t c summary opinion united_states tax_court harolyn tarr petitioner v commissioner of internal revenue respondent docket no 1787-10s filed date harolyn tarr pro_se katy s lin for respondent armen special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any unless otherwise indicated all subsequent section references are to the internal_revenue_code in effect for the taxable years in issue and all rule references are to the tax_court rules_of_practice and procedure other court and this opinion shall not be treated as precedent for any other case respondent determined the following deficiencies in and accuracy-related_penalties under sec_6662 on petitioner’s federal income taxes year deficiency sec_6662 dollar_figure dollar_figure big_number dollar_figure penalty after various concessions described hereinafter and without regard to purely mechanical matters related to certain credits the issues for decision are as follows whether for petitioner is entitled to a schedule c deduction for other expenses aggregating dollar_figure whether for petitioner is entitled to schedule c deductions for travel of dollar_figure meals and entertainment of dollar_figure and certain other expenses aggregating dollar_figure and whether petitioner is liable for the accuracy-related_penalty under sec_6662 background2 petitioner resided in the state of michigan when the petition was filed at all relevant times petitioner was married and she and her husband filed joint federal_income_tax returns for and none of the facts have been stipulated the taxable years at issue in this case on those returns petitioner and her husband each reported their wage income form_1040 for on the return petitioner did not report any taxable refund of state or local income_tax petitioner itemized_deductions for and she attached to the return a schedule a itemized_deductions on the schedule a petitioner claimed total itemized_deductions of dollar_figure which included miscellaneous_itemized_deductions principally employee business_expenses of dollar_figure net of the 2-percent floor on such deductions prescribed by sec_67 petitioner also attached to the return a schedule c profit or loss from business for her statistician activity and a schedule c for her husband’s financial services activity on petitioner’s schedule c which reflected a net_loss no gross_receipts or sales were reported on petitioner’s husband’s schedule c which also reflected a net_loss various deduction sec_3 the deficiencies and penalties at issue in this case were determined by respondent in a joint notice_of_deficiency issued to petitioner and her husband the caption of the petition filed with the court bore the name of petitioner’s husband however the petition bore the original signature of only petitioner at the trial session petitioner’s husband was repeatedly invited to ratify the petition by executing an amendment to petition and the necessary form was furnished to him after he steadfastly declined to do so the court issued an order dismissing this case as to him for lack of jurisdiction were claimed among them other expenses of dollar_figure consisting of the following communication expense dollar_figure transportation expense big_number moving expense big_number vehicle expense big_number dollar_figure form_1040 for petitioner itemized_deductions for and she attached to her return a schedule a on the schedule a petitioner claimed total itemized_deductions of dollar_figure consisting of taxes paid of dollar_figure gifts to charity of dollar_figure and miscellaneous_itemized_deductions principally employee business_expenses of dollar_figure net of the 2-percent floor on such deductions prescribed by sec_67 petitioner also attached to her return a schedule c which reflected a net_loss for her husband’s financial services activity various deductions were claimed on this schedule c including the following travel dollar_figure meals entertainment other expenses big_number communication expense dollar_figure transportation expense big_number moving expense notice_of_deficiency for respondent determined that petitioner failed to report gross_receipts of dollar_figure on her statistician schedule c and a taxable refund of state_income_tax of dollar_figure also for that year respondent disallowed in full schedule a miscellaneous_itemized_deductions and the deduction for other expenses claimed on the financial services schedule c for respondent disallowed all of the schedule a itemized_deductions and allowed instead the standard_deduction applicable to petitioner’s filing_status married_filing_jointly also for that year respondent disallowed in full schedule c deductions claimed for travel_expenses meals and entertainment_expenses and other expenses for each year respondent determined that petitioner was liable for the accuracy-related_penalty under sec_6662 stipulation of settled issues and other concessions prior to trial petitioner executed a stipulation of settled issues for petitioner conceded that she failed to report gross_receipts of dollar_figure and a taxable refund of dollar_figure and that she was not entitled to any miscellaneous_itemized_deductions on schedule a for petitioner conceded dollar_figure of the dollar_figure of total itemized_deductions claimed on the schedule a petitioner the difference between the amount claimed by petitioner on her return dollar_figure and the amount conceded by petitioner in the stipulation of settled issues dollar_figure is dollar_figure at trial respondent conceded that difference however respondent’s concession was obviously motivated by the fact that it had no tax effect because dollar_figure is less than the standard_deduction continued also conceded the moving_expense_deduction of dollar_figure claimed as a component of other expenses on her husband’s financial services schedule c a burden_of_proof discussion in general the commissioner’s determinations in a notice_of_deficiency are presumed correct and the taxpayer bears the burden of showing that those determinations are erroneous rule a 290_us_111 pursuant to sec_7491 the burden_of_proof as to factual matters may shift from the taxpayer to the commissioner under certain circumstances petitioner did not allege that sec_7491 applies nor did she either introduce the requisite evidence see sec_7491 or satisfy the substantiation recordkeeping and other requirements of that section see sec_7491 and b therefore petitioner bears the burden_of_proof see rule a b substantiation of deductions deductions are allowed solely as a matter of legislative grace and the taxpayer bears the burden of proving his or her entitlement to them rule a 503_us_79 new colonial ice co v helvering continued dollar_figure that respondent allowed in the notice_of_deficiency u s this includes the burden of substantiation sec_6001 65_tc_87 affd per curiam 540_f2d_821 5th cir sec_1_6001-1 e income_tax regs the fact that a taxpayer lists a deduction on the taxpayer’s return is not sufficient to substantiate the deduction 71_tc_633 62_tc_834 this is because a tax_return is merely a statement of the taxpayer’s claim and the return is not presumed to be correct wilkinson v commissioner supra pincite roberts v commissioner supra pincite see 103_tc_428 tax returns do not establish the truth of the facts stated therein 28_tc_1034 a taxpayer’s income_tax return is a self-serving declaration that may not be accepted as proof for the deduction or exclusion claimed by the taxpayer 7_tc_245 a taxpayer’s return is not self-proving as to the truth of its contents affd 175_f2d_500 2d cir taylor v commissioner tcmemo_2009_235 a tax_return is not evidence of the truth of the facts stated in it as a general_rule if in the absence of required records a taxpayer provides sufficient evidence that the taxpayer has incurred a deductible expense but the taxpayer is unable to adequately substantiate the amount of the deduction to which he or she is otherwise entitled the court may estimate the amount of such expense and allow the deduction to that extent 39_f2d_540 2d cir however the court may bear heavily against the taxpayer whose inexactitude is of his or her own making id further 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 amount to unguided largesse 245_f2d_559 5th cir in the case of certain expenses sec_274 expressly overrides the so-called cohan doctrine 50_tc_823 affd per curiam 412_f2d_201 2d cir sec_1_274-5t temporary income_tax regs fed reg date specifically and as pertinent herein sec_274 provides that no deduction is allowable for traveling expenses including meals_and_lodging while away from home or with respect to listed_property as defined in sec_280f unless the deduction is substantiated in accordance with the strict substantiation requirements of sec_274 and the regulations promulgated thereunder included within the definition of listed_property in sec_280f is any passenger_automobile or other_property used as a means of transportation and any cellular telephone sec_280f ii v sec_1_280f-6 and c income_tax regs see eg murata v commissioner tcmemo_1996_321 golden v commissioner tcmemo_1993_602 in other words in the absence of adequate_records or sufficient evidence corroborating the taxpayer’s own statement any deduction that is subject_to the stringent substantiation requirements of sec_274 is proscribed applying the foregoing principles to the instant case we are unable to conclude given the absence of relevant testimony and meaningful records that petitioner has proven entitlement to any of the schedule c deductions remaining in issue we therefore sustain respondent’s determination in this regard c accuracy-related_penalty sec_6662 imposes a penalty equal to percent of the amount of any underpayment attributable to negligence or disregard of rules or regulations sec_6662 the term negligence includes any failure to make a reasonable attempt to comply with tax laws and the term disregard includes any careless reckless or intentional disregard of rules or regulations sec_6662 negligence also includes any failure by the taxpayer to keep adequate books_and_records or to substantiate items properly sec_1_6662-3 income_tax regs sec_6664 provides an exception to the imposition of the accuracy-related_penalty if the taxpayer establishes that there was reasonable_cause for and the taxpayer acted in good_faith with respect to the underpayment see sec_1_6664-4 income_tax regs the determination of whether the taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account the pertinent facts and circumstances sec_1_6664-4 income_tax regs the taxpayer bears the burden of proving that he or she did not act negligently or disregard rules or regulations rule a welch v helvering u s pincite 116_tc_438 but see sec_7491 regarding the commissioner’s burden of production for petitioner failed to report any of the gross_receipts of her statistician schedule c activity she also failed to report a refund of state_income_tax albeit modest in amount also for that year petitioner grossly overstated her itemized_deductions conceding that she was not entitled to nearly percent of the deductions claimed on schedule a dollar_figure dollar_figure for petitioner also grossly overstated her itemized_deductions conceding that she was not entitled to over percent of the deductions claimed on schedule a dollar_figure dollar_figure in view of the foregoing we conclude that respondent satisfied his burden of production however we are unable to conclude that petitioner proved that there was reasonable_cause for and that she acted in good_faith with respect to the underpayment_of_tax for either or thus in addition to the unexplained failure to report gross_income and the gross overstatement of itemized_deductions no persuasive explanation was provided regarding the disallowed schedule c deductions we therefore hold for respondent on this issue conclusion we have considered all of the arguments made by petitioner and to the extent that we have not specifically addressed any of them we conclude that they are irrelevant or without merit to reflect our disposition of the disputed issues as well as petitioner’s concessions decision will be entered for respondent


