internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi - plr-140697-02 date date legend x a d1 year year dear this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated in year a the president of x represents that x was intended to be an s_corporation effective for x’s year taxable_year as evidenced by x’s corporate minutes dated d1 indicating a decision to change the status of the corporation to an s type however no form_2553 election by a small_business_corporation was timely filed for x sec_1362 of the code provides that if -- a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year based solely on the facts and the representations submitted and provided that x otherwise qualifies as an s_corporation we conclude that x will be treated as an s_corporation effective for its year taxable_year accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate plr-140697-02 -2- service_center effective for its year taxable_year within days following the date of this letter then such election will be treated as timely made for x effective for its year taxable_year a copy of this letter should be attached to the form_2553 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 including whether x was or is a small_business_corporation under sec_1361 of the code this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being forwarded to x’s authorized representative sincerely yours carolyn hinchman gray senior counsel branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


number release date id office uilc cca_2012113010482337 ---------- from ------------------- sent friday date am to ------------------ cc ----------- subject re aar petition statutes the sec_6227 statute applies if any aar was filed more that years after the partnership return was filed its is untimely unless the tmp signed a form 872-p or the partners signed form sec_872 sec_6227 if the claim was untimely then the form_9248 is invalid since an untimely aar does not initiate a petition period that can be extended


internal_revenue_service number release date index number r ----------------------------------------------------------- -------------------------------------------- ------------------- -------------------------- 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 b06 plr-157737-02 date date ----------------------------------------------------------------------------- taxpayer --------------------------------------------------------------------- parent state a b c ---------------------------------------------------------------------------------------- ---------------- ---------------------------------------------------------- ------------------- ------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------- d --------------------- ------------------ ---------------------- --------------------- ---------------------- ------------------------------------- -------------- --------------------------- ---------------------- ------------------ ------------------------------ e f g h i j k l m n dear ------------- this letter responds to a letter dated date and supplemental information submitted on behalf of taxpayer for a determination as to the normalization requirements under former sec_46 of the internal_revenue_code and e of the tax_reform_act_of_1986 vol c b the act for the accumulated deferred investment_tax_credit aditc associated with certain generation assets that were sold by taxpayer taxpayer represents that the facts are as follows taxpayer made the election to use the ratable flow-though method of normalizing plr-157737-02 facts taxpayer is an investor-owned electric and gas transmission and distribution utility delivering electricity and gas to customers in state taxpayer is subject_to the regulatory jurisdiction of the a with regards to its terms and conditions of service including the rates it can charge for the provision of service taxpayer is a member_of_an_affiliated_group headed by parent and files a consolidated federal_income_tax return with parent its investment tax_credits under former sec_46 on b the a issued a c this c in conjunction with the resulting legislation d strongly encouraged taxpayer to dispose_of its electric generation-related assets and liabilities as well as its wholesale power purchase contracts in order to create an industry structure that would allow for the eventual transition of the state market for electric power to a fully competitive market the a on f an administrative law judge issued an initial decision and report id r in connection with the proposal on g taxpayer entered into a stipulation with a number of the parties interested in taxpayer’s restructuring regarding certain aspects of the proposal on h the a issued a final_decision and order fd o which contained a number of relevant provisions these are quantification of taxpayer’s stranded costs two mechanisms to recover taxpayer’s stranded costs quantification of the value of taxpayer’s generation assets and authorization for taxpayer to sell its generation assets for full value as determined by the a in its fd o to i an unregulated affiliate of taxpayer which is a disregarded_entity all of whose membership interests are owned by parent on e taxpayer filed a comprehensive restructuring proposal proposal with at the date of the stipulation taxpayer had approximately dollar_figurej of aditc attributable to its generation assets neither the stipulation nor the fd o provided for the disposition of this amount upon the impending sale of the assets fearing such disposition may result in a violation of the investment_tax_credit normalization rules the fd o required taxpayer to seek a ruling from the internal_revenue_service to determine whether or not the value of the aditc can legitimately be credited to customers without violating the tax normalization policies of the internal_revenue_service to the detriment of the taxpayer and the customers and to provide a copy of that letter_ruling once received from the internal_revenue_service to the a and the k plr-157737-02 pursuant to the fd o on l taxpayer sold its generation assets to i taxpayer requests the internal_revenue_service to rule on the following issue taxpayer’s obligation to seek a ruling from the internal_revenue_service regarding the consequences under the investment_tax_credit normalization rules of the sale of its generation assets was reiterated in an order issued by the a on m in connection with docket no n ruling requested normalization rules set forth in former sec_46 if it credits to customers the aditc associated with the generating assets that have been sold to i as a part of taxpayer’s restructuring law and analysis taxpayer will not violate the requirements of the investment_tax_credit former sec_46 provides an election for ratable flow through under which an elector may flow through the investment_tax_credit to cost of service however former sec_46 provides that no investment_tax_credit is available if the taxpayer's cost of service for ratemaking purposes or in its regulated books of account is reduced by more than a ratable portion of the credit determined under former sec_46 and allowable by sec_38 also under former sec_46 no investment_tax_credit is available if the base to which the taxpayer's rate of return for ratemaking purposes is applied is reduced by reason of any portion of the credit determined under former sec_46 and allowable by sec_38 under former sec_46 the period of time used in computing depreciation expense for purposes of reflecting operating results in the taxpayer's regulated books of account shall be used former sec_46 provides that for purposes of determining ratable portions under sec_1_46-6 of the income_tax regulations ratable for purposes of former sec_46 is determined by considering the period of time actually used in computing the taxpayer's regulated depreciation expense for the property for which a credit is allowed regulated depreciation expense is the depreciation expense for the property used by a regulatory body for purposes of establishing the taxpayer's cost of service for ratemaking purposes such period of time shall be expressed in units of years or shorter periods units of production or machine hours and shall be determined in accordance with the individual useful_life or composite or other group asset account system actually used in computing the taxpayer's regulated depreciation expense a method of reducing is ratable if the amount to reduce cost of service is allocated ratably in proportion to the number of such units thus for example assume that the regulated depreciation expense is computed under the straight_line method by the method prescribed by sec_1_46-6 for determining whether the taxpayer's plr-157737-02 applying a composite annual percentage rate to original cost as defined for purposes of computing depreciation expense if cost of service is reduced annually by an amount computed by applying a composite annual percentage rate to the amount of the credit cost of service is reduced by a ratable portion if such composite annual percentage rate were revised for purposes of computing depreciation expense beginning with a particular accounting_period the computation of ratable portion must also be revised beginning with such period a composite annual percentage rate is determined solely by reference to the period of time actually used by the taxpayer in computing its regulated depreciation expense without reduction for salvage or other items such as over and under accruals cost of service for ratemaking is reduced by more than a ratable portion of the investment_tax_credit depends upon correlating the credit with the regulatory depreciable useful_life actually used for the property that generated the credit that the correlation must remain constant and current is illustrated by the requirement that the ratable portion must be adjusted to reflect correspondingly any revision to the composite annual percentage rate applied for purposes of computing regulated depreciation expense for computing the regulated depreciation expense there could no longer be any correlation between the property and the credit in that event the requirements of former sec_46 are violated if any portion of the credit is used to reduce the taxpayer's cost of service result the asset for which regulated depreciation expense is computed is no longer available consequently no portion of the related unamortized aditc remaining at the date of sale may be returned to customers by amortizing those aditc amounts over the period taxpayer recovers stranded costs from its customers conclusions violation if the remaining unamortized aditc balances or a proportionate part thereof existing at the date of sale are returned to customers by amortizing those amounts over the period taxpayer recovers stranded costs from its customers because taxpayer has sold the assets that generated the aditc the asset for which regulated depreciation expense is computed is no longer available consequently no portion of the related unamortized aditc remaining at the date of sale may be returned to customers by amortizing those aditc amounts over the period taxpayer recovers stranded costs from its customers should the property for which the aditc is allowed become no longer available in this case taxpayer has sold the assets that generated the aditc and as a hence in the ruling requested by taxpayer there would be a normalization plr-157737-02 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely peter c friedman in accordance with the power_of_attorney we are sending a copy of this letter to taxpayer’s authorized representatives we are also sending a copy of this letter to the industry director natural_resources and construction lm nrc enclosures copy copy for return cc peter c friedman senior technician reviewer branch office of associate chief_counsel passthroughs and special industries


