t c memo united_states tax_court richard a and carol b little petitioners v commissioner of internal revenue respondent docket no filed date p owned stock in dondi financial df df held percent of the stock of vernon v v was a savings and loan the fhlbb seized v terminated its operations and appointed the fslic as its receiver in date df filed for bankruptcy in date p owned stock in texana t t held percent of the stock of texana savings loan tsl the fhlbb put tsl in receivership and appointed the fslic to liquidate tsl in date p deducted losses for worthless_stock from df in and t in r disallowed part of the df loss and all of the t loss r amended the answer contending that p owed an additional deficiency because the df stock became worthless in r called two fbi agents as witnesses and offered into evidence pages of interview notes in response to p's hearsay objection r argued that the agents' oral testimony and notes were records or reports of a public agency admissible under fed r evid or held r's contention in the amended answer is new_matter upon which r bears the burden_of_proof rule a tax_court rules_of_practice and procedure held further oral testimony of the two fbi agents is not a record or report of a public agency of fed r evid held further oral testimony of the two fbi agents is not admissible under fed r evid because respondent did not satisfy the notice requirement of the rule held further the interview notes are not admissible because they were not exchanged before trial contrary to the court’s standing_pretrial_order held further p may deduct dollar_figure for df stock in held further p may deduct dollar_figure for t stock in john d copeland for petitioners steven walker and barbara leonard for respondent memorandum findings_of_fact and opinion colvin judge respondent determined that petitioners had deficiencies in federal_income_tax of dollar_figure for and dollar_figure for respondent filed an amended answer asserting an additional deficiency of dollar_figure for the issues for decision are whether respondent's contention that petitioners' worthless_stock deduction for dondi financial corp dondi financial stock in was taken in the wrong year is new_matter on which respondent bears the burden_of_proof we hold that it is whether testimony in the trial of this case by federal bureau of investigation fbi special agents is a record or report of a public agency admissible under rule or of the federal rules of evidence we hold that it is not whether pages of interview notes made by fbi special agents which were not exchanged before trial are admissible we hold that they are not whether petitioners may deduct dollar_figure for a loss from dondi financial stock in we hold that they may whether petitioners may deduct dollar_figure for a loss from texana capital corp stock in we hold that they may section references are to the internal_revenue_code in effect for the years in issue rule references are to the tax_court rules_of_practice and procedure unless otherwise stated findings_of_fact some of the facts have been stipulated and are so found a petitioners petitioners are married and lived in scottsdale arizona when they filed their petition richard a little petitioner graduated from the university of michigan in with a bachelor's degree in economics petitioner was an officer in the u s air force he was stationed in france from to he returned to the united_states in and worked for months as a registered stockbroker in santa barbara california he then worked for a home builder in ventura california for about a year and a half from to he operated his own building company and joint ventured with another person for years after succeeding in the home building business in california petitioner moved to new york city to work for levitt sons one of the nation's largest single-family-home builders after about years he took a position in columbus ohio with a company that built apartment buildings petitioner then worked in jacksonville florida for a company that built apartment and condominium buildings in petitioner moved to the san francisco area to work for builders resources builders builders' primary business was providing venture capital to small builders throughout the united_states petitioner worked for builders for about years during that time he met donald r dixon dixon dixon was then the third largest single-family-home builder in dallas texas builders financed dixon's dallas home-building activities from to petitioner worked on several real_estate developments and syndications and became the chief financial officer of a residential real_estate firm in petitioner moved to france in he moved to london and helped to establish the u s property trust which invested money from english and scottish pension funds petitioner was financially successful in he bought acres of land in sonoma county california he started a vineyard which produced about dollar_figure per year net of expenses and taxes starting in petitioner sold the vineyard in b dondi financial corp petitioner's association with dondi group inc from january to date dixon contacted petitioner in dixon wanted petitioner to work for him at dixon's request petitioner went to dallas in date to see dixon's home building business petitioner decided to work for dixon petitioner joined dixon's organization dondi group inc and ran a subsidiary financing company called dondi equities petitioner commuted between london and dallas from february to may and moved to dallas in date while working at dondi equities petitioner met woody lemons lemons lemons was president of vernon savings loan vernon at the time petitioner stopped working for dondi equities in date he moved to houston texas and started building single- family homes and an apartment project with a friend dixon's purchase of vernon during the summer of dixon decided that he wanted to buy a savings and loan dixon researched various financial institutions and chose vernon dixon proposed that he buy percent of vernon's stock and that petitioner lemons and rick ramsey not otherwise identified in the record each buy percent dixon bought percent of vernon in date for an amount not stated in the record dixon paid percent of the purchase_price in cash and financed percent dixon transferred vernon's stock to dondi financial in date dondi financial was a holding_company formed to hold vernon stock dondi financial had no other assets dondi financial assumed dixon's obligation to pay the rest of the purchase_price dondi financial paid significant amounts on this obligation while it owned vernon petitioner's reassociation with dondi group inc dixon contacted petitioner in date petitioner needed additional capital for his apartment project dixon convinced petitioner to work for him again by agreeing to provide capital for the project petitioner moved to dallas and started working for dixon at dondi financial in date petitioner became president of dondi financial shortly after he returned lemons was vernon's chairman when petitioner returned to dondi financial c texana savings loan lemons' purchase of tomanet stock in mid-1983 lemons approached petitioner about buying another savings and loan lemons suggested that he petitioner and several other dondi financial and vernon executives buy the stock of a holding_company named tomanet tomanet owned about percent of the stock of texana savings loan texana lemons negotiated an option to buy tomanet stock lemons bought tomanet stock with purchase money mortgages from tomanet stockholders and financial institutions such as first city savings petitioner and the other investors were to give lemons a downpayment and execute a note payable to him for the balance of the purchase_price if they wanted to buy the tomanet stock petitioner's purchase of tomanet stock from lemons petitioner bought big_number shares of tomanet stock for dollar_figure on date petitioner paid dollar_figure as a downpayment petitioner borrowed the downpayment from state savings loan not further identified in the record through an unsecured loan petitioner executed notes payable to lemons for dollar_figure and dollar_figure on date lemons gave petitioner quarterly reminders of the amounts due under the notes petitioner paid lemons about dollar_figure on the dollar_figure note petitioner had no agreement with lemons to not make payments on the dollar_figure note petitioner paid about dollar_figure on the dollar_figure note on date tomanet issued stock certificates to petitioner for big_number shares and big_number shares petitioner pledged big_number shares to lemons as security for his note on date tomanet changed its name to texana capital corp texana capital petitioner was not involved in any of texana's activities and did not receive texana's financial statements d petitioner's transfer to vernon's california subsidiary and dixon's offer to sell dondi financial stock to dondi group inc employees petitioner left dallas in date to become president of vernon asset management corp a vernon subsidiary in southern california while in california petitioner did not control vernon's day-to-day operations or know about every loan vernon made on date vernon entered into a supervisory agreement not otherwise described in the record with the federal savings and loan insurance corporation fslic dixon offered to sell dondi financial stock to dondi group inc employees in date dixon required any employee who wanted to buy the stock to pay percent down and execute a purchase_money_mortgage for percent the purchase_money_mortgage was a 5-year note employees were to pay only interest during the years and make a balloon payment of the principal after years dixon held at least percent of dondi financial stock at all relevant times petitioner bought big_number shares of dondi financial stock on date petitioner paid dollar_figure for the stock petitioner paid dollar_figure in cash and executed a note for dollar_figure the cash consisted of dollar_figure from deferred_compensation dollar_figure from interest on the deferred_compensation dollar_figure from accrued dividends and dollar_figure from a loan from vernon the loan from vernon was evidenced by a 5-year note for dollar_figure and secured_by petitioner's savings account petitioner paid the dollar_figure note in the dollar_figure note was payable to dondi financial the note required petitioner to make quarterly payments and had an interest rate of dollar_figure percent the note was fully recourse petitioner pledged his dondi financial stock as security for the note from date to date petitioner paid dollar_figure on the note petitioner agreed to give dixon dondi financial and the other dondi financial shareholders an option to buy petitioner's dondi financial stock if he stopped working for dondi financial dixon had the first right to buy the shares if dixon did not buy the stock within days dondi financial could exercise its option if dondi financial did not do so the shareholders could buy the stock pro_rata if neither dixon dondi financial nor the other shareholders exercised their option dondi financial had to buy the stock e initial actions by bank regulator sec_1 the cease and desist order on date the federal_home_loan_bank board fhlbb issued a cease and desist order fhlbb order