third party communication date of communication month dd yyyy cca_2015042206404711 id uilc number release date from sent wednesday date am to cc bcc subject fw follow-up to call to branch you asked about the applicability of the religious freedom restoration act rfra usc 2000bb et seq to seizure of property owned by a church irm requires area_counsel approval of proposed seizures of assets of a religious_organization the irm requires consideration of the sensitive nature of such seizures consideration of alternative methods of resolution and consideration of the implications of the rfra the rfra provides that the government shall not substantially burden a person’s exercise of religion unless it demonstrates that application of the burden is in furtherance of a compelling government interest and it is the least restrictive means of furthering that compelling government interest thus the initial test born by the challenger is whether there is a substantial burden being placed by the government action upon his or her free exercise of religion see glb lexi sec_12 and cases cited therein we do not believe that seizure of property or assets owned by a church but not directly used in the practice of the religion such as property owned by the church that is rented for individual residences would create a substantial burden upon the free exercise of religion at most it may only have an incidental effect see 322_fsupp2d_603 e d penn rfra does not explain what constitutes a ‘substantial burden’ on the exercise of religion however a useful definition derived from the supreme court's pre-smith decisions is that it arises when the government ‘puts substantial pressure on an adherent to modify her behavior and to violate her beliefs’ or ‘forces an individual to choose between following the precepts of her religion and forfeiting benefits on the one hand and abandoning one of the precepts of her religion ’ 40_fsupp2d_15 d d c quoting 374_us_398 10_led_965 83_sct_1790 and 450_us_707 67_led_624 101_sct_1425 seizure of property owned by a church but not used in the practice of religion does not fall within that definition even if the substantial burden threshold is established however the next prong of the rfra allows the government to establish an exception for a compelling government interest which is the lease restrictive means of furthering that interest see irs cca lexi sec_180 irs cca and cases cited therein again there are numerous cases which have recognized the compelling interest of the government in assessing and collecting unpaid tax_liabilities we are not aware of any cases finding a violation of the rfra for actions taken to assess or collect a tax determining the least restrictive means of collection must be analyzed on a case-to-case basis generally as instructed in the irm the irs will attempt alternative methods of resolution before resorting to administrative seizure thus the rfra does not bar the application of the tax laws or tax collection remedies such as administrative seizure and sale of church-owned property as noted the service should always take into account the sensitive nature of such seizures note also there may be additional requirements for seizures of certain types of property for example irm requires area director approval prior to seizure of property used as a personal_residence by any person including property owned by a taxpayer and rented to others for residential use please let us know if we can be of further assistance


t c memo united_states tax_court najeem b adeyemo and olubunmi a adeyemo petitioners v commissioner of internal revenue respondent docket no filed date najeem b adeyemo and olubunmi a adeyemo pro_se bradley c plovan for respondent memorandum findings_of_fact and opinion morrison judge the respondent in this case the irs issued a notice_of_deficiency to the petitioners mr najeem b adeyemo and mrs olubunmi a adeyemo for the tax years and the adeyemos filed joint federal_income_tax returns for and for the irs determined a deficiency of dollar_figure and an accuracy-related_penalty under sec_6662 of dollar_figure for the irs determined a deficiency of dollar_figure and an accuracy-related_penalty under sec_6662 of dollar_figure the adeyemos timely filed a petition under sec_6213 for redetermination of the deficiencies we have jurisdiction under sec_6214 after concessions the following issues for decision remain is the adeyemos’ rental real-estate business a passive_activity we hold that the business is a passive_activity does the allowance provided by sec_469 apply to the adeyemos’ rental real-estate business we hold that the allowance does not apply are the adeyemos entitled to any deductions for their rental real- estate business setting aside the effect of the passive-activity loss limitations of sec_469 any medical-expense deductions or any charitable-contribution deductions in excess of those allowed by the irs we hold that they are not so entitled all dollar amounts have been rounded to the nearest dollar at the time they filed the petition the adeyemos resided in maryland thus this case is appealable to the u s court_of_appeals for the fourth circuit unless the parties stipulate otherwise sec_7482 were the adeyemos insolvent immediately before they received a discharge of dollar_figure in credit-card debt in we hold that they were not insolvent are the adeyemos liable for accuracy-related_penalties under sec_6662 we hold that they are liable all section references are to the internal_revenue_code as in effect for the years at issue and all rule references are to the tax_court rules_of_practice and procedure findings_of_fact the adeyemos are a married couple living in laurel maryland mrs adeyemo had a full-time job working as a pharmacist throughout and mr adeyemo worked as a pharmaceutical sales representative in and he was unemployed for approximately five months in on their joint returns the adeyemos reported total wage income of dollar_figure and dollar_figure for and respectively these amounts were not challenged by the irs in addition to their day jobs the adeyemos owned and managed seven rental properties in various cities in maryland mr adeyemo performed the bulk of the management tasks with respect to the rental properties himself the couple did not employ an outside management company the activities mr adeyemo conducted included among other things maintaining and repairing the properties overseeing maintenance crews showing the properties to prospective tenants collecting rent and occasionally bringing eviction actions against tenants in maryland state court perhaps as a result of the financial crisis in and the adeyemos experienced increased difficulty renting out properties and collecting rent from tenants this created more work than was usual for mr adeyemo as he was forced to devote more time to finding credit-worthy tenants and collecting rent from existing tenants the adeyemos’ rental real-estate business proved unprofitable during the years at issue and the couple suffered losses on the business on their and schedules e supplemental income and loss the adeyemos claimed aggregate expenses of dollar_figure and dollar_figure respectively associated with the seven rental properties on the schedules e these expenses were separated into the following categories depreciation interest property taxes insurance maintenance repairs advertising auto and travel and various fees for each expense category the amount of the expense was further subdivided among the seven properties the adeyemos reported net losses from the seven properties of dollar_figure for and dollar_figure for they did not treat their rental real-estate business as a passive_activity and they deducted these net losses from other income on their form sec_1040 u s individual_income_tax_return in addition to the deductions they claimed for the expenses of their rental real-estate business the adeyemos reported a charitable-contribution deduction of dollar_figure and a medical-expense deduction of dollar_figure on their schedule a itemized_deductions they reported tax_liabilities of zero for and dollar_figure for the irs sent the adeyemos a notice_of_deficiency for and for each year the notice_of_deficiency made the following determinations with respect to the income and expenses attributable to the adeyemos’ rental real-estate business the notice disallowed--on grounds of lack of substantiation--some of the deductions the adeyemos claimed for the expenses of their rental real-estate business the deductions disallowed for lack of substantiation were all the deductions for advertising expenses all the deductions for auto and travel_expenses portions of the deductions for expenses for repairs insurance cleaning and maintenance and interest in total the notice disallowed on lack-of- substantiation grounds dollar_figure of the dollar_figure of claimed deductions for the rental real-estate business for and dollar_figure of the dollar_figure of claimed rental real-estate business deductions for the notice determined that neither mr adeyemo nor mrs adeyemo qualified as a real-estate professional and that therefore the adeyemos’ rental real- estate business was a passive_activity see sec_469 a passive_activity includes any rental_activity except as provided in sec_469 c sec_469 does not apply to any rental_activity of a taxpayer who is a real- estate professional the notice determined that the adeyemos’ only income from passive activities was their income from their rental real-estate business the notice did not make any adjustments to income from the rental real-estate business reported by the adeyemos on their returns the notice determined that the adeyemos did not qualify for the rental real-estate allowance provided by sec_469 as a consequence of these determinations the notice_of_deficiency made the following computations this determination affects the calculation of the passive_activity_loss see sec_469 defining a passive_activity_loss as the amount by which the aggregate losses from all passive activities exceed the aggregate income from all passive activities the deductions for the rental real-estate business as reduced by the deductions disallowed by the irs on lack-of-substantiation grounds exceeded and offset completely all income from the rental real-estate business the amount by which a the deductions for the rental real-estate business as reduced by the deductions disallowed by the irs on lack-of- substantiation grounds exceeded b income from the rental real-estate business was a passive_activity_loss and was not currently deductible see sec_469 b these adjustments are summarized in the following table income and deductions attributable to rental real-estate business gross_income reported deductions reported net_loss reported deductions disallowed in the notice_of_deficiency on lack- of-substantiation grounds deductions allowed in the notice_of_deficiency before application of the passive- loss-disallowance rule net_loss