t c summary opinion united_states tax_court kevin stockton petitioner v commissioner of internal revenue respondent docket no 20912-07s filed date kevin stockton pro_se kim-khanh thi nguyen for respondent laro judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case 1unless otherwise indicated section references are to the applicable versions of the internal_revenue_code code and rule references are to the tax_court rules_of_practice and procedure petitioner petitioned the court to redetermine respondent’s determination of a dollar_figure deficiency in petitioner’s federal_income_tax and a dollar_figure accuracy-related_penalty under sec_6662 and b following concessions we decide the following issues whether petitioner may deduct dollar_figure as an itemized_deduction for unreimbursed employee business_expenses we hold he may not whether petitioner may deduct dollar_figure as an itemized_deduction for charitable_contributions we hold he may not whether petitioner is liable for the accuracy-related_penalty we hold he is i preliminaries background the parties have submitted to the court a stipulation of facts with accompanying exhibits the stipulated facts and accompanying exhibits are incorporated herein by this reference petitioner resided in california when his petition to this court was filed ii petitioner’s employment petitioner is employed as a consultant on the automobile industry in that capacity he traveled from his home in california to various ford dealerships in the western united_states his employer reimbursed him up to dollar_figure a day for his traveling expenses petitioner used his personal vehicle on days during to drive to some of the ford dealerships in his region local dealerships petitioner’s employer reimbursed him for all of those automobile expenses petitioner traveled on days during to ford dealerships that were not local dealerships petitioner’s employer reimbursed him for all of his business_expenses related to that travel iii tax_return petitioner filed a form_1040 u s individual_income_tax_return for using the filing_status of single petitioner claimed on his return a dollar_figure itemized_deduction for unreimbursed employee business_expenses petitioner also claimed a dollar_figure itemized_deduction for charitable_contributions respondent disallowed both deductions in full but has since conceded that petitioner may deduct dollar_figure in charitable_contributions i deductions a burden_of_proof discussion petitioner bears the burden of proving that respondent’s determinations set forth in the notice_of_deficiency are incorrect see rule a 290_us_111 deductions are strictly a matter of legislative grace and petitioner must show that his claimed deductions are allowed by the code see rule a 292_us_435 petitioner also must keep sufficient records to substantiate any deduction that would otherwise be allowed by the code see sec_6001 sec_1 a income_tax regs while sec_7491 sometimes shifts the burden_of_proof to the commissioner that section is not applicable where as here petitioner has failed to meet the recordkeeping and substantiation requirements of the code see sec_7491 and b b unreimbursed employee business_expenses sec_162 allows a taxpayer to deduct the unreimbursed ordinary and necessary expenses_incurred during the taxable_year in carrying on any trade_or_business including expenses_incurred while away from home in the pursuit of a trade_or_business see 79_tc_1 see also 326_us_465 during petitioner’s employer reimbursed him for all of the business_expenses that he paid as to his employment we hold he is not entitled to any additional deduction related to his employment and we sustain respondent’s disallowance of petitioner’s claim to a deduction of dollar_figure in unreimbursed employee business_expenses c charitable_contributions petitioner seeks to deduct dollar_figure as a charitable_contribution for in addition to the dollar_figure allowed by respondent in support of that deduction petitioner testified that he contributed dollar_figure to his church dollar_figure to various other charities and bags of clothing which he valued at dollar_figure petitioner provided no independent evidence to substantiate his claim to any part of the dollar_figure deduction sec_1_170a-13 income_tax regs requires that monetary charitable_contributions of less than dollar_figure be substantiated by a canceled check a receipt from the recipient organization that lists the recipient’s name the date of the contribution and the amount thereof or other reliable written records that show the recipient’s name the date of the contribution and the amount thereof see also sec_170 sec_1_170a-13 income_tax regs generally requires as to noncash contributions that taxpayers maintain documentation for each contribution showing information such as the recipient’s name the contribution’s date and location and the contributed property’s description petitioner has failed to maintain the requisite documentation for any part of his claimed total of dollar_figure in charitable_contributions we decline to accept his uncorroborated self-serving testimony as to this matter see 87_tc_74 we sustain respondent’s determination that petitioner is not entitled to deduct any of the claimed dollar_figure ii accuracy-related_penalty respondent determined that petitioner is liable for an accuracy-related_penalty under sec_6662 and b sec_6662 and b imposes a penalty equal to percent of the portion of an underpayment_of_tax attributable to a taxpayer’s negligence or disregard of rules or regulations negligence connotes a lack of due care or failure to do what a reasonable and prudent person would do under the circumstances see 92_tc_1 affd 925_f2d_348 9th cir an accuracy-related_penalty is not applicable to any portion of an underpayment to the extent that the taxpayer had reasonable_cause for that portion and acted in good_faith with respect thereto see sec_6664 respondent bears the burden of production with respect to the applicability of the accuracy-related_penalty see sec_7491 that burden requires that respondent produce sufficient evidence that it is appropriate to impose the accuracy-related_penalty see 116_tc_438 once respondent meets this burden the burden_of_proof falls upon petitioner see id pincite petitioner may carry his burden by proving that he was not negligent ie he made a reasonable attempt to comply with the provisions of the code and was not careless reckless or in intentional disregard of rules or regulations see sec_6662 alternatively petitioner may establish that his underpayment was attributable to reasonable_cause and his acting in good_faith see sec_6664 we conclude that respondent has met his burden of production and that petitioner has failed to carry his burden_of_proof the record establishes that petitioner claimed substantial deductions to which he neither was entitled nor had a reasonable claim the record does not establish that petitioner made a reasonable attempt to comply with the provisions of the code that petitioner’s underpayment was attributable to reasonable_cause or that petitioner acted in good_faith as to the underpayment we sustain respondent’s determination with respect to the accuracy-related_penalty iii conclusion we have considered all of petitioner’s contentions and allegations and we conclude that those contentions and allegations not discussed herein are without merit or irrelevant to reflect the foregoing decision will be entered under rule


number release date id office uilc cca_2010030515541037 ---------- from ------------------- sent friday march pm to -------------------- cc ---------------------------------------------------- subject re ----------------------- if the sale occurred in year regardless of when payments are received that is when income attributable to the hot_assets must be recognized under sec_453 according to the earlier statements if it is fully recognizable in year it probably should not be recognized a second time when the payments are actually received sec_453 is outside my jurisdiction so i cannot opine on whether this earlier statement of the substantive treatment is correct -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------


