related to an organization’s exempt_purpose if it contributes importantly to the accomplishment of that purpose as stated above by acting as a central counterparty you will reduce the disruptions caused by a market participant’s default this contributes importantly to the accomplishment of your exempt_purpose of lessening the burdens of government by ensuring reliable electric service at reasonable rates therefore acting as a central counterparty is substantially related to your exempt_purpose and will not constitute an unrelated_trade_or_business within the meaning of sec_513 ruling sec_1 your establishment and implementation of a central counterparty structure pursuant to which you will become the central counterparty to transactions consummated through the markets you administer will not adversely affect your status as an organization exempt from federal_income_tax under sec_501 of the code the revenues you receive by virtue of being the central counterparty to transactions consummated through the markets you administer will not be classified as income from an unrelated_trade_or_business within the meaning of sec_513 this ruling will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice if you disagree with our proposed deletions you should follow the instructions in notice this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent this ruling is based on the facts as they were presented and on the understanding that there will be no material changes in these facts this ruling does not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described because it could help resolve questions concerning your federal_income_tax status this ruling should be kept in your permanent records if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter in accordance with the power_of_attorney currently on file with the service we are sending a copy of this letter to your authorized representative sincerely andrew f megosh jr manager exempt_organizations guidance group enclosure notice