IRS liberalizes tax-free treatment of partial annuity exchanges

Rev Proc 2011-38, 2011-30 IRB

In a Notice that further liberalizes previous guidance, IRS has provided that the direct transfer of part of the cash surrender value of an existing annuity contract for a second annuity contract will be treated as a tax-free Code Sec. 1035 exchange if no amount (other than an amount received as an annuity for a period of 10 years or more or during one or more lives) is received during the 180 days beginning on the date of the transfer. A later direct transfer won't be taken into account.

Background. No gain or loss is recognized on the exchange of an annuity contract for another annuity contract. ( Code Sec. 1035(a)(3) )

Under Code Sec. 72(e)(2) , distributions from an annuity contract that are not received as an annuity generally are taxed on an income-first basis. For this purpose, Code Sec. 72(e)(12) provides that all annuity contracts issued by the same company to the same policyholder during any calendar year are treated as a single annuity contract. Code Sec. 72(q)(1) imposes a 10% penalty on withdrawals or surrenders of annuity contracts, unless one of the exceptions in Code Sec. 72(q)(2) applies.

In early 2008, IRS issued Rev Proc 2008-24, 2008-1 CB 684 (see Weekly Alert ¶  9 03/20/2008 ), which described when a direct transfer of part of the cash surrender value of an existing annuity contract for a second annuity contract would be treated as a tax-free Code Sec. 1035 exchange. A transfer was treated as a tax-free exchange if no amount was withdrawn from, or received in surrender of, either of the contracts involved in the exchange during the 12 months beginning on the date of the transfer, or if the taxpayer demonstrated that one of the Code Sec. 72(q)(2) exceptions or any similar life event “occurred between” the date of the transfer and the date of the withdrawal or surrender. A transfer that wasn't treated as a tax-free Code Sec. 1035 exchange under this guidance was instead treated as a taxable distribution under Code Sec. 72(e) , followed by a payment for the second contract.

For amounts received in tax years beginning after Dec. 31, 2010, the Small Business Jobs Act (P.L. 111-240, 9/27/2010) provides rules for the partial annuitization of a single annuity contract. Under Code Sec. 72(a)(2) , if any amount is received as an annuity for 10 years or more or during one or more lives under any portion of an annuity, endowment or life insurance contract, (a) that portion is treated as a separate contract for purposes of Code Sec. 72 ; (b) the investment in the contract generally is allocated pro rata between each part of the contract from which amounts are received as an annuity and the portion from which amounts aren't so received; and (c) a separate annuity starting date is determined for each portion of the contract from which amounts are received as an annuity.

IRS has now modified and superseded the guidance in Rev Proc 2008-24 and has liberalized the rules even further.

New guidance. IRS says that a transfer described in Rev Proc 2011-38, Sec. 3 , i.e., a direct transfer of a part of the cash surrender value of an existing annuity contract for a second annuity contract, that isn't a transaction described in Code Sec. 72(a)(2) —regardless of whether the two annuity contracts are issued by the same or different companies—will be treated as a tax-free Code Sec. 1035 exchange. This treatment applies if no amount, other than an amount received as an annuity for a period of 10 years or more or during one or more lives, is received during the 180 days beginning on the date of the transfer (in the case of a new contract, the date the contract is placed in-force). ( Rev Proc 2011-38, Sec. 4.01 )

A later direct transfer of all or a part of either contract involved in such an exchange isn't taken into account for purposes of applying this guidance if it qualifies (or is intended to qualify) as a tax-free Code Sec. 1035 exchange. ( Rev Proc 2011-38, Sec. 4.01 )

IRS won't require aggregation under Code Sec. 72(e)(12) or otherwise of an original, pre-existing contract with a second contract that is the subject of a tax-free Code Sec. 1035 exchange and Rev Proc 2011-38, Sec. 4.01 , even if both contracts are issued by the same insurance company, but will instead treat the contracts as separate annuity contracts. ( Rev Proc 2011-38, Sec. 4.03 )

A transfer that is within the scope of the new revenue procedure (i.e., described in Rev Proc 2011-38, Sec. 3 ), but not subject to the above treatment under Rev Proc 2011-38, Sec. 4.01 , will be characterized in a manner consistent with its substance, based on general tax principles and all the facts and circumstances. ( Rev Proc 2011-38, Sec. 4.02 ) Thus, if a direct transfer of a portion of the cash surrender value of an existing annuity contract for a second annuity contract doesn't meet the 180-day test, IRS will apply general tax principles to determine the substance and tax treatment of the transfer. For example, an amount described by Code Sec. 72(e)(1)(A) that is received under either the original contract or the new contract within 180 days of the exchange may be characterized as either boot in a tax free exchange under Code Sec. 1035(d)(1) and Code Sec. 1031(c) ) or a distribution under Code Sec. 72(e) .

In sum, Rev Proc 2011-38 amends Rev Proc 2008 Rev Proc 24 to provide that: (1) the 12-month period referred to in Rev Proc 2008-24, Sec. 4.01(a) , is reduced to 180 days; (2) the rule requiring that one of the enumerated Code Sec. 72(q) conditions be met (or that a similar life event occur) is eliminated; (3) the limitations on amounts withdrawn from or received under an annuity contract involved in a partial exchange do not apply to amounts received as an annuity for a period of 10 years or more or during one or more lives; and (4) the automatic characterization of a transfer (as either a tax-free Code Sec. 1035 exchange or a distribution taxable under Code Sec. 72(e) followed by a payment for a second contract) is eliminated.

Effective date. Rev Proc 2011-38 is effective for transfers that are completed on or after Oct. 24, 2011. Rev Proc 2008-24 will continue to apply to transfers that are completed before that date. ( Rev Proc 2011-38, Sec. 5 )

Rev Proc 2011-38, Sec. 5 , also clarifies that the requirement in Rev Proc 2008-24, Sec. 4.01(b) , that one of the prescribed conditions of Code Sec. 72(q)(2) must have “occurred between” the date of the transfer and the date of the withdrawal or surrender, will be treated as satisfied if the condition was satisfied as of the date of the withdrawal or surrender. Thus, for example, an individual who attained the age of 59 1/2 before both the date of the transfer and the date of the withdrawal or surrender has satisfied this condition. ( Rev Proc 2011-38, Sec. 5 )

Rev. Proc. 2011-38, 2011-30 IRB, 06/28/2011, IRC Sec(s).

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Purpose

This revenue procedure addresses the tax treatment of certain tax-free exchanges of annuity contracts under   § 72 and   § 1035 of the Internal Revenue Code.   Rev. Proc. 2008-24, 2008-1 C.B. 684, is modified and superseded.

Background

  Section 1035(a)(3) provides that no gain or loss shall be recognized on the exchange of an annuity contract for another annuity contract. The legislative history of   § 1035 states that exchange treatment is appropriate for “individuals who have merely exchanged one insurance policy for another better suited to their needs.” H.R. Rep. No. 1337, 83d Cong., 2d Sess. 81 (1954).   Section 1.1035-1 of the Income Tax Regulations provides that “the exchange, without recognition of gain or loss, of an annuity contract for another annuity contract under   § 1035(a)(3) is limited to cases where the same person or persons are the obligee or obligees under the contract received in the exchange as under the original contract.”

If, in addition to an annuity contract, a taxpayer receives other property or money in exchange for a second annuity contract, then gain (if any) is recognized to the extent of the sum of money and the fair market value of other property received, but loss (if any) is not recognized to any extent.   Section 1035(d)(1) (cross referencing   § 1031(b) and   (c)); § 1.1031(b)-1(a);   § 1031(c)-1.

  Section 72(e) governs the federal tax treatment of any amount received under an annuity contract that is not received as an annuity if no other income tax provision applies with respect to such amount. Under   § 72(e)(2), such amounts generally are taxed on an income-first basis.   Section 72(e)(12) provides that all annuity contracts issued by the same company to the same policyholder during any calendar year are treated as a single annuity contract for purposes of   § 72(e).

In Conway v. Commissioner,   111 T.C. 350 (1998), acq., 1999-2 C.B. xvi, the Tax Court held that the direct exchange by an insurance company of a portion of an existing annuity contract to an unrelated insurance company for a new annuity contract was a tax-free exchange under   § 1035. Such a transaction is sometimes referred to as a “partial exchange.” See also   Rev. Rul. 2007-24, 2007-21 I.R.B. 1282 (receipt of a check under a nonqualified annuity contract and endorsement of the check to a second company as consideration for a second annuity contract treated as a distribution under   § 72(e), rather than as a tax-free exchange under   § 1035);   Rev. Rul. 2002-75, 2002-2 C.B. 812 (assignment of an entire annuity contract for deposit into a preexisting annuity contract treated as a tax-free exchange under   § 1035).