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 b02 plr-135176-08 date date legend x ----------------------- ---------------------------- country ------------ date1 ------------------ date2 ------------------- date3 ---------------------- dear ---------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations for x to file an entity classification election the information submitted states that x was formed under the laws of country on date1 x represents that x is a foreign_entity eligible to elect to be treated as a partnership for federal tax purposes x intended to elect to be treated as a partnership for federal tax purposes effective on date2 on date3 x filed a form_8832 entity classification election electing to be treated as a partnership the election however did not contain all of the required signatures plr-135176-08 sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes elections are necessary only when an eligible_entity does not want to be classified under the default classification or when an eligible_entity chooses to change its classification sec_301_7701-3 provides that except for certain existing entities described in sec_301_7701-3 unless a foreign eligible_entity elects otherwise the entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single member that does not have limited_liability sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under sec_301 b by filing form_8832 with the appropriate service_center under sec_301_7701-3 this election will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified the date specified on form_8832 cannot be more than days prior to the date on which the election is filed 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 provides that the term regulatory election includes an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government based solely on 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 days from the date of this letter to file a form_8832 with the appropriate service_center and elect to be treated as a partnership for federal tax purposes effective date2 a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose plr-135176-08 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 internal_revenue_code and the regulations thereunder this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent 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 curt g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc


office_of_chief_counsel internal_revenue_service memorandum number release date cc corp b01 postf-137227-11 uilc date date to ------------------------ ---------------------- large business international from ------------------------- -------------------------------- corporate third party communication none date of communication not applicable subject whether notice_2008_83 operates to exclude certain bank loans from the computation of nubig nubil for purposes of sec_382 and sec_56 this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent legend taxpayer target date date a b c d ------------------------- ------------------------------- --------------------------- --------------------------- ------------- ------------ ---------------- ---------------- postf-137227-11 issues whether-----------------------------------------------------------------excludes------------------- from the computation of net_unrealized_built-in_gains nubigs and net unrealized built-in losses nubils for purposes of sec_382 and sec_56 conclusions ------------------------does not alter the nubig nubil computation for purposes of either section but rather serves only to allow ----------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ------------------------------ with regard to sec_382 taxpayer must include the -------- --------------------------------------------------------------------------------------------------------------------- --------- in its nubig nubil computation with regard to sec_56 taxpayer must reduce the basis of target’s assets for purposes of the adjusted_current_earnings computation facts taxpayer is a -----------------and the parent of a consolidated_group of corporations effective after the close of business on date taxpayer acquired target the acquisition and target became a member of taxpayer’s consolidated_group beginning with the taxable_year ending date for purposes of sec_382 taxpayer determined that target had a nubig of approximately dollar_figurea as discussed below taxpayer computed target’s nubig based on the assumption that assets giving rise to -------------------------------------------------------------- ------------ are to be excluded from the nubig nubil computation if such assets were included in target’s nubig nubil computation target would have a nubil in excess of dollar_figureb instead for the taxable_year ending date taxpayer determined that it had a tentative_minimum_tax of dollar_figurec which was less than its computed regular_tax_liability of dollar_figured in determining its adjusted_current_earnings ace for purposes of calculating its alternative_minimum_taxable_income amti taxpayer did not step down the basis of target’s assets pursuant to sec_56 law and analysis computation of nubig nubil for purposes of sec_382 postf-137227-11 sec_382 limits the extent to which a loss_corporation that has undergone an ownership_change may use pre-change losses to offset post-change taxable_income sec_382 governs the treatment of certain built-in gains and losses recognized with respect to assets that were held by a loss_corporation at the time of an ownership_change subparagraph h a of sec_382 provides that if a loss_corporation had a nubig at the time of the ownership_change the sec_382 limitation for a taxable_year will be increased by any recognized built-in gains rbigs for such taxable_year conversely subparagraph h b of sec_382 provides that if a loss_corporation had a nubil at the time of the ownership_change any recognized_built-in_loss rbil for a taxable_year is subject_to the sec_382 limitation in the same manner as if it were a pre-change_loss for these purposes the terms nubig and nubil mean with respect to any old_loss_corporation the amount by which i the fair_market_value of the assets of such corporation immediately before an ownership_change is more or less respectively than ii the aggregate adjusted_basis of such assets at such time sec_382 target was a loss_corporation that underwent an ownership_change in the acquisition thus taxpayer only may utilize target’s pre-change losses to the extent of the annual limitation calculated under sec_382 additionally if target had a nubil at the time of the ownership_change then any rbils with respect to assets held by target at the time of the acquisition are subject_to the sec_382 limitation as if they were pre- change losses on the other hand if target had a nubig at the time of the ownership_change then the sec_382 limitation is increased by any rbigs with respect to assets held at such time in computing target’s nubig nubil taxpayer wholly excluded certain assets held by target at the time of the ownership_change hereafter the ---------------- that were of a type that would give rise to -------------------------------------------------------- taxpayer thus determined that target had a nubig of approximately dollar_figurea had taxpayer included the - ------------------in the nubig nubil computation target would have had a nubil of approximately dollar_figureb instead although nothing in sec_382 or the regulations thereunder permits the ----------to be excluded from the nubig nubil computation taxpayer takes the position that -----------------requires nubig nubil to be computed in this manner --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ---------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- -------------------------------------------------------------- postf-137227-11 --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------- taxpayer makes two primary arguments in support of its position that --------------permits ------------------------to be excluded from the nubig nubil computation first taxpayer observes that ------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -------------------------------------------- taxpayer thus contends that ------------------------------- --------------------------------------------------------------------------------------------------------------------- -------------- requires that -----------not be treated as built-in or pre-change losses for any purpose under sec_382 including for purposes of computing nubig nubil we do not find taxpayer’s first argument to be persuasive the nubig nubil computation is not the subject of the notice in fact ------------------------------------------------ ---------------------------- rather the subject of --------------is ---------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------- in this vein ----------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ------------------------------------- moreover taxpayer’s conclusion that ----------------------------cannot create a nubil because ------------------------ such losses are not treated as built-in or pre-change losses for purposes of sec_382 is incorrect taxpayer’s position in this regard appears to be predicated on the assumption that losses generally must be treated the same way for purposes of determining rbils and computing nubil yet such is not the case the treatment of rbils incurred on bank loans or other assets and the computation of a loss corporation’s nubig nubil are separate matters as noted above -------------------------------------------------------------------------------- postf-137227-11 the separate and distinct nature of the rbil determination and the nubil computation is illustrated by notice_2003_65 2003_2_cb_747 notice_2003_65 provides two alternative safe harbors regarding the identification of built-in items under sec_382 h -the approach and the approach loss corporations with a nubil usually apply the approach for as indicated below this approach generally yields fewer rbils than the approach the approach generally incorporates the rules of sec_1374 and sec_1 and in calculating nubig nubil and identifying rbig rbil sec_1_1374-3 generally defines nubig as the amount that would be the amount_realized if at the beginning of the first day of the recognition_period the corporation had remained a c_corporation and had sold all its assets at fair_market_value to an unrelated party that assumed all its liabilities subject_to certain adjustments in turn items of income_or_deduction generally are treated as rbigs or rbils under sec_1_1374-4 if the item would have been properly included in gross_income or properly allowed as a deduction against gross_income before the beginning of the recognition_period by an accrual-method taxpayer this difference in methods of computing nubig nubil and rbig rbil is acknowledged in the preamble to the final regulations under sec_1374 where the irs and the treasury_department declined to extend the nubig nubil hypothetical sale approach to the computation of net_recognized_built-in_gain the irs and the treasury_department reached this conclusion because the nubig nubil computation is made in the aggregate whereas the net_recognized_built-in_gain calculation involves the determination whether and to what extent an individual item is an rbig or rbil thus with respect to the latter requiring taxpayers to posit a hypothetical sale in each instance would be unduly burdensome both for taxpayers