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 b07 plr-106160-06 date date this letter responds to your letter requesting permission for corporation to ------------------------- ---------- ------- ------------------- legend legend corporation ------------------------------- a b c dear ------------------ revoke its election under ' c of the internal_revenue_code corporation is the parent of a sec_41 controlled_group that files a consolidated federal_income_tax return for its b taxable_year corporation on behalf of itself and the members of is controlled_group elected to compute the credit_for_increasing_research_activities research_credit utilizing the alternative_incremental_research_credit airc rules of sec_41 prior to the due_date including extensions for corporation’s income_tax return for the taxable_year ending on c_corporation on behalf of itself and the members of its controlled_group requested permission to revoke its sec_41 election for the taxable_year ending on c and all subsequent years determine their research_credit under the airc rules of ' c sec_41 corporation is an accrual_method taxpayer with each taxable_year ending on a for taxable years beginning after date taxpayers may elect to the facts and representations submitted are as follows based solely on the facts submitted and representations made we grant plr-106160-06 provides that any election under ' c a shall apply for the taxable_year in which made and all succeeding taxable years unless revoked with the consent of the secretary permission for corporation and its controlled_group to revoke its election to determine its research_credit under the airc rules of ' c for qualified_research_expenses paid_or_incurred during the taxable_year ending on c_corporation should compute its research_credit for the taxable_year ending on c using the general_rule of ' a except as expressly provided herein we express or imply no opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter further we express or imply no opinion concerning expenditures corporation or any member of its controlled_group treated as qualified_research_expenses provides that it may not be used or cited as precedent relevant the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request_for_ruling it is subject_to verification on examination this ruling is directed only to the taxpayer requesting it sec_6110 a copy of this letter must be attached to any income_tax return to which it is sincerely s brenda m stewart senior counsel branch passthroughs special industries


t c memo united_states tax_court marrianne elizabeth rayhill petitioner v commissioner of internal revenue respondent docket no filed date marrianne elizabeth rayhill pro_se kimberly a santos and kathryn a meyer for respondent memorandum opinion halpern judge respondent determined a deficiency in petitioner's federal_income_tax of dollar_figure and additions to tax of dollar_figure dollar_figure and dollar_figure under sec_6651 and and a respectively unless otherwise stated all section references are to the internal_revenue_code in effect for and all rule references are to the tax_court rules_of_practice and procedure we round all dollar amounts to the nearest dollar petitioner bears the burden_of_proof see rule a background some facts are stipulated and are so found respondent concedes that petitioner is not liable for the sec_6654 addition_to_tax and we will therefore not discuss it further petitioner filed no return for and for that reason respondent prepared for her a substitute for return see sec_6020 the principal adjustments giving rise to respondent's determination_of_a_deficiency in tax are omissions from gross_income of the following items interest income--dollar_figure wages tips and other compensation--dollar_figure and social_security benefits-- dollar_figure the parties have made numerous concessions regarding those adjustments petitioner concedes that she omitted from gross_income interest of dollar_figure respondent concedes that the taxable_amount of the social_security_benefit petitioner received is only dollar_figure which petitioner concedes is includible in gross petitioner makes no argument that pursuant to sec_7491 the burden shifts to respondent in any event the record establishes that petitioner does not satisfy the preconditions found in sec_7491 income respondent also concedes that petitioner is allowed on schedule a itemized_deductions a miscellaneous expense deduction of dollar_figure for attorney's_fees connected with securing the social_security_benefits petitioner concedes that pursuant to an employer_provided and funded group long-term disability policy she received dollar_figure disability payment from the hartford life_insurance co respondent concedes that she received no more than that amount petitioner concedes that some but not all of the disability payment is includible in her gross_income respondent concedes that petitioner is entitled to a schedule a cash charitable_contribution_deduction of dollar_figure and a schedule a noncash charitable_contribution_deduction of dollar_figure respondent concedes that petitioner is entitled to a deduction on schedule c profit or loss from business for business_expenses of dollar_figure petitioner concedes that she neither filed a federal_income_tax return nor paid any_tax for we accept all concessions and find accordingly trial was held in this case on date in los angeles california at the conclusion of the trial the court reviewed with the parties the issues still in dispute although petitioner concedes that some portion of the disability payment is includible in her gross_income she believes that because in part the disability payment represented amounts that she should have received in prior years only that portion allocable to is includible in her gross_income petitioner also believes that she should be allowed deductions for amounts that the parties have stipulated that she spent in and that she claims were for business_expenses but which respondent would not allow as deductions because petitioner failed to show that they were ordinary and necessary business_expenses properly substantiated see sec_162 sec_274 finally notwithstanding petitioner's concession that she neither filed a income_tax return nor paid the tax due she believes that because she was sick during she should not have to pay the sec_6651 and additions for delinquent filing and failure to pay timely also at the conclusion of the trial we set a briefing schedule ordering seriatim briefs with petitioner to go first we allowed her days to file her brief she failed to do so and we allowed her an additional days she again failed to file a brief petitioner resided in california when she filed the petition discussion we are left with few issues to decide and although we could declare petitioner in default with respect to the remaining issues with respect to all of which she bears the burden_of_proof see rule sec_123 sec_151 84_tc_693 aff'd without published opinion 789_f2d_917 4th cir horn v commissioner tcmemo_2002_207 we will address those issues i disability payment sec_451 provides that the amount of any item_of_gross_income shall be included in the gross_income for the taxable_year in which received by the taxpayer unless under the method_of_accounting used in computing taxable_income such amount is to be properly accounted for as of a different period the law is clear that gains profits and income are to be included in the gross_income of a cash_method taxpayer for the taxable_year in which they are received see sec_1_451-1 sec_1_446-1 income_tax regs since petitioner has failed to show that for she was other than a cash_method taxpayer the entire amount of the disability payment must be included in her gross_income because she received the entire amount in that year ii deductions petitioner has failed to carry her burden of showing that the disputed deductions were ordinary and necessary expenses paid_or_incurred during in carrying on any trade_or_business see sec_162 or that she has met the substantiation requirements of sec_274 we will allow no deductions other than those respondent allowed iii additions to tax sec_6651 provides for an addition_to_tax in the event a taxpayer fails to timely file a return determined with regard to any extension of time for filing unless the taxpayer shows that such failure is due to reasonable_cause and not due to willful neglect the addition equal sec_5 of the amount_required_to_be_shown_as_tax on the delinquent_return for each month or fraction thereof during which the return remains delinquent up to a maximum addition of for returns more than four months delinquent id sec_6651 imposes an addition_to_tax when a taxpayer fails to pay the amount of tax shown on a return by the prescribed date unless the taxpayer shows that such failure is due to reasonable_cause and not due to willful neglect the addition equals of the tax for each month or fraction thereof during which the tax remains unpaid up to a maximum addition of under sec_6651 a substitute for return prepared pursuant to sec_6020 is treated as the taxpayer's return for purposes of sec_6651 we note in passing that while a properly made substitute for return is necessary before a sec_6651 addition_to_tax for failure to pay the tax shown on return can be imposed on a nonfiler a substitute for return is not a prerequisite to the commissioner's determining a deficiency in tax e g 847_f2d_1379 9th cir deficiency procedures set out in the internal_revenue_code do not require the commissioner to continued with respect to both the sec_6651 and additions to tax respondent bears the burden of coming forth with evidence that imposition of the addition is appropriate see 116_tc_438 see also sec_7491 petitioner concedes that she neither filed a return nor paid any_tax for accordingly we conclude that respondent has produced sufficient evidence to show that the sec_6651 and additions to tax are appropriate unless petitioner proves that either or both of her failure_to_file and failure to pay were due to reasonable_cause and not due to willful neglect a failure_to_file is due to reasonable_cause if a taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time sec_301_6651-1 proced admin regs see also 469_us_241 a failure_to_pay_tax will be considered to be due to reasonable_cause if the taxpayer exercised ordinary care and prudence in providing for her tax_liability but was unable to pay sec_301_6651-1 proced admin regs willful neglect is interpreted as a conscious intentional failure or reckless indifference boyle u s pincite continued prepare a return on a taxpayer's behalf before determining and issuing a notice_of_deficiency accord watson v commissioner tcmemo_2007_146 aff'd 277_fedappx_450 5th cir petitioner claims that she was unaware that any of her income was taxable petitioner's mistake as to or ignorance of the law however does not amount to reasonable_cause and thus will not relieve her from the imposition of the addition_to_tax pursuant to sec_6651 see 25_tc_13 west v commissioner tcmemo_2011_272 wl at petitioner also argues that she was not able to file her returns because of her health problems to substantiate her argument petitioner testified that she is a disabled taxpayer and that she had additional serious medical problems in both and a taxpayer's disability may constitute reasonable_cause for failure_to_file returns boyle u s pincite n see eg rappaport v commissioner tcmemo_2006_87 wl at however a taxpayer does not have reasonable_cause for failing to file tax returns if he or she was performing normal business operations e g rappaport v commissioner wl at while we do not trivialize the medical problems facing petitioner the record indicates she carried on her real_estate brokerage business and her other business affairs throughout petitioner was not specific in her testimony as to the periods of her medical problems or how during those periods her medical problems interfered with her filing a return indeed she testified that she did not file because she did not think that she had to petitioner has not convinced us that her medical problems provided reasonable_cause for her failure to timely file see kelso v commissioner tcmemo_2009_125 wl at consequently we find that petitioner did not have reasonable_cause for her failure to timely file her return and that she is liable for the addition_to_tax under sec_6651 for the reasons stated in connection with our sustaining respondent's imposition of the sec_6651 addition_to_tax we also find that petitioner has not produced evidence that her failure to pay was due to reasonable_cause and not due to willful neglect consequently we find that petitioner is liable for the addition_to_tax under sec_6651 decision will be entered under rule