to vernon because of its improper lending practices the fhlbb order required vernon to correct its loan approval process to evaluate its portfolio and to bring its operations into compliance with regulatory standards the fhlbb order required vernon to prepare a plan detailing its projected business strategies and operations through date petitioner's resignation from dondi financial petitioner resigned from dondi financial on date petitioner wanted to sell his dondi financial stock for about dollar_figure million as provided by the shareholder agreement in date dondi financial offered to buy petitioner's stock for an amount not disclosed in the record petitioner rejected this offer petitioner and dondi financial could not agree on a selling_price and petitioner did not sell the stock vernon's financial troubles in date the state of texas appointed earl hall hall a state regulatory agent to run vernon hall and the remaining directors tried to continue vernon's operations on date respondent issued a refund check to dondi financial for dollar_figure on date dondi financial endorsed the check to vernon f the attempted sale of texana capital in late petitioner and other texana capital shareholders tried to sell texana capital's texana stock the shareholders held about percent of texana capital's shares and texana capital held about percent of texana's shares texana capital had no assets other than texana stock in november or december of lemons negotiated the sale of texana capital's texana stock in february of lemons and petitioner signed agreements to sell the stock however the parties did not make a final agreement and petitioner never sold his stock petitioner would have made a profit of about dollar_figure if the agreement had been completed g termination of vernon's operations and bankruptcy of dondi financial the seizure of vernon the fhlbb seized vernon terminated its operations and appointed the fslic as receiver on date vernon disavowed all of its obligations to pay its creditors vernon was reconstituted as vernon federal savings association vfsa vfsa did not issue stock to dondi financial to replace dondi financial's holdings in vernon on date the fslic sued seven vernon officers including petitioner for dollar_figure million the bankruptcy of dondi financial dondi financial filed for bankruptcy on date petitioner filed a claim against dondi financial for dollar_figure this amount was the difference between the repurchase price of his stock and the balance on the note the bankruptcy trustee trustee sued petitioner for dollar_figure plus interest on petitioner's note these suits were settled on date petitioner paid the bankruptcy_estate dollar_figure and withdrew his suit the trustee also withdrew his suit philip palmer palmer was the attorney for dondi financial's bankruptcy trustee palmer examined dondi financial's books_and_records during his investigation of dondi financial palmer saw vernon's financial statements including those which had been certified by audit and others that had been prepared by government regulatory authorities for each year before the bankruptcy monthly reports from to and regulatory reports palmer used these documents to estimate vernon's fair_market_value from about to palmer took into account the fair_market_value of vernon and about three of its small subsidiaries in estimating when dondi financial became insolvent palmer focused on vernon's commercial and residential loans because vernon's and dondi financial's insolvency resulted from the improper granting and reporting of these loans the fslic's seizure of petitioner's assets on date the fslic obtained a preliminary injunction against seven vernon directors including petitioner the injunction sequestered the directors' assets the injunction allowed petitioner to spend dollar_figure each month that amount was increased a few days later to dollar_figure because of the injunction petitioner could no longer make payments on the dollar_figure note to lemons the injunction made petitioner insolvent the injunction was still in effect at the time of the trial of this case the closing of texana on date the fhlbb put texana in receivership and appointed the fslic as receiver to liquidate texana h criminal prosecution and conviction of some vernon officers and directors some vernon officers and directors not including petitioner were convicted of crimes relating to their activities at vernon or its subsidiaries on date roy dickey a former vernon president was convicted of falsifying a delinquent loan list submitted to the fslic on date james r veteto the former president of vernon service corp was convicted of falsifying vernon loans on date pat l malone a vernon executive vice president was convicted of misapplying vernon funds using false documents to conceal the misapplication of funds and using the misapplied funds to make illegal political campaign contributions on date patrick king a former vice chairman of vernon's board_of directors was convicted of making false entries in vernon books reports and statements and of using vernon funds to make illegal campaign contributions on date lemons was convicted of misapplying vernon funds and accepting a bribe petitioner was not indicted for or convicted of any crimes relating to vernon a burden_of_proof opinion we first decide whether respondent's contention that petitioners' worthless_stock deduction for dondi financial stock in was taken in the wrong year is new_matter on which respondent bears the burden_of_proof burden_of_proof if respondent raises new_matter or an increased deficiency in an amended answer the taxpayer generally bears the burden_of_proof rule a 290_us_111 however if the commissioner pleads new_matter or an increased deficiency in the answer the commissioner has the burden_of_proof as to the new_matter or increased deficiency rule a a new position taken by the commissioner is not new_matter if it clarifies and is consistent with the original determination and does not increase the deficiency 61_tc_744 50_tc_478 however if the new position requires the taxpayer to present different evidence it is new_matter and the commissioner bears the burden_of_proof 77_tc_881 58_tc_895 notice_of_deficiency petitioners deducted dollar_figure for worthless dondi financial stock in and dollar_figure for worthless texana capital stock in in the notice_of_deficiency respondent disallowed dollar_figure of petitioners' deduction for and all of their deduction for respondent determined that petitioners did not establish that the amount shown ie dollar_figure and dollar_figure was a a loss and b sustained by you the notice_of_deficiency also included the following calculation purchase cost dollar_figure purchase cost dollar_figure less cash paid big_number payments verified adjustment big_number adjustment big_number amendment to answer in the petition petitioners contended that respondent erred in disallowing the worthless_stock deductions in the answer respondent denied that respondent's determination was in error about months later and days before trial respondent moved to amend the answer and lodged an amended answer we granted respondent's motion in the amended answer respondent asserted that petitioners were liable for an increased deficiency of dollar_figure for because they were not entitled to deduct the dollar_figure respondent had previously allowed for the dondi financial stock in the amended answer respondent asserted for the first time that because dondi financial became insolvent in a year earlier than the stock in dondi financial corp became worthless no later than date increased deficiency and new_matter under rule respondent contends that the amended answer did not raise new_matter for purposes of rule and that the notice_of_deficiency required petitioners to prove that the dondi financial stock became worthless in respondent argues that respondent discovered that the notice_of_deficiency mistakenly failed to disallow all of the deduction and that respondent's error was computational respondent also contends that the notice_of_deficiency was broadly worded and that the amended answer is consistent with that broad language respondent bears the burden_of_proof if respondent asserts an increased deficiency rule a thus respondent bears the burden of proving that petitioner is liable for the additional deficiency of dollar_figure we also conclude that respondent raised new_matter in the amended answer respondent allowed petitioners' deduction in for part of the dondi financial stock loss dollar_figure petitioner would not be entitled to any worthless_stock deductions for dondi financial in unless it became worthless in we can only conclude that respondent was not challenging petitioners' claim that the dondi financial stock became worthless in in the amended answer respondent contends that the dondi financial stock became worthless no later than date petitioners would be required to present different evidence to contest this allegation than they would have been required to present to contest the notice_of_deficiency thus respondent's contention in the answer is new_matter upon which respondent bears the burden_of_proof respondent contends that the amended answer corrected a mathematical computation in the notice_of_deficiency we disagree respondent has not identified a mathematical error in the notice_of_deficiency respondent contends that petitioners bear the burden_of_proof because they are not prejudiced if they are required to prove the year their dondi financial stock became worthless respondent contends that petitioners are not prejudiced because they amended their petition after respondent amended the answer to claim that if their dondi financial stock did not become worthless in then it became worthless in or we disagree first rule a provides that the burden_of_proof on new_matter is on the commissioner rule a does not limit this to cases where the taxpayer would be prejudiced by bearing the burden_of_proof rule a second petitioners would be prejudiced by being first told days before trial that they have the burden of proving when their dondi financial stock became worthless conclusion petitioners bear the burden of proving that their basis in dondi financial stock was as claimed on their tax_return respondent bears the burden of proving that the dondi financial stock became worthless before b evidentiary matters we next decide whether certain evidence is admissible testimony by fbi special agents in the pretrial memorandum respondent listed two fbi special agents as witnesses curt l hodges hodges and dale v hogue hogue respondent's memo said only that both agents would testify about their investigation of the facts surrounding this case and to the truthfulness or untruthfulness of the petitioner's witnesses in hodges and hogue were assigned to a task force created to investigate suspected criminal activity in the texas savings and loan industry hogue was the agent in charge of the vernon investigation from to hodges investigated vernon from to respondent called hodges and hogue to testify about their investigation petitioner objected that the testimony was hearsay whether hodges' and hogue's testimony is a record of a public agency for purposes of rule of the federal rules of