In   Rev. Rul. 2003-76, 2003-2 C.B. 355, a taxpayer directly transferred a portion of the cash surrender value of an existing annuity contract (the original contract) for a new contract issued by a second insurance company. The ruling concludes that the transfer was a tax-free exchange under   § 1035, and that the basis and investment in the contract for the original contract immediately before the exchange was required to be allocated ratably between the original contract and the new contract based on the percentage of the cash value transferred to purchase the new contract.

  Rev. Proc. 2008-24 set forth circumstances under which a direct transfer of a portion of the cash surrender value of an existing annuity contract for a second annuity contract would be treated as a tax-free exchange under   § 1035. Under the revenue procedure, a transfer was treated as a tax-free exchange if no amount was withdrawn from, or received in surrender of, either of the contracts involved in the exchange during the 12 months beginning on the date of the transfer, or if the taxpayer demonstrated that one of the conditions described by   § 72(q)(2)(A), (B), (C), (E), (F), (G), (H), or (J) or any similar life event “occurred between” the date of the transfer and the date of the withdrawal or surrender. A transfer within the scope of   Rev. Proc. 2008-24 that was not treated as a tax-free exchange under   § 1035 was instead treated as a taxable distribution under   § 72(e), followed by a payment for the second contract.   Rev. Proc. 2008-24 superseded interim guidance provided by   Notice 2003-51, 2003-2 C.B. 362.

  Section 2113 of the Small Business Jobs Act, P.L. 111-240, added   § 72(a)(2) of the Internal Revenue Code to provide rules for the partial annuitization of a single annuity contract.   Section 72(a)(2) provides that, if any amount is received as an annuity for 10 years or more or during one or more lives under any portion of an annuity, endowment or life insurance contract— (a) that portion is treated as a separate contract for purposes of   § 72; (b) the investment in the contract generally is allocated pro rata between each portion of the contract from which amounts are received as an annuity and the portion from which amounts are not so received; and (c) a separate annuity starting date is determined with respect to each portion of the contract from which amounts are received as an annuity. The amendment applies to amounts received in taxable years beginning after December 31, 2010.

Since 2008, Treasury and the Service have learned of several practical issues that diminish the effectiveness of   Rev. Proc. 2008-24. For example, some taxpayers have commented that it is not clear how the “occurred between” standard should be applied with regard to several of the conditions that are enumerated in   § 72(q)(2) or to similar life events. Other taxpayers have commented that the alternative characterization of a transfer that does not qualify as a tax-free exchange is unclear, and that a 12-month waiting period produces administrative difficulties in some situations where an income tax return already was filed for the year in which the transfer took place. Still others have argued that Treasury and the Service should provide relief for payments received as an annuity under an annuity contract involved in a partial exchange. As a result of the recent amendment of   § 72(a), a taxpayer may partially annuitize a single annuity contract and apply an exclusion ratio, rather than the income-first rule of   § 72(e), to amounts received as an annuity under the annuitized portion of the contract.

Treasury and the Service have determined that it is in the interest of sound tax administration to modify the guidance provided by   Rev. Proc. 2008-24 to address these issues. Accordingly, this revenue procedure makes the following changes to   Rev. Proc. 2008-24: First, the 12-month period referred to in section 4.01(a) of   Rev. Proc. 2008-24 is reduced to 180 days. Second, the rule requiring that one of the enumerated   § 72(q) conditions be met (or that a similar life event occur) is eliminated. Third, the limitations on amounts withdrawn from or received under an annuity contract involved in a partial exchange do not apply to amounts received as an annuity for a period of 10 years or more or during one or more lives. Fourth, the automatic characterization of a transfer as either a tax-free exchange under   § 1035 or a distribution taxable under   § 72(e) followed by a payment for a second contract is eliminated. Under this approach, if a direct transfer of a portion of the cash surrender value of an existing annuity contract for a second annuity contract does not meet the 180-day test described above, the Service will apply general tax principles to determine the substance, and hence the treatment, of the transfer. Thus, for example, an amount described by   § 72(e)(1)(A) that is received under either the original contract or the new contract within 180 days of the exchange may be characterized as either boot in a tax free exchange (see   § 1035(d)(1) and   1031(c)) or a distribution under   § 72(e).

Scope

This revenue procedure applies to the direct transfer of a portion of the cash surrender value of an existing annuity contract for a second annuity contract, regardless of whether the two annuity contracts are issued by the same or different companies.

This revenue procedure does not apply to transactions to which   § 72(a)(2) applies.

Procedure

A transfer that is within the scope of this revenue procedure will be treated as a tax-free exchange under   § 1035 if no amount, other than an amount received as an annuity for a period of 10 years or more or during one or more lives, is received under either the original contract or the new contract during the 180 days beginning on the date of the transfer (in the case of a new contract, the date the contract is placed in-force). A subsequent direct transfer of all or a portion of either contract involved in an exchange described in this section 4.01 is not taken into account for purposes of applying this section if the subsequent transfer qualifies (or is intended to qualify) as a tax-free exchange under   § 1035.

A transfer that is within the scope of this revenue procedure but not described in section 4.01 will be characterized in a manner consistent with its substance, based on general tax principles and all the facts and circumstances.

The Service will not require aggregation pursuant to the authority of   § 72(e)(12), or otherwise, of an original, pre-existing contract with a second contract that is the subject of a tax-free exchange under   § 1035 and section 4.01 of this revenue procedure, even if both contracts are issued by the same insurance company, but will instead treat the contracts as separate annuity contracts. See   Rev. Rul. 2003-76;   Rev. Rul. 2007-38, 2007-1 C.B. 1420.

Effective Date

This revenue procedure is effective for transfers described in   section 3 of this revenue procedure that are completed on or after October 24, 2011.   Rev. Proc. 2008-24 will continue to apply to transfers that are completed before that date, with the clarification of the requirement of section 4.01(b) that one of the prescribed conditions of   § 72(q)(2) have “occurred between” the date of the transfer and the date of the withdrawal or surrender will be treated as satisfied if the condition was satisfied as of the date of the withdrawal or surrender. Thus, for example, an individual who attained the age of 59 1/2 before both the date of the transfer and the date of the withdrawal or surrender has satisfied the condition of   § 72(q)(2)(A) and will be treated as satisfying section 4.01(b) of   Rev. Proc. 2008-24.

Effect On Other Documents

  Rev. Proc. 2008-24 is modified and superseded.

Drafting Information

The principal author of this revenue procedure is John E. Glover of the Office of the Associate Chief Counsel (Financial Institutions & Products). For further information regarding this revenue procedure, contact Mr. Glover at (202) 622-3970 (not a toll-free call).

www.irstaxattorney.com 888-712-7690

COMM. v. SIMMONS, Cite as 107 AFTR 2d 2011-XXXX, 06/21/2011

Commissioner of Internal Revenue Service, Appellant v. Dorothy Jean Simmons, Appellee.

Case Information:

Code Sec(s):      

Court Name:      United States Court of Appeals FOR THE DISTRICT OF COLUMBIA CIRCUIT,

Docket No.:        No. 10-1063,

Date Argued:     02/04/2011

Date Decided:   06/21/2011.

Prior History:     

Disposition:       

HEADNOTE

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OPINION

Patrick J. Urda, Attorney, U.S. Department of Justice, argued the cause for appellant. With him on the briefs was Kenneth L. Greene, Attorney.

Robert J. Onda argued the cause for appellee. With him on the brief was Timothy S. Rankin.

Matthew A. Eisenstein was on the brief foramici curiae The National Trust For Historic Preservation, The L'Enfant Trust, and Foundation for the Preservation of Historic Georgetown in support of appellee.

United States Court of Appeals FOR THE DISTRICT OF COLUMBIA CIRCUIT,

Appeal from the United States Tax Court

Before: Ginsburg and Garland, Circuit Judges, and Silberman, Senior Circuit Judge.

Opinion for the Court filed by Circuit JudgeGinsburg.

Judge: Ginsburg, Circuit Judge:

The Commissioner of Internal Revenue appeals a decision of the Tax Court holding taxpayer Dorothy Jean Simmons was entitled to claim deductions in 2003 and 2004 for donating to the L'Enfant Trust, Inc. conservation easements on the façades of two buildings located in an historic district. The Commissioner argues Simmons may not take these deductions because her contribution was not “exclusively for conservation purposes,” as required by 26 U.S.C. § 170(h)(1)(C), and because she failed to obtain “qualified appraisals” meeting the standards of Treasury Regulation § 1.170A-13(c)(3)(ii). We hold the Tax Court did not clearly err in concluding the factual circumstances supporting Simmons's deductions met the applicable statutory and regulatory requirements.