internal_revenue_service number release date index number --------------------------------- ------------------------------- -------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc psi b03 plr-108978-07 date date legend ----------------- taxpayers ----------------------------------------------------------------------- ----------------------------------------------------------------------- year dear --------------------------- ------------------- ------- this letter responds to a letter dated date and subsequent correspondence requesting a ruling under sec_301_9100-3 of the procedure and administration regulations that taxpayers be granted an extension of time to file an election under sec_469 of the internal_revenue_code and sec_1_469-9 of the income_tax regulations to treat all interests in rental real_estate as a single rental real_estate activity commencing in year facts according to the information submitted taxpayers are spouses who file their tax returns jointly taxpayers represent that in year they were in a real_property business as defined by sec_469 and were qualified to elect to treat all interests in rental real_estate as a single rental real_estate activity under sec_469 and b taxpayers relied on a qualified_tax professional who inadvertently failed to make this election for year when he did not include the statement required under sec_1_469-9 with the taxpayer’s joint_return filed for year law and analysis plr-108978-07 under sec_469 the term passive_activity generally includes any rental_activity sec_469 provides a limited exception to this rule for taxpayers in a real_property business specifically sec_469 indicates that if a taxpayer meets the requirements of sec_469 the taxpayer's rental real_estate activity will no longer be presumptively passive by its terms the exception under sec_469 is to be applied as if each interest of the taxpayer in rental real_estate were a separate activity however a taxpayer may elect to treat all interests in rental real_estate as a single activity sec_1_469-9 provides that a qualifying taxpayer makes the election to treat all interests in rental real_estate as a single rental real_estate activity by filing a statement with the taxpayer's original income_tax return for the taxable_year sec_1_469-9 describes the information that must be contained in the statement sec_301_9100-1 provides that the commissioner in exercising the commissioner’s discretion may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 provides that the term regulatory election means an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 sets forth 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 sec_301_9100-3 provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result taxpayers are granted an extension of time of sixty days from the date of this letter to make an election under sec_469 to treat all their interests in rental real_estate as a single rental real_estate activity effective year the election must be in the form of the statement required by sec_1_469-9 and attached to an amended_return for year a copy of this letter should be attached to the election plr-108978-07 except as expressly set forth above no opinion is expressed or implied concerning the federal tax consequences of the facts discussed above under any other provision of the code specifically no opinion is expressed or implied concerning whether taxpayers satisfy the requirements under sec_469 or whether taxpayers materially participate in any activity this ruling is directed only to the taxpayers requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representatives s sincerely william p o'shea associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


t c memo united_states tax_court john robert maguire petitioner v commissioner of internal revenue respondent docket no filed date robert t maguire for petitioner john aletta for respondent memorandum opinion clapp judge respondent determined a deficiency of dollar_figure in petitioner's federal_income_tax and a penalty of dollar_figure pursuant to sec_6662 after concessions by the parties the issues for decision are whether petitioner's expenditures related to residential_real_property were paid_or_incurred in carrying_on_a_trade_or_business pursuant to sec_162 or for the production_of_income pursuant to sec_212 we hold that most of these expenditures are not deductible under either section whether petitioner is liable for a penalty pursuant to sec_6662 for negligence or disregard of rules or regulations we hold that petitioner is liable for the penalty all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated we have combined our findings_of_fact and opinion some of the facts are stipulated and are so found we incorporate by reference the stipulation of facts and attached exhibits petitioner resided in wallingford connecticut at the time he filed the petition in this case petitioner was a cash_basis taxpayer for the taxable_year he was employed full time as a policeman in wallingford connecticut in petitioner purchased a single-family home on cape cod at harwichport massachusetts for dollar_figure this was petitioner's first real_estate purchase petitioner never occupied the home as a personal_residence and he never intended to do so petitioner originally intended to profit by selling the property as opposed to renting it when petitioner purchased the property portions of the kitchen and bathroom floors were rotted due to water damage rainwater had leaked into the kitchen and caused the plywood flooring to rot some of the kitchen and bathroom faucets in the home worked while others did not the house was badly run down and uninhabitable it needed considerable work to put it in condition for sale petitioner removed the rotted plywood floor base below the tile and replaced it with new plywood petitioner removed the kitchen counter top and cabinets and installed a new counter top and new kitchen cabinets petitioner installed new tile in the kitchen and the bathroom petitioner hired a contractor to rewire portions of the property petitioner purchased new appliances in connecticut and used a rented ryder truck to deliver the appliances to the harwichport property petitioner installed the appliances and sealed vent outlets that were no longer needed petitioner hired a contractor to adjust the septic line from the home to the septic tank to comply with state environmental regulations petitioner installed new gutters storm doors and a toilet petitioner hired an electrician to install a new electrical distribution box with circuit breakers which replaced the home's fuse box petitioner performed most of the work himself and sometimes would spend several consecutive days working on the harwichport property on these occasions he stayed at the harwichport property instead of renting a room at a motel petitioner spent in excess of days working on the harwichport property excluding travel time between the harwichport property and petitioner's residence in wallingford connecticut in the boston globe on date petitioner advertised the harwichport property for sale completely furnished for dollar_figure in date petitioner placed similar advertisements in the cape codder and the providence journal there were no advertisements in offering the property for rent petitioner's employment as a police officer included the use of an unmarked police car the only restriction on petitioner's use of the police car was that he could not take that vehicle outside the state of connecticut petitioner owned a lincoln continental lincoln which he left parked at his father's house located in warren connecticut when petitioner needed to travel to the harwichport property he would park his police car at his father's house petitioner would then drive the lincoln to the harwichport property on the form_4562 attached to petitioner's form_1040 petitioner indicated a business_use_percentage of percent for the lincoln petitioner did not respond to the questions do you have evidence to support the business use claimed and if 'yes ' is the evidence written that appear on line sec_22a and sec_22b respectively of form_4562 petitioner is a licensed real_estate agent in the state of connecticut but that license is not valid in the state of massachusetts the documents submitted at trial constitute all of the harwichport property expense records for during the taxable_year petitioner incurred and paid mortgage interest_expense of dollar_figure and real_estate_taxes of dollar_figure in the notice_of_deficiency respondent determined that petitioner's expenditures were not paid_or_incurred in carrying_on_a_trade_or_business pursuant to sec_162 or for the production_of_income pursuant to sec_212 respondent also determined that the expenditures were not ordinary and necessary petitioner bears the burden of proving that respondent's determination is not correct rule a 290_us_111 respondent filed an amended answer and alleged that petitioner failed to substantiate the claimed expenses as required by sec_274 and that sec_469 precludes petitioner from deducting the expenses we conclude that sec_469 does not limit petitioner's deductions in petitioner participated in the activity for more than hours and this amounted to substantially_all of the participation in the activity see sec_1_469-5t and temporary income_tax regs fed reg date the parties also disagree whether the expenditures were capital in nature or currently deductible petitioner argues that his activity on the harwichport property constituted a trade_or_business or in the alternative that the harwichport property was held_for_the_production_of_income in order to be engaged in carrying_on_a_trade_or_business pursuant to sec_162 the taxpayer must be involved in the activity with continuity and regularity and the taxpayer's primary purpose for engaging in the activity must be for income or profit 480_us_23 90_tc_1263 affd 877_f2d_1075 1st cir the term property_held_for_the_production_of_income pursuant to sec_212 includes income from