evidence the public records exception to the hearsay rule the federal rules of evidence generally apply to proceedings of this court sec_7453 rule a 99_tc_370 affd 39_f3d_658 6th cir 80_tc_1145 affd 749_f2d_1216 6th cir respondent concedes that hodges' and hogue's testimony is hearsay but contends that it is admissible under rule c of the federal rules of evidence as a report or statement of a public agency records reports statements or data compilations of a public agency setting forth factual findings resulting from an investigation made pursuant to authority granted by law are admissible as an exception to the hearsay rule unless the sources of information or other circumstances indicate lack of trustworthiness fed r evid c fed r evid provides an exception to the hearsay rule for records reports statements or data compilations in any form of public offices or agencies setting forth a the activities of the office or agency or b matters observed pursuant to duty imposed by law as to which matters there was a duty to report excluding continued respondent contends that the trial testimony of hodges and hogue is a statement of a public agency for purposes of rule c of the federal rules of evidence we recognize that the word statement viewed in isolation could refer to an oral communication if rule of the federal rules of evidence referred to statements by an employee of a public agency we might agree with respondent that oral testimony could be a statement for purposes of that rule however the phrase an employee of does not appear in rule of the federal rules of evidence thus we think the phrase a statement by a public agency does not include an oral statement by an individual agency employee instead we think it refers to a more formal written document which was reviewed approved or subject_to a clearance process of some sort that transforms it from a statement by an employee of an agency to a statement by the agency respondent does not cite and we have not found a case where trial testimony was admissible as a record or report of a public continued however in criminal cases matters observed by police officers and other law enforcement personnel or c in civil actions and proceedings and against the government in criminal cases factual findings resulting from an investigation made pursuant to authority granted by law unless the sources of information or other circumstances indicate lack of trustworthiness agency under rule of the federal rules of evidence the cases respondent cites all involve written documents see 283_f2d_613 9th cir selective service file 210_f2d_795 9th cir file containing affidavits investigator reports and bank reports 196_f2d_120 9th cir transcript of an administrative hearing 159_f2d_105 2d cir written interdepartmental communications contrary to respondent's position professor wigmore concludes that a statement should be in writing to be admitted under the common_law public records exception wigmore on evidence sec pincite we conclude that hodges' and hogue's oral testimony is not admissible under rule c of the federal rules of evidence whether hodges' and hogue's oral testimony is admissible under rule of the federal rules of evidence the residual exception to the hearsay rule a background respondent contends that hodges' and hogue's testimony is admissible under rule of the federal rules of evidence fed r evid provides an exception to the hearsay rule for a statement not specifically covered by any of the foregoing exceptions but having equivalent circumstantial guarantees of trustworthiness if the court determines that a the statement is continued the residual exception to the hearsay rule to admit a statement under rule of the federal rules of evidence the proponent must show that it has circumstantial guarantees of trustworthiness equivalent to those required to qualify for other hearsay exceptions is offered as evidence of a material fact is more probative on the point for which it is offered than any other evidence which the proponent could obtain through reasonable efforts serves the general purposes of the federal rules of evidence and the interests of justice if admitted and was provided with particulars of the testimony to the other party sufficiently in advance of trial so that the other party has a fair opportunity to prepare to meet it fed r evid rule of the federal rules of evidence is narrowly construed and applies only in exceptional circumstances 890_f2d_1215 d c cir 595_f2d_755 d c cir continued offered as evidence of a material fact b the statement is more probative on the point for which it is offered than any other evidence which the proponent can procure through reasonable efforts and c the general purposes of these rules and the interests of justice will best be served by admission of the statement into evidence however a statement may not be admitted under this exception unless the proponent of it makes known to the adverse_party sufficiently in advance of the trial or hearing to provide the adverse_party with a fair opportunity to prepare to meet it the proponent's intention to offer the statement and the particulars of it including the name and address of the declarant 100_tc_457 86_tc_1134 b_notice requirement rule of the federal rules of evidence requires the offering party to notify the opposing party of the particulars of the testimony sufficiently in advance of trial to prepare to meet it respondent contends that petitioner had adequate notice of hodges' and hogue's testimony we disagree respondent's only notice to petitioner was a statement in the pretrial memorandum that the two agents would testify about the truthfulness or untruthfulness of petitioners' witnesses and the facts surrounding this case ie this civil tax case a case which hodges said at trial was not the subject of the task force's investigation respondent did not give notice to petitioners of any of the particulars of the direct examination which covered transcript pages respondent cites 770_f2d_768 9th cir and 654_f2d_591 9th cir in which the u s court_of_appeals for the ninth circuit interpreted the notice requirement of rule c of the federal rules of evidence in brown the court_of_appeals held that the trial_court properly admitted the defendants' passports where the government did not tell the defendants before trial that it intended to offer the passports into evidence united_states v brown supra the government's failure to meet the notice requirement did not prevent admission of the passports because the defendants had a fair opportunity to attack the trustworthiness of their own passports id in piva work sheets and information about job applicants were held to be admissible even though the notice requirement was not met the trial lasted more than a year after the evidence was admitted during which the other party could have moved to strike it or could have rebutted it with additional evidence also the opposing party had ample opportunity to attack the trustworthiness of the evidence through extensive cross- examination and the trial_court found that the evidence was reliable piva v xerox corp supra pincite this case is very different from brown and piva respondent elicited very detailed testimony from hodges and hogue petitioner had no notice of the testimony except for a general reference in respondent's pretrial memorandum respondent contends that petitioner had a fair opportunity to cross-examine hodges and hogue we disagree although petitioners' counsel had cross-examined hodges and hogue respondent's pretrial memorandum did not help petitioners to prepare for it petitioners' counsel telephoned both hodges and hogue about a week before trial to ask about their testimony however neither agent responded to his inquiry we hold that respondent did not give petitioners notice as required by rule of the federal rules of evidence c circumstantial guarantees of trustworthiness respondent must also show that hodges' and hogue's testimony has circumstantial guarantees of trustworthiness equivalent to those required to qualify for other hearsay exceptions fed r evid respondent contends that the testimony meets this requirement because the fbi agents had an adequate basis for their factual findings the results of the fbi's investigation support the truthfulness of the fbi agents' factual findings petitioner extensively cross-examined the fbi agents and statements made by public officials based on their factual findings from an investigation made pursuant to authority granted by law are generally believed to be trustworthy we disagree that these points establish circumstantial guarantees of trustworthiness equivalent to those required to qualify for other hearsay exceptions respondent's only reference to another hearsay exception is to rule of the federal rules of evidence we held above that rule of the federal rules of evidence does not apply here see par b-2 p the rules of evidence do not provide a blanket hearsay exception for testimony by public officials respondent has not shown that the fbi agents' testimony has circumstantial guarantees of trustworthiness that are equivalent to other hearsay exceptions we hold that the testimony of hodges and hogue is not admissible under rule of the federal rules of evidence whether statements made by witnesses to fbi agents are admissible a fd-302 reports hodges and hogue testified that the fbi agents assigned to the task force prepared memoranda of interviews with to people during their investigation of vernon these documents are fd-302 reports reports respondent offered into evidence reports for witnesses covering pages respondent first gave the reports to petitioner pincite p m on the second and last day of trial respondent also asked that the reports be sealed respondent asked that the reports be used only for the instant case and that the copy petitioner was to receive be returned by petitioners' counsel with a statement under penalty of perjury that it had not been copied or released and that no additional copies of which he was aware were made petitioner objected to admitting the reports on the grounds that they were not exchanged before trial as required by the standing_pretrial_order and that they are hearsay b standing_pretrial_order about months before this case was calendared for trial we sent a copy of the court's standing_pretrial_order to the parties it stated in part any documents or materials which a party expects to utilize in the event of trial except for impeachment but which are not stipulated shall be identified in writing and exchanged by the parties at least days before the first day of the trial session materials not provided in compliance with our pretrial orders may be excluded from evidence 77_f3d_637 2d cir exclusion of documents under the standing_pretrial_order is particularly justified if they are complex and voluminous as here see kodak v commissioner tcmemo_1991_485 affd without published opinion 14_f3d_47 3d cir the reports are not admissible because they were not exchanged at least days before the first day of the trial session as required by our standing_pretrial_order in light of our ruling that the reports are not admissible because they were not exchanged before trial we need not consider petitioner's hearsay objection c