as adjusted in the notice_of_deficiency the notice_of_deficiency reduced the net_loss by the deductions disallowed for lack of sub- stantiation and determined that the amount of the net_loss so reduced was a passive- activity loss dollar_figure big_number -big_number dollar_figure big_number -big_number big_number big_number big_number big_number -big_number -big_number the passive-activity loss stated in the notice_of_deficiency was -dollar_figure according to our to our review of all adjustments in the notice this amount understates the passive-activity loss by dollar_figure thus the amount of the passive- activity loss should have been -dollar_figure with respect to the adeyemos’ personal ie non-business expenses and income the notice_of_deficiency made the following determinations that the charitable-contribution deduction for should be dollar_figure instead of the dollar_figure reported on the return that the medical-expense deduction for should be dollar_figure instead of the dollar_figure reported on the return and that the adeyemos failed to report dollar_figure of income arising from discharge_of_indebtedness in at trial the irs confronted mr adeyemo with evidence that during an audit of the couple’s and returns he had given the irs forged or altered receipts purporting to show that the couple had made payments for expenses related to their rental real-estate business the receipts generally provided the amount_paid the purpose of the expense and the property to which the expense related the court admitted the receipts for the limited purpose of impeaching mr adeyemo’s credibility as a witness mr adeyemo admitted in testimony that he had forged or altered the receipts the adeyemos’ certified_public_accountant who prepared the couple’s and returns testified at trial the accountant was present at the audits of the adeyemos’ and returns the accountant’s testimony related to the conduct of the irs agents at the audits and the types of questions the agents asked the accountant did not testify about his professional background or any advice he gave the adeyemos at the time they filed their and returns also at trial the adeyemos introduced some pages of documents apparently related to their rental real-estate business the documents were in no discernible order and consisted primarily of receipts invoices leases and court documents the adeyemos did not explain how the documents corroborate their position other than to suggest that the documents demonstrate the significant amount of time and effort that went into managing the couple’s rental properties opinion with respect to determinations in the notice_of_deficiency the taxpayer generally bears the burden_of_proof rule a 290_us_111 the burden_of_proof is satisfied by a preponderance_of_the_evidence 88_tc_38 if the taxpayer shows that the requirements of sec_7491 and are satisfied the burden_of_proof shifts to the irs 116_tc_438 sec_7491 requires the taxpayer to present credible_evidence with respect to factual issues relevant to ascertaining the taxpayer’s tax_liability credible_evidence is evidence that after critical analysis would constitute a sufficient basis for deciding the issue in favor of the taxpayer if no contrary evidence were submitted 132_tc_105 aff’d 613_f3d_1360 11th cir higbee v commissioner t c pincite sec_7491 requires the taxpayer to comply with substantiation and record-keeping requirements and cooperate with the irs’s reasonable requests for witnesses information documents meetings and interviews sec_7491 and b the taxpayer bears the burden of proving that the requirements of sec_7491 have been met see 135_tc_471 aff’d 668_f3d_888 7th cir with respect to the first issue--whether the adeyemos’ rental real-estate business is a passive activity--all of our findings are based on the preponderance_of_the_evidence therefore it is not necessary to determine which party has the burden_of_proof 131_tc_185 with respect to the second issue--whether the allowance provided by sec_469 applies to the adeyemos’ rental real-estate business--we determine that the allowance is inapplicable for reasons that do not require the resolution of any disputed facts therefore the identity of the party bearing the burden_of_proof is irrelevant see 115_tc_523 919_fsupp2d_1140 d n m with respect to the third issue--the availability of various types of deductions--the adeyemos provided no evidence--credible or incredible-- with respect to the charitable- contribution and medical-expense deductions therefore they bear the burden of proof with respect to the charitable-contribution and medical-expense deductions see sec_7491 with respect to the fourth issue--the insolvency issue--the adeyemos presented no evidence other than mr adeyemo’s bare testimony that the adeyemos had dollar_figure million of debt this testimony is unpersuasive in the absence of more specific evidence of the adeyemos’ net_worth including their debts and their assets thus the adeyemos have not presented credible_evidence with respect to the insolvency issue they therefore bear the burden_of_proof with respect to this issue see id whether the adeyemos’ rental real-estate business is a passive_activity sec_162 and sec_212 generally permit taxpayers to deduct ordinary and necessary expenses paid_or_incurred in carrying_on_a_trade_or_business or for the production_of_income in the case of an individual sec_469 disallows any current deduction for a passive_activity_loss sec_469 b a passive_activity_loss is equal to the aggregate losses from all of the taxpayer’s passive activities minus the aggregate income from all passive activities sec_469 as we find that the adeyemos have abandoned the argument that they are entitled to business-expense deductions that were disallowed by the irs on lack- of-substantiation grounds see infra pp we need not determine whether they bear the burden_of_proof for that issue the effect of the passive-activity-loss disallowance rule is that deductions continued generally a passive_activity is any trade_or_business in which the taxpayer does not materially participate see sec_469 c rental_activity including rental real-estate activity is per se passive unless the taxpayer qualifies as a real-estate professional as defined in sec_469 sec_469 if the taxpayer qualifies as a real-estate professional the taxpayer’s rental real_estate activity escapes the per se rule otherwise applicable to rental_activity sec_469 a a taxpayer qualifies for the exception for real-estate professionals only if the following two requirements are met i more than one-half of the personal services performed by the taxpayer during such taxable_year are performed in real_property trades_or_businesses in which the taxpayer materially participates and continued related to passive activities are allowed against income from passive activities and the excess ie the amount by which the deductions related to passive activities exceed the income from passive activities cannot be deducted from income from activities other than passive activities see 279_f3d_547 7th cir section prohibits the deduction of passive_activity_losses except insofar as the losses are used to offset passive_activity income aff’g 114_tc_366 wage income and portfolio investment_income are not treated as income from passive activities see sec_469 d a 481_f3d_717 9th cir wage income is not passive_income aff’g cal interiors inc v commissioner tcmemo_2004_99 ii such taxpayer performs more than hours of services during the taxable_year in real_property trades_or_businesses in which the taxpayer materially participates sec_469 in the case of a joint_return the above requirements are satisfied if and only if either spouse separately satisfies both requirements id thus the couple’s activities cannot be aggregated for purposes of qualification as a real-estate professional id a regulation provides guidance regarding the types of proof to be used in determining the extent of an individual’s participation in an activity sec_1 5t f temporary income_tax regs fed reg date the regulation provides the extent of an individual’s participation in an activity may be established by any reasonable means contemporaneous daily time reports logs or similar documents are not required if the extent of such participation may be established by other reasonable means reasonable means for purposes of this paragraph may include but are not limited to the identification of services performed over a period of time and the approximate number of hours spent performing such services during such period based on appointment books calendars or narrative summaries we have held that this regulation governs the type of proof to be used in determining the hours_of_service spent by an individual in real-property trades_or_businesses 135_tc_365 the regulation governs the acceptability of proof offered by a taxpayer to show that he performed more than hours of services in real-property trades_or_businesses the regulation does not permit a post-event ballpark guesstimate id pincite citing bailey v commissioner t c memo in addition the taxpayer’s uncorroborated testimony need not be relied on bailey v commissioner slip op pincite against the irs’s argument that their rental real-estate business is a passive_activity the adeyemos’ sole contention is that they qualify for the exception for real-estate professionals the adeyemos do not contend that mrs adeyemo was a real-estate professional in either or therefore we focus only on whether mr adeyemo was a real-estate professional in making this determination we assume without deciding that the adeyemos’ rental real- estate business constitutes a real-property trade_or_business and mr adeyemo materially participated in the adeyemos’ rental real-estate business even with these favorable assumptions mr adeyemo did not qualify as a real-estate professional in or for reasons given below we find that mr adeyemo performed big_number hours of personal services working as a pharmaceutical sales representative during but that he performed no more than hours in the adeyemos’ rental real-estate business this means that less than of the hours of personal services performed by mr adeyemo during were performed in the adeyemos’ rental real-estate business in that year this amount is less than the ie one-half required by sec_469 we also find that mr adeyemo performed no more than hours of personal services in the adeyemos’ rental real-estate business in this amount is less than the hours required by sec_469 these findings are summarized in the following table hours of personal services performed by mr adeyemo in the adeyemos’ rental real-estate business hours of personal services performed by mr adeyemo outside the adeyemos’ rental real-estate business row row row row row we now explain our reasoning hours big_number unresolved big_number unresolved unresolved the adeyemos provided three primary sources of support for their position that mr adeyemo was a real-estate professional a logbook a spreadsheet prepared for trial and testimony we discuss each source in turn the fraction equal sec_34 at trial the adeyemos introduced and the court admitted into evidence a logbook that provides an almost-daily account of the activities that mr adeyemo conducted with respect to the couple’s rental properties these activities include showing properties to prospective tenants picking up rent and overseeing work crews each entry includes a date a description of the activities that mr adeyemo performed on that date and the amount of time he devoted to the respective activities mr adeyemo