I. Background

During the years at issue, Simmons owned two properties in the Logan Circle neighborhood of Washington, D.C. — one on the Circle and one nearby on Vermont Avenue. The two properties were and are subject to the District of Columbia's Historic Landmark and Historic District Protection Act of 1978, D.C. Code  § 6-1101 et seq.. The D.C. Historic Preservation Office may fine any person who violates the District's preservation laws and can compel that person to restore a structure that he impermissibly altered. Id.  § 6-1110.

A. The Conservation Easement Deeds

The L'Enfant Trust, Inc. is a tax-exempt organization under 26 U.S.C. § 501(c)(3), dedicated to the preservation of historic properties. In 2003 Simmons executed a “Conservation Easement Deed of Gift” granting to L'Enfant “an easement in gross, in perpetuity, in, on, and to the Property, the Building and the Façade” on Logan Circle. In 2004 she granted to L'Enfant another, essentially identical easement on the Vermont Avenue property.

Each deed prohibits Simmons from materially altering the façade of the property without the written consent of L'Enfant, and requires her to maintain the properties in good repair, periodically clean the façades, and ensure any change to a façade will comply with “applicable federal, state and local governmental laws and regulations.” The deeds give L'Enfant the right to inspect the façades and to seek equitable remedies for any violation of the easements. By their terms, the easements are binding upon Simmons and her “successors, heirs and assigns,” run “in perpetuity with the land,” and “survive any termination of Grantor's or the Grantee's existence.”

The deeds allow L'Enfant “to give its consent (e.g., to changes in a Façade) or to abandon some or all of its rights” thereunder. The deeds also acknowledge the properties were already encumbered by deeds of trust securing loans to a mortgage company, but recite that the lenders have agreed to subordinate their rights in the property to the rights of L'Enfant “and join in the execution” of the easement deed for this limited purpose. Attached to each deed are “Lender Acknowledgements” signed by a representative of the lenders.

B. Simmons's Claim of Charitable Deductions

Simmons filed tax returns for 2003 and 2004 claiming charitable deductions of, respectively, $162,500 and $93,000 for having donated the conservation easements to L'Enfant. A taxpayer generally may not take a charitable deduction for the gift of a partial interest in property. 26 U.S.C. § 170(f)(3)(A). There is an exception, however, for a “qualified conservation contribution,” id.  § 170(f)(3)(B)(iii), defined as the contribution “(A) of a qualified real property interest, (B) to a qualified organization, (C) exclusively for conservation purposes,” id.  § 170(h)(1). The parties agree the easements are “qualified real property interest[s]” and L'Enfant is a “qualified organization.” See id.  , § 170(h)(2)(C), (3).

As required by the applicable Treasury regulations,see   Treas. Reg. § 1.170A-13(c)(2)–(3), Simmons obtained appraisals performed by a licensed and certified appraiser, estimating the fair market value of each easement, which appraisals she submitted with her tax returns. The appraiser, James Donnelly, determined that prior to the easement the fair market value of the Logan Circle property was $1,250,000 and that of the Vermont Avenue property was $845,000. Donnelly estimated donation of the easement would diminish the value of the former by $162,500 (13 percent), and that of the latter by $93,000 (11 percent).

Before the Tax Court, the Commissioner argued Simmons could not claim a charitable deduction because (1) the easements were not granted “exclusively for conservation purposes,” (2) Simmons had failed to submit “qualified appraisals” proving the fair market value of the easements, and (3) as shown by an appraisal done by an employee of the Internal Revenue Service, the easements were of no value. The Tax Court disagreed in all respects but held the easements were worth only $56,250 and $42,250 respectively. Simmons v. Comm'r,  98 T.C.M. (CCH) 211, 212 [TC Memo 2009-208] (2009).

II. Analysis

On appeal the Commissioner argues the Tax Court erred in holding (1) the easements donated by Simmons were “exclusively for conservation purposes,”  § 170(h)(1)(C), and (2) Simmons had obtained “qualified appraisals” as required by Treasury Regulation § 1.170A-13(c)(3)(ii). * Because his arguments raise mixed questions of fact and law, our review is only for clear error. See Jombo v. Comm'r,  398 F.3d 661, 663 [95 AFTR 2d 2005-1141] (D.C. Cir. 2005).

A. Exclusively for Conservation Purposes

To reiterate, a taxpayer may take a deduction for a “conservation contribution” only if it constitutes a qualified interest in real property given exclusively for a “conservation purpose[].” For a contribution to be deemed exclusively for a conservation purpose, that purpose must be “protected in perpetuity.” 26 U.S.C. § 170(h)(5)(A). A regulation promulgated by the Department of the Treasury states further that “any interest in the property retained by the donor ... must be subject to legally enforceable restrictions ... that will prevent uses of the retained interest inconsistent with the conservation purposes of the donation.”  Treas. Reg. § 1.170A-14(g)(1).

The Commissioner argues Simmons is not entitled to deductions for charitable contributions because the easements she granted L'Enfant satisfy neither the statute nor the regulation quoted above. More specifically, the Commissioner points to the clause in the deeds stating “nothing herein contained shall be construed to limit the Grantee's right to give its consent (e.g., to changes in a Façade) or to abandon some or all of its rights hereunder.” This clause, he maintains, is inconsistent with conservation in perpetuity because it leaves L'Enfant free to consent to an ahistorical change in the façade and to abandon altogether its right to enforce the restrictions set out in the deeds. The Commissioner also asserts the deeds will not prevent uses of the properties “inconsistent with” their conservation because neither easement includes a clause providing for the perpetuation of the easements in the event L'Enfant ceases to exist or simply abandons its right to enforce the easements.

Simmons objects that each deed states explicitly the parties' intent to preserve the subject property and that, in any event, both she and L'Enfant are limited in what they can change by the District's historic preservation laws. She also points out that L'Enfant's interest in preserving its tax-exempt status will prevent it from approving changes inconsistent with the conservation purposes of — let alone abandoning — the easements. Finally, Simmons maintains if L'Enfant is dissolved, then the easements will be transferred to another organization that engages in similar activities, citing the testimony of the State Historic Preservation Officer.

We conclude the easements meet the requirement of perpetuity in  § 170(h)(5)(A). The deeds impose an affirmative obligation upon Simmons “in perpetuity” to maintain the properties in a manner consistent with their historic character and grant L'Enfant the authority to inspect the properties and to enforce the easements. By their terms, the deeds will “survive any termination of Grantor's or the Grantee's existence.” Although the deeds do not spell out precisely what would happen upon the dissolution of L'Enfant, D.C. law provides the easements would be transferred to another organization that engages in “activities substantially similar to those of” L'Enfant. D.C. Code  §§ 29-301.48, 29-301.56. More specifically, the State Historic Preservation Officer testified the easement initially reverts to the District of Columbia, which then seeks to assign it to a conservation organization. Accordingly, the deeds do all the Commissioner can reasonably demand to “prevent” uses of the properties inconsistent with conservation purposes, as required by  Treasury Regulation § 1.170A-14(g)(1).

The clauses permitting consent and abandonment, upon which the Commissioner so heavily relies, have no discrete effect upon the perpetuity of the easements: Any donee might fail to enforce a conservation easement, with or without a clause stating it may consent to a change or abandon its rights, and a tax-exempt organization would do so at its peril. As the amici curiae — the National Trust for Historic Preservation, L'Enfant, and the Foundation for the Preservation of Historic Georgetown — further explain, this type of clause is needed to allow a charitable organization that holds a conservation easement to accommodate such change as may become necessary “to make a building livable or usable for future generations” while still ensuring the change is consistent with the conservation purpose of the easement.

Moreover, the Commissioner has not shown the possibility L'Enfant will actually abandon its rights is more than negligible. L'Enfant has been holding and monitoring easements in the District of Columbia since 1978, yet the Commissioner points to not a single instance of its having abandoned its right to enforce. Simmons's deeds in particular make express L'Enfant's intention to ensure her properties “remain essentially unchanged.” Treasury Regulation § 1.170A-14(c)(1) also provides “an eligible donee” — as L'Enfant undisputedly is — must have a “commitment to protect the conservation purposes of the donation” and “the resources to enforce the restrictions.” Simmons's entitlement to a deduction for a “qualified conservation contribution” under 26 U.S.C. § 170(f)(3)(B)(iii), therefore, is supported by the limitation in  Treasury Regulation § 1.170A-14(g)(3):

A deduction shall not be disallowed under section 170(f)(3)(B)(iii) and this section merely because the interest which passes to, or is vested in, the donee organization may be defeated by the performance of some act or the happening of some event, if on the date of the gift it appears that the possibility that such act or event will occur is so remote as to be negligible.