the disposition of the property 47_tc_120 petitioner was not in the trade_or_business of reconditioning dilapidated structures for resale this was petitioner's first real_estate purchase he worked on the harwichport property in his spare time while employed full time as a police officer petitioner was not in the trade_or_business of renting real_estate in petitioner testified that he offered the property for rent in but we find that the property was not suitable for sale or rent until late he first tried to sell the harwichport property on date but when he could not sell it he rented the property in date petitioner produced no advertisements indicating the harwichport property was available for rent in or during discovery respondent requested the advertisements related to the sale or rental of the harwichport property petitioner responded with cancelled checks payable to various newspapers but he produced no advertisements the only advertisements produced at trial were obtained by respondent we find that the harwichport property was not available for rent in and that the property was not available for sale prior to date we conclude that petitioner's activity on the harwichport property did not constitute a trade_or_business in petitioner's level of activity and attempted disposition of the harwichport property indicate that petitioner prepared the harwichport property for resale during the year in issue we conclude that petitioner held the harwichport property for the production_of_income in in general_deductions incurred for the production_of_income under sec_212 are subject_to the same requirements and restrictions that apply to a trade_or_business expense deduction under sec_162 79_tc_503 4_tc_121 in order to be deductible the expenditures must be ordinary and necessary sec_162 sec_212 petitioner must prove a proximate connection between the expenditure and the conduct of a profit- seeking activity 33_tc_838 in general an expenditure made primarily to secure a personal benefit is not deductible sec_262 whereas a similar expenditure may be deductible if made primarily for a profit- seeking purpose see 326_f2d_743 7th cir affg tcmemo_1963_149 respondent argues that many of the expenditures deducted by petitioner are not ordinary and necessary and are instead personal expenses not related to the harwichport property the taxpayer must prove that he is entitled to any claimed deductions rule a 292_us_435 welch v helvering supra pincite this includes proof of the amount and purpose of the item claimed 65_tc_87 affd per curiam 540_f2d_821 5th cir sec_1_6001-1 income_tax regs a tax_return is not proof of entitlement to a credit or deduction claimed therein a tax_return merely sets forth the taxpayer's claim see 62_tc_834 28_tc_1034 as a general_rule if the record provides sufficient evidence that the taxpayer has incurred a deductible expense but the taxpayer is unable to substantiate adequately the amount the court may estimate the amount of such expense and allow the deduction to that extent bearing down heavily on the taxpayer since the problem is of his own making 39_f2d_540 2d cir however in order for the court to estimate the amount of an expense we must have some basis upon which an estimate may be made 85_tc_731 without such a basis any allowance would be unguided largesse 245_f2d_559 5th cir respondent argues that expenditures within the following categories should be disallowed entirely or in the alternative that the expenditures must be capitalized petitioner argues that the same expenditures are currently deductible the disputed categories include travel_expenses utilities cellular phone service cable service advertisements clock repair truck rental real_estate license taxes and miscellaneous travel_expenses a deduction for travel_expenses may be allowed where the expenses are incurred while away from home are reasonable and necessary and bear a proximate relation to the profit-seeking activity 66_tc_122 mckinney v commissioner tcmemo_1981_181 affd 732_f2d_414 10th cir travel_expenses must also be substantiated as required by sec_274 respondent disallowed an dollar_figure deduction for meals a dollar_figure deduction for amounts paid to various oil companies a dollar_figure deduction for auto repairs deductions of dollar_figure dollar_figure and dollar_figure alleged to be for insurance on the lincoln and depreciation_deductions on the lincoln petitioner testified that percent of the lincoln's use related to the harwichport property he produced nothing to corroborate that testimony and he failed to explain how he arrived at that figure petitioner produced a chart to show the number of days he spent in harwichport petitioner appears to have constructed the chart using the receipts from purchases made in harwichport assuming that he must have been in harwichport when he made the purchases however petitioner also appears to contend that if there was no receipt then he was not in harwichport and he must have returned to wallingford and incurred travel_expenses in doing so petitioner's contention is a non sequitur that overstates the number of round trips from wallingford to harwichport it seems more likely that he was in harwichport on a number of days when he did not purchase anything as for meal expenses petitioner used the number of days shown on his chart along with a ballpark figure of dollar_figure for meals per day to calculate his meal expenses although it seems clear that petitioner had some expenses for meals and travel between wallingford and harwichport he has failed to prove the number of trips to harwichport the amount spent on meals and travel the percentage use of the lincoln and he failed to maintain a log or other record as required by sec_274 accordingly we sustain respondent's disallowance of the travel_expenses utilities cellular phone service and cable service respondent has conceded some of the utility expenses but argues that other utility expenses deducted by petitioner do not relate to the harwichport property we conclude that the payments to ne tel harwater commonwealth electric and hall oil relate to petitioner's income-producing activity and are either capital expenditures or currently deductible as discussed below respondent disallowed deductions for petitioner's cellular phone and related service fees and charges petitioner merely testified that he had the cellular phone installed in the lincoln petitioner deducted the cost of cable television service at the harwichport property and respondent disallowed that deduction we find that the cellular phone and cable television service were personal expenses and sustain respondent's disallowance of these items advertisements clock repair and truck rental petitioner deducted dollar_figure for newspaper advertisements and respondent disallowed dollar_figure of that deduction the dollar_figure in dispute relates to advertisements allegedly placed prior to date petitioner produced none of the alleged newspaper advertisements placed prior to date petitioner testified that he advertised nothing but the harwichport property in newspapers during but respondent produced an advertisement wherein petitioner had offered his automobile for sale in the new york times on date petitioner has failed to prove that the dollar_figure in dispute related to advertisement of the harwichport property we sustain respondent's disallowance of these items respondent disallowed a dollar_figure deduction for the overhaul of a clock petitioner offered no evidence relating this item to the harwichport property we sustain respondent's disallowance of this item respondent disallowed a dollar_figure deduction for the rental of a ryder truck petitioner used the ryder truck to deliver new appliances to the harwichport property we find that the dollar_figure truck rental expense must be capitalized as a preopening expense as discussed below real_estate license respondent disallowed the costs associated with the renewal of petitioner's connecticut real_estate license we find no connection between petitioner's real_estate license and his activity on the harwichport property we sustain respondent's disallowance of these items taxes respondent disallowed a dollar_figure payment to the town of warren for personal_property_tax on the value of the lincoln a dollar_figure payment to the wallingford tax office and a dollar_figure payment listed under 90' cap exp petitioner is entitled to deduct personal_property_taxes associated with the lincoln pursuant to sec_164 petitioner offered no explanation for the dollar_figure payment to the wallingford tax office or the dollar_figure payment and we sustain respondent's disallowance of these items miscellaneous items respondent disallowed the following deductions that petitioner characterized as supplies dollar_figure for books dollar_figure for rugs dollar_figure for a television dollar_figure for furniture dollar_figure for sheets dollar_figure for pillows dollar_figure for lamps and dollar_figure for linens petitioner testified that he rented the harwichport property furnished in but we do not consider this general testimony sufficient to conclude that the items outlined above related to the production_of_income from the harwichport property in we sustain respondent's disallowance of these items in depreciation of capital improvements respondent disallowed depreciation_deductions related to dollar_figure of capital improvements allegedly made in petitioner argues that in he added dollar_figure of capital improvements to the harwichport property and he began depreciating those improvements in the taxpayer must establish the property's depreciable basis by showing the cost of the property its useful_life and the previously allowable_depreciation e g 28_tc_845 affd in part revd in part and remanded per curiam 267_f2d_39 6th cir petitioner's father testified that the cost of some of the improvements to the property was carried over to and added to the depreciable basis of the harwichport property we have no way of sorting out petitioner's expenditures we sustain respondent's determination respondent argues that all of the expenditures must be capitalized as preopening expenses startup expenses must be capitalized pursuant to the preopening expense doctrine and that doctrine is applicable to sec_212 activities as well as sec_162 activities 93_tc_684 882_f2d_484 11th cir revg tcmemo_1987_351 petitioner produced no advertisements showing the harwichport property for rent or sale respondent produced newspaper advertisements published on or after date showing the harwichport property for sale we have found that the property was not available for sale prior to date we conclude that the expenses_incurred prior to date are preopening expenses and must be capitalized accordingly they are not deductible currently under sec_212 but must be added to the basis of the property we next address the post-date expenditures in dispute capital expenditures add to the value or substantially prolong the useful_life of the property sec_1_263_a_-1 income_tax regs expenses for incidental repairs or maintenance are deductible currently if they neither materially add to the value of the property nor appreciably prolong the property's useful_life sec_1_162-4 income_tax regs the remaining expenditures include plumbing expenses in the amounts of dollar_figure and dollar_figure paid on date and date respectively