dondi financial stock as stated above petitioners bear the burden of proving that their basis in the dondi financial stock was as they claimed on their tax_return and respondent has the burden of proving that the dondi financial stock became worthless before see par a-5 p basis petitioner paid dollar_figure in cash and executed a dollar_figure note for big_number shares of dondi financial stock respondent concedes and we find that petitioners' basis in the dondi financial stock was dollar_figure worthlessness a background respondent contends that the dondi financial stock became worthless in or earlier we disagree and we conclude that the dondi financial stock became worthless in we reach this conclusion regardless of which party has the burden_of_proof stock is worthless if it has neither liquidating value nor potential value 71_tc_955 a corporation's stock has liquidating value if its assets exceed its liabilities id a corporation's stock has potential value if there is a reasonable expectation that it will become valuable in the future 38_bta_1270 affd 112_f2d_320 7th cir a corporation's stock may be worthless if the corporation declares bankruptcy ceases to operate liquidates or has a receiver appointed because these events can destroy the stock's potential value id whether stock becomes worthless in a particular year is a question of fact 326_us_287 253_f2d_639 9th cir affg in part and revg in part tcmemo_1956_247 austin co v commissioner supra pincite the standard for deciding when stock becomes worthless varies according to the circumstances of each case boehm v commissioner supra 280_us_445 the taxpayer's attitude and conduct are considered but are not dispositive boehm v commissioner supra pincite 56_tc_191 b collapse of vernon and dondi financial respondent contends that dondi financial became insolvent by because the real_estate market crashed in vernon paid millions of dollars of compensation to vernon officers and directors from to and vernon paid other flamboyant expenses we disagree we think other more significant facts show that dondi financial stock did not become worthless in the fhlbb order required vernon to change its financial practices to meet federal regulatory standards the fhlbb order required vernon to prepare a comprehensive plan detailing business strategies and operations through date these actions show that an effort was made by the fhlbb and vernon to keep vernon operating it is reasonable to conclude that dondi financial stock had value as long as vernon operated we conclude that vernon had value until the fhlbb appointed a receiver and ordered its liquidation and dondi financial declared bankruptcy in date c palmer's testimony respondent contends that dondi financial stock had no liquidating value after because palmer the bankruptcy trustee's attorney during dondi financial's bankruptcy proceedings testified that dondi financial was insolvent by respondent asserts that palmer's opinion is convincing because he was independent and his findings are supported by a reasonable foundation the real_estate downturn from to and crash by early vernon's liability for the loans owned by dondi residential properties inc for its property and vernon's extensive lending of money on commercial real_estate projects we disagree palmer believed that the fslic appraisers underappraised property yet he relied on the fslic appraisals and did not use an independent_appraiser palmer did not consider vernon's non- texas assets palmer was reviewing whether dondi financial had made any fraudulent_conveyances within the last years before its insolvency under the then-applicable texas fraudulent_conveyances law a transfer was void if a debtor dondi financial did not have enough assets in texas to pay all of its debts tex bus com code ann sec_24 a west thus palmer's valuation of vernon and dondi included only texas assets see in re dondi financial corp bankr this statute was amended in see tex bus com code ann sec_24 historical note west n d tex about percent of the amount of vernon loans was non-texas loans ie out-of-state loans made in florida california louisiana and oklahoma palmer recognized that vernon failed gradually he said vernon savings loan died by degrees the first was the notice in '81 as i recall to see if the vernon savings loan people could correct their own problems the second was in when the federal government went in there and put their people in to see if the supervision would help the third was also in when the federal government actually took over the running of it to see whether or not it could be sold the final take over in is after you've determined that none of those others will work the patient is dead and it's time for a funeral on date the fhlbb seized vernon appointed the fslic as receiver and reconstituted vernon as vfsa dondi financial filed its bankruptcy petition on date we hold that this was when dondi financial stock became worthless d petitioner's testimony about dondi financial_assets and liabilities dondi financial received a dollar_figure million tax_refund check in date petitioner testified that as of date dondi financial had liabilities of about dollar_figure to dollar_figure million respondent did not introduce evidence to rebut petitioner's testimony petitioner was knowledgeable about vernon's and dondi financial's finances and was dondi financial's president from to and president of vernon's california operations from to petitioner estimated that vernon had between dollar_figure and dollar_figure million in assets when dixon bought it in and that those assets had grown to more than dollar_figure million when petitioner returned to dondi financial in petitioner also testified that a monthly report submitted to the fhlbb showed that vernon had a positive net_worth as of date while petitioner's testimony is less reliable than vernon's or dondi financial's financial statements we disagree with respondent's view that we should disregard it e respondent's other contentions respondent points out that petitioner did not provide documents or expert testimony to establish the amount of vernon's or dondi financial's liabilities for any year petitioner testified to these points but respondent urges us to disregard his testimony as self-serving we may not arbitrarily disregard testimony that is competent relevant credible and uncontradicted conti v commissioner f 3d pincite 217_f2d_252 3d cir 211_f2d_210 6th cir we found petitioner's testimony to be credible and uncontradicted respondent contends that we should infer that any documentary_evidence or testimony from prospective witnesses would have been unfavorable to petitioner respondent points out that where a party fails to introduce evidence in his or her possession which if true would be favorable there is a presumption that the evidence if produced would favor the opposing party 6_tc_1158 affd 162_f2d_513 10th cir we do not apply that presumption here for several reasons first petitioner offered vernon's monthly reports for march june and date and an unaudited statement of vernon's financial condition for july and date these exhibits were admitted to show their effect on petitioner and not for their truth however since petitioners offered the documents the rationale behind the negative inference under wichita terminal does not apply second petitioners introduced evidence that the dondi financial stock became worthless in wichita terminal does not apply to situations where a party provides evidence sufficient to meet the burden_of_proof see ianniello v commissioner tcmemo_1991_415 cohen v commissioner tcmemo_1991_413 third respondent not petitioner had the burden of proving that the dondi financial stock became worthless no later than date the wichita terminal presumption generally applies where the party failing to produce the evidence has the burden_of_proof wichita terminal elevator co v commissioner supra pincite fourth respondent's contention that we infer that testimony by prospective witnesses not called at trial would be unfavorable to petitioner seems hypothetical at best since respondent did not identify any available witnesses who petitioners should have called f testimony of hodges and hogue respondent contends that testimony by hodges and hogue shows that dondi financial stock lost its value before_1984 as stated above hodges' and hogue's testimony is inadmissible see par b p however even if we considered their testimony our conclusion would remain the same hodges and hogue testified about criminal activities by vernon officers hodges said that the fbi agents did not consider the financial impact those activities had on vernon or dondi financial their testimony about vernon's financial status consisted of examples of bad loans and accounting misrepresentations of delinquent loans to the federal regulatory authorities and was based on the reports some of which were prepared by other agents the testimony although marginally relevant to the liquidating value analysis is not helpful in deciding whether dondi financial stock had potential value as stated above we conclude that petitioners' dondi financial stock became worthless in conclusion we hold that petitioners may deduct dollar_figure in for worthless dondi financial stock d texana capital stock notice_of_deficiency respondent does not contend and we therefore need not consider whether petitioners had any debt-forgiveness income in respect of the dondi financial stock in or in the notice_of_deficiency respondent calculated the amount of petitioners' texana capital stock loss by subtracting what respondent determined petitioners' basis to be zero from the amount petitioners deducted dollar_figure respondent gives no reason for making this calculation if respondent was intending to challenge the timing of petitioners' deduction respondent also determined that petitioners did not establish that the amount deducted was a a loss and b sustained by you respondent describes the determination as broadly worded while the language in the previous sentence is broad the notice_of_deficiency also included the computation described earlier in this paragraph as we concluded above regarding the dondi financial stock we conclude that the notice_of_deficiency challenged petitioners' basis in their texana capital stock but not that it became worthless in see par a-4 p thus we need not address respondent's argument on brief that petitioners did not prove that their texana capital stock became worthless in if we had to decide whether was the year in which petitioners' texana capital stock became worthless however we would find that was the appropriate year in date petitioner agreed to sell his texana capital stock although a final agreement was never executed petitioners would have made a dollar_figure profit on the sale this suggests that the texana capital stock had value in there is no indication in the record that the stock became worthless until date when the fhlbb placed texana into receivership and appointed the fslic to liquidate texana thus if the year of worthlessness were in issue every indication from the record although sparse is that the texana capital stock became worthless in basis petitioners' basis in the texana capital stock is the amount petitioner paid for it sec_1012 