testified that the logbook entries were made contemporaneously with the events in question and accurately depict his involvement with the rental properties the irs contends that we should not rely on the logbook because the irs argues it is vague and was likely created shortly before trial the irs’s position that the logbook is not contemporaneous is supported by at least two points in the record first mr adeyemo provided inconsistent answers in response to irs counsel’s questions concerning when and why the adeyemos began to maintain the logbook as to what year the couple as an out-of-court statement the logbook could potentially be subject_to a hearsay objection but the irs did not object to the logbook on hearsay grounds and the court admitted the logbook see fed r evid prohibiting admission of hearsay c defining hearsay generally as a statement not made while testifying at the trial the irs objected to the logbook on grounds other than hearsay but the court overruled the objection began to maintain the logbook mr adeyemo gave multiple inconsistent answers and in addition the irs auditor credibly testified that prior to the adeyemos’ audit mr adeyemo told him he had not kept any sort of timelog while these inconsistencies raise some doubts as to the contemporaneousness of the logbook the regulations state that the taxpayer’s records need not be contemporaneous sec_1_469-5t temporary income_tax regs supra thus the fact that the logbook may not be a contemporaneous account of mr adeyemo’s and rental real-estate activities does not preclude us from relying on it the thoroughness and consistency of the logbook convince us that it is an accurate account of mr adeyemo’s activities the logbook shows that mr adeyemo spent at most hours managing the couple’s rental properties in and hours managing the properties in asserting that the logbook reflects only a portion of the total hours that mr adeyemo devoted to the adeyemos’ rental real-estate business the adeyemos also the irs argues that logbook hours attributable to travel time should not count toward the 750-hour and tests sec_469 and ii we refrain from deciding this issue as it does not alter the outcome of our inquiry into whether mr adeyemo was a real-estate professional for the hours of personal service performed in the rental real-estate business by mr adeyemo-- even including travel time--were less than of his total hours of personal services for the hours of personal service performed in the rental real-estate business--even including travel time--were less than hours presented a summary spreadsheet that purportedly provides a complete account of the total hours mr adeyemo spent managing the properties mr adeyemo testified that he created the spreadsheet just before trial some three to four years after the tax years at issue the types of activities listed in the spreadsheet are similar to those listed in the logbook eg showing properties to prospective tenants and overseeing maintenance work like the logbook the activities are listed by date and each entry includes the time spent on the relevant activity mr adeyemo explained that the spreadsheet was more comprehensive than the logbook because the spreadsheet included time spent in court in eviction actions time spent showing properties in addition to time recorded in the logbook and some travel time in addition to travel time in the logbook in total the spreadsheet states that mr adeyemo spent hours in and hours in managing the couple’s rental properties at trial mr adeyemo testified about how he created the spreadsheet mr adeyemo explained that generally he reviewed his phone records the logbook as an out-of-court statement such a document could potentially be subject_to a hearsay objection see fed r evid prohibiting admission of hearsay c defining hearsay generally as a statement not made while testifying at the trial however the parties stipulated that the spreadsheet should be treated by the court as if mr adeyemo had testified to the contents of the spreadsheet the court admitted the spreadsheet with that condition under that condition the spreadsheet is an in-court statement and is not hearsay and newspaper ads for available properties from and to get a sense of where he was on a particular day if he had several calls that were either made from or received in say laurel and he knew he had a rental listing for a laurel property around that time mr adeyemo would assume that he was showing the laurel property for a few hours that day he might confirm this assumption by examining logbook entries from that particular date for reasons explained below we find that the spreadsheet is an uncorroborated post-event ballpark guesstimate rather than reasonable means of proof moss v commissioner t c pincite sec_1_469-5t temporary income_tax regs supra we observe three principal issues that tend to undermine the reasonableness of the spreadsheet as a method of proof we discuss each in turn the first problem is that the times and activities listed in the spreadsheet are not consistent with either the adeyemos’ testimony or their documentary_evidence mr adeyemo testified that the activities listed in the spreadsheet were derived from his memory as well as from documentary_evidence such as receipts phone bills the logbook and newspaper ads to the extent that the spreadsheet entries are purportedly derived from documentary_evidence the record does not establish a credible link between the spreadsheet and the underlying documents for example most entries include a general reference to a batch of receipts or phone bills however the references are too vague and the receipts too disorganized for us to trust that the spreadsheet is corroborated by the underlying documents in addition some of the underlying documents are inapposite some receipts are from and an example further illustrates the lack of connection between the spreadsheet and the other documentary_evidence the spreadsheet lists multiple property showings on date one spreadsheet entry states that mr adeyemo spent minutes showing a property on montpelier drive in laurel on that date the entry includes the reference see phone bill the phone records show that the adeyemos made calls from or received calls in laurel on the morning of february however other than the spreadsheet itself there is nothing in the record that demonstrates whether the laurel calls were related to mr adeyemo’s rental activities the fact that the adeyemos resided in laurel further complicates this analysis as there is no evidence that ties mr adeyemo to the property on montpelier drive in laurel as opposed to the couple’s personal_residence in laurel on that date the adeyemos presented no other evidence that would support the proposition that mr adeyemo spent minutes showing the property on montpelier drive in laurel on february the spreadsheet has another entry on that date which allocates minutes to a showing at a property on kinmount road in lanham maryland again the entry includes the reference see phone bill however the phone records do not provide a reliable indication that calls were made from or received in lanham on that date second it appears that the spreadsheet describes activities of both spouses at first mr adeyemo testified that the spreadsheet reflected the activities of both him and mrs adeyemo in response to an inquiry from the court during trial irs counsel correctly explained that the two requirements for the real-estate professional exception must be independently satisfied by one of the spouses in the case of a joint_return see sec_469 and ii after he heard this mr adeyemo changed his testimony to state that the spreadsheet reflected only his activities and that mrs adeyemo performed only minor administrative work this testimony is inconsistent with mrs adeyemo’s testimony she later testified that a treatise states in the case of a joint_return if either spouse single-handedly satisfies both requirements then all rental_real_estate_activities of both spouses qualify for the exception one cannot however combine the two spouses’ efforts for purposes of satisfying either of the two requirements for individuals for example by adding hours of work by one spouse to hours of work by the other in order to reach the more-than-750 hours threshold daniel n shaviro passive_loss_rules 549-2nd tax mgmt bna at a-42 on more than one occasion she spent four hours to five hours cleaning a property in our view the spreadsheet reflects significant activities of both spouses because sec_469 requires us to consider the time spent by each spouse individually the spreadsheet fails as a source of proof that mr adeyemo met the requirements of sec_469 and ii dollar_figure we also consider whether the adeyemos’ testimony provides an independent basis from which we can determine the number of hours mr adeyemo worked in the couple’s rental real-estate business both mr and mrs adeyemo credibly testified that they put a significant amount of time and effort into managing their rental properties however their testimony does not contain a reliable estimate of how much time mr adeyemo spent managing the properties mr adeyemo perfunctorily testified that he spent at least big_number hours on the couple’s rental properties this is the number of hours that would nearly satisfy the first requirement of sec_469 that is if mr adeyemo worked big_number hours as a pharmaceutical sales representative--as he testified at one point that he did however mr adeyemo failed to establish how he arrived at hi sec_12 see supra note as we explain infra p we determine that mr adeyemo worked big_number hours as a pharmaceutical sales representative in we need not determine the continued big_number hour estimate of hours worked on the rental properties the logbook states that mr adeyemo worked only hours in and hours in thus the logbook does not appear to be the basis of his big_number hour estimate mr adeyemo testified that he had not added up the time in the spreadsheet therefore the spreadsheet does not appear to be the basis for his big_number hour estimate mr adeyemo suggested that the primary basis for his estimate is that as a general proposition managing seven rental properties is a lot of work however such post-event ballpark guesstimates are insufficient for establishing the hours that mr adeyemo spent managing the couple’s rental properties see 135_tc_365 after reviewing the record we conclude that the logbook is the only credible account of the time that mr adeyemo devoted to the adeyemos’ rental properties in and on the basis of the logbook we find that mr adeyemo worked at most hours in the couple’s rental real-estate business in and hours in dollar_figure continued corresponding number of hours for see supra note as mr adeyemo did not devote hours to the couple’s rental real-estate business in he was not a real-estate professional in that year see sec_469 because mr adeyemo may have worked the requisite hours in we next determine whether he devoted at least half of his time spent on personal services to the couple’s rental real-estate business see sec_469 mr adeyemo worked as a pharmaceutical sales representative throughout he testified that he did not have a fixed schedule at trial mr adeyemo provided inconsistent estimates regarding how many hours he worked at that job in at one point he testified that he worked approximately six hours per day five days per week we find this estimate credible and find that mr adeyemo worked approximately big_number hours in since mr adeyemo spent no more than hours on the couple’s rental