and expenses for hardware items in the amounts of dollar_figure and dollar_figure paid on date and date respectively petitioner paid dollar_figure to the town of harwichport on date and we find that this payment related to trash removal we conclude that these remaining items are deductible in respondent determined that petitioner is liable for a penalty pursuant to sec_6662 sec_6662 imposes a penalty equal to percent of the portion of the underpayment which is attributable to negligence or disregard of rules or regulations negligence is defined as the lack of due care or the failure to do what a prudent person would do under the circumstances marcello v commissioner 380_f2d_499 5th cir affg in part and remanding in part 43_tc_168 85_tc_934 petitioner must prove that the negligence_penalty does not apply 58_tc_757 petitioner contends that he and his father meticulously prepared his federal_income_tax return for generally the duty_of filing accurate returns cannot be avoided by placing responsibility on an agent 88_tc_654 57_tc_781 petitioner cannot rely on the advice of his father to avoid the negligence_penalty because petitioner failed to show that his father had any expertise in tax matters see 925_f2d_348 9th cir affg 92_tc_1 failure to keep adequate_records is some evidence of negligence marcello v commissioner supra pincite 73_tc_980 petitioner's records were incomplete and in disarray at trial petitioner offered cancelled checks with few of the corresponding receipts these records provided very little if any indication of how the cancelled checks related to the harwichport property for example the cancelled checks payable to the oil companies did not indicate the items purchased the dates of purchase or where the transactions took place the testimony of petitioner and his father gave the distinct impression that petitioner kept no contemporaneous_records of his expenses petitioner's testimony that he advertised no property in the new york times other than the harwichport property was incorrect petitioner deducted items such as clock repair and then offered nothing at trial that related the clock to the harwichport property we conclude that the understatement is attributable to negligence we have addressed the items still in dispute that we can discern from the record however the record and the briefs in this case leave much to be desired if items remain we expect the parties to resolve them in the context of a rule computation to reflect the foregoing and the concessions by the parties decision will be entered under rule


department of the treasury internal_revenue_service washington d c date office symbols cc dom fs it a case number uilc numbers number release date internal_revenue_service national_office field_service_advice memorandum for district_counsel attn from deborah a butler assistant chief_counsel field service subject 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 a b c d e f partnership i partnership ii year year year year year date date date date date date date date date s dollar_figure t dollar_figure u dollar_figure v w dollar_figure x y dollar_figure z dollar_figure court g f1 dollar_figure f2 dollar_figure f3 dollar_figure issue s whether legal fees incurred by a are currently deductible pursuant to sec_162 or capitalizable under sec_263 in defending a lawsuit alleging the following causes of action fraud conspiracy to commit fraud and breach of fiduciary duty surrounding the acquisition of c’s partnership_interest breach of contract conversion breach of fiduciary duty and dissolution of partnership with respect to a’s and other defendants’ conduct as partners which allegedly led to a decrease in the value of c’s partnership_interest conclusion legal fees incurred by a to defend the above-stated causes of action should be capitalized facts a a corporation is primarily engaged in the business of renting property to automobile dealerships b is the sole owner of a a also served as a partner in several partnerships one of the partnerships in which a served as a general and limited_partner was partnership i in addition to a the other general partners of partnership i consisted of b c and d c and d specialized in real_estate development in year a contributed real_property to partnership i which c and d developed a b c and d formed several additional partnerships such as partnership ii c served as general managing partner of partnership ii from date to date a was a general and limited_partner during this time other partners included e and f a and b often loaned money to c and d to enable them to engage in their real_estate development activities in date c and d decided to terminate their business relationship due to complaints made by e against c’s management of partnership ii c agreed to resign from all partnerships and other ventures in which he and d had been involved c requested additional loans from a to assist in the termination of his business activities with d on or about date a loaned c and d an additional dollar_figuret for which amount they were jointly liable on date to aid in terminating all business relationships in which c and d had engaged c entered into three loan agreements with a and b in which the joint note was canceled and two separate notes were executed each making c and d liable for a fifty percent share of the outstanding loan amounts plus interest the loan agreements which were executed on date provided that c pay back all loan amounts and accrued interest by date the agreements further provided that as security for the loans c would pledge his v partnership_interest in partnership i the parties agreed that the fair_market_value of c’s partnership_interest was dollar_figureu in the event of c’s non-payment the agreements stated that a portion of the partnership_interest equivalent to the amount still owed on the due_date would automatically be deemed sold and transferred to a and b a and b would receive a portion of c’ sec_1 c and d entered into one loan agreement with a and two loan agreements with b the agreements contained substantially_similar provisions cid this amount was equivalent to c’s total outstanding loan obligations owed to a and b partnership_interest in proportion to the amount of money loaned by each c did not pay his portion of the loan and interest by date pursuant to the agreement a proportionate share of c’s partnership_interest was deemed sold and transferred to a more than three years later c sued a b d e f and other parties with whom he conducted business as a real_estate developer the suit was commenced in the court g in year the complaint and amended complaint contained a variety of causes of action relating to c’s business dealings with these defendants including the aforementioned loan agreements with a and b most of the causes of action in the complaint did not pertain to a but rather to d and various entities under d’s control in his amended complaint c asserted causes of action concerning a in two different areas the first area related to the provision of the loan agreement between a and c which set forth the fair_market_value of c’s partnership_interest in partnership i c asserted that the value set forth in the loan agreement was less than half of the actual fair_market_value of his partnership_interest c accused a d and b of breach of fiduciary duty fraud and conspiracy to commit fraud by allegedly misleading him as to the fair_market_value of his partnership_interest in partnership i c accused d and b of representing to him that d would be subject_to an agreement with similar terms allegedly in order to induce c to sell his partnership i partnership_interest for less than its fair_market_value c alleged that even though d failed to pay the loan amounts his partnership_interest was not transferred to either b or a the relief requested for these causes of action totaled dollar_figurew the second area in the amended complaint concerning a related to its role as a partner in partnership ii c who served as a general and limited_partner of cid cid one of the loan agreements between b and c also provided that if c failed to repay the amounts due under all of the agreements then b would have the option to require c to withdraw as a general_partner from partnership i and to convert c’s general_partnership interest to a limited_partnership_interest the agreement further provided that if c was forced to convey a portion of his interest in the partnership to b or a as a result of non-payment of the loan c had the option to sell the remaining partnership_interest in partnership i to b and if c did not exercise this option then b would have the option for a limited time to require c to sell b the remainder of his partnership_interest counsel did not mention this set of claims in its fsa request counsel subsequently indicated to this office in a telephone conversation that he would like the fsa to analyze the tax treatment of the legal expenses stemming from these claims partnership ii alleged that various partners of partnership ii including a breached the terms of the partnership_agreement by meeting without his knowledge and engaging in various actions which had the effect of reducing a percentage of his partnership ii partnership_interest c also alleged that the general partners met without his knowledge and amended various terms of the agreement the partnership_agreement provided that if the partnership was in need of funds then the various partners would advance funds at their own election in proportion to their partnership_interest once the funds were advanced each partner’s percentage interest would be recalculated and increased or decreased accordingly c alleged that b loaned monies to partnership ii thereafter the general partners met without c’s knowledge or consent reclassified b’s loan as a capital_contribution made by a on behalf of b and reduced c’s partnership_interest in partnership ii c alleged that according to the adjustments made to each partner’s interest a converted x of his partnership_interest based on these allegations c asserted causes of action for conversion breach of contract and breach of fiduciary duty c requested dollar_figurey in damages c also requested that partnership ii be judicially dissolved due to the alleged misconduct of its partners described above a and b filed an answer with counterclaims and an amended answer with counterclaims on date they denied all of the allegations contained in the causes of action regarding the loan agreement they did not address the claims relating to partnership ii presumably since the court dismissed these claims by order of date however a and b asserted counterclaims for malicious prosecution and abuse of process relating to the causes of action asserted in c’s complaint regarding partnership ii in their counterclaims they asserted that c brought these claims to force them to pay him a large sum of money they highlighted court g’s order dismissing the partnership ii causes of action as evidence of their lack of merit the counterclaims sought dollar_figures in compensatory_damages as well as a separate award of punitive_damages thereafter a b and d moved for partial summary_judgment against c regarding the fraud conspiracy to commit fraud and breach of fiduciary duty claims relating to the acquisition of c’s partnership i interest the court granted the motion by order of date the court held that defendants were entitled to judgment as a matter of law on these claims in its order the court noted that there was no evidence to suggest that b a or d committed fraud as the value of the partnership was set with all parties’ consent and c a sophisticated businessman voluntarily accepted the valuation as to the breach of fiduciary duty claims the court pointed out that b and d were not trying to force c out of partnership i but instead b was approached by c to sell his partnership_interest on date c and the defendants including a entered into a settlement agreement the agreement provided that c’s suit and all appeals related thereto be dismissed with prejudice the agreement also contained general releases as to liability for any past present or future claims brought against all defendants named in c’s suit the agreement required defendants to maintain insurance for c in relation to partnership ii until date it is possible that this settlement provision related to other claims asserted against partnership ii in which a was not named since the claims pertaining to a set forth above were dismissed by the court on date the agreement also makes no reference to any amount to be given to c in settlement of the causes of action relating to the loan agreement since the motion for partial summary_judgment for these claims was granted according to the facts in your request c allegedly received dollar_figurez in this out-of-court settlement the date agreement does not refer to this amount a incurred legal expenses in defending the suit in the following amounts for the following years dollar_figuref1 for year dollar_figuref2 for year and dollar_figuref3 for year a deducted the legal expenses in each of the respective tax years the service denied a’s deductions on the basis that the legal fees a expended to acquire a partnership_interest are capital expenditures and not presently deductible a’s representative filed a protest which contended that the legal expenses a incurred originated in a’s real_estate business dealings with c and d and thus were deductible as ordinary and necessary business_expenses law and analysis sec_162 provides that a taxpayer may deduct all ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business sec_1_162-1 provides that ordinary and necessary expenditures directly connected with the taxpayer’s trade_or_business are deductible from gross_income sec_263 provides that no deduction shall be allowed for capital expenditures capital expenditures include the cost of permanent improvements made to increase the value of any property and expenses which either create or enhance a capital_asset 418_us_1 capital expenditures are added to the basis of a capital_asset for which they were incurred and are recognized either through depreciation or reduction in capital_gains at the time the asset is sold 397_us_572 the deduction of expenses is an the service adjusted these amounts downward based on the amount of damages claimed and the number of defendants named in each cause of action exception to the general_rule that expenses should be capitalized idaho power co u s pincite in determining whether litigation costs are deductible or capitalizable courts have examined the origin of the claim with respect to which the costs were incurred u s v gilmore 372_us_39 under the origin_of_the_claim_test the focus of inquiry is the event that led to the tax dispute 688_f2d_675 9th cir mckeague v united_states cl_ct aff’d 852_f2d_1294 fed cir the purpose of the origin_of_the_claim_test is to find the transaction or activity from which a taxable_event resulted in order to minimize the number of factual elements to be taken into account and to limit the category of controlling facts to those which are objective rather than subjective woodward v commissioner u s pincite in creating the origin_of_the_claim_test the supreme court rejected a prior test known as the primary purpose test which examined the motives and purposes for which the parties instituted a claim woodward u s pincite the origin of the claim analysis is a factually-based one 59_tc_708 acq 1973_2_cb_1 factors which the tax_court has employed in making this analysis include the allegations appearing in the complaint the legal issues involved the nature and objectives of the litigation the defenses asserted the purposes for which the amounts claimed to be deductible were expended the background of the litigation and all facts pertaining to the controversy id pincite the transaction from which the claim arose must also be carefully examined boagni t c pincite the taxpayer has the burden of proving that the claimed legal expenses may be deducted as ordinary and necessary business_expenses t c rule a welch v helvering u s in order for a legal expense to be presently deductible the expense must not be based in or originate from the acquisition or disposition of a capital_asset 397_us_572 397_us_580 sec_1 a provides that the cost of acquiring a capital_asset is a type of capital expense expenses_incurred in acquiring or protecting an interest in an capital_asset are considered to be part of the cost of the asset and thus are capitalizable woodward v commissioner u s pincite thus the question of whether litigation expenses are incurred in the purchase or disposition of a capital_asset involves whether the origin of the claim litigated is in the process of acquisition itself id under sec_162 litigation costs are deductible if they arise directly from or are proximately related to taxpayer’s business activity and if they are ordinary and necessary litigation costs must be directly attributable to a trade_or_business carried on by the taxpayer to be deductible as a business_expense sec_162 ordinary business_expenses have been described as those which are normal in relation to the taxpayer’s business and necessary has been defined as appropriate or helpful 308_us_488 if a suit contains multiple claims courts have examined each claim using the origin_of_the_claim_test to determine whether the claim was based in the taxpayer’s trade_or_business or in a transaction giving rise to a nondeductible_expenditure such as the disposition of a capital_asset see mccay v commissioner 102_tc_465 revrul_80_119 1980_1_cb_40 if it is determined that legal expenses were incurred relating to claims based in capital and non-capital transactions an allocation must be made as to the amount of legal fees to be assigned to each claim singer v commissioner tcmemo_1975_63 aff’d 560_f2d_196 5th cir court apportioned legal expenses between defending the ownership of stock a capitalizable expense and conserving the income-producing level of shares a deductible expense see generally 65_tc_862 65_tc_640 acq in part 1981_2_cb_3 59_tc_708 59_tc_634 acq 1973_2_cb_1 in the present case in order to determine whether a’s legal expenses constitute ordinary and necessary business_expenses or capital expenses it is necessary to determine whether the claims brought against a by c arose from a’s activities in the ordinary course of its business or from the acquisition or disposition of a capital_asset as there are two sets of claims involving two distinct areas namely those relating to the acquisition of c’s partnership i interest and those relating to the decrease in c’s partnership ii interest each set of claims will be separately analyzed below claims relating to c’s partnership i interest one set of claims in c’s suit for which a incurred legal expenses consisted of fraud conspiracy to commit fraud and breach of fiduciary duty all of these claims had their origin in c’s dissatisfaction with the amount designated in the loan agreement as the fair_market_value of his partnership_interest in partnership i as noted above the agreement contained this valuation to inform the parties of the amount for which a could acquire c’s partnership_interest upon his non-payment of the outstanding loans and upon either party’s exercise of the options to sell and purchase the partnership_interest the legal expenses which a incurred to defend against c’s claims must be capitalized since they involved a capital_asset the partnership_interest and originated in a capital_transaction a’s acquisition of that interest in general a partnership_interest constitutes a capital_asset and the sale of a partnership_interest constitutes a capital_transaction see sec_741 see generally 152_f2d_570 2nd cir partner’s interest in a going firm is to be regarded as a capital_asset shapiro v 125_f2d_532 6th cir as noted above it is well established that legal fees incurred in connection with the purchase or disposition of a capital_asset must be capitalized a number of courts have held that legal fees arising from claims pertaining to the valuation of a capital_asset which is being acquired or sold must be capitalized in woodward v commissioner and united_states v hilton hotels corporation the supreme court was faced with the issue of whether expenses_incurred in stock appraisal litigation were capital expenses 397_us_572 397_us_580 taxpayers who were required to purchase stock of shareholders who objected to a proposed corporate transaction incurred litigation expenses in suits commenced to determine the fair_market_value of the shares the supreme court concluded that in both cases where a capital_asset is transferred to a new owner in exchange for an agreed upon price the payment is a capital expense and the legal fees incurred in determining the value of the asset are also capital expenses since they are part of the cost of acquiring the asset woodward u s pincite hilton hotels corporation u s pincite see also 668_f2d_264 7th cir legal fees incurred in defending claims pertaining to key employee’s stock purchase agreement held to constitute capital expenses 611_fsupp_33 n d ill held that legal fees paid in suit for fraud securities violations and breach of contract surrounding stock sale were capital expenses missouri pacific corp v united_states cl_ct expenses from suit commenced by purchasers of stock for misrepresentation of its value held to be capitalizable as origin of claim was in capital_transaction 70_tc_584 legal expenses_incurred in securities fraud claims held to be capital based on claims’ origin in stock purchase in mckeague v united_states petitioner a corporate officer entered into a contract with the other officers for a buyout of his shares as the result of a dispute mckeague v united_states cl_ct the parties were unable to reach an agreement regarding the value of petitioner’s shares id pincite petitioner commenced an action alleging inter alia that the other officers breached the agreements relating to the acquisition of his shares id the court determined that the legal fees relating to the dispute as to whether the price offered for petitioner’s shares was unreasonably low should be capitalized as they related to an increase in the basis of a capital_asset id pincite courts have applied similar reasoning where the valuation of a capital_asset has been challenged after its sale or purchase has been completed in locke v commissioner an individual sold shares of stock to petitioner and following the purchase the individual learned that petitioner had shortly thereafter sold the shares to another entity at a substantially higher price 65_tc_1004 aff’d 568_f2d_663 9th cir petitioner who was sued for fraud incurred legal expenses id the court held that the legal expenses were capital in nature