the amount he paid includes cash and other_property given in exchange for the property and any liabilities petitioner assumed or to which the property is subject 461_us_300 331_us_1 petitioner bought big_number shares of texana capital stock for dollar_figure on date petitioner borrowed dollar_figure for the downpayment and executed notes for dollar_figure and dollar_figure to buy the stock respondent contends that petitioners have not proven that they had basis in the texana capital stock because they did not provide a copy of the dollar_figure promissory note or other documentary_evidence showing how much petitioner paid and that petitioner's only evidence of payment is his testimony we may not arbitrarily disregard testimony that is competent relevant credible and uncontradicted conti v commissioner f 3d pincite we found petitioner's testimony to be generally credible respondent also contends that petitioner did not provide documentary_evidence that he paid interest or principal on the dollar_figure promissory note respondent finally contends that petitioner did not prove that the dollar_figure he says that he paid in cash to buy texana capital stock went to lemons to buy the stock petitioner testified that he paid lemons dollar_figure on the dollar_figure note and about dollar_figure on the dollar_figure note and that he stopped paying lemons when the fslic's injunction made him insolvent despite respondent's skepticism we found petitioner to be credible we believe that petitioner made payments on the dollar_figure and dollar_figure notes and that he used those notes and the dollar_figure he borrowed to buy texana capital stock conclusion we hold that petitioners' basis in the texana capital stock was dollar_figure and conclude that petitioners are entitled to a dollar_figure worthless_stock deduction for texana capital stock in to reflect the foregoing and concessions decision will be entered under rule respondent does not contend that and we need not consider whether petitioners had any debt-forgiveness income in respect of the texana capital stock in or


t c memo united_states tax_court edward l walter and jamie k walter petitioners v commissioner of internal revenue respondent docket no filed date deborah r jaffe and robert m mccallum for petitioners julie l payne for respondent memorandum opinion laro judge this case is before the court for decision without trial see rule petitioners petitioned the court to redetermine respondent’s determination of a dollar_figure rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated section references are to the applicable versions of the internal_revenue_code deficiency in their federal_income_tax and an addition_to_tax of dollar_figure under sec_6651 after concessions by respondent we are left to decide the date on which to value stock transferred to edward walter petitioner through his exercise of stock_options respondent argues that the appropriate valuation_date is date petitioners argue that the appropriate valuation_date is date we agree with respondent background all facts were stipulated or contained in the exhibits submitted therewith we find the facts accordingly at the time of the filing of the petition herein petitioners resided on bainbridge island washington stock_option grants petitioner was employed by primus knowledge solutions inc primus until his employment terminated on date as an employee of primus petitioner was granted three separate options to purchase its publicly traded common_stock more specifically respective stock_option letter agreements dated date granted petitioner a nonqualified_stock_option first option to purchase big_number shares of primus stock a nonqualified_stock_option second option to purchase big_number shares of primus stock and an incentive_stock_option third option to purchase big_number shares of primus stock the exercise price under each of these options was dollar_figure per share as of date petitioner was sufficiently vested to purchase big_number of the shares mentioned in the first option big_number of the shares mentioned in the second option and big_number of the shares mentioned in the third option the stock_option letter agreements pertaining to the first and second options provided for payment of the exercise price of the shares described therein as follows the option may be exercised by the delivery of a cash personal check unless at the time of exercise the plan_administrator determines otherwise bank certified or cashier’s check or b unless the plan_administrator in its sole discretion determines otherwise shares of the capital stock of the company held by you for a period of at least six months having a fair_market_value at the time of exercise as determined in good_faith by the plan_administrator equal to the exercise price as a condition to the exercise of a non-qualified stock_option you shall make such arrangements as the company may require for the satisfaction of any federal state or local withholding_tax obligations that may arise in connection with such exercise the stock_option letter agreement pertaining to the third option provided for payment of the exercise price of the shares described therein as follows unless the plan_administrator at any time determines otherwise the option may be exercised by the delivery of a cash personal check bank certified or cashier’s check or b shares of the capital stock of the company held by you for a period of at least six months having a fair_market_value at the time of primus’s stock incentive compensation plan the plan defined the plan_administrator as primus’s board_of directors or any properly designated committee of the board exercise as determined in good_faith by the plan_administrator equal to the exercise price stock incentive compensation plan the stock_options granted by the three stock_option letter agreements were granted pursuant to the plan and each of those agreements incorporated the plan by reference section of the plan states that an optionee may exercise his or her stock_options by written notice to the company in accordance with procedures established by the plan_administrator setting forth the number of shares with respect to which the option is being exercised and accompanied by payment in full as described in section of the plan section of the plan states that payment in full may be made by the following means the exercise price for shares purchased under an option shall be paid in full to the company primus by delivery of consideration equal to the product of the option exercise price and the number of shares purchased such consideration must be paid in cash except that the plan_administrator may either at the time the option is granted or at any time before it is exercised and subject_to such limitations as the plan_administrator may determine authorize payment in cash and or one or more of the following alternative forms i common_stock already owned by the holder for at least six months or any shorter period necessary to avoid a charge to the company’s earnings for financial reporting purposes having a fair_market_value on the day prior to the exercise date equal to the aggregate option exercise price ii a promissory note authorized pursuant to sec_11 of the plan iii if the common_stock is publicly traded delivery of a properly executed exercise notice together with irrevocable instructions to a a brokerage firm designated by the company to deliver promptly to the company the aggregate amount of sale or loan proceeds to pay the option exercise price and any withholding_tax obligations that may arise in connection with the exercise and b the company to deliver the certificates for such purchased shares directly to such brokerage firm all in accordance with the regulations of the federal reserve board or iv such other consideration as the plan_administrator may permit section of the plan states that primus may require an optionee to pay primus the amount of any withholding_tax that primus is required to withhold with respect to the grant exercise payment or settlement of the option the plan does not provide for postponing the delivery of shares of stock to an optionee who exercises a stock_option petitioner’s piper jaffray account during all periods relevant to this case u s bancorp piper jaffray piper jaffray was a brokerage firm designated by primus as one authorized to pay the optionee’s exercise price and receive the optionee’s certificates for purchased shares on date petitioner opened an asset management account at piper jaffray petitioner stated on the application that his annual income was dollar_figure that his net_worth excluding his home was more than dollar_figure and that his liquid net_worth eg his cash and securities holdings totaled dollar_figure the account gave petitioner automatic access to credit extension pre-approved loans at competitive rates petitioner’s account at piper jaffray was subject_to an asset management account agreement disclosure statement and application pj account agreement the pj account agreement stated in part that petitioner’s account included a ready purchase credit feature that feature allowed petitioner to purchase securities on credit of up to percent of the current market_value of eligible securities in his account if petitioner used this feature any securities in his piper jaffray account became collateral for the extended credit and in the event of a default by petitioner in repaying the extension of credit could be sold by piper jaffray to reduce or to liquidate entirely any debit balances in his account as to any order that petitioner placed with piper jaffray for the purchase of securities the pj account agreement stated when i buy securities you will first apply any cash in my account on the settlement_date to pay for the purchase if there is insufficient cash you will then redeem fund shares at net asset value to pay the amount due if there are not enough fund shares in the account to pay this amount the trade will be treated as a credit transaction you may extend credit to me on the terms and conditions set forth in this agreement any credit you extend to me will be automatically collateralized by eligible securities in my account if there are not sufficient eligible securities in the account i must deposit additional cash or eligible securities into my account within the timeframes required by regulations and your policies if cash or eligible securities are not deposited on time you may liquidate the securities at market risk and exposure to me stock_option notice of exercise and exercise in order for petitioner to exercise his stock_options from primus piper jaffray used a 1-page form notice the notice was drafted on piper jaffray letterhead and was entitled stock_option notice of exercise the top half of the notice allowed petitioner to advise primus that he was exercising his stock_options and to instruct piper jaffray on the manner in which he would pay for the exercise by checking one of three boxes with corresponding instructions the top half of the notice also advised primus that piper jaffray was enclosing its check or checks payable to primus as the total_payment amount representing the exercise price due as a result of the stock_option exercise instructed primus to deposit