Simmons's deductions cannot be disallowed based upon the remote possibility L'Enfant will abandon the easements.See Stotler v. Comm'r ,  53 T.C.M. (CCH) 973, 980–81 [¶87,275 PH Memo TC] (1987) (concluding easement was granted in perpetuity even though grantee could abandon it because possibility future events would undermine perpetuity was “so remote as to be negligible”).

We also note any change in the façade to which L'Enfant might consent would have to comply with all applicable laws and regulations, including the District's historic preservation laws. * In short, because the donated easements will prevent in perpetuity any changes to the properties inconsistent with conservation purposes, we hold Simmons has made a contribution “exclusively for conservation purposes,” in accordance with 26 U.S.C. § 170(h)(1)(C).

B. Qualified Appraisals

 Section 155(a) of the Deficit Reduction Act of 1984, Pub. L. No. 98-369, 98 Stat. 494, 691, directs the Secretary of the Treasury to prescribe regulations requiring an individual claiming a charitable deduction pursuant to  § 170 for property valued at more than $5,000 to obtain “a qualified appraisal for the property contributed.” The regulations contain “substantiation requirements,” viz., that the appraisal include, as relevant here:

(J) The method of valuation used to determine the fair market value, such as the income approach, the market-data approach, and the replacement-cost-less-depreciation approach; and

(K) The specific basis for the valuation, such as specific comparable sales transactions or statistical sampling ....

 Treas. Reg. § 1.170A-13(c)(2)–(3).

The Commissioner argues the Tax Court erred in holding Simmons's appraisals were “qualified.” First, he contends Donnelly failed to explain the “method of valuation” he used and to include a substantive basis for the valuation, as required by paragraphs (J) and (K), set out above. In doing the appraisals, Donnelly had relied upon an article prepared by Mark Primoli, an IRS employee, which stated, “Internal Revenue Service Engineers have concluded that the proper valuation of a façade easement should range from approximately 10% to 15% of the value of the property.” Internal Revenue Service,Façade Easement Contributions (2000). The Commissioner suggests Donnelly arbitrarily picked a percentage between 10 and 15 rather than stating any identifiable method to determine the “after-easement” value.

Simmons argues that because there was no market price for conservation easements, Donnelly properly used the “before and after approach,” Hilborn v. Comm'r,  85 T.C. 677, 688–89 (1985): He calculated the “difference between the fair market value of the property” prior to donation and “the fair market value of the encumbered property after the granting of the restriction,” as permitted by § 1.170A-14(h)(3). To estimate the fair market value of each property once subject to the easement, Donnelly examined sales of similarly encumbered properties and took into account factors a buyer would consider in valuing such a property. The Commissioner, however, complains Donnelly did not identify the properties examined or the parties with whom he spoke and therefore did not provide adequate detail; instead, he said he had considered “subjective and conjectural factors” that would lower the value of the properties after being encumbered by easements.

We hold the Tax Court did not clearly err in concluding the appraisals sufficiently identified the method and basis for the valuations. To determine the fair market value of the property before being encumbered, Donnelly consulted sales of similar properties and identified some of these sales in the appraisals. In ascertaining the fair market value after encumbrance, Donnelly explained he spoke with and considered “the mindset of competent buyers and sellers” and took account of the “considerations they have actually had, or are likely to have, in the buying or selling of a property encumbered by a façade easement.” For example, each appraisal noted the property would lose some value because the easement imposed more onerous requirements than does D.C. law. It also listed several factors that would lower the value of the encumbered property, such as potential legal exposure if the donor were to breach the easement and L'Enfant's right of prior approval for any change to the façade.

After examining sales of easement-encumbered properties and speaking with interested parties, Donnelly concluded the donation of each easement would diminish the value of the property by from 10 to 15 percent, as contemplated by Primoli's article. Specifically, he determined the Logan Circle and the Vermont Avenue properties would lose, respectively, 13 and 11 percent of their value. Although the appraisals might have elaborated further upon the specific bases for reaching each valuation, and thus avoided litigation of this issue, it was not clear error for the Tax Court to conclude Simmons satisfied the substantiation requirements concerning valuation. *

In a footnote, the Commissioner “suggests” the appraisals “failed to satisfy other requirements of [Treasury Regulation] § 1.170A-13(c)(3)(ii)” but acknowledges the “omissions might seem venal [sic] sins.” It is not our practice, however, to indulge “cursory arguments made only in a footnote.”Spirit of the Sage Council v. Norton , 411 F.3d 225, 229 n. (D.C. Cir. 2005) (internal quotation marks omitted). Accordingly, we hold the Tax Court did not err in holding Simmons provided the Commissioner with “qualified appraisals.”

III. Conclusion

For the foregoing reasons, the judgment of the Tax Court that Simmons was entitled to claim the deductions at issue is

Affirmed.

*

  The issue whether the Tax Court improperly valued the easements is not before us because, as the Commissioner clarified during oral argument, he did not raise this point as an independent basis for objecting to the judgment of the Tax Court.

*

  The Commissioner makes the rather niggling argument that, because of certain administrative shortcomings, compliance with the District's preservation scheme would not perpetuate the conservation purposes of the deeds. Appearing as it does for the first time in the reply brief, the argument is forfeit and we do not address it. See Sitka Sound Seafoods, Inc. v. NLRB, 206 F.3d 1175, 1181 (D.C. Cir. 2000).

*

  The Commissioner also contends the requirements of  § 1.170A-13(c)(3) are mandatory rather than directory and therefore cannot be satisfied by merely substantial compliance. Cf. Bond v. Comm'r,  100 T.C. 32, 41 (1993) (if Treasury regulations “are procedural or directory in that they are not of the essence of the thing to be done ..., they may be fulfilled by substantial, if not strict compliance”) (quotingTaylor v. Comm'r ,  67 T.C. 1071, 1077–78 (1977)). For her part, Simmons argues the requirements in § 1.170A-13(c)(3) are directory because they do not go to “the essence” of whether a charitable contribution has been made under  § 170. See Bond, 100 T.C. at 40–41 (reporting requirements of  § 1.170A-13(c)(2)(i)(A) and (3) are “directory and not mandatory”). We need not, however, resolve the issue whether a taxpayer can fulfill the requirements of  § 1.170A-13(c)(3) through substantial compliance because we conclude above that the Tax Court did not clearly err in finding Simmons fully “complied with the substantiation requirements” by including “all of the required information.” 98 T.C.M. (CCH) at 216.

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SWANSON v. COMM., Cite as 107 AFTR 2d 2011-XXXX, 06/15/2011

DAVID W. SWANSON and CONNIE L. SWANSON, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Case Information:

Code Sec(s):      

Court Name:      UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT,

Docket No.:        No. 09-73770,

Date Argued:     06/08/2011

Date Decided:   06/15/2011Submitted June 8, 2011 Pasadena, California.

Disposition:       

HEADNOTE

.

Reference(s):

OPINION

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT,

Appeal from a Decision of the United States Tax Court

Before: D.W. NELSON and IKUTA, Circuit Judges, and PIERSOL, Senior District Judge. **

MEMORANDUM *

Judge:

NOT FOR PUBLICATION

Tax Ct. No. 550-00

The Tax Court did not err in ruling that the burden of proof in this case did not shift to the Commissioner under 26 U.S.C. § 7491.  Section 7491's burden-shifting framework did not apply to the 1994 deficiency, because the parties stipulated that the IRS's investigation of those deficiencies commenced prior to July 22, 1998. Nor did the Tax Court err in determining  § 7491's burden shifting framework did not apply to the 1993 and 1995 deficiencies due to the Swansons' failure to introduce credible evidence and failure to cooperate with the Commissioner. The Tax Court's determination that the Swansons were not credible was not clearly erroneous, given (among other things), the Swansons' claim that clearly personal expenses were deductible “management expenses,” that they relinquished their ownership interest in FSH “for nothing more than a stranger's promise of a loan,” and they claimed never to have discussed tax avoidance with Evans and O'Brien, despite the fact that Evans and O'Brien were both convicted of promoting tax evasion schemes.See Wood v. Comm'r ,  338 F.2d 602, 605 [14 AFTR 2d 5951] (9th Cir. 1964). The Tax Court's determination that certain personal expenses were not business expenses was not contrary to the parties' stipulation. The Swansons did not identify any specific inconsistencies, and the stipulation stated that the Commissioner did not agree with the Swansons' characterization of all of their personal expenses or stipulate to the accuracy of all their exhibits. Nor did the Tax Court clearly err in determining that the Swansons were not cooperative with the Commissioner, given evidence that they brought a law suit against one IRS agent and refused to answer questions posed by his successor.