and for the irs t d 1995_1_cb_170 under notice_2003_65 both the approach and the approach utilize the hypothetical sale approach to calculating nubig or nubil-this figure is the net amount of gain_or_loss that would be recognized in a hypothetical sale of the loss corporation’s assets to a third party for fair_market_value immediately before the ownership_change but these two approaches handle rbig rbil determinations differently the approach generally identifies rbig or rbil by comparing the loss corporation’s actual items of income gain deduction and loss with those items that would result if a sec_338 election had been made for the hypothetical purchase in contrast in cases other than sales and exchanges the approach generally relies on the accrual_method of accounting to identify income_or_deduction items as rbigs or rbils respectively in other words an item properly included in income or allowed as a deduction during the recognition_period generally is considered attributable to periods before the change_date under sec_382 and thus is treated as an rbig or rbil respectively if an accrual-method taxpayer would have included the item in income or been allowed a deduction for the item before the change_date the fact that nubig and nubil are computed in the same manner under both approaches but that rbigs and rbils are identified using different methodologies reveals that these determinations are separate and distinct postf-137227-11 in applying the accrual_method the approach generally does not treat income from a built-in_gain asset during the recognition_period as rbig because such income did not accrue before the change_date for example say that lossco has a dollar_figure nubig that is attributable in part to a patent with a fair_market_value of dollar_figure and an adjusted_basis of dollar_figure in year of the recognition_period lossco has dollar_figure of gross_income attributable to royalties collected in connection with the license of the patent this income item is not treated as an rbig because the income would not have been properly taken into account before the change_date by an accrual-method taxpayer see notice_2003_65 example as this example demonstrates an asset may be included in the nubig nubil computation even if income therefrom is not treated as an rbig the approach also deviates from the accrual_method in certain respects for example the approach generally treats cancellation-of-indebtedness income cod income as an rbig if the income arises from a debt owed by the loss_corporation at the beginning of the recognition_period but only if such item_of_income is properly taken into account during the first months of the recognition_period notice_2003_65 treats any reduction of tax basis under sec_108 and sec_1017 that occurs as a result of cod income realized within this 12-month_period as having occurred immediately before the ownership_change for purposes of the sec_382 rbig rbil determination but any such basis_reduction does not affect the loss corporation's nubig or nubil under sec_382 the rbig rbil determination and the nubig nugil computation are thus separate an item_of_income or deduction may be included in or excluded from the former without affecting the latter similarly the approach under notice_2003_65 generally treats a bad_debt deduction under sec_166 as an rbil if the deduction arises from a debt owed to the loss_corporation at the beginning of the recognition_period but only if such deduction is properly taken into account during the first months of the recognition_period consequently a debt_instrument may be treated as an asset for nubig nubil purposes even though a bad_debt deduction with respect thereto will not be treated as an rbil if it properly arises after the first year of the recognition_period second taxpayer argues that the purpose of -----------------was to ----------------------------- --------------------------------------------------------------------------------------------------------------------- ----------------------------------- and that excluding ------------------ from the nubig nubil computation furthers that purpose as support for its argument taxpayer cites --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- postf-137227-11 --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- ---------------------- based upon such language taxpayer concludes that -------------------should be excluded from the nubig nubil computation because ------------------- were not readily ascertainable at the time of the acquisition yet ------------------------------does not constitute official guidance upon which taxpayers are entitled to rely furthermore ---------------never explicitly addresses whether ---------- ---------are to be excluded from the nubig nubil computation and what it does state about the actual operation of ----------------is inconsistent with taxpayer’s position specifically ---------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- ------------------------------------------------------------ emphasis added the reference to --------------------------------makes clear that --------------------------------------- --------------------------------------------------------------------------------------------------------------------- ------------------- nothing in ------------------------addresses the nubig nubil computation or suggests that the notice altered the operation thereof thus even if excluding -------- --------- from the nubig nubil computation would further the goal of ------------------------- ---------------------- nothing in -----------------------suggests that --------------was intended to go that far moreover whether or not -------------------were readily ascertainable at the time of the acquisition is irrelevant to target’s nubig nubil calculation for the acquisition is governed by sec_382 sec_382 provides that i f percent or more in value of the stock of a corporation is acquired in transaction or in a series of related transactions during any 12-month_period for purposes of determining the net_unrealized_built-in_loss the fair_market_value of the assets of such corporation shall not exceed the grossed up amount_paid for such stock properly adjusted for indebtedness of the corporation and other relevant items in other words for purposes of the pertinent nubil calculation taxpayer simply needed to use the stock price for target subject_to certain adjustments nothing in the ----------suggests that --------------was intended to trump or alter the application of sec_382 postf-137227-11 finally taxpayer’s approach would affect the tax treatment of items of gain and loss other than ---------------------------------------------------------------------------- in other words if a taxpayer were able to exclude --------------from the nubig nubil computation then the taxpayer could end up with a nubig rather than a nubil as a consequence none of the taxpayer’s built-in losses-whether losses on ---------------------------or otherwise- would be subject_to the sec_382 limitation moreover the taxpayer’s rbigs would increase the sec_382 limitation such results go well beyond ------------------------------- --------------- in sum ---------------------has no impact on the nubig nubil computation for purposes of sec_382 but rather ------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------- computation of nubig nubil for purposes of sec_56 for purposes of determining a corporation’s alternative_minimum_tax amt the corporation’s alternative_minimum_taxable_income amti is increased by percent of the excess if any of the corporation’s adjusted_current_earnings ace over the corporation’s amti determined without the ace_adjustment and without regard to the alternative_tax nol deduction sec_56 a corporation’s ace is equal to its amti with certain adjustments under one such adjustment a loss_corporation with a nubil that undergoes an ownership_change must reduce the basis of the corporation’s assets to their fair market values as of the date of the ownership_change more specifically sec_56 provides that if i there is an ownership_change within the meaning of sec_382 in a taxable_year beginning after with respect to any corporation and ii there is a net_unrealized_built-in_loss within the meaning of sec_382 with respect to such corporation then the adjusted_basis of each asset of such corporation immediately after the ownership_change shall be its proportionate share determined on the basis of respective fair market values of the fair_market_value of the assets of such corporation determined under sec_382 immediately before the ownership_change in calculating its ace for the taxable_year ending date taxpayer did not reduce the basis of target’s assets pursuant to sec_56 because taxpayer treated target as having a nubig rather than a nubil at the time of the ownership_change for reasons discussed above target’s ------------------should have been included in its nubig nubil computation for regular_tax purposes and target should have been treated as having a nubil rather than a nubig on the date of the acquisition according to sec_1_56_g_-1 e xcept as otherwise provided by regulations or other guidance issued by the internal_revenue_service all internal_revenue_code provisions postf-137227-11 that apply in determining the regular taxable_income of a taxpayer also apply in determining adjusted_current_earnings moreover sec_56 quoted above explicitly follows sec_382 for purposes of determining whether there is a nubil consequently pursuant to sec_56 the basis of target’s assets should have been reduced for purposes of the ace computation case development hazards and other considerations --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call if you have any further questions