into petitioner’s piper jaffray account the shares he purchased by exercising his stock_options and contained lines on which petitioner should enter certain specified personal information and sign his name with a date of signature the bottom half of the notice contained a statement that primus verified the information set forth on the top half of the notice and that it would deliver the requested shares to piper jaffray within business days or a reasonable_time thereafter the bottom half of the notice also the respective instructions to the three boxes were same day sale exercise your stock_options by selling all shares immediately cashless exercise exercise your stock_options by selling enough shares to cover exercise cost and exercise and hold margin stock to exercise options and hold at us bancorp piper jaffray interest rates will be charged according to current margin rates contained a space that piper jaffray desired primus to sign to acknowledge its verification on date petitioner signed his notice and either he or piper jaffray faxed the notice to primus after primus’s close of business the notice stated that petitioner was exercising his options to purchase big_number shares and that the total due was dollar_figure in payment of those shares petitioner checked the box corresponding to same day sale exercise your stock_options by selling all shares immediately at a m of the next day date piper jaffray faxed primus a second notice that consisted of the notice faxed the day before with two alterations the first alteration crossed out the election of the same day sale and the second alteration checked the box corresponding to exercise and hold and circled that box and the related instructions the notice faxed on date was accompanied by a cover sheet that explained that the first notice was incorrect in that petitioner was exercising and holding his shares rather than selling them the cover sheet also explained that petitioner on that day was wiring dollar_figure to piper jaffray and that piper jaffray would forward those proceeds to primus when received on date dollar_figure wa sec_4 it does not appear that primus signed the statement on petitioner’s notice big_number shares multiplied by a per share exercise price of dollar_figure equals dollar_figure transferred by wire from petitioner’s account at charles schwab to petitioner’s account at piper jaffray piper jaffray sent primus two checks drawn on petitioner’s piper jaffray account the first check in the amount of dollar_figure and dated date was for payment of the exercise price the second check in the amount of dollar_figure and dated date was for payment of withholding_tax on the exercise of petitioner’s nonqualified_stock_options petitioner used credit from piper jaffray to fund dollar_figure of the dollar_figure on date primus prepared three confirmations the confirmations reported that petitioner on date had exercised his first second and third options in purchase of big_number shares big_number shares and big_number shares respectively at a market_value per share of dollar_figure75 on each weekday from friday july through thursday date shares of primus common_stock had a closing price and an average high low price as follows july closing price high low average dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure75 dollar_figure dollar_figure form_w-2 issued to petitioner and petitioners’ return petitioner received from primus a form_w-2 wage and tax statement reporting income of dollar_figure from wages tips and other compensation primus reported that dollar_figure of this amount was attributable to the exercise of petitioner’s stock_options in calculating petitioner’s income from the exercise of his stock_options primus used a market_value per share of dollar_figure75 which amount is the shares’ high low average on date on their joint federal_income_tax return petitioners reported income from wages salaries tips etc of dollar_figure which amount represents all of the income reported as paid to petitioner on the forms w-2 issued by primus and the illinois institute of technology on line other income of their return petitioners reduced their gross_income by dollar_figure this amount reflects a per share value of dollar_figure25 for primus stock purchased by the exercise of petitioner’s nonqualified_stock_options which value was the closing price for primus common_stock on date this figure equals the big_number shares purchased through the exercise of the first and second options multiplied by the high low average of dollar_figure75 less the big_number shares multiplied by the dollar_figure per share exercise price in other words big_number x dollar_figure75 - big_number x dollar_figure dollar_figure in addition to the form_w-2 issued by primus a form_w-2 was issued to petitioner by the illinois institute of technology in the amount of dollar_figure discussion sec_83 generally provides that when property is transferred to a person in_connection_with_the_performance_of_services the fair_market_value of the property at the first time the rights of the person having the beneficial_interest in the property are transferable or not subject_to a substantial_risk_of_forfeiture less the amount_paid for the property is includable in the gross_income of the person who performed the services see 117_tc_237 affd 65_fedappx_508 5th cir in general an employee who receives a nonstatutory stock_option without a readily_ascertainable_fair_market_value is taxed not on the receipt of the option but at the time pursuant to the employee’s exercise of the option the shares have been transferred to and become substantially_vested in the employee see sec_83 e tanner v commissioner supra pincite sec_1_83-1 income_tax regs shares become substantially_vested in the employee when the shares are either transferable or not subject_to a substantial_risk_of_forfeiture see racine v commissioner tcmemo_2006_162 facq v commissioner tcmemo_2006_111 sec_1_83-3 income_tax regs the parties do not argue that the disputed shares were nontransferrable or that petitioner’s right to full enjoyment of the shares was conditioned upon the future performance of substantial services resolution of the issue before us turns on the date of the transfer of the shares to petitioner see sec_1_83-3 income_tax regs for purposes of sec_83 and the regulations thereunder a transfer of property occurs when a person acquires a beneficial_ownership interest in the property see sec_1_83-3 income_tax regs petitioner’s rights in the primus stock subject_to option are fixed by the terms of the plan and the stock_option letter agreements thus the determination of when petitioner acquired a beneficial_interest in the primus stock requires an analysis of the contract provisions set forth in those documents these provisions define and establish when the exercise is complete so as to constitute a transfer of a beneficial_interest to petitioner we read those documents to conclude that petitioner acquired a beneficial_ownership interest in his primus stock on the day the notice became effective ie on date petitioner’s notice was first faxed to primus after the close of business on date and was superseded by the second notice faxed to primus the next morning the transmission of the notice as superseded satisfied the requirements for exercising the options set forth in section of the plan it was a written notice delivered to primus specifying the number of shares to be purchased and accompanied by payment in full as described in section of the plan both the writing of a check to primus and the crediting of the shares to petitioner’s brokerage account were but ministerial acts done in furtherance of his exercise of date petitioners argue that the exercise of the stock_options did not occur until date because that is when full payment of the exercise price of the shares took place in the form of the issuance and delivery by piper jaffray of a check in full payment of the exercise price petitioner’s notice as superseded provided for payment in a method as an alternative to a cash payment that was permitted by section iii of the plan and was sufficient to validate and make effective the notice on date petitioners argue that this method was unavailable to petitioner as a means by which to exercise his options because it was not expressly provided for in the stock_option letter agreements entered into between petitioner and primus we disagree it was not necessary for that method to be expressly provided for in those agreements because the agreements specifically state that the terms of the options are as set forth in the plan and the stock_option letter agreements that the agreements are subject_to and in accordance with the express terms and conditions of the plan and are in all respects limited by and subject_to the express terms and provisions of the plan and that the terms set forth in the agreements are a summary of the most important terms set forth in the plan a copy of the plan was attached to and expressly incorporated by reference into each of the stock_option letter agreements although not mentioned by petitioners we recognize that section iii of the plan states that irrevocable instructions shall be given to pay not only the option_price but any withholding obligations as well and that the total amount shown as due on the notice does not include any withholding_tax we do not believe that this fact means that petitioner’s exercise of his options was not effective on date to be sure primus considered petitioner to have met and treated petitioner as having met all of the requirements to have exercised his options in purchase of the stock on date primus issued to petitioner the confirmations reporting that he had exercised his options on that date and it issued to him the form_w-2 valuing the stock as of that date primus’s view on the date on which petitioner exercised his options is especially probative here where notwithstanding the applicability of section iii of the plan section iv of the plan allowed the plan_administrator to accept in exercise of the options any form of consideration that it desired moreover by way of the notice petitioner on date gave irrevocable instructions to piper jaffray to purchase primus stock through an exercise of his options and directed primus to issue the stock to him by placing the stock in his piper jaffray account petitioner also directed piper jaffray to hold the stock and to purchase the stock on margin to generate any funds necessary to pay for the purchase the fact that the notice did not state specifically that primus was also instructed to forward to primus any withholding obligation connected to the exercise of the options does not necessarily mean that primus as of that date was not obligated to do so given petitioner’s instructions to piper jaffray and his pj account agreement with piper jaffray piper jaffray was required to pay promptly to primus all costs related to petitioner’s exercise of his options in purchase of the primus stock and such costs would have included the prompt depositing of the withholding taxes if and when required in this regard section iii of the plan did not require that the option exercise price or any withholding obligation be tendered with the exercise