The Tax Court did not err in holding that FSH Services lacked economic substance. See Sparkman v. Comm'r,  509 F.3d 1149, 1155 [100 AFTR 2d 2007-6961] (9th Cir. 2007); see also Markosian v. Comm'r,  73 T.C. 1235, 1243–45 (1980). The Tax Court's conclusions that the Swansons' relationship with FSH's property did not materially differ before and after the creation of the trust, that neither Evans nor O'Brien functioned as an independent trustee, that economic benefits did not inure to other beneficiaries of the trust, and that the Swansons failed to respect the rules and restrictions of the trust were not clearly erroneous. Sparkman, 509 F.3d at 1155. Though the Swansons offered evidence that Evans made loans in his capacity as a trustee, such loan activity was de minimis. Moreover, when Evans was caught misappropriating funds, the Swansons selected his replacement. Having determined that FSH lacked economic substance, the Tax Court did not err in attributing the income of the trust to the Swansons, rather than to Evans, because Mr. Swanson was the primary source of FSH's income. Id. at 1158.

The Tax Court did not err in declining to categorize various continuing education expenses as Schedule C deductions because the Swansons did not carry their burden of demonstrating why those deductions were business expenses. See New Colonial Ice Co. v. Helvering,  292 U.S. 435, 440 [13 AFTR 1180] (1934); Rockwell v. Comm'r,  512 F.2d 882, 886 [35 AFTR 2d 75-1055] (9th Cir. 1975).

The Tax Court did not err in holding that the 1993, 1994, and 1995 deficiency actions were timely given that the Swansons omitted from their gross income an amount in excess of 25 percent of the amount of gross income stated in their tax returns.See 26 U.S.C. § 6501(e)(1)(A).

The Tax Court did not err in upholding the penalties imposed under 26 U.S.C. § 6662 on the ground that the Swansons substantially understated their tax liability and failed to prove that they acted with reasonable cause and in good faith.See 26 U.S.C. § 6664(c)(1). The Swansons did not carry their burden of proving they acted with due care in setting up the trust and calculating their tax liability, and the Tax Court's determination that they were negligent and that their testimony was not credible was not clearly erroneous.Sparkman , 509 F.3d at 1161.

Nor did the Tax Court abuse its discretion in imposing a penalty of $12,500 under 26 U.S.C. § 6673. Larsen v. Comm'r,  765 F.2d 939, 941 [56 AFTR 2d 85-5487] (9th Cir. 1986) (per curiam). The Tax Court did not err in determining that the Swansons were maintaining frivolous or groundless positions, given that the Swansons continued to pursue litigation despite their knowledge that Evans and O'Brien (co-trustees of FSH) were facing (and were eventually convicted of) criminal charges of tax fraud. Moreover, reasonable inquiry would have revealed that Evans, Cache Properties, and Martha Doerr were involved in other trust transactions that were deemed shams. Cf. Wolf v. Comm'r,  4 F.3d 709, 716 [72 AFTR 2d 93-5740] (9th Cir. 1993). The Tax Court did not clearly err in finding that the Swansons's evidence and arguments did not lead to the agreed-upon reduction of their tax liabilities; rather, the reductions resulted from concessions by the Commissioner that would have occurred during the course of normal negotiations between the parties.

AFFIRMED.

**

  The Honorable Lawrence L. Piersol, Senior District Judge for the U.S. District Court for South Dakota, Sioux Falls, sitting by designation.

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Oscar C. Hawaii, et ux. v. Commissioner, TC Memo 2011-134 , Code Sec(s) 165; 6159; 6330 7122.

OSCAR C. AND ARANKA M. HAWAII, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent .

Case Information:

Code Sec(s):       165; 6159; 6330 7122

Docket:                Docket No. 12718-08L.

Date Issued:       06/15/2011

Judge:   Opinion by RUWE

HEADNOTE

XX.

Reference(s): Code Sec. 165 ; Code Sec. 6159 ; Code Sec. 6330 Code Sec. 7122

Syllabus

Official Tax Court Syllabus

Counsel

Alvaro G. Velez, for petitioners.

Louis H. Hill, for respondent.

Opinion by RUWE

MEMORANDUM FINDINGS OF FACT AND OPINION

The petition in this case was filed in response to a Notice of Determination Concerning Collection Action(s) Under  Section 6320 and/or 6330 (notice of determination) for petitioners' taxable year 2005. 1

On September 3, 2007, respondent sent petitioners separate Letters 1058, Final Notice of Intent to Levy and Notice of Your Right to a Hearing, regarding their unpaid income tax liability for 2005. In response, petitioners timely mailed a Form 12153, Request for a Collection Due Process or Equivalent Hearing, in which they sought an in-person hearing. At their hearing with the Internal Revenue Service's (IRS) Appeals Office, petitioners submitted a Form 1040X, Amended U.S. Individual Income Tax Return, that indicated that their total tax should be reduced to $10,612 from the $56,486 reported on their original return. 2 On the basis of the information in the amended return, petitioners requested a streamlined installment agreement on the adjusted balance due. In their amended return petitioners claimed that they are entitled to a theft loss deduction for the taxable year 2005. Petitioners contended that this deduction would reduce their tax liability below $25,000, which would allow them to qualify for a streamlined installment agreement.

The Appeals officer did not agree with petitioners' claim that their 2005 tax liability should be reduced. On April 22, 2008, respondent sent to petitioners a notice of determination sustaining the proposed levy action. The notice of determination indicated that respondent rejected petitioners' request for a streamlined installment agreement because respondent had determined that petitioners' balance due exceeded the $25,000 limit for that payment option. Petitioners never received a notice of deficiency, nor did they have a prior administrative or judicial opportunity to challenge the amount of the deficiency, and respondent has acknowledged that the underlying liability is properly at issue. See  sec. 6330(c)(2)(B); Montgomery v. Commissioner,  122 T.C. 1, 8 (2004).

The issues for decision are: (1) Whether petitioners incurred a theft loss of $100,000, and (2) whether respondent abused his discretion by not accepting petitioners' request for an installment agreement.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of facts, the supplemental stipulation of facts, and the attached exhibits are incorporated herein by this reference.

At the time the petition was filed, petitioners resided in Ohio.

During 2005 Oscar C. Hawaii (petitioner) owned and operated a small trucking business. By early 2005 petitioner, who was then over 70, had accumulated retirement savings of approximately $300,000, which he kept in an individual retirement account with Charles Schwab. 3

In January 2005 petitioner was approached about making an investment in ProCore Group, Inc. (ProCore), 4 by Carol Popp, who was one of ProCore's primary shareholders. Mr. Popp and petitioner attended the same church, and it was there that Mr. Popp initially spoke with petitioner about investing with ProCore. Petitioner told Mr. Popp that he could not invest in ProCore because his money was tied up in his retirement account. Petitioner also told Mr. Popp that he was not knowledgeable about investments and that Charles Schwab handled his investments. Mr. Popp assured petitioner that an investment in ProCore would be advantageous.

Mr. Popp invited petitioner to attend a meeting with some of the other officers and shareholders of ProCore so that they could further discuss investment opportunities with him. At the meeting petitioner was introduced to George Csatary, ProCore's chief financial officer. Petitioner was informed that Mr. Csatary was a certified public accountant. Messrs. Popp and Csatary convinced petitioner that ProCore was an exceptional investment that would allow him to make considerable short-term profits. Petitioner was neither given a prospectus nor shown any of ProCore's financial documents or Securities and Exchange Commission (SEC) filings. Petitioner decided to invest $100,000 of his retirement savings in ProCore. Petitioner made the investment because he trusted Mr. Popp, since they attended church together.

On January 24, 2005, Mr. Csatary arranged for a wire transfer of $100,000 from petitioner's retirement account to ProCore. Petitioner told Messrs. Popp and Csatary that he needed to receive either stock certificates or a return of his funds within 60 days in order to avoid paying tax on the withdrawal from his retirement account.

By mid-March 2005 petitioner had not received either the return of his funds or stock certificates. Petitioner became increasingly concerned that his investment was in jeopardy. This prompted petitioner to hire an attorney to help him recover the money he had invested. On March 17, 2005, petitioner, through his attorney, sent ProCore a letter demanding the return of his investment. In response to petitioner's demand letter, ProCore presented petitioner with stock certificates for 3,333,333 restricted and unregistered shares in the company. Petitioner was told that the shares had been delivered to him at a price established in a private placement memorandum previously registered with the SEC. After receiving the stock certificates, petitioner gave them to Charles Schwab. Charles Schwab has never informed petitioner, or led him to believe, that the ProCore stock certificates were fraudulent or otherwise defective.