since the claims that formed the basis for the action originated in allegedly fraudulent representations made to the buyers when they bought the shares id pincite accord 104_tc_584 aff’d u s app lexis 9th cir legal fees from suit by minority shareholders regarding dispute over value of stock sold by majority shareholder held to be capitalizable since claim originated in stock sale the origin_of_the_claim_test has been applied to legal fees incurred by both sellers and purchasers of capital assets since it is the kind of transaction out of which the fees arise rather than the identity of the party who commenced the action which is relevant 426_f2d_1293 8th cir construing woodward and hilton hotels as favoring a liberal interpretation of an expense incurred in the disposition of a capital_asset in wagner v commissioner after a buyer agreed to purchase stock from petitioner buyer sued petitioner for securities fraud for allegedly failing to disclose information affecting the stock’s value which led the buyer to purchase the stock at an inflated price 78_tc_910 petitioner deducted expenses which it incurred in defending these claims id pincite the tax_court determined that petitioner must capitalize its legal expenses as they originated in the purchaser’s suit to modify the terms of the stock sale to reflect the stock’s true value and thus the legal expenses are part of the costs of the stock transaction id pincite in arthur h dugrenier inc v commissioner petitioner entered into an agreement with a former shareholder’s estate to redeem the decedent’s stock dugrenier v commissioner 58_tc_931 the estate subsequently sued petitioner for allegedly misrepresenting and concealing information which caused it to receive less than fair_market_value for the decedent’s shares id petitioner made a payment to the shareholder to settle the action which it thereafter deducted id applying the origin_of_the_claim_test the court held that the settlement payment must be capitalized since the payment originated in the stock purchase id pincite as in the above cited precedent c’s claims of fraud conspiracy to commit fraud and breach of fiduciary duty directly pertained to whether a misrepresented or failed to disclose information regarding the fair_market_value assigned to the partnership_interest for purposes of its acquisition the agreement allowed c to sell and a to purchase c’s partnership_interest in partnership i the loan agreement provided that if c did not pay the loan or interest his partnership_interest would automatically be deemed sold to a c executed a collateral_assignment of partnership_interest for this purpose since a incurred legal fees based on c’s claims relating to the valuation of a capital_asset which a had acquired such fees should be deemed to constitute fees incurred in connection with the acquisition of a capital_asset and should be capitalized by a in its protest a raises several arguments against the capitalization of legal fees it incurred relating to the fraud conspiracy to commit fraud and breach of fiduciary duty claims a primarily argues that the origin of all of the claims in c’s suit involving a was its commercial real_estate business activities with c and disputes between c and d which occurred during the course of those activities and thus are deductible under sec_162 as ordinary and necessary business_expenses incurred in its trade_or_business a reasons that it would not have been involved in the suit had it not been for its history of business dealings with c and d and that respondent mischaracterizes the suit by contending that its origin was in the loan agreement a’s arguments contain several weaknesses first in analyzing the origin of c’s claims a fails to examine each claim separately to discover if it originated in the conduct_of_a_trade_or_business as an ordinary and necessary business_expense or if it originated from a transaction giving rise to a capital expense as set forth in the precedent cited above a repeatedly refers to the origin of the claims or the origin of the suit and frequently notes that the service is incorrect in focusing on the loan agreement a single aspect of the parties’ business relations as stated above c’s claims against a arise from two distinct sets of transactions and events involving different partnerships the claims relating to each of these transactions must be scrutinized separately in order to discover their true origins due to the multiplicity of defendants and transactions addressed in c’s complaints a’s argument that the entire suit should be considered in analyzing the origin of the claim analysis is inappropriate the analysis runs counter to the very purpose for which the origin_of_the_claim_test was created namely to narrow the focus of the court to those issues which are most directly related to the claims second a places the origin of the claims for fraud conspiracy to commit fraud and breach of fiduciary duty at too remote a point a argues that it would not have been named in c’s suit but for its commercial real_estate dealings with c and thus the origin of the claims is in c’s business activities with a the origin_of_the_claim_test involves an inquiry into the specific activity or transaction from which a taxable_event resulted and not merely a but for causation analysis a’s test not only cid in its protest a makes no specific reference to the claims c asserted regarding partnership ii but only refers to the claims surrounding the loan agreement and the transfer of c’s partnership i interest traces the origin of the claim to remote events with only a peripheral connection to the claim but it also runs counter to the purpose of the origin_of_the_claim_test by increasing the number of factual elements to be taken into account and expanding the category of controlling facts as the tax_court stated in boagni v commissioner the origin_of_the_claim_test does not contemplate a mechanical search for the first in the chain of events which led to the litigation but rather requires an examination of all the facts 59_tc_708 although a is correct in stating that it would not have been sued by c had theynot met and been engaged in any business dealings the claims asserted by c did not directly stem from this source but from c’s dissatisfaction with the fair_market_value placed on his partnership i interest in the loan agreement between himself and a a also asserts that the origin of c’s claims was in the partners’ dissension this statement is inaccurate as these claims did not originate in the dissension and dissolution of the parties’ business relationships but in c’s dissatisfaction with the value placed on his interest in partnership i c agreed to terminate his business relationship with d and to resign from all partnerships in which they had been involved including partnership i a also maintains in its protest that c’s suit was merely an attempt by c to coerce a into making large payments to him this argument incorrectly focuses on the subjective motivation or purpose for which the underlying action was commenced or defended as stated above the primary purpose test was rejected by the supreme court due to its subjectivity and arbitrariness a cites several cases to support its position that the legal fees relating to the claims stemming from the valuation of c’s partnership i interest are deductible all of the cases cited are factually distinguishable from the present case a relies on the supreme court’s decision in kornhauser v united_states in which legal fees incurred by a partnership in a former partner’s suit for an accounting for partnership profits were deductible 276_us_145 the basis of the former partner’s claim was that he failed to receive his share of compensation_for professional services performed by the partnership while he was still a partner id the court held that the partnership’s legal fees incurred in defense of the claim were deductible since they proximately resulted from the partnership’s trade_or_business id pincite this case is distinguishable from the present case in that the claim in kornhauser related to the collection of compensation or business earnings rather than the valuation of a capital_asset in addition this case pre-dated the origin_of_the_claim_test which is the governing analysis with regard to the tax treatment of legal expenditures also cited is howard v commissioner in which taxpayer the owner of a corporation incurred legal fees in a suit by a former shareholder for misrepresentation and conspiracy in the conduct of the corporation’s business 22_bta_375 acq c b the court held that the legal fees were deductible since they arose out of the business dealings between the parties and did not result in the acquisition of a capital_asset id pincite in contrast the causes of action surrounding the loan agreement in the present case arose from the acquisition of a capital_asset and did not involve allegations of fraud in the conduct of a’s real_estate business the fraud claims were instead alleged in connection with the valuation of c’s partnership_interest set forth in the loan agreement a relies heavily on bha enterprises v commissioner where the tax_court allowed a radio broadcasting corporation to deduct legal expenses_incurred in connection with litigation commenced by the federal communications commission to revoke its license to operate a radio station 74_tc_593 acq in part 1982_2_cb_1 the court reasoned that even though the broadcast licenses were capital assets they were essential to the operation of taxpayer’s business and thus the fees taxpayer incurred in defending against the lawsuit were deductible id pincite the court analogized taxpayer’s situation to an example contained in a revrul_78_389 which provided that a taxpayer who had an established business of extracting and supplying sand and stone incurred legal fees in a suit to challenge a newly enacted local law prohibiting the operation of taxpayer’s business in the locality id pincite see revrul_78_389 1978_2_cb_126 the service declared that in such a situation taxpayer would be permitted to deduct legal fees on the ground that the suit arose from the taxpayer’s business activities and no capital_asset was either acquired or sold id bha is factually distinguishable from the present case in that a capital_asset was not created enhanced acquired or sold the revenue_ruling can be similarly distinguished the claim in that example consisted of a challenge to the validity of a statute which prevented taxpayer from conducting its business in contrast the claims asserted in c’s suit did not affect the a’s ability to operate its business and were directly related to the acquisition of a capital_asset also cited by a is ncnb corporation v united_states in which taxpayer who was in the business of operating a network of banks incurred expenses relating to the opening of a new bank branch ncnb corporation v united_states 684_f2d_285 4th cir these expenses included feasibility and metro studies which related to finding new sites to open bank branches as well as for applications to the comptroller of the currency for the purpose of obtaining authorization to open a particular branch id the court held that these expenditures were deductible since they were essential to the successful operation of the business id pincite the court categorized these costs as relating to the protection of an existing investment and the