notice in order to make the notice effective it simply stated that the optionee must instruct the brokerage firm to deliver the option exercise price and any withholding_tax obligations promptly nor do the stock_option letters require that petitioner actually pay the withholding_tax just that he make such arrangements as the company may require for the satisfaction of any withholding obligations connected to the exercise petitioners further argue that even if petitioner had been authorized to pay the exercise price by the method set forth in section iii of the plan such attempt was ineffective because petitioner gave irrevocable instructions neither to primus nor to piper jaffray we find petitioners’ arguments on this point unavailing on date primus became obligated to issue the shares and piper jaffray became obligated to pay for them either by selling the shares or advancing funds on margin petitioner’s date notice constitutes his unconditional acceptance of primus’s offer under the stock_option grants and created a contract between primus and petitioner for the sale of the exercised shares of stock petitioner could not revoke or withdraw his acceptance of primus’s offer moreover petitioners have not shown that petitioner’s exercise was conditional or that he reserved the right to revoke the notice a beneficial_owner is one who does not have legal_title to property but has rights in the property which are the normal incidents of owning property 345_fsupp2d_1046 n d cal such rights include the right to receive dividends on and vote the shares the right to dispose_of the shares as the beneficial_owner sees fit and the right to use the shares as collateral see 359_fsupp2d_1129 w d wash miller v united_states supra pincite another indication that a transfer has occurred is the extent to which the transferee incurs the risk that the value of the property at the time of transfer will decline sec_1_83-3 income_tax regs as of date petitioner could dispose_of his primus stock as he saw fit in fact according to his notice petitioner provided for the sale on date of all of the primus shares he obtained by exercising his stock_options this sale would have taken place if petitioner had not again exercised control_over those shares by changing his sell order petitioner also evidenced his beneficial_ownership interest in the primus shares by using at least some of those shares as collateral for the funds he borrowed from piper jaffray petitioner used credit from piper jaffray to fund dollar_figure of the dollar_figure paid to primus for withholding taxes on the exercise of the stock_options under petitioner’s pj account agreement petitioner’s use of credit caused the securities in his account consisting largely of the primus stock he purchased by exercising his stock_options to become collateral for that credit also on date petitioner incurred the risk of a beneficial_owner that the value of his primus stock would decline according to his notice petitioner determined to eliminate this risk by electing to sell all of his primus stock immediately after exercise when petitioner changed his mind and canceled his sell order he chose to hold his primus stock and to bear the risk of a decline in its value we hold for respondent we have considered all arguments made by petitioners for a contrary holding and found those arguments not discussed herein to be without merit to reflect the foregoing decision will be entered under rule


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 b04 plr-123602-16 date date re ---------------------------------------- legend settlor spouse children trust law firm date date date date year ---------------------------------------------------- ----------------- ------------------------- ------------------ -------------------- --------------------------------------------------------------------------- ---------------------------------------- ---------------------- ------------------------ -------------------- -------------------- ------- dear -------------- this letter responds to your authorized representative's letter dated date requesting an extension of time under sec_2642 of the internal_revenue_code and sec_301_9100-1 of the procedure and administration regulations to allocate settlor’s spouse’s gst_exemption to a transfer to a_trust facts the facts and representations submitted are summarized as follows on date settlor created and funded trust an irrevocable_trust for the benefit of children and settlor’s descendants settlor also made transfers to trust on date and later in the same year on date date is in year a year prior to date plr-123602-16 settlor failed to file a timely form_709 united_states gift and generation-skipping_transfer_tax return to report the date sec_2 and transfers because settlor relied on tax professionals for estate_planning advice and to prepare all necessary tax returns the failure to allocate spouse’s gst_exemption was discovered by law firm when reviewing the gst status of trust form sec_709 were filed on date by settlor and spouse and both made elections under sec_2513 to split the gift it is represented that no additions constructive or actual were made to trust after date and that spouse has sufficient gst_exemption to allocate to the date sec_2 and transfers you request an extension of time pursuant to sec_2642 and sec_301_9100-3 to allocate spouse’s gst_exemption to the date sec_2 and transfers to trust that the gst_exemption allocated to the date sec_2 and transfers will be effective as of the date of the transfers law and analysis sec_2601 imposes a tax on every generation-skipping_transfer a generation- skipping transfer is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2602 provides that the amount of the tax imposed by sec_2601 is the taxable_amount multiplied by the applicable_rate sec_2641 defines the term applicable_rate with respect to any gst transfer as the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer sec_2642 provides that the inclusion_ratio with respect to any property transferred in a generation-skipping_transfer is the excess if any of over the applicable_fraction under sec_2642 the applicable_fraction is defined as a fraction the numerator of which is the amount of the gst_exemption allocated to the trust or to property transferred in a direct_skip and the denominator of which is the value of the property transferred to the trust or involved in the direct_skip reduced by the sum of any federal estate_tax or state death_tax actually recovered from the trust attributable to such property and any charitable deduction allowed under sec_2055 or sec_2522 with respect to such property sec_2631 as in effect for year provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable plr-123602-16 sec_2632 provides that any allocation by an individual of his or her gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual’s estate determined with regard to extensions regardless of whether such a return is required to be filed sec_26_2632-1 of the generation-skipping_transfer_tax regulations provides in part that an allocation of gst_exemption to property transferred during the transferor’s lifetime other than in a direct_skip is made on form_709 sec_2642 provides in part that except as provided in sec_2642 if the allocation of the gst_exemption to any transfers of property is made on a gift_tax_return filed on or before the date prescribed by sec_6075 for such transfer the value of such property for purposes of sec_2642 shall be its value as finally determined for purposes of chapter within the meaning of sec_2001 and such allocation will be effective on and after the date of such transfer sec_2642 provides that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 or and an election under sec_2632 or c such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of this paragraph sec_2642 provides that in determining whether to grant relief under this paragraph the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief under this paragraph the time for making the allocation or election shall be treated as if not expressly prescribed by statute notice_2001_50 2001_2_cb_189 provides in part that under sec_2642 the time for allocating the gst_exemption to lifetime transfers is to be treated as if not expressly prescribed by statute and taxpayers may seek an extension of time to make an allocation described in sec_2642 or b under the provisions of sec_301_9100-3 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election 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_9100-3 provides that in general requests for extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 must be made under the rules of sec_301_9100-3 plr-123602-16 sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute in accordance with sec_2642 and notice_2001_50 taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore spouse is granted an extension of time of days from the date of this letter to allocate spouse’s available gst_exemption to the date sec_2 and transfers to trust the allocation will be effective as of the respective date of the transfers to trust and the value of the transfers to trust as determined for federal gift_tax purposes will be used in determining the amount of settlor’s gst_exemption to be allocated to trust this allocation should be made on an amended form_709 and filed with the cincinnati service_center at the following address internal_revenue_service cincinnati service_center - stop cincinnati oh a copy of this letter should be attached to the supplemental form sec_709 the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as specifically ruled herein we express or imply no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code plr-123602-16 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely associate chief_counsel passthroughs special industries melissa liquerman melissa liquerman branch chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number ----------------------------------------------------------- ---------------------------------- ------------------------------ ------------------------------------ department of the treasury washington dc person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc psi plr-155780-07 date date legend x ----------------------------------------- ----------------------------------- a ------------------------- b --------- date ------------------------ ---------- year ------- dear -------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting that the service grant x an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to make an election under sec_754 of the internal_revenue_code the information submitted states that x is a limited_liability limited_partnership a is the tax_matters_partner of x b was a majority owner of x b died on date of year x’s partnership return was timely filed for year but a sec_754 election to adjust the basis of partnership property was inadvertently not filed with the return sec_754 provides that if a partnership files an election in accordance with the regulations prescribed by the secretary the basis of partnership property is adjusted in the case of a distribution_of_property in the manner provided in sec_734 and in the case of a transfer of a partnership_interest in the