In May 2005 petitioners' attorney was instructed to file suit against various individuals involved with ProCore in an effort to recover petitioners' money. Petitioners paid the attorney $7,500 in exchange for his representation. The attorney sent a letter to ProCore dated May 26, 2005, demanding that petitioners' funds be returned to them. The attorney also drafted a complaint alleging that ProCore and its officers had committed securities fraud and negligence and breached their fiduciary duties. The complaint was never filed.

At a later date during 2005 petitioner invested an additional $150,000 in Luhan Investment Securities, which was another venture promoted by some of the individuals behind ProCore. The outcome of this later investment is not evident from the record. Petitioner did not contend that this later investment resulted in any additional deductible losses during 2005.

In 2008 petitioner filed a complaint with the Ohio Department of Commerce's Division of Securities requesting that ProCore's officers be investigated and criminally prosecuted for defrauding him. The Division of Securities declined to pursue petitioner's complaint.

In 2009 petitioner hired and paid $15,000 to another attorney to file suit in Ohio against ProCore's officers and its successor entity. On March 10, 2009, a complaint was filed in the U.S. District Court for the Northern District of Ohio against the surviving entity of ProCore—Universal Property and Development Acquisition Corp.—as well as other named defendants alleging that petitioners were the victims of securities fraud, breaches of fiduciary duties, negligence, fraud, and breach of contract. After the filing of the 2009 complaint, petitioner's counsel informed him that most of the claims in the complaint were barred by the statute of limitations in Ohio and that he was uncertain as to whether petitioner's money could be retrieved even if his case was favorably adjudicated.

OPINION

 Section 6330(a)(1) provides that no levy may be made on any property or right to property of any person unless the Secretary has notified the person in writing of his or her right to a hearing under this section before the levy is made. The notice must include in simple and nontechnical terms, inter alia, the right of the person to request a hearing to be held by the IRS Office of Appeals. See  sec. 6330(a)(3)(B).

At the hearing the person may raise any relevant issue relating to the unpaid tax or the proposed levy, including appropriate spousal defenses, challenges to the appropriateness of collection actions, and offers of collection alternatives.  Sec. 6330(c)(2)(A).   Section 6330(c)(2)(B) further provides that the person may also raise at the hearing challenges to the existence or amount of the underlying tax liability for any tax period if the person did not receive any statutory notice of deficiency for the tax liability or did not otherwise have an opportunity to dispute the tax liability. Where the validity of the underlying tax liability is at issue in a collection review proceeding, the Court will review that issue de novo. Thornberry v. Commissioner, 136 T.C. __, __ (2011) (slip op. at 12); Davis v. Commissioner,  115 T.C. 35, 39 (2000). However, we generally review other issues regarding the collection action determined by the Appeals Office for abuse of discretion. Thornberry v. Commissioner, supra at __ (slip op. at 12); Goza v. Commissioner,  114 T.C. 176 (2000).   Section 6330(d)(1) confers jurisdiction on the Tax Court to review the determination of the Appeals officer.

It is uncontested that the merits of the underlying income tax liability are properly at issue. Therefore, we must first decide petitioners' claim that they are entitled to a loss deduction of $100,000.

 Section 165(a) permits a deduction against ordinary income for “any loss sustained during the taxable year and not compensated for by insurance or otherwise.” For individuals, the deduction is limited to: (1) Losses incurred in a trade or business; (2) losses incurred in any transaction entered into for profit though not connected to a trade or business; or (3) losses of property not connected with a trade or business or a transaction entered into for profit, if such losses arise from “fire, storm, shipwreck, or other casualty, or from theft.” (Emphasis added.) See  sec. 165(c); Lockett v. Commissioner,  T.C. Memo. 2008-5 [TC Memo 2008-5], affd.  306 Fed. Appx. 464 [103 AFTR 2d 2009-301] (11th Cir. 2009). A taxpayer may deduct a theft loss in the year the loss is sustained.   Sec. 165(a). Generally, a theft loss is treated as sustained during the taxable year in which the taxpayer discovers it.   , Sec. 165(a), (e). However, even after a theft loss is discovered, if a claim for reimbursement exists during the year of the loss with respect to which there is a reasonable prospect of recovery, then a theft loss is treated as “sustained” only when it can be ascertained with reasonable certainty whether such reimbursement for the loss will be obtained. Jeppsen v. Commissioner,  128 F.3d 1410, 1414 [80 AFTR 2d 97-7710] (10th Cir. 1997), affg.  T.C. Memo. 1995-342 [1995 RIA TC Memo ¶95,342];  , Secs. 1.165-1(d)(2)(i), (3),  1.165-8(a)(2), Income Tax Regs. Stated differently, a reasonable prospect of recovery will postpone the theft loss deduction until such time as the prospect no longer exists. Petitioners have the burden of proving they have sustained a theft loss. See Rule 142(a); Welch v. Helvering, 290 U.S. 111 [12 AFTR 1456] (1933).

I. Theft The term “theft” under  section 165 is a word of general and broad meaning that includes any criminal appropriation of another's property, including theft by swindling, false Edwards v. Bromberg, 232 pretenses, and other forms of guile. F.2d 107, 110 (5th Cir. 1956);  sec. 1.165-8(d), Income Tax Regs. The exact nature of a theft, whether it be larceny, embezzlement, obtaining money by false pretenses, or other wrongful misappropriation of property of another, is of little importance provided it constitutes a theft. See Edwards v. Bromberg, supra; Grothues v. Commissioner,  T.C. Memo. 2002-287 [TC Memo 2002-287]; see also  sec. 1.165-8(d), Income Tax Regs. Whether a theft loss has been established depends upon the law of the State where the alleged theft occurred. Bellis v. Commissioner,  540 F.2d 448, 449 [38 AFTR 2d 76-5546] (9th Cir. 1976), affg.  61 T.C. 354 (1973); Luman v. Commissioner,  79 T.C. 846, 860 (1982); Paine v. Commissioner,  63 T.C. 736, 740 (1975), affd. without published opinion 523 F.2d 1053 (5th Cir. 1975). A criminal conviction is not necessary in order for a taxpayer to demonstrate a theft loss. See Monteleone v. Commissioner,  34 T.C. 688, 692-694 (1960). Instead, a taxpayer must prove a theft occurred under applicable State law by only a preponderance of the evidence and not beyond a reasonable doubt. See Allen v. Commissioner,  16 T.C. 163, 166 (1951) (”If the reasonable inferences from the evidence point to theft, the proponent is entitled to prevail. If the contrary be true and reasonable inferences point to another conclusion, the proponent must fail.”).

Petitioners resided in Ohio when the transaction at issue occurred, and the solicitation of petitioner's investment was initiated within Ohio. Therefore, we will decide whether the evidence presented allows for us to reasonably infer that a theft occurred under Ohio law. Ohio Rev. Code Ann. sec. 2913.02 (LexisNexis 2010) provides:

(A) No person, with purpose to deprive the owner of property or services, shall knowingly obtain or exert control over either the property or services in any of the following ways:

(1) Without the consent of the owner or person authorized to give consent;

(2) Beyond the scope of the express or implied consent of the owner or person authorized to give consent;

(3) By deception;

(4) By threat;

(5) By intimidation. (B)(1) Whoever violates this section is guilty of theft.

From the evidence and testimony before us, we are unable to conclude that the transaction in issue resulted in a theft. Petitioners have failed to satisfy their burden of proving that the transaction was a theft rather than merely a poor investment decision.

At trial petitioner implied throughout his testimony that his investment was stolen but provided no specific evidence in support of that conclusion. The record indicates that petitioners made a $100,000 payment for an investment in ProCore, in exchange for which they received 3,333,333 shares of stock in the company. 5 There is no evidence that the 3,333,333 shares of stock ProCore issued are not valid and legitimate shares of stock. Petitioner testified that the shares had been accepted by Charles Schwab and that he was never notified that the shares were in any way irregular or deficient.

Petitioners provided no evidence, other than petitioner's testimony, to establish that the 3,333,333 shares of ProCore stock were valueless in 2005 or that they ever became valueless. In fact, in 2009 petitioner paid an attorney $15,000 to file suit against ProCore's successor and other individuals in an attempt to recover their investment. 6

In sum, the record before us is insufficient to determine that petitioners were the victims of theft. As a result, we hold that petitioners have failed to meet their burden of proving that a theft occurred during 2005.