real-estate business in compared to approximately big_number hours working as a pharmaceutical sales representative he did not satisfy the first prong of sec_469 therefore mr adeyemo was not a real-estate professional in as mr adeyemo was not a real-estate professional in or the adeyemos’ rental real-estate business is a passive_activity see sec_469 whether the allowance provided by section i applies to the adeyemos’ rental real-estate business the adeyemos raise the alternative argument that if mr adeyemo does not satisfy the exception for real-estate professionals they may still deduct dollar_figure in rental losses from nonpassive_income pursuant to sec_469 the provision is available to individual taxpayers that actively participate in rental real-estate activities during the year in which the loss arises the allowance phases out for taxpayers with adjusted gross incomes exceeding dollar_figure and is completely phased out for taxpayers with adjusted gross incomes exceeding dollar_figure sec_469 in determining adjusted_gross_income for this purpose passive_activity_losses and losses allowed by reason of the real-estate professional exception are disregarded sec_469 that is a taxpayer cannot reduce his or her adjusted_gross_income by passive_activity_losses nor any losses attributable to rental_activity regardless of whether the rental_activity is passive see sec_469 c a i the adeyemos’ assertion that they are entitled to relief pursuant to sec_469 fails the adeyemos reported total wage income of dollar_figure and dollar_figure for and respectively these amounts exceed the dollar_figure adjusted- gross-income cap found in sec_469 see also sec_62 defining adjusted_gross_income as gross_income reduced for enumerated deductions none of which are applicable here defining gross_income to include compensation_for services losses from their rental activities do not offset their adjusted gross incomes for those years see sec_469 thus they do not qualify for any portion of the dollar_figure allowance provided by sec_469 deductions for rental real-estate business medical_expenses and charitable_contributions a business-expense deductions reported on schedules e sec_162 allows deductions for ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business including expenses for repairs advertising and supplies the notice_of_deficiency determined that some deductions the adeyemos claimed for the expenses of their rental real-estate business should be disallowed for lack of substantiation the adeyemos seemingly challenged this determination stating in their brief that the amount of adjusted_income should be adjusted to include all or portions of the expenses that were denied during the initial review in challenging this aspect of the notice_of_deficiency the adeyemos have failed to meet the court’s briefing requirements rule e requires a party to include in his or her brief proposed findings_of_fact with references to evidence relied upon rule e requires a party to state his or her argument in the brief including a discussion of any disputed factual issues the adeyemos’ brief points to no specific support from the record or elsewhere for the proposition that they are entitled to deductions for their rental real-estate business that were disallowed on lack-of-substantiation grounds the brief’s failure to advance this issue beyond a vague assertion convinces us that the adeyemos have waived the issue see rule e estate of jorgensen v commissioner tcmemo_2009_66 slip op pincite ndollar_figure applying rule e and and explaining that the taxpayer’s failure to argue the issue beyond a vague assertion leads us to conclude that the issue has been waived aff’d 431_fedappx_544 9th cir cf eg d’errico v commissioner tcmemo_2012_149 slip op pincite we need not and will not undertake the work of sorting through every piece of evidence petitioners have provided in an attempt to find support for petitioners’ ultimate legal positions taken in this case b itemized_deductions reported on schedules a the adeyemos assert that they are entitled to charitable-contribution and medical-expense deductions in excess of what was allowed in the notice_of_deficiency however the adeyemos have not provided any evidence at all with respect to these deductions the adeyemos’ blanket assertions in their brief that they are entitled to the deductions are not evidence see rule c as the adeyemos have failed to meet their burden_of_proof with respect to these items we find that they are not entitled to any additional deductions for charitable_contributions or medical_expenses whether the adeyemos were insolvent immediately before they received a discharge of dollar_figure in credit-card debt in the adeyemos conceded that in they received a discharge of dollar_figure in credit-card debt the adeyemos contend however that the amount is excludable from their income because they were insolvent immediately before the discharge see sec_108 sec_61 defines gross_income as all income from whatever source derived including income_from_discharge_of_indebtedness sec_61 sec_108 provides certain exceptions under which discharge-of-indebtedness income is excluded from income one such exception arises where the taxpayer is insolvent immediately before the discharge sec_108 d insolvent means that the taxpayer’s liabilities exceed the fair_market_value of his or her assets sec_108 the amount of the exclusion is limited to the amount by which the taxpayer is insolvent ie the amount by which the taxpayer’s liabilities exceed the fair_market_value of his or her assets sec_108 d see also mcallister v commissioner tcmemo_2013_96 at the amount by which the taxpayer is insolvent is defined as the excess of the taxpayer’s liabilities over the fair_market_value of the taxpayer’s assets taxpayers who like the adeyemos bear the burden_of_proof regarding the insolvency_exception must prove that their total liabilities exceeded the fair_market_value of their assets immediately before the discharge see 109_tc_463 aff’d 192_f3d_844 9th cir the adeyemos have made no such showing at trial mr adeyemo testified that the couple had over dollar_figure million in debt outstanding at the time the credit-card debt was discharged however the adeyemos failed to provide any other evidence supporting that assertion or any explanation for their failure to do so further the adeyemos did not provide any evidence of the fair_market_value of their assets as a result we have no information upon which to base a finding of insolvency even if we were to take the adeyemos’ assertion as to their outstanding liabilities at face value which we do not see id a component of the taxpayer’s burden in showing that he or she is insolvent includes proof of the fair_market_value of the taxpayer’s assets as the adeyemos have not met their burden_of_proof with respect to this matter we find that the adeyemos were not insolvent at the time of discharge thus they are not entitled to exclude the amount of the discharge from income whether the adeyemos are liable for accuracy-related_penalties under sec_6662 sec_6662 imposes a penalty on an underpayment_of_tax attributable to any of the causes listed in sec_6662 these causes include negligence or disregard of rules or regulations and any substantial_understatement_of_income_tax a substantial_understatement is defined as any understatement exceeding the greater of i of the tax required to be shown on the return for the taxable_year or ii dollar_figure sec_6662 with respect to any penalty sec_7491 imposes the burden of production on the irs higbee v commissioner t c pincite this requires the irs to come forward with evidence indicating that it is appropriate to impose the relevant penalty sec_7491 higbee v commissioner t c pincite once the irs has met this burden the taxpayer bears the burden of proving that the penalty is inappropriate because for example the taxpayer acted with reasonable_cause and in good_faith higbee v commissioner t c pincite the penalty under sec_6662 does not apply if the taxpayer can demonstrate that the taxpayer had reasonable_cause for the underpayment and acted in good_faith with respect to the underpayment sec_6664 the regulations provide that reasonable_cause and good_faith are determined on a case- by-case basis taking into account all pertinent facts and circumstances generally the most important factor is the extent of the taxpayer’s effort to assess the taxpayer’s proper tax_liability circumstances that may indicate reasonable_cause and good_faith include an honest misunderstanding of fact or law that is reasonable in light of all facts and circumstances including the experience knowledge and education of the taxpayer reliance on professional advice constitutes reasonable_cause and good_faith if under all the circumstances such reliance was reasonable and the taxpayer acted in good_faith sec_1_6664-4 income_tax regs to establish good_faith and reasonable_cause through reliance on professional advice the taxpayer must show that t he adviser was a competent professional who had sufficient expertise to justify reliance the taxpayer provided necessary and accurate information to the adviser and the taxpayer actually relied in good_faith on the adviser’s judgment 115_tc_43 aff’d 299_f3d_221 3d cir to satisfy the third prong of this test the taxpayer must show that the tax professional opine d on the legitimacy of the aspects of the return that were challenged by the irs id pincite for and the irs imposed accuracy-related_penalties on the adeyemos due to negligence or alternatively substantial understatements of income_tax the adeyemos’ understatements exceed of the tax required to be shown on the returns which is greater than dollar_figure for each year see sec_6662 accordingly we need not determine whether the adeyemos were negligentdollar_figure the adeyemos assert a defense based on reasonable_cause and good_faith see sec_6664 we consider two possible theories for the adeyemos’ defense the first is that they personally made a reasonable good-faith attempt to assess their proper tax_liabilities with respect to the couple’s rental losses mr adeyemo testified that he began to track the time he spent managing the couple’s rental activities at the suggestion of the couple’s accountant while maintaining the logbook reflects a degree of effort there is no evidence suggesting that the couple relied on the logbook when filing their returns nor that they made any attempt to understand the passive-activity-loss rules similarly the record reveals that the adeyemos maintained records for some of their business_expenses but not the irs asserted on brief that mr adeyemo conceded the accuracy- related penalties on behalf of the adeyemos at trial however it is possible that mr adeyemo’s purported concessions were based on a misunderstanding of the relevant issues as we find that the adeyemos are liable for accuracy-related_penalties regardless of whether they conceded them we do not decide whether they did indeed concede the accuracy-related_penalties all of them there is nothing in the record suggesting that these excess_deductions were the result of honest mistake or reasonable_cause the second theory for the adeyemos’ defense we consider is that they relied on the advice of an accountant in filing their returns the evidence related to the accountant’s preparation of the adeyemos’ returns shows only that the accountant did in fact prepare the couple’s and returns and that the accountant encouraged mr adeyemo to keep a log of the couple’s rental activities the fact that the adeyemos had an accountant prepare their returns does not in and of itself prove that they acted with reasonable_cause and in good_faith see neonatology assocs p a v commissioner t c pincite importantly the adeyemos presented no evidence indicating that they gave the accountant all necessary and accurate information or that the accountant made a considered judgement about the aspects of the return later challenged by the irs id as the adeyemos have not met their burden_of_proof with respect to the reasonable-cause-and-good-faith defense we find that the sec_6662 accuracy-related_penalties are appropriate we have considered all of the arguments that the parties have made and to the extent that we have not discussed them we find them to be irrelevant moot or without merit decision will be entered for respondent