manner provided in sec_743 such an election plr-155780-07 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 that an election under sec_754 to adjust the basis of partnership property under sec_734 and sec_743 with respect to a distribution_of_property to a partner or 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 distribution or 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 that 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 internal_revenue_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 the election 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 evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government based solely upon the information submitted and the representations made we 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 sixty days following the date of this letter to make a sec_754 election effective year the election should be made in a written_statement filed with the applicable service_center for association with x's amended year return a copy of this letter should be attached to the statement filed as a condition for this late election relief x and any affected taxpayers must file within days of the date of this letter their federal_income_tax returns for year through the present consistent with x having made a timely election to be treated as a plr-155780-07 partnership effective year copies of this letter should be attached to the form_8832 and to any returns or amended returns except as specifically set forth above we express no opinion concerning the federal_income_tax consequences of the transactions described above under any other provision of the code specifically we express no opinion as to whether or not x is a partnership for federal tax purposes except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code this ruling is directed only to the taxpayer s requesting it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely william p o'shea associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service department of the treasury index number u i l no washington dc person to contact telephone number refer reply to cc dom p si plr-105149-99 date date number release date legend company state shareholder a dear this letter responds to a letter dated date requesting a ruling on behalf of company under sec_1362 of the internal_revenue_code the information submitted discloses that company was incorporated on a in state company has one shareholder shareholder it is represented that company has intended to be an s_corporation since its incorporation believing itself to be an s_corporation company has operated accordingly since a after the end of its taxable_year beginning on a however company discovered that its s election had not been timely filed company requests a ruling that its sec_1362 election will be treated as timely made for its taxable_year that begins on a sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 explains when an s election will be effective generally if an s election is made within the first two and one half months of a corporation’s taxable_year then that corporation will be treated as an s_corporation for the year in which the election is made sec_1362 provides that 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 following the year in which the s election is made sec_1362 provides that if no sec_1362 election is made for any 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 applying the relevant law to the facts submitted and representations made we rule that company's sec_1362 election will be treated as timely made for its taxable_year that begins on a however this ruling is contingent on company filing form_2553 election by a small_business_corporation with an effective date of a with the appropriate service_center within days from the date of this ruling a copy of this letter should be attached to the form_2553 except as specifically set forth above we express no opinion concerning the federal tax consequences of the foregoing facts specifically we express no opinion on whether company otherwise qualifies as an s_corporation this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours william p o’shea chief branch office of the assistant chief_counsel passthroughs and special industries enclosure copy for sec_6110 purposes


internal_revenue_service department of the treasury number release date index number washington dc person to contact david bergkuist id telephone number refer reply to cc intl br 3-plr-112570-01 date date do ty legend corp w corp x corp y corp z date b dear this is in response to a letter dated date requesting a ruling that corp y and its subsidiaries be permitted to change from the fair_market_value_method of asset valuation to the tax_book_value_method of asset valuation for purposes of apportioning interest_expense beginning with date b the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for a ruling it is subject_to verification on examination corp w is a domestic_corporation that is the parent of an affiliated_group_of_corporations that files a consolidated federal_income_tax return on a calendar_year basis corp w’s stock is widely held and publicly traded corp x is an affiliated domestic indirect subsidiary of corp w that joins in the corp w consolidated federal_income_tax return prior to date a more than percent of the vote and the value of all of the outstanding_stock of corp y a domestic_corporation was held by corp z the remaining outstanding shares of corp y were publicly traded corp w and its pre- acquisition subsidiaries have consistently used the tax_book_value_method of asset plr-112570-01 valuation as described in sec_1_861-9t of the temporary income_tax regulations for purposes of interest_expense apportionment on date a corp y became a wholly owned subsidiary of corp x prior to this acquisition corp y and its subsidiaries were part of the corp z affiliated_group_of_corporations that filed a consolidated federal_income_tax return on a calendar_year basis prior to date a the corp z affiliated_group used the fair_market_value_method of asset valuation as described in sec_1_861-9t of the temporary regulations for purposes of apportioning interest_expense as a result of the acquisition corp y and its subsidiaries will be included in corp w’s consolidated federal_income_tax return for the portion of corp w’s taxable_year that post-dates the acquisition the post-acquisition portion of corp w’s taxable_year begins on date b sec_864 of the internal_revenue_code provides that all allocations and apportionments of interest_expense shall be made on the basis of assets rather than gross_income sec_1_861-9t of the temporary regulations provides that for purposes of apportioning interest_expense a taxpayer may elect to determine the value of its assets on the basis of either the tax book_value or the fair_market_value of its assets sec_1_861-8t provides that once a taxpayer uses the fair_market_value_method the taxpayer and all related parties must continue to use such method unless expressly authorized by the commissioner to change methods sec_1_861-9t provides that if the taxpayer chooses the fair_market_value_method of asset valuation the taxpayer must establish the fair_market_value of its assets to the satisfaction of the commissioner otherwise the commissioner may determine the appropriate values or require the taxpayer to use the tax_book_value_method of apportionment sec_1_861-9t sets forth the rules for determining the fair_market_value of taxpayer’s assets under the fair_market_value_method for purposes of apportioning interest_expense corp w requests pursuant to sec_1_861-8t and sec_1_861-9t that corp y and its subsidiaries be permitted to use the tax_book_value_method of asset valuation beginning on date b this request was made in order to conform corp y and its subsidiaries to the method of asset valuation used by other members of the corp w consolidated_group an additional basis for corp w’s request is that corp w and its pre-acquisition subsidiaries wish to remain on the tax_book_value_method of asset valuation corp w’s ruling_request states that it desires to retain the tax_book_value_method because that method decreases complexity and avoids potential disagreements with the service plr-112570-01 with respect to the fair_market_value of assets avoids the cost of having fair_market_value studies performed and provides greater certainty of tax results to both the taxpayer and the service based solely upon the information submitted the representations made and the reasons given for this request corp y and its subsidiaries may change from the fair_market_value_method of asset valuation for purposes of apportioning interest_expense to the tax_book_value_method of asset valuation pursuant to sec_1_861-8t and sec_1_861-9t beginning on date b except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant sincerely anne o’connell devereaux assistant to the branch chief branch office of the associate chief_counsel international


internal_revenue_service number release date index number ---------------------------------------------- ----------------------------------------- ------------------------------------- ------------------------------ - - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-122484-06 date date ---------- ------------------ ------------------- ----------------------------------------- legend x ------------------------ d1 d2 state dear ------------ this responds to a letter dated date submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts according to the information submitted x was incorporated on d1 under the laws of state x intended to be treated as an s_corporation for federal tax purposes effective d2 but the election was not timely filed law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule for when an s election will be effective plr-122484-06 sec_1362 provides 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 if the election is made after the first two and one-half months of a corporation's taxable_year then the corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if no election is made pursuant to sec_1362 or if made the election is made after the date prescribed for making such an election and the secretary determines there was reasonable_cause for the failure to timely make the election then the secretary may treat such election as timely made for such taxable_year and effective as of the first day of that year x did not file a timely election to be treated as an s_corporation under sec_1362 effective d2 x has however established reasonable_cause for not making a timely election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and representations made and provided that x otherwise qualifies as a subchapter_s_corporation and that within days from the date of this letter x submits a properly completed form_2553 with a copy of this letter attached to the appropriate service_center we conclude that x will be recognized as an s_corporation effective d2 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed or implied concerning whether x is in fact an s_corporation for federal tax purposes 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 sincerely dianna k miosi chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes cc