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 intl bo2 plr-135544-10 date november ty ------- ty ------- legend partnership x --------------------- ------------------------ corporation a -------------------------------------- corporation b ------------------ country ----------- state ------------- s --- t --- dear ------------- this is in response to a letter dated date requesting certain rulings on behalf of partnership x 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 facts partnership x is a limited_liability_company formed under the laws of state and treated as a partnership for u s federal tax purposes partnership x has s members t of which are u s persons us members the us members consist of u s individuals and a domestic_corporation collectively non-partnership members that each own less than percent of partnership x and domestic partnerships partnership members that each own more than percent of partnership x taxpayer has represented that notice_2010_41 2010_22_irb_715 does not apply to partnership x’s structure plr-135544-10 partnership x wholly-owns corporation a a limited_liability_company formed under the laws of state that is disregarded as an entity separate from partnership x for u s federal tax purposes corporation a in turn wholly-owns corporation b an entity formed under the laws of country which is treated as a corporation for u s federal tax purposes corporation b will earn income that is expected to be passive_income within the meaning of internal_revenue_code code sec_1297 corporation b qualifies as a controlled_foreign_corporation cfc as defined under code sec_957 because partnership x is a domestic_partnership that wholly owns corporation b for u s federal tax purposes in addition corporation b expects to qualify as a passive_foreign_investment_company pfic without taking into account the application of code sec_1297 as defined under code sec_1297 ruling requested corporation b will not be treated as a pfic with respect to partnership x the non- partnership members or any direct or indirect owner of a partnership member pursuant to code sec_1297 during the portion of partnership x’s holding_period that partnership x is a u s shareholder within the meaning of code sec_951 with respect to corporation b and corporation b is a cfc law code sec_957 defines a cfc as a foreign_corporation with regard to which more than percent of the total combined voting power of all classes of stock entitled to vote or the total value of the stock of the corporation is owned directly indirectly or constructively by u s shareholders code sec_951 defines a u s shareholder for cfc purposes as a u_s_person who owns directly indirectly or constructively percent or more of the total combined voting power of all classes of stock entitled to vote of the foreign_corporation u s shareholder code sec_7701 defines a u_s_person as a u s citizen or resident a domestic_partnership a domestic_corporation and any domestic estate_or_trust code sec_702 provides generally that each partner in a partnership takes into account a distributive_share of the partnership’s income or gain in determining the partner’s income_tax code sec_702 provides that the character of an item_of_income or gain included in a partner’s distributive_share is determined as if such item were realized directly from plr-135544-10 the source from which realized by the partnership or incurred in the same manner as incurred by the partnership code sec_1297 defines a pfic as any foreign_corporation if either at least percent of the corporation’s income for the taxable_year is passive_income or the average percentage of assets held by the corporation during the taxable_year that produce or are held for the production of passive_income is at least percent code sec_1297 defines passive_income for purposes of the pfic income test as income which is of a kind which would be foreign_personal_holding_company_income as defined in code sec_954 subject_to certain exceptions code sec_1298 provides that a foreign_corporation is treated as a pfic with respect to a u s shareholder and the u s shareholder is subject_to the excess_distribution regime if the foreign_corporation qualified as a pfic but not a qualified_electing_fund at any point during the u s shareholder’s holding_period code sec_1297 provides that a corporation shall not be treated with respect to a shareholder as a pfic during the qualified_portion of such shareholder’s holding_period with respect to the stock in such corporation overlap rule code sec_1297 defines qualified_portion to mean the portion of a shareholder’s holding_period which is after date and during which the shareholder is a u s shareholder of the corporation and the corporation is a cfc the legislative_history to code sec_1297 provides that the overlap rule was enacted because of a concern about the unnecessary complexity caused by the application of the subpart_f and pfic regimes to the same shareholders to address this concern the legislative_history to code sec_1297 states that a shareholder that is subject_to current inclusion under the subpart_f rules with respect to stock of a pfic that is also a cfc generally is not subject also to the pfic provisions with respect to the same stock analysis it is expected that corporation b will qualify as a pfic as defined under code sec_1297 partnership x a domestic_partnership is a u_s_person within the meaning of code sec_7701 partnership x is the sole owner of corporation b for u s federal tax purposes and thus is a u s shareholder with respect to corporation b accordingly partnership x will be subject_to the subpart_f rules with respect to corporation b and will not be subject_to the pfic regime with respect to corporation b pursuant to the overlap rule the non-partnership members will take into account their distributive shares of partnership x’s income including any sec_951 inclusion with respect to corporation b the partners in the partnership members will take into plr-135544-10 account their distributive_share of their respective partnership member’s distributive_share of partnership x’s income including any sec_951 inclusion with respect to corporation b ruling based on the information submitted and the representations made we rule as follows corporation b will not be treated as a pfic with respect to partnership x the non- partnership members or the direct or indirect owners of the partnership members pursuant to code sec_1297 during the qualified_portion within the meaning of code sec_1297 of partnership x’s holding_period that partnership x is a u s shareholder of corporation b and corporation b is a cfc taxpayer has represented that notice_2010_41 does not apply to partnership x’s structure in the event a u_s_person does beneficially own an interest in partnership x directly or indirectly through a cfc as described in notice_2010_41 this ruling does not apply to such u_s_person 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_ruling this letter_ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter_ruling must be attached to any federal_income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling 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 jeffery mitchell branch chief branch associate chief_counsel international


t c summary opinion united_states tax_court henry moses and denise gilmore-moses petitioners v commissioner of internal revenue respondent docket no 9873-10s filed date henry moses and denise gilmore-moses pro sese brian a pfeifer for respondent summary opinion carluzzo special_trial_judge this case was heard pursuant to the provisions of section of the internal_revenue_code in effect when the 1section references other than to sec_7463 are to the internal_revenue_code_of_1986 as amended in effect for the years in issue rule references are to the continued petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case in a notice_of_deficiency dated date notice respondent determined deficiencies in and penalties with respect to petitioners’ federal_income_tax as follows year deficiency penalty sec_6662 dollar_figure big_number dollar_figure dollar_figure background some of the facts have been stipulated and are so found at the time the petition was filed petitioners resided in florida petitioners are and were at all times relevant married to each other they filed a timely joint federal_income_tax return for each year in issue both returns were prepared by a paid federal_income_tax return preparer their return includes a schedule a itemized_deductions a schedule c profit or loss from business relating to defiant records records and a schedule c relating to continued tax_court rules_of_practice and procedure aspiring travel agency travel their return also includes a schedule c relating to records and a schedule c relating to travel the schedules c relating to records and travel for and are hereinafter referred to as schedules c the issues for decision are whether for petitioners are entitled to certain deductions claimed on the schedule a whether petitioners are entitled to certain deductions claimed on the schedules c and whether petitioners are liable for a sec_6662 accuracy-related_penalty for either year in issue during the years in issue petitioners were both employed as sanitation truck drivers petitioners’ employers provided the sanitation trucks and other necessary equipment henry moses worked for the city of north bay village florida denise gilmore-moses worked for the city of south miami florida neither petitioner was required to travel away from home as an employee of either of the above-referenced cities from time to time during the years in issue each petitioner purchased fuel at his or her expense for his or her sanitation truck both could have been reimbursed for doing so by their respective employers if they had requested reimbursement on the schedule a included with their return petitioners claimed a dollar_figure unreimbursed employee_business_expense deduction relating to their respective employments as sanitation truck drivers they also claimed deductions for medical_expenses and charitable_contributions on the schedule a in addition to their employment as sanitation truck drivers each petitioner was the sole_proprietor of a business according to the schedules c both businesses were conducted from petitioners’ residence income and deductions relating to the sole proprietorships are shown on the schedules c in the notice respondent disallowed the entire unreimbursed employee_business_expense deduction claimed on the schedule a disallowed a portion of the medical_expense_deduction claimed on the schedule a disallowed a portion of the charitable_contribution_deduction claimed on the schedule a disallowed most of the deductions claimed on the schedules c and imposed a sec_2according to a form_2106 employee business_expenses for each petitioner included with petitioners’ return the amount includes vehicle expenses parking fees and tolls other unspecified business_expenses and expenses for meals and entertainment 3actually no income is shown for either business for for the schedule c for records shows dollar_figure of income but no income is reported on travel’s schedule c respondent allowed some of the deductions claimed on the schedules c but disallowed most for lack