II. Installment Agreement We review respondent's Appeals Office determination with respect to collection alternatives for abuse of discretion. See McCall v. Commissioner,  T.C. Memo. 2009-75 [TC Memo 2009-75]. In reviewing for abuse of discretion, we do not conduct an independent review of whether any collection alternative proposed by a taxpayer was acceptable or substitute our judgment for that of the Appeals Office. Id. Rather, we must uphold the Appeals Office determination unless it is arbitrary, capricious, or without sound basis in fact or law. See id.; see also Murphy v. Commissioner,  125 T.C. 301, 320 (2005), affd.  469 F.3d 27 [98 AFTR 2d 2006-7853] (1st Cir. 2006). In making a determination following a collection due process hearing, the Appeals officer must consider: (1) Whether the requirements of any applicable law or administrative procedure have been met; (2) any relevant issues raised by the taxpayer; and (3) whether the proposed collection action balances the need for efficient collection with legitimate concerns that the collection action be no more intrusive than necessary.   Sec. 6330(c)(3). The Appeals officer considered those factors, and there is no evidence to indicate that he abused his discretion in making his determination.

During their face-to-face conference with the Appeals officer, petitioners requested that they be granted a streamlined installment agreement to satisfy the balance due on their account. Respondent denied petitioners' request because their liability exceeded $25,000.

 Section 6159(a) authorizes the Secretary to enter into written agreements with any taxpayer under which the taxpayer is allowed to make payment on any tax in installment payments if the Secretary determines that an agreement will facilitate full or partial collection of the liability. The Commissioner has the discretion to accept or reject an installment agreement proposed by a taxpayer. See  sec. 301.6159-1(b)(1)(i), Proced. & Admin. Regs. A streamlined installment agreement is an installment agreement that may be processed quickly and without financial analysis or managerial approval and is available for taxpayers whose aggregate unpaid balance of assessments is $25,000 or less. Internal Revenue Manual (IRM) pt. 5.14.5.1(1) (Mar. 30, 2002); IRM pt. 5.14.5.2(1) (July 12, 2005). Because petitioners' outstanding liability exceeded $25,000, they were not eligible to enter into a streamlined installment agreement. See Shaw v. Commissioner,  T.C. Memo. 2010-210 [TC Memo 2010-210]; McCall v. Commissioner, supra; see also IRM pt. 5.14.1.2(4), 5.14.5.2(1) (Sept. 26, 2008). Respondent's Appeals Office verified that “the requirements of any applicable law or administrative procedure have been met” as required by  section 6330(c)(1) and balanced the need for the efficient collection of taxes with petitioners' concern that the collection action be no more intrusive than necessary as required by  section 6330(c)(3)(C). Therefore, we have no basis upon which to find that respondent abused his discretion in rejecting petitioners' request for a streamlined installment agreement.

To reflect the foregoing, Decision will be entered for respondent.

1

  Unless otherwise indicated, all section references are to the Internal Revenue Code as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure.

2

  Petitioners' original 2005 Federal income tax return is not part of the record before the Court. All figures used are based on petitioners' amended return for 2005.

3

  At the time of trial, petitioner no longer received income from the trucking business.

4

  ProCore Group, Inc. was at all relevant times a California corporation licensed to do business in the State of Florida.

5

  Petitioner testified that after his investment in ProCore, at some later point during 2005, he decided to invest an additional $150,000 in Luhan Investment Securities, another venture backed by the same individuals who had introduced him to ProCore.

6

  Paying an attorney $15,000 in 2009 to institute a lawsuit to recover his investment raises an inference that petitioner believed as recently as 2009 that there was a reason
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Tax breaks are available for travelers who mix a bit of pleasure with their business travel

Although video conferencing has made inroads in the ranks of business travelers, there still are many situations where it's necessary to travel away-from-home overnight for face-to-face meetings with staff, management, or customers. Businesspeople or professional who must travel for work reasons should keep in mind that they may be able to qualify for a travel bargain by piggybacking a vacation onto an out-of-town business trip. In effect, the business traveler gets free vacation airfare if the trip is set up the right way. And if the travel is undertaken for an employer, a properly set up reimbursement arrangement for the business portion of the trip will be income- and payroll-tax-free. This Practice Alert takes a closer look at how this combination works for domestic travel, along with a review of other business travel strategies that may yield personal savings. It doesn't cover some of the more specialized rules, such as those that apply to travelers in the transportation industry, or the per diem reimbursement rules.

Deductions for trip undertaken primarily for business.

A taxpayer who mixes a bit of pleasure with business while away from home nonetheless may deduct all of the round-trip transportation costs as long as the trip was undertaken primarily for business reasons. ( Reg. § 1.162-2(b)(1) ) The cost of lodging plus 50% of meals while on business status is deductible. Additionally, if the traveler is an employee reimbursed for all expenses under an accountable plan that requires a timely accounting of the time, place, and business purpose of the travel, plus receipts, the reimbursement is tax-free to the traveler (but the personal portion of the trip yields no tax benefit to the traveler).

 In effect, the 100% deduction for the round-trip travel costs works as a kind of tax subsidy for a personal vacation, or as a partially tax-free perk.

Example 1: Jane, a self-employed information technology specialist, flies from the East Coast to Los Angeles for a 5-day business trip. She takes in three days of vacation and sight-seeing after the business part of the trip is over.

Result: Because Jane can deduct the entire air fare, part of her mini-vacation is, in effect, subsidized by the tax break.

Example  2: The facts are the same as in illustration (1), except that Jane is employed by a corporation that reimburses her for the business portion of the trip after she submits detailed records and receipts. She pays for the personal portion of the trip (meals and lodging during the three personal days).

Result: Under the accountable plan rules, the reimbursement for the round-trip airfare (as well as for meals and lodging while on business status) is tax-free to Jane, and is not subject to FICA or income tax withholding. ( Reg. § 1.62-2(c)(2)(i) , Reg. § 1.62-2(d)(1) ) That's true even though she took a mini-vacation after her business trip ended. The corporation deducts the travel costs it pays (but only 50% of the cost of meals is deductible).

Example 3: The facts are the same as in illustration (2), except that the corporation reimburses Jane for the cost of the entire trip, including the 3-day mini-vacation.

Result: Her cost for the personal portion of the trip consists of the tax she pays on the personal portion's value (hotel, meals, etc.), which must be treated as compensation income. The corporation's deduction consists of 50% of the meal costs while Jane is on business travel status, 100% of the round-trip air fare, 100% of the lodging costs while she is on travel status, and (assuming that her entire compensation package is “reasonable”) 100% of the cost of the mini-vacation since that was treated as compensation paid to Jane.

When is a trip treated as undertaken primarily for business? There is no hard-and-fast rule. It depends on the facts and circumstances of each case. The regs do say, however, that the way travelers split their time between business and personal pursuits is “an important factor.” ( Reg. § 1.162-2(b)(2) )

 Example 4: Fred works in Atlanta and travels to New Orleans on business. On his way home, he stops in Mobile to visit his parents. During the nine days he is away from home, he spends $1,999 for travel, meals, lodging, and other travel expenses. Had he not stopped in Mobile, Fred would have been away from home for only six days and his trip would have cost only $1,699.

Result: Fred can deduct $1,699 for his trip, including the round-trip transportation to and from New Orleans. The 50% deduction limit applies to his meals while on business status. (IRS Pub. 463 (2010), p. 6)

 As is evident from example (4), the personal part of a trip need not occur at the business destination. It can take place on the way home from the business destination (or, for that matter, en route to the business destination).

 Taxpayers who make a stop for personal reasons en route to a business location or on the way home should be sure to keep records of what their round-trip transportation costs would have been without the personal stop.

Saturday night stayovers.

Although an employee's out-of-town business chores conclude on Friday, he may extend his business trip to take advantage of a low-priced fare requiring a Saturday night stayover, where the savings in airfare are higher than the costs of the weekend meals and lodging. The employee doesn't pay tax on the reimbursement for his Saturday meal and lodging expenses. ( PLR 9237014 ) In this case, IRS said that under a “common sense test,” payments to the employee for the Saturday stay were deductible if a “hardheaded business person would have incurred such expenses under like circumstances.”

When a personal day may not be a personal day. An away-from-home business trip may straddle a weekend. For example, a traveler may have to attend business meetings on Thursday, Friday, and Monday. He is too far away to travel home and then come back (and besides, the trip back and forth would cost more than staying put), so he spends the weekend relaxing at the out-of-town location. Because he must remain at the location for business reasons, the weekend days (Saturday and Sunday) should under the “common sense test” be treated as business days the expenses for which are deductible (50% of meal costs, 100% for other expenses) or excludible if the traveler is reimbursed under an accountable plan. Note that in the context of foreign travel, IRS Pub. 463 (2010), p. 8, treats such standby days as business days.

Tax break for weekend travel home. A business traveler on an extended out-of-town assignment may decide to fly home for a weekend to be with family or friends. The cost of the weekend trip home is deductible up to the amount the traveler would have spent on meals and lodging at the out-of-town location. Note, however, that this rule applies only if the traveler checks out of the out-of-town hotel before leaving for the weekend trip home, and then re-registers. If the traveler retains the hotel room, its cost is deductible, but the deduction for the weekend trip home (i.e., the air fare) is limited to what the traveler would have spent on meals during the weekend at the out-of-town location. (IRS Pub. 463 (2010), p. 4)

Tax breaks when spouse or companion comes along. The expenses of a spouse or other companion accompanying a traveler aren't deductible unless (1) the spouse or other companion is an employee of the taxpayer and travels for a bona fide business purpose, and (2) the expenses would otherwise be deductible by the spouse or other companion. ( Code Sec. 274(m)(3) ) Nevertheless, even if the spouse's or other companion's travel expenses aren't deductible, a tax benefit may still be salvaged from traveling together. That's because the business traveler's deduction isn't based on 50% of the trip expenses. The deduction is based on what it would have cost the taxpayer to travel alone. ( Rev Rul 56-168, 1956-1 CB 93 ) This rule can be a money saver on accommodations. For example, where the cost of a hotel room is $200 for one occupant and $149 for two, a taxpayer on business status may deduct $149 per night, not $100, when he gets a room for two. (IRS Pub. 463 (2010), p. 5)

Similarly, where the taxpayer travels out of town on business via rental car, and his spouse or other companion accompanies him for nonbusiness purposes, the entire cost of the rental is deductible, because the cost would have been the same for the taxpayer even if his spouse did not join him on the trip. (Pohl, Kenneth, (1990) TC Memo 1990-298 , PH TCM ¶90298 , IRS Pub. 463 (2010), p. 5)

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Remittances of employment taxes were tax payments subject to time limit on refunds

Nicholas Acoustics & Specialty Company, Inc. v. U.S., (CA 5 6/15/2011) 107 AFTR 2d ¶ 2011-950

The Court of Appeals for the Fifth Circuit, affirming the district court, has held that a corporation's remittances of employment withholding taxes were tax payments under Code Sec. 6513(c) , and not deposits. Since such payments were subject to the Code Sec. 6511 three-year statute of limitations, the Court denied the corporation's refund request as untimely.

Background. IRS classifies a remittance of taxes as either a payment or a deposit. If a tax remittance is determined to be a deposit, it is treated like a cash bond, which IRS simply holds, and a taxpayer may seek a refund of the deposit at any time. (Rosenman v. U.S., (S Ct 1945) 33 AFTR 314 ) But if a remittance is deemed a payment, the taxpayer may only recover the money by filing a timely claim for a refund. (Miller v. U.S., (Fed Cl 11/9/2000) 86 AFTR 2d 2000-7058 )

A remittance that discharges or pays a deemed or assessed tax liability constitutes a payment. In addition, a remittance also constitutes a payment if it's made under a Code section for which the statute's plain language states that the remittance is to be “deemed paid.” (Deaton v. Comm., (CA 5 2006) 97 AFTR 2d 2006-984 , Baral v. U.S., (S Ct 2000) 85 AFTR 2d 2000-941 )

In Baral, the Supreme Court considered an individual's refund claim for income tax partially paid through his employer's wage withholding and partially paid through his own remittance of the estimated tax. While Baral's analysis specifically applied to Code Sec. 6513(b)(1) and Code Sec. 6513(b)(2) , which govern employee withholding taxes, the Court noted that remittances which are governed by a “deemed paid” provision akin to Code Sec. 6513 are “payments” subject to Code Sec. 6511 . Under Code Sec. 6511(a) , a claim for credit or refund of an overpayment must be filed by the taxpayer within three years from the time the return was filed or two years from the time the tax was paid, whichever period expires later.

Under Code Sec. 6513(c)(1) , if a return for any period ending with or within a calendar year is filed before April 15 of the succeeding calendar year, the return is considered filed on April 15 of the succeeding calendar year. Under Code Sec. 6513(c)(2) , if a tax with respect to remuneration or other amount paid during any period ending with or within a calendar year is paid before April 15 of the succeeding calendar year, the tax is considered paid on April 15 of the succeeding calendar year. Further, Reg. § 31.6302-1(h)(9) provides that any money remitted to IRS in connection with Code Sec. 6513(c)(2) will be considered to be a payment of tax on the last day prescribed for filing the applicable return for the return period.

Facts. Between '99 and 2003, the construction firm Nicholas Acoustics & Specialty Company, Inc., (Nicholas) paid employment payroll taxes, but failed to file any tax returns. It didn't remit funds for the exact amount owed, but instead estimated the amount due, occasionally overpaying taxes. Nicholas erroneously assumed that IRS could apply the overpayment to other quarters in which it had underpaid its tax liability.

In 2003, IRS audited Nicholas due to its failure to file its returns. After the audit, Nicholas filed returns for the missing quarters, which allowed IRS to refund overpayments or credit the overpayments to certain quarters in which a deficit had occurred. IRS said it could only refund or credit Nicholas's overpayments for returns due within the past three years because of the statute of limitations. Nicholas still owed taxes for the period in question, even after IRS made the adjustments. IRS filed a lien against Nicholas, which it paid before seeking a refund.

In seeking a refund, Nicholas contended that the shortfall wouldn't have occurred if IRS had applied all of its overpayments to future or past quarters rather than transferring the money into an excess collection account. IRS countered that when Nicholas actually filed the refund claims, certain overpayments couldn't be refunded due to the three-year statute of limitations under Code Sec. 6511 . Nicholas sought relief in the district court.

District court decision. The district court rejected Nicholas's contention that IRS should have classified the tax remittances as deposits rather than tax payments. As a deposit, the amount could be refunded at any time; but as a payment, the amount was subject to the statute of limitations. Relying on Baral, the district court found that the plain language of Code Sec. 6513(c)(2) made it a “deemed paid” provision and, accordingly, it concluded that tax deposits remitted under Code Sec. 6513(c) were payments. Nicholas's payments were subject to Code Sec. 6511 's statute of limitations as a matter of law. IRS was correct in not refunding Nicholas's late refund claims.

Taxpayer's position. Nicholas argued that the district court was wrong in concluding that its employment tax remittances were payments that couldn't be refunded due to the three-year statute of limitations. It argued that the district court erroneously concluded that Code Sec. 6513(c)(2) was a “deemed paid” provision under Baral.

Deemed paid. The Fifth Circuit concluded that the employment tax remittances constitute payments and that refunds of these payments were subject to the three-year statute of limitations under Code Sec. 6511 . The Court found that the district court correctly interpreted and applied Baral. The plain language of Code Sec. 6513(c)(2) indicates that it is a deemed paid provision, and so subject to Code Sec. 6511 's limitation period for refunds. Similarly, Reg. § 31.6302-1(h)(9) deems a remittance of employment taxes to be a payment.

The Court also noted that the remittances at issue constituted payments under the then-applicable Rev Proc 84-58, 1984-2 CB 501 (this revenue procedure was superseded after Nicholas filed its tax returns). In Rev Proc 84-58 , IRS had set up a mechanism by which taxpayers could remit money (i.e., a “deposit in the nature of a cash bond”) to it and stop the accrual of underpayment interest. Rev Proc 84-58 stated that IRS would treat remittances as deposits if they were made before the mailing of a notice of deficiency and designated by the taxpayer in writing as a deposit in the nature of a cash bond. Nicholas's payments weren't made in response to a deficiency notice or a proposed liability. Additionally, at the time of payment, Nicholas didn't protest these payments in writing or request that the payments be treated as deposits.

 In 2005, IRS issued Rev Proc 2005-18, 2005-1 CB 798 , which provides procedures for taxpayers to make, withdraw, or identify deposits to suspend the running of interest on potential underpayments under Code Sec. 6603 , which was added by the American Jobs Creation Act of 2004. Under this provision, which liberalized prior rules, a cash deposit made in conformity with IRS rules may be used to pay income, gift, estate, or generation-skipping tax or certain excise taxes that have not yet been assessed at the time of the deposit. Rev Proc 2005-18 superseded Rev Proc 84-58 , effective for remittances made after Mar. 27, 2005. ( Rev Proc 2005-18, Sec. 9 ) .

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