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-117307-06 date date ----------------------------------------------- ----------------------------------------------------------------------- ------------------------------------------------------------------------ legend x -------------------------------------------------------------------- trusta agreement ------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------- trusta1 ----------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- trusta2 ------------------------------------------------------------------------ trusta3 ------------------------------------------------------------------------ trusta4 ---------------------------------------------------------------- trusta5 ----------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------- trustb agreement ------------------------------------------------------------ trustb1 -------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- ------------------------------------------------------------------------ ------------------------------------------------------------------------ ----------------------------------------------------------------------- --------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- plr-117307-06 -------------------------------------------------------------------- trustb2 ------------------------------------------------------------------------ -------------------------------------------------------------------- trustb3 ------------------------------------------------------------------------ -------------------------------------------------------------------- trustb4 ------------------------------------------------------------------------- -------------------------------------------------------------------- trustb5 ------ ---------------------------------------------------------------------- -------------------------------------------------------------------- trustb6 ------------------------------------------------------------------------------ --------------------------------------------------------------------- a ---------------------------------------------------------------------- b ---------------------------------------------------------------------- state1 state2 date1 date2 date3 date4 date5 ----------------------------- -------------------------- -------------------------- -------------------------- -------------------------- -------------------------- ------------------------ ------------------ ------------------ plr-117307-06 dear -------------------- this letter responds to your letter dated date and subsequent correspondence requesting a ruling on behalf of x that pursuant to sec_1362 of the internal_revenue_code certain trusts qualify as shareholders of an s_corporation facts the information submitted states that x was incorporated in state1 on date2 x made a timely s_corporation_election effective date2 on date1 a and b united_states citizens and husband and wife executed trusta agreement under state2 law the trusta agreement created sub-trusts trusta1 trusta2 trusta3 trusta4 and trusta5 under the terms of section iii of the trusta agreement shares of the trust assets were apportioned as separate and distinct trusts but physical separation of the assets was not required a and b the grantors of the trust authorized the trustee to mingle and commingle investments but wishes it understood that grantor is creating independent trusts for all purposes on date2 trusta1 trusta2 trusta3 trusta4 and trusta5 acquired x corporation stock section xiv of the trusta agreement provides that the trust is irrevocable section iv of the trusta agreement provides that a and b retain the right and power to acquire or reacquire any trust property and substitute other_property of equivalent value without incurring liability to a_trust beneficiary or other party the trusta agreement states that the substitution power granted to the power holder is exercisable in a non- fiduciary capacity section vii of the trusta agreement provides each beneficiary of the respective sub-trusts the right to appoint to himself a proportionate share of additions made to the sub-trust each year the amount appointed cannot exceed the amount excludable for gift_tax purposes in any calendar_year on date3 a and b united_states citizens and husband and wife executed trustb agreement under state2 law the trustb agreement created sub-trusts trustb1 trustb2 trustb3 trustb4 trustb5 and trustb6 under the terms of section iii of the trustb agreement shares of the trust assets were apportioned as separate and distinct trusts but physical separation of the assets was not required a and b the grantors of the trust authorized the trustee to mingle and commingle investments but wishes it understood that grantor is creating independent trusts for all purposes on date3 the sub-trusts created under trusta agreement merged under state2 law into the sub-trusts created under trustb agreement the x corporation stock held by the plr-117307-06 trusta agreement sub-trusts was transferred to the trustb agreement sub-trusts on date3 section xiv of the trustb agreement provides that the trust is irrevocable section iv of the trustb agreement provides that a and b retain the right and power to acquire or reacquire any trust property and substitute other_property of equivalent value without incurring liability to a_trust beneficiary or other party the trustb agreement states that the substitution power granted to the power holder is exercisable in a non- fiduciary capacity section vii of the trustb agreement provides each beneficiary of the respective sub-trusts the right to appoint to himself a proportionate share of additions made to the sub-trust each year the amount appointed cannot exceed the amount excludable for gift_tax purposes in any calendar_year a and b were treated on their joint federal_income_tax returns as owners of the x corporation stock transferred to the sub-trusts created under the trusta agreement and merged into the sub-trusts created under the trustb agreement from the time of the stock transfers through date4 effective one day later on date5 a and b irrevocably relinquished their power to substitute trust assets with respect to trustb agreement sub-trusts elections were made to treat each of the trustb agreement sub-trusts as electing small_business trusts under sec_1361 effective date5 the beneficiaries of the sub-trusts created under trusta agreement and trustb agreement received timely notification of their withdrawal rights and no beneficiary has exercised those rights law and analysis sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that a small_business_corporation may not have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 provides that for purpose of sec_1361 a husband and wife shall be treated as one shareholder sec_1361 provides that for purposes of sec_1361 a_trust all of which is treated under subpart e of part i of subchapter_j of chapter i as owned by plr-117307-06 an individual who is a citizen or resident_of_the_united_states may be a shareholder in an s_corporation the deemed owner of the trust shall be treated as the shareholder under sec_1361 sec_1_1361-1 of the income_tax regulations provides that for purposes of sec_1_1361-1 stock owned by a husband and wife is treated as if owned by one shareholder regardless of the form in which they own the stock for example if husband and wife are owners of a subpart e trust they will be treated as one individual both husband and wife must be u s citizens or residents sec_675 provides that the grantor shall be treated as the owner of any portion of a_trust in respect of which a power_of_administration is exercisable in a nonfiduciary capacity by any person without the approval or consent of any person in a fiduciary capacity sec_675 provides that power_of_administration means among other things a power to reacquire the trust corpus by substituting other_property of an equivalent value sec_1_675-1 iii flush language provides in part that if a power is not exercisable by a person as trustee the determination of whether the power is exercisable in a fiduciary or nonfiduciary capacity depends on all of the terms of the trust and the circumstances surrounding its creation and administration sec_678 provides that a person other than the grantor shall be treated as the owner of any portion of a_trust with respect to which such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself or the person has previously partially released or otherwise modified such a power and after the release or modifications retains such control as would cause a grantor to be treated as the owner of such portion of the trust within the principles of sec_671 to inclusive sec_678 provides that sec_678 shall not apply with respect to a power over income as originally granted or thereafter modified if the grantor of the trust is otherwise treated as the owner under the provisions of subpart e other than sec_678 conclusion based solely on the facts and representations submitted we conclude that the circumstances surrounding the administration of the sub-trusts created under the trusta agreement and the trustb agreement will determine whether the power_of_administration is exercisable in a fiduciary or nonfiduciary capacity this is a question of fact the determination of which must be deferred until the federal_income_tax returns of the parties involved have been examined by the internal_revenue_service office where plr-117307-06 the returns are filed therefore we cannot determine at this time whether a and b will be treated as the owners of the sub-trusts created under the trusta agreement and the trustb agreement under sec_675 provided that the circumstances indicate that the power_of_administration is exercisable in a nonfiduciary capacity a and b will be treated as the owners of the sub-trusts created under the trusta agreement and the trustb agreement under sec_675 and sec_678 accordingly the sub-trusts created under the trusta agreement were permitted shareholders in x an s_corporation under sec_1361 if otherwise eligible from date2 until date3 the sub-trusts created under the trustb agreement were permitted shareholders in x an s_corporation under sec_1361 if otherwise eligible from date3 through date4 except as expressly provided herein we express or imply no opinion concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion concerning whether x is otherwise eligible to be an s_corporation for federal tax purposes is being sent to x’s authorized representative in accordance with a power_of_attorney on file with this office a copy of this letter this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely s james a quinn senior technician reviewer acting branch office of associate chief_counsel passthroughs and special industries enclosures a copy of this letter a copy for sec_6110 purposes