of substantiation and or technical reasons a accuracy-related_penalty for each year in issue other adjustments made in the notice are computational and will not be addressed in this summary opinion i disallowed deductions discussion as we have observed in countless opinions deductions are a matter of legislative grace and the taxpayer bears the burden_of_proof to establish entitlement to any claimed deduction rule a 503_us_79 292_us_435 this burden requires the taxpayer to substantiate deductions claimed by keeping and producing adequate_records that enable the commissioner to determine the taxpayer’s correct_tax liability sec_6001 65_tc_87 aff’d per curiam 540_f2d_821 5th cir a taxpayer claiming a deduction on a federal_income_tax return must demonstrate that the deduction is allowable pursuant to some statutory 4according to the notice petitioners are not entitled to the recovery rebate credit for because of other adjustments made in the notice otherwise the record is incomplete on the point 5petitioners do not claim that the provisions of sec_7491 are applicable and we proceed as though they are not provision and must further substantiate that the expense to which the deduction relates has been paid_or_incurred see sec_6001 hradesky v commissioner t c pincite sec_1_6001-1 income_tax regs both petitioners testified at trial simply put their testimonies lead to the inescapable conclusion that the deductions here in dispute are little more than numbers shown on their returns neither petitioner could explain how the amounts shown for the disputed deductions were computed or why the expense to which a particular deduction relates is deductible both blamed their return preparer for any overstated or improper deductions equally as problematic for petitioners is their failure to substantiate any of the deductions here in dispute according to petitioners their records were stolen from their home during a robbery in situations where the taxpayer’s records are unavailable through no fault of the taxpayer the court expects the taxpayer to make some attempt to reconstruct those records see gizzi v commissioner 6petitioners’ exhibits include bank records and two ledgers the bank records show numerous transactions and the ledgers show various amounts expended on various dates throughout the years in issue the relationship between the information contained in these exhibits and the deductions here in dispute is less than clear t c petitioners made no such effort even though for example it would seem that substantiation for the medical_expense_deduction here in dispute would have been readily available from the provider s of the medical services to which the deduction relates petitioners could not explain many of the disallowed deductions and they failed to properly substantiate any of them respondent’s disallowances of the many deductions here in dispute are sustained ii accuracy-related_penalties for each year in issue respondent imposed a sec_6662 accuracy-related_penalty that section imposes an accuracy-related_penalty equal to of the underpayment_of_tax required to be shown on the taxpayer’s return that among other grounds is attributable to a substantial_understatement_of_income_tax the underpayment_of_tax required to be shown on petitioners’ return for each year and the understatement of income_tax equal the deficiency see sec_6211 sec_6662 sec_6664 because the understatement of income_tax exceeds dollar_figure for each year in issue it is a substantial_understatement_of_income_tax sufficient to support the imposition of a sec_6662 accuracy-related_penalty see sec_6662 that being so respondent has met his burden of production with respect to the penalty see sec_7491 nevertheless if it is shown that petitioners acted in good_faith and there is reasonable_cause for the underpayment_of_tax for each year then the sec_6662 accuracy-related_penalty is not applicable for any of those years see sec_6664 116_tc_438 according to petitioners they relied upon their return preparer for advice regarding the types and amounts of expenses that could be deducted according to petitioners their return preparer is responsible for any improper or overstated deduction reliance upon the advice of a tax professional may establish reasonable_cause and good_faith for the purpose of avoiding liability for the sec_6662 penalty see 469_us_241 reliance on a tax professional however is not an absolute defense but merely a factor to be considered 89_tc_849 aff’d 904_f2d_1011 5th cir aff’d 501_us_868 the taxpayer claiming good-faith reliance on a competent adviser must demonstrate that the adviser was a competent professional who had sufficient expertise to justify reliance the taxpayer provided necessary and accurate information to the adviser and the taxpayer actually relied in good_faith on the adviser’s judgment 115_tc_43 aff’d 299_f3d_221 3d cir petitioners did not call their tax_return_preparer as a witness there is no evidence in the record as to the advice their tax_return_preparer might have given them no evidence to support a determination that petitioners acted reasonably or in good_faith in relying upon any such advice no evidence as to their tax_return preparer’s qualifications no evidence that petitioners disclosed to their tax_return_preparer all relevant facts and circumstances and no evidence that the advice was based on reasonable factual or legal assumptions in short petitioners have failed to establish that they acted in good_faith with respect to the underpayment_of_tax required to be shown on their return for each year in issue they are liable for a sec_6662 accuracy-related_penalty for each year in issue to reflect the foregoing decision will be entered under rule to allow the parties to reflect the proper treatment of the recovery rebate credit


acknowledged significant advice may be disseminated office_of_chief_counsel internal_revenue_service memorandum tl-n-3284-98 date sep sca released to assistant district_counsel kansas-missouri district cc msr ksm kcy attention dale p kensinger from assistant chief_counsel employee_benefits and exempt_organizations cc ebeo subject significant service_center advice this responds to your request for significant advice dated date regarding whether amounts received for services performed in a work release program or while at a halfway house qualify as earned_income for purposes of the earned_income_tax_credit eic under sec_32 of the internal_revenue_code disclosure statement unless specifically marked acknowledged significant advice may be disseminated above this memorandum is not to be circulated or disseminated except as provided in paragraphs iii d and iv a of part of the ccdm see office_of_chief_counsel notice dated date regarding service_center advice procedures this document may contain confidential information subject_to the attorney-client and deliberative_process privileges therefore this document shall not be disclosed beyond the office or individual s who originated the question discussed herein and are working the matter with the requisite need to know in no event shall it be disclosed to taxpayers or their representatives issue whether amounts received for services performed in a work release program or while at a halfway house are earned_income for purposes of the eic conclusion amounts received for services performed in a work release program or while at a halfway house are amounts received while the individual is an inmate at a penal institution those amounts are excluded from the definition of earned_income under sec_32 of the code law and analysis sec_32 of the code allows an eic in the case of an eligible_individual generally the amount of the eic is based on earned_income earned_income is defined in sec_32 of the code to include wages salaries tips and other employee compensation amounts received for services provided by an individual while the individual is an inmate at a penal institution are excluded from the definition of earned_income by sec_32 of the code sec_32 of the code was added by sec_723 of the uruguay round agreements act publaw_103_465 enacted on date the ways_and_means_committee report and the senate_finance_committee report contain an identical explanation of this addition the eitc is designed to alleviate poverty and to provide work incentives to low-income individuals because of the compulsory nature of much of the work performed by prison inmates it does not further the objectives of the eitc to include in earned_income for eitc calculations any amounts paid for inmates’ services see h_r rep part i 103d cong 2d sess s rep 103d cong 2d sess although not defined in sec_32 of the code or its legislative_history the phrase penal institution is a generic term that includes places of confinement for individuals convicted of a crime such as jails prisons workhouses and other correctional facilities see black’s law dictionary 6th ed amjur 2d sec_2 and supp an inmate is a person confined to a prison penitentiary or penal institution see black’s law dictionary 6th ed no case law arising under sec_32 of the code addresses the issue of whether amounts received for services performed through a work release program or while at a halfway house are considered earned_income however discussions of these programs in other contexts provide guidance on this issue revrul_75_325 1975_2_cb_415 concerns the status of prison inmates who performed services for federal prison industries inc by authority of the president and congress the corporation was required to provide employment for all inmates in penal and correctional facilities inmates were paid a sub-minimum wage pursuant to the fair labor standards act of and were subject_to disciplinary action for refusing to work the service held that the relationship between the inmates and federal prison industries inc arises from the incarceration of the inmates and the legal duty_of the corporation to provide rehabilitative labor accordingly the service held that there was no legal relationship of employer and employee for federal employment_tax purposes in cases considering whether there is a violation of due process when an individual is transferred out of a work release program or halfway house courts indicate that an individual who participates in a work release program or is transferred to a halfway house is still an inmate under confinement even though that individual is allowed to leave the prison facilities to work through the work release program or through the halfway house these cases also indicate that the individual has not been released from the penal institution the imposed sentence has not ended and the individual can be returned to the general prison population for violation of the work release program or halfway house rules see generally 813_f2d_1 1st cir 758_f2d_1416 11th cir 880_fsupp_928 d c mass although an individual may be allowed to participate in a work release program those individuals are still confined to the penal institution and must return to the penal institution when not performing services although the work performed by those individuals is not performed at the penal institution itself it is performed while the individual is an inmate at a penal institution neither sec_32 of the code nor its legislative_history suggests that the place where the work is performed is relevant to a determination of whether the services are provided while the individual is an inmate at a penal institution thus any payments received by the inmate while performing services in a work release program are amounts received while the individual is an inmate at a penal institution those amounts are excluded from the definition of earned_income under sec_32 of the code with respect to individuals transferred to a halfway house those individuals have not been released from their sentences can be returned to the prison facility and are usually required to perform services although these individuals are not confined to a prison jail or penitentiary they are confined to the halfway house for the remainder of their sentence thus a halfway house falls within the general definition of a penal institution accordingly any amounts received for services performed by an inmate while at a halfway house are amounts received for services performed while at a penal institution those amounts are excluded from the definition of earned_income under sec_32 of the code if you have any questions regarding this memorandum please call assistant chief_counsel employee_benefits and exempt_organizations by s mark schwimmer chief branch


department of the treasury internal_revenue_service washington d c cc dom fs p si uilc date internal_revenue_service national_office field_service_advice number release date memorandum for attn from subject assistant chief_counsel field service cc dom fs this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend taxpayer year year year v w dollar_figurex dollar_figurey a dollar_figure dollar_figure issues whether taxpayer properly elected to treat his rental_real_estate_activities in year and year as one activity under sec_469 and sec_1_469-9 if taxpayer did not make a proper election under sec_469 whether he substantially complied with the provisions of sec_1_469-9 in year and year entitling him to treat his rental_real_estate_activities as one activity under sec_469 if taxpayer did not make a proper election under sec_469 and has not substantially complied with sec_1_469-9 whether he can obtain a judicial extension of time to file the election for year and year without pursuing administrative relief under sec_301_9100-3 conclusions taxpayer failed to properly elect to treat his rental_real_estate_activities in year and year as one activity under sec_469 and sec_1_469-9 taxpayer did not substantially comply with the provisions of sec_1_469-9 in year or year having failed to pursue administrative relief under sec_301_9100-3 taxpayer is not entitled to a judicial extension of time to file the election for year and year under sec_469 facts during year and year taxpayer owned several rental properties neither taxpayer nor his family used the properties for personal purposes during year or year in year taxpayer performed v hours of personal services with respect to the rental properties during the same year taxpayer performed w hours of personal services as a commercial airline pilot in year taxpayer has not established the hours of personal services performed with respect to the rental properties or as a commercial airline pilot you estimate that taxpayer performed in excess of hours of personal services with respect to the rental properties you estimate further that more than one-half of the personal services performed by taxpayer in trades_or_businesses were performed with respect to the rental activities on his year and year form sec_1040 individual_income_tax_return taxpayer separately_stated the income and expenses from each rental real_estate interest on schedule e all properties showed a net_loss the net losses were aggregated and the total loss dollar_figurex for year and dollar_figurey for year was reported on line of the form sec_1040 in year prior to filing the year return taxpayer’s income_tax_return_preparer contacted a to determine the proper manner of making the election under sec_469 it is not clear what information a imparted to taxpayer’s tax_return_preparer taxpayer did not attach to his year or year income_tax return a statement as required under sec_1_469-9 indicating that he elected under sec_469 to treat his rental_real_estate_activities as a single activity taxpayer has not requested an extension of time to make an election under the administrative relief provisions set forth in sec_301_9100-3 and he has declined district counsel’s suggestion to seek such administrative relief taxpayer made a valid election under sec_469 in year law and analysis issue in general a taxpayer is allowed to deduct all ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business sec_162 an individual is allowed to deduct all ordinary and necessary expenses paid_or_incurred during the taxable_year for the production_or_collection_of_income for the management_conservation_or_maintenance_of_property_held_for_the_production_of_income or in connection with the determination collection_or_refund_of_any_tax sec_212 an individual generally is not allowed a passive_activity_loss or credit sec_469 and a a a passive_activity is any activity which involves the conduct of any trade_or_business in which the taxpayer does not materially participate sec_469 except as provided in sec_469 a passive_activity includes any rental_activity regardless of whether the taxpayer materially participates in the activity sec_469 and if a taxpayer comes within sec_469 a rental real_estate activity is not by definition a passive_activity sec_469 pursuant to sec_469 a - if this paragraph applies to any taxpayer for a taxable year- i paragraph shall not apply to any rental real_estate activity of such taxpayer for such taxable_year and ii this section shall be applied as if each interest of the taxpayer in rental real_estate were a separate activity notwithstanding clause ii a taxpayer may elect to treat all interests in rental real_estate as one activity nothing in the preceding provisions of this subparagraph shall be construed as affecting the determination of whether the taxpayer materially participates with respect to any interest in a limited_partnership as a limited_partner sec_469 provides in part that sec_469 shall apply to a taxpayer for a taxable_year if-- i more than one-half of the personal services performed in trades_or_businesses by the taxpayer during such taxable_year are performed in real_property trades_or_businesses in which the taxpayer materially participates and ii such taxpayer performs more than hours of services during the taxable_year in real_property trades_or_businesses in which the taxpayer materially participates sec_469 provides that the term real_property_trade_or_business means- any real_property development redevelopment construction reconstruction acquisition conversion rental operation management leasing or brokerage trade_or_business a taxpayer is treated as materially participating in an activity if the taxpayer is involved in the operations of the activity on a basis which is regular continuous and substantial sec_469 a qualifying taxpayer is a taxpayer that owns at least one interest in rental real_estate and meets the requirements of sec_469 sec_1_469-9 and c to make the election to treat all interests in rental real_estate as a single rental real_estate activity the qualifying taxpayer must file a statement with his original income_tax return for the taxable_year sec_1_469-9 the statement must contain a declaration that the taxpayer is a qualifying taxpayer for the taxable_year and is making the election pursuant to sec_469 sec_1_469-9 sec_1_469-9 was added by t d 1996_1_cb_73 and is effective for taxable years beginning on or after date and to elections made under sec_469 and sec_1_469-9 with returns filed on or after date accordingly sec_1_469-9 is applicable for taxpayer’s year and year tax years the tax_court has held that a taxpayer may not retroactively make the election under sec_469 if no election under sec_469 is made the passive_loss_rules are applied as if each interest of the taxpayer in rental real_estate were a separate activity see notice of service of transcript in boyce v commissioner no t c filed date if taxpayer met the requirements of c b his rental_real_estate_activities were not by definition passive activities however he would have to show that he materially participated in each rental real_estate activity or if he elected to treat all of his rental real_estate interests as one activity that he materially participated in the one activity taxpayer failed to make the election by filing a statement with his original income_tax return for year and year as required under sec_1_469-9 accordingly taxpayer is not entitled to treat his interests in rental real_estate as one activity issue substantial compliance with a regulation is sufficient when the regulation requires a procedural detail that does not go to the essence of the statute if the requirement goes to the essence of the statute it is mandatory and must be met 783_f2d_1201 5th cir aff’g 83_tc_831 81_tc_709 69_tc_837 42_tc_308 to determine whether a regulatory provision setting forth how an election is to be made goes to the essence of the statute and therefore must be literally complied with the following factors are considered whether the taxpayer’s failure to comply fully defeats the purpose of the statute proposed_regulations providing guidance for making an election under sec_469 were published on date prop sec_1_469-9 fed reg the subparagraph in the proposed_regulations addressing the election is identical to the subparagraph in the final_regulation we express no opinion as to whether taxpayer satisfies the requirements of sec_469 the relationship of the regulatory requirement to other provisions the terms of the underlying statute whether the sanction imposed on the taxpayer for the failure is excessive and out of proportion to the default whether the taxpayer attempts to benefit from hindsight by adopting a position inconsistent with his original action or omission whether the commissioner is prejudiced by the untimely election and whether the regulation provided with detailed specificity the manner in which an election was to be made american air filter co t c pincite 60_tc_910 whether a taxpayer materially participates in his rental_real_estate_activities is determined as if each interest of the taxpayer in rental real_estate is a separate activity unless the taxpayer elects under sec_469 to treat all interests in rental real_estate as one activity if the taxpayer does not attach the required election statement to the return the service cannot otherwise discern from the return that the election was made and cannot determine whether the taxpayer needed to meet the substantive requirement of sec_469 accordingly the requirement to file an election under sec_469 goes to the essence of the statute and must be met in addition if an election is made the election is binding for the taxable_year in which it is made and for all future years in which the taxpayer is a qualifying taxpayer even if there are intervening years in which the taxpayer is not a qualifying taxpayer sec_1_469-9 the taxpayer may revoke the election only in the taxable_year in which a material_change in the taxpayer’s facts and circumstances occurs or in a subsequent year in which the facts and circumstances remain materially changed from those in the taxable_year for which the election was made sec_1_469-9 to revoke the election the taxpayer must file a statement with the taxpayer’s original income_tax return for the year of revocation the statement must contain a declaration that the taxpayer is revoking the election and an explanation of the nature of the material_change sec_1_469-9 based on the above the filing of an election with the taxpayer’s income_tax return notifies the service of the taxpayer’s intention to treat his interests in rental real_estate as one activity whether the election is made potentially impacts the character of losses generated from the rental real_estate interests and treatment of suspended losses upon disposition of an interest for the year of election and all subsequent years until the election is revoked see sec_469 accordingly the requirement to file an election under sec_469 goes to the essence of the statute is mandatory and must be met to hold otherwise would permit a taxpayer to make no election until he is audited and forced to make the election in effect taxpayers’ position would reward a taxpayer who plays the audit_lottery thus taxpayers have shown no justification for disregarding the commissioner’s regulation notice of service of transcript boyce v commissioner no slip op pincite because taxpayer failed to comply with sec_1_469-9 in year and year he is not entitled to treat his rental real_estate interests as one activity in those years even if the court determines that substantial compliance with sec_1_469-9 is sufficient because the regulation requires a procedural detail that does not go to the essence of the statute taxpayer failed to substantially comply with the regulation the courts have found substantial compliance where the filing of an election merely confirms an election that has been made in substance while no court has addressed the election requirements set forth in sec_1_469-9 cases addressing other elections illustrate what constitutes substantial compliance for example in 42_tc_308 the court held that the taxpayer substantially complied with an election to have his proprietorship taxed as a corporation under sec_1361 when he filed the election but failed to include some of the required information establishing that the qualifications of sec_1361 were met and failed to include an agreement required by the regulations in 61_tc_5 the court held that the taxpayer substantially complied with an election to treat a charitable_contribution made within ½ months after the close of the previous taxable_year as deductible in the previous taxable_year in that case the taxpayer claimed the deduction on its return but failed to attach a copy of the corporate minutes authorizing the contribution and the verified written declaration of an officer of the corporation as required by the regulations in american air filter co t c pincite the court held that the taxpayer substantially complied with an election under sec_963 where the taxpayer fulfilled the essential purpose of sec_963 and its failure_to_file the election was a clerical omission in 74_tc_458 the court held that when a partnership included all the information required for an election under sec_1 k - b except the per-unit information the partnership had substantially complied with the regulations on his year and year income_tax returns taxpayer separately_stated the income and expenses from each rental real_estate interest on three schedules e all properties showed a net_loss the net losses were aggregated and the total loss dollar_figurex for year and dollar_figurey for year was reported on line of each form_1040 as filed the year and year income_tax returns are devoid of any indication that taxpayer intended to make an election under sec_469 to the contrary the returns were filed in the same manner they would have been filed if taxpayer had not intended to make the election accordingly taxpayer has failed to substantially comply with sec_1_469-9 and is therefore not entitled to an election under sec_469 see eg 69_tc_837 underlying requirement that an application_for certification had been made to the proper state_certifying_authority before the return is filed relates to the essential qualification for election for rapid amortization under sec_169 and is not a mere procedural detail dunanvant v commissioner 63_tc_316 failure_to_file election required by sec_333 precluded taxpayers’ use of sec_333 because the election had a substantive effect on the classification of the particular individual shareholder as a qualified_electing_shareholder and on the status of every other electing individual because of an percent rule in sec_333 and valdes t c pincite taxpayers failed to make an unequivocal election to use the extended expropriation_loss carryover provisions the fact that taxpayer’s representative inquired as to how to make the election and that taxpayer may have intended to make such an election is insufficient an election under sec_469 reflects the taxpayer’s unequivocal agreement to take the benefits and burdens of treating all interests in rental real_estate as one activity taxpayer failed to indicate on his year and year income_tax returns that he intended to accept such benefits and burdens see 783_f2d_1201 5th cir aff’g 83_tc_831 n ineteen bishops swearing as to taxpayers’ subjective intent would not carry this argument because it contends for an irrelevant fact the commissioner did not have access to the taxpayers’ workpapers and was not otherwise informed of their state of mind taxpayer contends that he substantively complied with sec_1_469-9 by combining all income and losses from his rental real_estate interests on line of the year and year income_tax returns regardless of whether a taxpayer makes an election under sec_469 all income and losses from rental real_estate interests are reported on schedule e with the net_income or loss aggregated and reported on line accordingly the method used by taxpayer to report his rental real_estate interests is not indicative of whether he intended to make an election under sec_469 taxpayer also contends that he substantively complied with sec_1_469-9 because he treated the income and losses from the rental_real_estate_activities as nonpassive rather than passive taxpayer points out that in the year prior to year the activities were considered passive and that he did not combine these prior year passive losses with year and year losses this argument does not distinguish between the exception under sec_469 allowing a qualified_taxpayer to treat losses from rental real_estate interests in which he materially participated as nonpassive and the election under sec_469 allowing a taxpayer to elect to treat all rental real_estate interests as one activity a taxpayer could qualify for the exception provided in sec_469 without making the election provided for in sec_469 issue the commissioner in his discretion may grant an extension of time to file an election under sec_469 sec_301_9100-3 to qualify for an extension a taxpayer must establish to the satisfaction of the commissioner that he acted reasonably and in good_faith and that granting the extension will not prejudice the interests of the government sec_301_9100-3 a taxpayer will be deemed to have acted reasonably and in good_faith if the taxpayer requests relief under sec_301_9100-3 before the failure to make the regulatory election is discovered by the service failed to make the election because of intervening events beyond the taxpayer’s control failed to make the election because after exercising reasonable diligence the taxpayer was unaware of the necessity for the election reasonably relied on the written advice of the service or reasonably relied on a qualified_tax professional and the tax professional failed to make or advise the taxpayer to make the election sec_301_9100-3 if a taxpayer can establish that he acted reasonably and in good_faith and the extension will not prejudice the interests of the government he must comply with the procedural requirements set forth in sec_301_9100-3 and request a private_letter_ruling as provided for under sec_301_9100-3 see also revproc_98_1 1998_1_irb_7 sec_5 there is insufficient information to determine if taxpayer would be entitled to relief under sec_301_9100-3 if taxpayer chooses to pursue such relief and submit a request for a private_letter_ruling he could request a continuance of his docketed_case taxpayer has declined to seek an extension of time to file the election under sec_469 pursuant to the administrative relief provisions of sec_301_9100-3 having failed to obtain administrative relief taxpayer is not entitled to a judicial extension of time to file an election case development hazards and other considerations assistant chief_counsel field service by melissa c liquerman senior technician reviewer passthroughs special industries branch field service division