continuation of an existing business both of which are currently deductible rather than to the creation or enhancement of a capital_asset id pincite the present case does not entail legal expenses stemming from an expense incurred by taxpayer on a regular basis for the purpose of carrying on its business thus the expenses at issue in this case are wholly different from those discussed in ncnb taxpayer also cites dunlap v commissioner where the tax_court allowed a corporation to deduct expenses_incurred to acquire controlling interests in banks 74_tc_1377 rev’d on other gds 670_f2d_785 8th cir the corporation was a bank_holding_company id pincite it incurred various expenses such as rent advertisements employee_benefits and depreciation related to its acquisition of other companies’ stock id the court reasoned that these costs were incidental to the corporation’s business of acquiring and holding an interest in banks and not directly related to the acquisition of the banks id pincite in the present case the legal fees relating to taxpayer’s acquisition of c’s partnership_interest were not expenses incidental to the conduct of its commercial real_estate business but pertained to the acquisition of a partnership_interest a capital_transaction claims relating to c’s partnership_interest in partnership ii the other set of claims in c’s suit pertained to partnership ii for which a presumably incurred legal expenses in defending causes of action for of breach of contract conversion breach of fiduciary duty and partnership dissolution in relation to these claims b and a asserted counterclaims alleging malicious prosecution and abuse of process all of these causes of action had their origin in c’s belief that the other partners of partnership ii including a had reduced his partnership_interest in partnership ii c’s causes of action were asserted in an attempt to protect defend and restore the portion of his interest in partnership ii which had allegedly been reduced by the defendants without his knowledge or consent the legal expenses which a incurred in defending c’s suit and in pursuing its counterclaims must be capitalized since the claims were based in the defense and protection of a capital_asset namely a’s partnership_interest in partnership ii which c claimed was improperly increased at the expense of c’s partnership_interest legal expenses_incurred in asserting or defending claims related to the protection or defense of title to a capital_asset must be capitalized sec_1 a - c see also 397_us_572 55_tc_32 27_tc_158 aff’d 253_f2d_821 2nd cir singer v commissioner t c m pincite such expenses are considered to be a part of the cost of the asset and are thus non-deductible see heath v commissioner tcmemo_1983_399 46_tcm_698 berger v commissioner no big_number t c memo this principle is illustrated in several tax_court decisions in lin v commissioner taxpayers commenced an action for dissolution of two corporations lin v commissioner tcmemo_1984_581 49_tcm_1 with regard to the first_corporation taxpayers claimed that they possessed a ownership_interest in the corporation contrary to defendants’ contention that defendants owned a majority interest in the corporation id pincite with regard to the second corporation taxpayers contested the validity of a deed in which defendants asserted full ownership of a parcel of real_property id pincite the court held that the origin of claims was to protect their ownership interests in stock and real_property and thus taxpayers’ legal fees incurred in asserting the claims were capitalizable id pincite in reed v commissioner taxpayer incurred legal expenses in her attempt to rescind a partnership_agreement which restricted her ability to sell her partnership_interest 55_tc_32 the court characterized this restriction as effectively depriving taxpayer of an incident_of_ownership id pincite since the origin of taxpayer’s claim constituted an attempt to repeal these restrictions the court held that the legal fees expended in asserting the claim involved the perfection of title to the partnership_interest and were thus capitalizable id see also 56_tc_624 legal fees incurred in defending action brought by stockholder to preserve ownership of stock which taxpayer was allegedly holding in trust constituted capitalizable expenses duntley v commissioner tcmemo_1987_579 54_tcm_1138 legal fees incurred by decedent’s husband defense of suit by heirs contesting husband’s entitlement to decedent’s property held to be capitalizable since rooted in defense and protection of title as in the above-cited cases the claims asserted by c stemmed directly from his desire to defend protect and restore his partnership ii interest a capital_asset which had allegedly been reduced by the other partners without his knowledge or consent accordingly we recommend that you take the position that a must capitalize the legal costs incurred in defending these claims and in asserting its counterclaims case development hazards and other considerations deborah a butler assistant chief_counsel field service by thomas d moffitt senior technician reviewer income_tax accounting branch field service division


department of the treasury_department of the treasury internal_revenue_service internal_revenue_service washington d c washington d c date cc dom fs proc number release date uilc internal_revenue_service national_office field_service_advice memorandum for from deborah a butler assistant chief_counsel field service cc dom fs subject 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 x issue s whether the service is authorized to abate interest under sec_6404 when the tax relates solely to tefra partnership items conclusion s the service is authorized to abate interest under sec_6404 when the tax relates solely to tefra partnership items facts x was a partner in a partnership that was audited under the tefra procedures after the issuance of a notification of beginning administrative_proceeding nbap and a notice of final_partnership_administrative_adjustment fpaa the tax_matters_partner filed a petition in the tax_court a settlement was reached and decision documents were sent to the individual partners x has filed a request for abatement of interest pursuant to sec_6404 alleging that the service failed to timely act law and analysis under the tax equity and fiscal responsibility act of tefra pub_l_no 96_stat_324 congress mandated that in order to provide a uniform method of adjusting partnership items the tax treatment of any partnership_item must be determined on the partnership level sec_6221 87_tc_783 prior to the enactment of tefra adjustments of partnership items were determined at the individual partners' level resulting in duplication of administrative and judicial resources and inconsistent results between partners 64_f3d_101 2d cir sec_6404 a authorizes the service to abate any assessment of interest on any deficiency attributable in whole or in part to any error or delay by an officer_or_employee of the internal_revenue_service acting in his official capacity in performing a ministerial_act similarly sec_6404 authorizes the service to abate any assessment of interest on any payment of any_tax described in sec_6212 to the extent that any error or delay in such payment is attributable to such officer_or_employee being erroneous or dilatory in performing a ministerial_act abatement is authorized only if no significant aspect of the delay can be attributed to the taxpayer's conduct and only after the internal_revenue_service has contacted the taxpayer in writing with respect to the deficiency or payment this section was enacted under the tax_reform_act_of_1986 publaw_99_514 100_stat_2085 and applies to interest accruing on deficiencies for tax years beginning after date goettee v commissioner tcmemo_1997_454 sec_6404 was amended by sec_301 of the taxpayer bill of right sec_2 tbor publaw_104_168 110_stat_1452 to provide that errors or delays attributable to unreasonable ministerial or managerial acts may result in abatement of interest however the amendments to sec_6404 are effective only for tax years beginning after date 112_tc_19 n at issue in this case is whether the term_interest on any deficiency encompasses interest on a tax that is assessed as a result of tefra flow-through adjustments all statutory section references are to the internal_revenue_code in effect for the taxable years at issue in this case a deficiency is defined in sec_6211 as the amount by which the tax imposed by subtitle a or b or chapter sec_41 sec_42 sec_43 and sec_44 exceeds the excess of -- the sum of a the amount shown by the taxpayer on his return if a return was made by the taxpayer and an amount was shown by the tax by the taxpayer thereon plus b the amounts previously assessed or collected without assessment as a deficiency over-- the amount of rebates as defined in subsection b made sec_6211 provides a special rule for partnership items c coordination with subchapter_c in determining the amount of any deficiency for purposes of this subchapter adjustments to partnership items shall be made only as provided in subchapter_c the types of taxes referred to in sec_6211 are income estate gift and certain excise_taxes nothing in sec_6211 suggests that a income_tax determined via the tefra partnership procedures cannot constitute a deficiency in fact the opposite is indicated sec_6211 provides that when determining a deficiency for the purposes of subchapter_b deficiency procedures in the case of income estate gift and certain excise_taxes the adjustments to the partnership items shall be made only as provided in subchapter_c tax treatment of partnership items therefore although the adjustment is determined at the partnership level once the amount of income_tax flowing from the partnership to the taxpayer is fixed if the tax owed by the taxpayer exceeds the sum of the amount shown on his return plus amounts previously assessed or collected less the amount of rebates the taxpayer will have a deficiency but that deficiency is not subject_to the deficiency procedures this broad interpretation of a deficiency is supported by sec_6225 which states that no assessment of a deficiency attributable to a partnership_item may be made and no levy or proceeding in any court for the collection of any such deficiency may be made unle sec_150 days has elapsed and no tax_court petition has been filed or if a petition has been filed until the court’s decision becomes final see also 87_tc_783 which held respondent has no authority to assess a deficiency attributable to a partnership_item until after the close of a partnership proceeding sec_6225 and may be enjoined from making premature assessments sec_6225 emphasis added sec_6225 and maxwell both indicate that once the partnership proceeding is over the resulting liability falls within the literal definition of a deficiency furthermore we could find nothing in the internal_revenue_code including i r c a that would restrict this interpretation of deficiency section a states that subchapter_b except as provided shall not apply to the assessment or collection of any computational adjustment it does not make the blanket statement that subchapter_b shall not apply to any part of subchapter_c it simply makes it clear that the assessment and collection of computational adjustments are to be resolved by tefra procedures instead of deficiency procedures unless the deficiency is attributable to affected items or nonpartnership_items described in section a inasmuch as the subchapter_b restriction in section a places no limitation on defining a deficiency a deficiency exists as long as the criteria in sec_6211 are met accordingly x’s liability may constitute a deficiency and interest on x’s deficiency may be subject_to abatement under sec_6404 this field_service_advice is limited to determining whether the service may abate interest on a tax related to a tefra adjustment our advice does not address whether x satisfies the remaining requirements of sec_6404 nevertheless we note that loss of records is considered a managerial act2 and for the years at issue sec_6404 does not authorize the service to abate interest on a deficiency attributable to errors or delays by an employee of the service in performing a managerial act finally if any portion of the request for abatement of interest is disallowed letter or letter should be issued if x does not want appeals consideration or if x does not file a protest within days the final_determination letter or letter should be issued if x disagrees with the service’s final_determination x will be able to petition the tax_court provided x meets the requirements of sec_6404 please call if you have any further questions by sara m coe chief procedural branch see sec_301_6404-2


internal_revenue_service number release date index number ---------------------------------------------- ------------------------- -------------------------- --------------------------- - department of the treasury washington dc person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc psi b01 - plr-112244-04 date date ---------------------------------------------- ---------------------- ------------------------------------------ ---------------------- legend x --------------------------------------------------- country entity date dear ---------------- this letter responds to a letter dated date written on behalf of x requesting a ruling that x be granted an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a disregarded_entity for federal tax purposes facts according to the information submitted x is a country entity x intended to elect to be treated as a disregarded_entity for federal tax purposes effective date however the form_8832 entity classification election inadvertently was not timely filed x represents that it is an entity that is eligible to elect under sec_301_7701-3 to be a disregarded_entity for federal_income_tax purposes sec_301_7701-3 provides in part that a business_entity that is not law and analysis classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 plr-112244-04 sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association_taxable_as_a_corporation if all members have limited_liability unless the entity makes an election to be treated otherwise if a foreign eligible_entity has one owner it may elect to be treated as a disregarded_entity pursuant to the rules in sec_301_7701-3 if a foreign eligible_entity has more than one owner it may elect to be treated as a partnership pursuant to the rules in sec_301_7701-3 sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date on which the form is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose deadline is prescribed by a regulation published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic_extension of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301 a conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file form_8832 with the appropriate service_center and elect to be treated as a disregarded_entity for federal tax purposes effective date to be valid the election must contain any consents required under sec_301_7701-3 and iii further a copy of this letter should be attached to the election plr-112244-04 except as specifically set forth above no opinion is expressed or implied as to the federal_income_tax consequences of the transactions described above under any other provision of the code this ruling is directed only to the taxpayer on whose behalf it was requested sec_6110 of the internal_revenue_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 sincerely being sent to your authorized representative s heather c maloy enclosures cc --------------------------- copy of this letter copy for sec_6110 purposes heather c maloy associate chief_counsel passthroughs and special industries -------------- ------------------------------------- --------------------- -------------------------------------- ---------------------------------- ----------------------------------------------------------------------------------------------------- -------------- ------------------------------------ ---------------------------------- ----------------------


department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ----------------- id no ------------- telephone number --------------------- refer reply to cc intl b02 plr-124247-08 date september internal_revenue_service number release date index number ---------------------------- -------------------------------- -------------------------- -------------- ------------------------------------ ty ------- ty ------- legend taxpayer --------------------------------------------------- -------------------------- year year year year fc country x country y trust ------- ------- ------- ------- ---------------- ------------------ ----------- ------------------------- trustee o trustee r ---------------------------- ------------------------------ law firm p law firm q ------------------------------------------------------------------------------------------ ---------------------- ---------------------------------------------------------- dear ------------------ plr-124247-08 this is in response to your letter received by our office on date submitted by your authorized representative requesting the consent of the commissioner of the internal_revenue_service to make a retroactive qualified_electing_fund qef election under sec_1295 of the internal_revenue_code code and sec_1_1295-3 with respect to your investment in fc the rulings contained in this letter are based upon information and representations submitted by taxpayer and accompanied by a penalties of perjury statement executed by the appropriate parties 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 taxpayer is a u s citizen and a named beneficiary of the trust established under the laws of country x by taxpayer's grandmother a citizen and resident of country y in year the trust acquired shares in fc a corporation organized under the laws of country y at all times since its formation the trust was administered and managed by various foreign nationals who served as the trustees of the trust trustee o who served as a trustee of the trust at all times since inception is an attorney with substantial experience in transnational tax planning and was a partner at law firm p during all the years at issue trustee o is competent to render international tax_advice trustee o and the other trustees had full access to all the records of the trust and trustee o was aware at all relevant times that taxpayer resided permanently in the united_states taxpayer is not a tax professional and has no experience in international tax matters taxpayer represents that as a beneficiary of the trust taxpayer had no control_over the assets of the trust and relied on the trustees to manage the assets of the trust at all times the trustees and in particular trustee o never informed taxpayer that the trust held shares of fc that fc was a passive_foreign_investment_company pfic under sec_1297 of the code for u s federal_income_tax purposes and of the consequences of such investment and of the possibility of making any elections qef or otherwise with respect to such shareholdings for u s federal_income_tax purposes in year after the death of taxpayer's father taxpayer engaged law firm q and others to determine the extent of the family's assets in year during its evaluation of the trust's assets law firm q determined that fc had been a pfic since year and informed taxpayer of fc's characterization as a pfic at that time plr-124247-08 taxpayer has submitted an affidavit signed under penalties of perjury describing the events that led to the failure to make the qef election by the election due_date including the role of the trustees taxpayer has also submitted affidavits of trustee o and trustee r corroborating the representations made by taxpayer taxpayer represents that as of the date of this request_for_ruling the pfic status of fc has not been raised by the irs on audit for any of the taxable years at issue ruling requested taxpayer requests the consent of the commissioner of the internal_revenue_service to make a retroactive qef election with respect to fc for year under sec_1_1295-3 law sec_1295 of the code provides that any pfic shall be treated as a qef with respect to a taxpayer if an election by the taxpayer under sec_1295 applies to such company for the taxable_year and the company complies with such requirements as the secretary may prescribe for purposes of determining the ordinary_earnings and net capital_gains of such company under sec_1295 a qef election may be made for any taxable_year at any time on or before the due_date determined with regard to extensions for filing the return for such taxable_year to the extent provided in regulations such an election may be made after such due_date if the taxpayer failed to make an election by the due_date because the taxpayer reasonably believed the company was not a pfic under sec_1_1295-3 a taxpayer may request the consent of the commissioner to make a retroactive qef election for a taxable_year if the shareholder reasonably relied on a qualified_tax professional within the meaning of sec_1_1295-3 granting consent will not prejudice the interests of the united state sec_3 government as provided in sec_1_1295-3 the request is made before a representative of the internal_revenue_service raises upon audit the pfic status of the corporation for any taxable_year of the shareholder and the shareholder satisfies the procedural requirements of sec_1 f the procedural requirements include filing a request for consent to make a retroactive election with and submitting a user_fee to the office of the associate chief plr-124247-08 counsel international sec_1_1295-3 additionally affidavits signed under penalties of perjury must be submitted that describe the events which led to the failure to make a qef election by the election due_date the discovery of such failure the engagement and responsibilities of the qualified_tax professional and the extent to which the shareholder relied on such professional sec_1_1295-3 and iii conclusion based on the information submitted and representations made with taxpayer’s ruling_request we conclude that taxpayer has satisfied sec_1_1295-3 accordingly consent is granted to taxpayer to make a retroactive qef election with respect to fc for year provided that taxpayer complies with the rules under sec_1_1295-3 regarding the time and manner for making the retroactive qef election this private_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 ruling must be attached to any_tax return to which it is relevant in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to taxpayer's authorized representative sincerely s ethan a atticks senior technical reviewer branch international