internal_revenue_service number release date index number ------------------- -------------------------------- ------------------------------------------------ ----------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-120643-06 date date legend legend x state llc a b c date1 -------------------------------- ein ---------------- ------------ ------------------------------------- ein ---------------- ------------------------------- --- --- dollar_figurey date2 date -------------------------- -------------------------- -------------------------- dear ------------- correspondence submitted on behalf of x by x’s authorized representative requesting this letter responds to a letter dated date and subsequent ------------- ------------- dollar_figurez x owns an interest in llc which is treated as a partnership for federal tax the information submitted states that x was incorporated in state on date x x has approximately b employees of which c provide services on behalf of llc plr-120643-06 a ruling that x’s rental income from llc is not passive_investment_income within the meaning of sec_1362 elected to be treated as an s_corporation effective date purposes and is in the business of renting real_property to tenants x represents that as a managing member of llc it is responsible for managing the properties owned by llc as of date x represents llc owns a x represents that it provides various services services provided by x include but are not limited to the following renovating and remodeling spaces to suit new tenants cleaning and making spaces ready for new tenants inspecting spaces for safety and proper maintenance maintaining physical security cleaning and repairing common areas landscaping and maintaining the grounds maintaining the heating air conditioning ventilation plumbing wastewater and electrical systems hiring supervising and compensating outside vendors and service providers supplying tenant amenities supplying and making available discounts and special offers from area merchants providing marketing services to merchant tenants in taxable_year ending date llc received or accrued approximately dollar_figurey in rents which includes any reimbursements by tenants for insurance property taxes expenses for maintaining common areas and promotional fees paid_by llc llc paid_or_incurred approximately dollar_figurez in relevant expenses other than depreciation sec_1361 defines an s_corporation as a small_business_corporation for which an election under ' a is in effect for the taxable_year sec_1362 provides than an election under ' a shall be terminated whenever at any time after the first day of the first taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 provides that an election under ' a shall be terminated whenever the corporation has accumulated_earnings_and_profits at the close of each of consecutive taxable years and has gross_receipts for each of such taxable years more than percent of which are passive_investment_income any termination under this paragraph shall be effective on and after the first day of the first taxable_year beginning after the third consecutive taxable_year referred to above plr-120643-06 sec_1362 provides that except as otherwise provided the term passive_investment_income means gross_receipts derived from royalties rents dividends interest annuities and sales or exchanges of stock_or_securities sec_1_1362-2 of the income_tax regulations provides that rents does not include rents derived in the active trade_or_business of renting property rents received by a corporation are derived in an active trade_or_business of renting property only if based on all the facts and circumstances the corporation provides significant services or incurs substantial costs in the rental business generally significant services are not rendered and substantial costs are not incurred in connection with net leases whether significant services are performed or substantial costs are incurred in the rental business is determined based upon all the facts and circumstances including but not limited to the number of persons employed to provide the services and the types and amounts of costs and expenses_incurred other than depreciation based solely on the facts and the representations submitted we conclude that the rental income that x derives from the llc is not passive_investment_income as described in ' d c i except as specifically set forth above we express no opinion as to the federal tax consequences of the transaction described above under any other provision of the code specifically we express no opinion on whether x is a small_business_corporation eligible to make an s election further the passive_investment_income rules of ' are completely independent of the passive_activity rules of section ' unless an exception under ' applies the rental_activity remains passive for purposes of ' this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to x s authorized representative sincerely audrey w ellis senior counsel branch passthroughs special industries enclosures copy of this letter copy for sec_6110 purpose


t c summary opinion united_states tax_court james clement powell and lucy hamrick powell petitioners v commissioner of internal revenue respondent docket no 9562-14s filed date james clement powell and lucy hamrick powell pro_se timothy b heavner and matthew s reddington for respondent summary opinion wells judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case all section references are to the internal_revenue_code code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated all dollar amounts are rounded to the nearest dollar respondent determined a deficiency of dollar_figure against petitioners for tax_year petitioners timely filed their petition on date background petitioners timely filed a form_1040 u s individual_income_tax_return for the taxable_year petitioners also timely filed a form_1120 u s_corporation income_tax return for wpl inc wpl an s_corporation wholly owned by petitioner husband on date petitioners submitted a form 1040x amended u s individual_income_tax_return for showing a tax overpayment of dollar_figure respondent did not accept the form 1040x for filing and made no adjustments to petitioners’ tax_liability as a result of its submission instead on date respondent mailed petitioners a statutory_notice_of_deficiency determining a deficiency in income_tax of dollar_figure petitioners dispute the entire dollar_figure deficiency and demand the overpayment reported in their amended_return additionally petitioners seek dollar_figure in damages from respondent under sec_7433 i notice_of_deficiency in the notice_of_deficiency respondent disallowed a wpl vehicle expense deduction of dollar_figure a wpl employee benefit expense deduction of dollar_figure and a loss carryforward deduction of dollar_figure claimed on schedule c profit or loss from business respondent also reduced petitioners’ self-employment_tax and the related self-employment_tax deduction by excluding wpl’s income from the self-employment_tax calculation as a result of these adjustments respondent also disallowed the make work pay government_retiree_credit petitioners claimed on their return ii wpl wpl is engaged in petroleum acquisitions and sales wpl’s workforce includes petitioner husband two consultants one full-time_employee and petitioner wife who keeps the books petitioner husband kept a daily logbook during showing all of wpl’s activities with respect to its customers only some of which involved travel during wpl workers traveled to several states for various business purposes the relevant logbook entries show dates customer names the purpose or description of the work hours spent and billed and miles driven petitioners reported on an attachment to the return that big_number business miles were driven during roughly two-thirds of the entries listing mileage specify the city traveled to in the purpose or description of work section the remaining entries either include the state traveled to or do not list any location all mileage entries are multiples of for a trip totaling miles for example petitioner would have recorded miles there is also an entry for each month showing the sum of miles driven for marketing client development and bank errands petitioner husband recorded the miles driven for each marketing and client development event but the logbook does not break down the dates locations or mileage of each event nor does the entry separate the marketing and development entries from the banking entries the banking entries were determined by estimating the number of wpl workers’ trips to the bank for the month wpl also deducted dollar_figure in employee_benefits the notice_of_deficiency does not explain why the deduction was disallowed petitioner husband testified that there was never an explanation given for why it was denied petitioners believed the deduction was denied on a legal basis rather than a factual basis petitioners litigated their and tax years before the tax_court and the opinion issued in that case discusses the deductibility of wpl’s employee_benefits as a legal issue not a factual one see powell v commissioner tcmemo_2014_235 at discussing sec_162 and revrul_91_26 1991_1_cb_184 to determine whether petitioners’ inclusion of the benefit amount in income was required for wpl to be entitled to the deduction aff’d in part vacated in part and remanded ___f app’x ___ a f t r 2d ria 4th cir date on appeal of that case respondent conceded among other things the entitlement to the health insurance deduction of dollar_figure for each of the two tax years powell v commissioner a f t r 2d ria in the instant case respondent’s sole contention in the pretrial memorandum is that the expense was denied for lack of substantiation at trial however respondent echoed the previous litigation by asking whether the employee_benefits were included in petitioners’ personal income as well as in the wpl deductions petitioner husband answered no and also testified that the amount deducted was the amount_paid for long-term healthcare petitioners submitted into evidence a detailed list of expenses which was filed with the return showing the dollar_figure expense as employee health insurance iii loss carryforward deduction petitioners claimed a loss carryforward deduction of dollar_figure related to claimed losses from the tax years and as discussed above petitioners’ and tax years were litigated before the tax_court see powell v commissioner tcmemo_2014_235 the final_decision determined that for tax years and petitioners had deficiencies in income_tax totaling dollar_figure and penalties totaling dollar_figure id order dated date petitioners concede that their loss carryforward is determined by the and litigation the decision from which they appealed respondent largely prevailed on appeal although a few concessions were made powell v commissioner a f t r 2d ria the concessions which consist of a deduction of dollar_figure for each year an dollar_figure increase in the basis of sold property and a dollar_figure reduction of the amount_realized upon the sale of the real_property will reduce the amounts of the deficiencies determined in the tax court’s decision but will not eliminate them discussion generally the commissioner’s determinations in a notice_of_deficiency are presumed correct and the taxpayer bears the burden of proving that those determinations are erroneous rule a 290_us_111 furthermore deductions are a matter of legislative grace and a taxpayer must prove his or her entitlement to a deduction 503_us_79 under sec_7491 in certain circumstances the burden_of_proof may shift from the taxpayer to the commissioner petitioners have not claimed or shown that they meet the specifications of sec_7491 to shift the burden_of_proof to respondent as to any relevant factual issue i wpl we must determine whether wpl properly claimed its deductions for before we can determine the effect on petitioners’ return for generally an s_corporation shareholder determines his or her tax_liability by taking into account a pro_rata share of the s corporation's income losses deductions and credits sec_1366 where a notice_of_deficiency includes adjustments for s_corporation items with other items we have jurisdiction to determine the correctness of all adjustments see 135_tc_238 respondent disallowed two expense deductions related to wpl vehicle expenses and employee health insurance expenses as a result respondent increased the corresponding flowthrough business income that petitioners reported on their form_1040 we now turn to the two expenses a vehicle expenses taxpayers are required to substantiate expenses underlying each claimed deduction by maintaining records sufficient to establish the amount of the expense and to enable the commissioner to determine the correct_tax liability sec_6001 116_tc_438 certain expenses specified in sec_274 such as vehicle expenses are subject_to strict substantiation rules sec_274 sec_280f in deducting vehicle expenses in lieu of calculating expenses using actual expenditures a taxpayer may use a standard mileage rate as established by the internal_revenue_service irs kavuma v commissioner tcmemo_2016_101 at sec_1_274-5 income_tax regs to meet these strict substantiation rules for each claimed expense a taxpayer must substantiate by adequate_records or by sufficient evidence corroborating the taxpayer’s own statement the amount the time and place of the travel or use and the business_purpose sec_274 petitioners claimed deductions for wpl’s vehicle expenses using the irs standard mileage rate adequate_records substantiating vehicle expenses when using the standard mileage rate generally consist of an account book a diary a log a statement of expense trip sheets or a similar record made at or near the time of the expenditure or use along with supporting documentary_evidence sec_1_274-5t temporary income_tax regs fed reg date the degree of substantiation necessary to establish business_purpose varies depending upon the facts and circumstances of each case id subdiv ii b fed reg mileage logs even contemporary ones that report only the state to which the taxpayer traveled fall short of the strict reporting requirements because they fail to specify the location adams v commissioner tcmemo_2013_92 petitioners’ log book largely meets the strict substantiation rules the entries specify dates traveled the number of miles driven the city driven to and the client or business_purpose respondent contends that petitioners’ logbook entries must be estimates because the mileage numbers all end in or petitioner husband testified that the numbers were not estimated but rather rounded we find petitioner to be a credible witness and believe his testimony that the miles listed are based on actual contemporaneous calculations of the miles driven certain of the entries however do not amount to adequate substantiation the entries listing a state rather than a specific location for example are too vague to satisfy the regulations the client and market development and banking entries also fail to satisfy the regulations petitioner husband explicitly testified that the banking entries were estimates and we cannot untangle the client and market development mileage from the banking mileage nor do we have locations or dates for the client and market development entries rendering them too vague to satisfy the regulations pursuant to this analysis petitioners substantiated that during wpl workers drove big_number miles for a deduction of cents was allowed for each mile driven related to business see revproc_2009_54 sec_2 2009_51_irb_930 accordingly petitioners’ deduction for travel is limited to dollar_figure b health insurance expenses wpl is entitled to deductions for health insurance benefits paid on behalf of petitioner husband see sec_1372 powell v commissioner at revrul_91_ supra in the instant case respondent contends that petitioners did not provide any evidence beyond self-serving testimony that any expense had actually been paid however we have found petitioner husband to be a reliable witness and the reliability of his records and testimony is bolstered by the consistent treatment of the expense throughout several tax years as well as respondent’s previous years’ concessions see exxon corp v commissioner tcmemo_1993_616 wl at koufman v commissioner tcmemo_1976_330 wl the petitioner’s testimony on this issue was consistent with all the other circumstances and we found it to be credible and reliable accordingly wpl is entitled to the claimed health insurance expense deduction ii carryforward loss petitioners concede that the loss carryforward deduction they claimed from the tax_year is determined by their previous litigation in the litigation the tax_court sustained a determined deficiency for petitioners’ tax_year rather than a loss powell v commissioner tcmemo_2014_235 although respondent conceded on appeal that petitioners were entitled to certain adjustments the amounts involved in the concessions are insufficient to change the deficiency into a loss see powell v commissioner a f t r 2d ria accordingly petitioners are not entitled to a carryforward loss deduction for the tax_year iii other adjustments petitioners’ filings discuss several additional adjustments in the notice_of_deficiency such as the make work pay government_retiree_credit amounts for personal exemptions an increase in petitioners’ agi and the calculation of self- employment_tax and its accompanying deduction the changes to petitioners’ adjusted_gross_income due to the adjustments discussed above will affect the operation of items such as credits any computational issues that remain will be adjusted and confirmed in the rule_155_computations iv sec_7433 damages petitioners seek dollar_figure in damages from respondent under sec_7433 sec_7433 provides that a taxpayer may bring a civil_action for damages against the united_states for intentional reckless or negligent disregard of any provision of the code or any regulation promulgated under the code by any officer_or_employee of the irs in connection with any collection of federal tax sec_7433 further provides that the taxpayer must bring the civil_action in a district_court of the united_states and that except as provided in sec_7432 the civil_action in district_court shall be the exclusive remedy for recovering damages resulting from such actions therefore we lack jurisdiction to hear petitioners’ sec_7433 claim see eg powell v commissioner at petito v commissioner tcmemo_2002_271 wl at any contentions we have not addressed we deem irrelevant moot or meritless to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index numbers ------------------------------------------------------------ --- ---------------------------------------------- ------------------------------------- ---------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------- id no ----------------- telephone number --------------------- refer reply to cc psi b01 plr-101947-15 date date legend x ---------------------------------------------------- ---------------------------------------------- date date date date date year year dollar_figurea dollar_figureb n state ------------------- -------------------------- ---------------------- --------------------- ------------------ ------ ------ ------------- ------ ------ ------ plr-101947-15 dear -------------- this is in response to a letter dated date and supplemental correspondence submitted on behalf of x by x’s authorized representative requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_754 of the internal_revenue_code facts according to the information submitted x was formed as a limited_liability_company under the laws of state on date x is treated as a partnership for federal tax purposes in year x executed a note payable to unrelated individuals in the amount of dollar_figurea at the time the note was issued a warrant was issued to the unrelated individuals to purchase a n interest in x for consideration on date the warrant was executed and the n interest in x was transferred to the unrelated individuals for dollar_figureb on date a redemption agreement was executed between x and the unrelated individuals for the redemption of the n promissory notes were issued from x to the unrelated individuals x filed its income_tax return for year x represents that it relied upon its tax advisor when preparing the tax_return for year x represents that it was unaware that it was eligible to make a sec_754 election x further represents that around date x became aware of its eligibility to make a sec_754 election and its failure to timely make the election with its return for its taxable_year ending on date x further represents that it has acted reasonably and in good_faith that granting relief will not prejudice the interests of the government and that it is not using hindsight in making the election law and analysis sec_754 provides that a partnership may elect to adjust the basis of partnership property when there is a distribution_of_property or a transfer of a partnership_interest an election under sec_754 applies with respect to all distributions of property by the partnership and to all transfers of interests in the partnership during the taxable_year with respect to which the election was filed and all subsequent taxable years sec_1_754-1 of the income_tax regulations provides that an election under sec_754 to adjust the basis of partnership property under sec_734 and sec_743 with respect to a plr-101947-15 distribution_of_property to a partner or a transfer of an interest in a partnership must be made in a written_statement filed with the partnership return for the taxable_year during which the distribution or transfer occurs for the election to be valid the return must be filed not later than the time prescribed by sec_1 e including extensions for filing the return for such taxable_year 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 internal_revenue_code except subtitles e g h and i section b defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards that 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 extensions of time for making certain elections sec_301_9100-3 provides rules for requesting extensions of time for regulatory 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 interest of the government section a conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time of one hundred twenty days from the date of this letter to make a sec_754 election for year the election should be made in a written_statement filed with the applicable service_center for association with x’s tax_return for its taxable_year ending date a copy of this letter should be attached to the statement filed except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-101947-15 pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely curt g wilson deputy associate chief_counsel passthroughs special industries by david haglund david haglund branch chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc