department of the treasury internal_revenue_service washington d c t a x e x e m p t a n d g o v e r n m e n t e n t i t i e s d i v i s i o n number release date employer_identification_number fax number contact person contact number identification_number sin - no third party contact date legend state a y dear ------------ we have considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code as an organization described in sec_501 based on the information submitted we have concluded that you do not qualify for exemption under that section the basis for our conclusion is set forth below you were incorporated on under the state nonprofit corporation act your charter states that you were formed for the following purposes c of health care financing acting in conjunction with national state and local governments and their agencies nongovernmental organizations ngos professional societies or associations patients hospitals nursing homes other heath a to promote encourage and help assure the availability of quality health care financing to the low-income citizens of developing countries at an appropriate cost and in accordance with professionally recognized standards to study implement and assist in the development administration and delivery b and the improvement and protection of the public health to study and promote improved methods and means of health care financing d promote the public welfare through the development and improvement of health care delivery and financing systems care facilities and delivery systems the insurance industry health care service corporations representatives of management and labor and any other interested persons and organizations and you will engage primarily in providing technical assistance to financial institutions and insurance_companies in creating and implementing a products and other products designed for the poor in developing countries you define a as the protection of low-income people against specific perils in exchange for regular premium payments proportionate to the likelihood and cost of the risk involved a products include insurance on health and dental care life and accidental death and are provided by insurance_companies that are usually for-profit and regulated you refer to assisted financial institutions as y institutions y institutions provide loans and credit to low-income persons and businesses y institutions extend small amount of loans that are in the average of dollar_figure for a term of four months up to one year borrowers can renew loans only upon full payment of outstanding loans you will identify and select a y institution and an insurance_company for appropriate partnership and assisting them in their relationship in their development of products and services you indicate that the specific activities you will provide to y institutions and insurance_companies include the following research banking legislations to ensure legality of products and distribution channels research to determine market and supply demands developing product prototypes responding to market needs review insurance legislation to ensure legality of products and their delivery process development between y institutions and insurance_companies product pilot test and development assistance in the planning and implementation of a rollout plan after the product customer satisfaction studies product review passes the pilot test you indicate that a is different from traditional insurance in various aspects a is sold through y institutions as compared to traditional insurance that is sold by insurance agents or branches a coverage is often restricted to generic drugs to keep the premiums lower a premiums are calculated using adjusted national treatment statistics as compared to traditional insurance premiums that are calculated using national treatment statistics you charge a fee in providing assistance to y institutions and insurance_companies you indicate that your fees vary depending on the activity the costs of personnel you send and the assisted clients your activities are provided by your subcontracted professionals and by your president director your fee to clients includes their daily rates plus percent for your other expenses these professionals charge a daily rate ranging from dollar_figure to dollar_figure per day your president director’s daily rate fee is dollar_figure per day sec_501 of the code provides exemption for organizations that are organized and operated exclusively for educational charitable or other exempt purposes sec_1_501_c_3_-1 of the income_tax regulations the regulations provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish such purposes an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 of the regulations provides that an organization is not organized and operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest thus to meet the requirements of this subdivision it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creators shareholders of the organization or persons controlled directly or indirectly by such private interests sec_1_501_c_3_-1 of the regulations provides that an organization may meet the requirements of sec_501 although it operates a trade_or_business as a substantial part of its activities if the operation of such trade_or_business is in furtherance of the organization's exempt_purpose or purposes and if the organization is not organized or operated for the primary purpose of carrying on an unrelated_trade_or_business an organization which is organized and operated for the primary purpose of carrying on an unrelated_trade_or_business is not exempt under sec_501 revrul_68_117 1968_1_cb_251 held that a nonprofit domestic organization formed and operated to help poor rural inhabitants of developing countries was furthering charitable and educational_purposes and exempt under sec_501 of the code the organization conducted a guided self-help program for social and economic development that included furnishing expert guidance to subsistence-level farmer groups on modern agricultural methods livestock and poultry care and up-to-date marketing practices in an effort to raise their standard of living providing assistance in arranging credit for farmers on reasonable terms with a realistic repayment schedule establishing a program to purchase on credit u s surplus agricultural commodities under long term supply contracts pursuant to the agricultural trade development and assistance act of training farm women in home economics cooking nutrition food preserving and infant care conducting demonstrations on how to upgrade dilapidated housing at a cost that the farmers can afford and conducting public health training programs with emphasis on preventative measures in carrying out its program the organization works in cooperation with governments of the developing countries and with u s governmental agencies whose programs relate to economic development in the countries the organization does not charge for any of its services but rely for financial support from contributions revrul_68_165 1968_1_cb_253 held that a domestic nonprofit corporation that provided free technical and material assistance for self-help projects designed to improve the living conditions of underprivileged people in foreign countries was engaged in charitable activities and exempt under sec_501 of the code the organization's activities included furnishing tools educational materials and other supplies providing agricultural assistance and giving advice and training necessary to administer health and welfare programs revrul_54_305 1954_2_cb_127 describes an organization whose primary purpose is the operation and maintenance of a purchasing agency for the benefit of its otherwise unrelated members who are exempt as charitable organizations the ruling held that the organization does not qualify for exemption under the predecessor to sec_501 of the code because its activities consisted primarily of the purchase of supplies and the performance of other related_services which are considered ordinary trade_or_business revrul_69_528 1969_2_cb_127 describes an organization formed to provide investment services on a fee basis only to organizations exempt under sec_501 of the code the organization invested funds received from participating tax-exempt organizations was free from the control of the participants and had absolute and uncontrolled discretion over investment policies the ruling held that the organization's activities of providing investment services on a regular basis is a trade_or_business ordinarily carried on for profit and precluded the organization from qualifying for exemption under sec_501 revrul_72_369 c b describes an organization formed to provide managerial and consulting services for nonprofit_organizations exempt under sec_501 of the code the organization enters into agreements with unrelated organizations to furnish managerial and consulting services at cost the services consist of writing job descriptions and training manuals recruiting personnel constructing organizational charts and advising organizations on specific methods of operation all designed for the individual needs of each client organization the ruling states that providing managerial and consulting services on a regular basis for a fee is a trade_or_business ordinarily carried on for profit the fact that the services are provided at cost and solely for exempt_organizations is not sufficient to characterize the activity as charitable within the meaning of sec_501 the ruling held that the organization does not qualify for exemption under sec_501 revrul_73_127 1973_1_cb_221 described an organization that operated a retail grocery store to residents of a poverty area the store operated in a manner similar to profit-making business in the area but sold groceries at prices substantially lower than those of competing grocery stores the store provided free delivery service to residents who needed it and it participated in the federal food stamp program also the organization provided job training for unemployed residents the organization’s store earnings were used principally for salaries and customary operating_expenses of the grocery store the organization allocated of its earning for use in a continuous training program for the hardcore unemployed the organization provided training in the various jobs in a retail food store and provided trainees with a small salary during the training period at its store the trainees are expected to seek employment elsewhere in the retail food industry the ruling held that the organization did not qualify for exemption under sec_501 of the code while the organization’s purpose of providing job training for the unemployed is charitable and educational under sec_501 the organization’s purpose of operating a low-cost grocery store is not a recognized charitable purpose the grocery store operation is an independent objective of the organization notwithstanding its use in part for the training program also the grocery store operation was conducted on a scale larger than was reasonably necessary for the organization’s job training program and was not intended to or in fact served solely as a vehicle for carrying out the training program in 70_tc_352 the court considered the petition for exemption under sec_501 of the code of an organization which was formed for the purpose of providing consulting services primarily in the area of rural-related policy and program development the organization's goals are to help entities deal with problems they face regarding the external environments within which they operate changing priorities and implementing realistic internal planning and management policies another important goal of the organization is to improve clients' understanding of governmental policy processes and methods of becoming more effective in their work through public and private funding in ruling that the organization did not qualify for exemption under sec_501 the court indicates that the organization's activities constitute the conduct of a consulting business of the sort which is ordinarily carried on by commercial ventures for profit further competition with commercial firms is strong evidence of the predominance of nonexempt commercial purposes in airlie foundation v irs u s dist lexis d d c date the plaintiff was formed for educational_purposes and its primary activity is the operation of a conference center on average it hosted groups per year of which an average of of its conference events were for government clients for nonprofit and or educational clients and -40 for other uses that include private events and commercial clients pursuing their private interests the court held that the plaintiff operated its conference center as a commercial business and was not entitled to recognition of exemption under sec_501 of the code the court stated -- while plaintiff was organized for an exempt_purpose the court cannot find under the totality of the circumstances that it is operated similarly our analysis indicates that you are primarily engaged in assisting insurance_companies and financial institutions in developing and marketing insurance and loan products to be made available to citizens of and businesses operating in developing countries essentially your activity is acting as a broker between the providers y company and the insurance_company and the consumers you will receive income for providing services to assisted entities and you use your income primarily to pay for fees and other expenses in providing your service this service for fee activity is indicative of an ordinary trade_or_business activity similarly found in rev ruls as well as in b s w group and airlie foundation supra while we recognize that your activity would provide benefits to low-income consumers we found that a significant part of your activities is promoting the business of assisted insurance_companies and financial institutions further the y company and the insurance_company expect to generate profit from the service they provide by engaging primarily in a trade_or_business ordinarily carried on for profit not in furtherance of an exempt_purpose you are not operated exclusively for one or more exempt purposes under sec_501 of the code see sec_1_501_c_3_-1 and sec_1_501_c_3_-1 of the regulations you are distinguishable from the organizations described in rev ruls and whose activities for the underprivileged and poor people in foreign countries were found to be charitable within sec_501 of the code whereas those organizations directly provided free services to program beneficiaries you are providing services to program providers and for a fee basis further while we recognize that your activities may indirectly provide certain benefits to needy people and could further an exempt_purpose a greater part of your activities is not in furtherance of an exempt_purpose see revrul_73_127 accordingly you do not qualify for exemption as an organization described in sec_501 of the code and you must file federal_income_tax returns contributions to you are not deductible under sec_170 of the code you have the right to protest this ruling if you believe it is incorrect to protest you should submit a statement of your views to this office with a full explanation of your reasoning this statement signed by one of your officers must be submitted within days from the date of this letter you also have a right to a conference in this office after your statement is submitted you must request the conference if you want one when you file your protest statement if you are to be represented by someone who is not one of your officers that person will need to file a proper power_of_attorney and otherwise qualify under our conference and practices requirements if you do not protest this ruling in a timely manner it will be considered by the internal_revenue_service as a failure to exhaust available administrative remedies sec_7428 of the code provides in part that a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted administrative remedies available to it within the internal_revenue_service if we do not hear from you within days this ruling will become final and a copy will be forwarded to the ohio tax exempt and government entities te_ge office thereafter any questions about your federal_income_tax status should be directed to that office either by calling a toll free number or sending correspondence to internal_revenue_service te_ge customer service p o box cincinnati oh the appropriate state officials will be notified of this action in accordance with code sec_6104 in the event this ruling becomes final it will be made available for public inspection under sec_6110 of the code after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice if you disagree with our proposed deletions you should follow the instructions in notice if you decide to protest this ruling your protest statement should be sent to the address shown below if it is convenient you may fax your reply using the fax number shown in the heading of this letter internal_revenue_service te_ge se t eo ra t constitution ave n w pe washington d c if you do not intend to protest this ruling and if you agree with our proposed deletions as shown in the letter attached to notice you do not need to take any further action if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter enclosure notice lois g lerner director exempt_organizations rulings agreements sincerely


t c memo united_states tax_court bernice m and stanley m ulanoff petitioners v commissioner of internal revenue respondent docket nos filed date stanley m ulanoff pro_se louise r forbes for respondent memorandum findings_of_fact and opinion dawson judge these consolidated cases were assigned to special_trial_judge robert n armen jr pursuant to the provisions of sec_7443a and rule sec_180 sec_181 and sec_183 unless otherwise indicated all 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 the court agrees with and adopts the opinion of the special_trial_judge which is set forth below opinion of the special_trial_judge armen special_trial_judge respondent determined a deficiency additions to tax and additional interest with respect to petitioners' federal income taxes for the years and in the amounts as shown below docket no additional additions to tax interest sec sec sec sec year deficiency a a c dollar_figure dollar_figure t dollar_figure docket no additional additions to tax interest sec sec sec sec year deficiency a a c -- big_number big_number -- -- big_number -- -- big_number -- percent of the portion of the underpayment that is attributable to negligence for through the underpayments dollar_figure for dollar_figure for and dollar_figure for were determined and assessed pursuant to a partnership-- level proceeding see secs in the present cases respondent determined that the entire underpayment for each of the years in issue is attributable to negligence interest on the entire underpayment to be computed pincite percent of the rate otherwise applicable under sec_6621 after a stipulation by the parties the issues remaining for decision are as follows whether petitioner stanley m ulanoff petitioner is entitled to a partnership loss and investment and energy credits for flowing from the sentinel epe recycler leasing program entered into by plymouth equipment associates we hold that he is not whether petitioner is liable for additional interest under sec_6621 with respect to the underpayment for we hold that he is whether petitioner is liable for additions to tax under sec_6653 and for negligence or intentional disregard of rules or regulations for each of the years in issue we hold that he is whether petitioner is liable for the addition_to_tax under sec_6659 for an underpayment_of_tax attributable toa valuation_overstatement for each of the years in issue we hold that he is the parties stipulated that pursuant to the provisions of sec_6015 petitioner bernice m ulanoff is not liable for the deficiency additions to tax and additional interest as determined by respondent in the notices of deficiency at issue herein findings_of_fact some of the facts have been stipulated and they are so found the stipulated facts and attached exhibits are incorporated herein by this reference petitioners resided in roslyn estates new york at the time that their petitions were filed with the court a the recycling transactions these consolidated cases are part of the plastics recycling group of cases in particular the deficiency additions to tax and additional interest for and the additions to tax for through arise from the disallowance of losses investment credits and energy credits claimed by petitioner with respect to the following two partnerships for plymouth equipment associates plymouth and for through taylor recycling associates taylor for convenience we refer to plymouth and taylor collectively as the partnerships for a detailed discussion of the transactions involved in the plastics recycling group of cases see provizer v commissioner tcmemo_1992_177 affd per curiam without published opinion 996_f2d_1216 6th cir the underlying transactions involving the sentinel recycling machines recyclers in petitioner's cases are substantially identical to the transactions in provizer v commissioner supra and with the exception of certain facts that we regard as having minimal significance petitioner has stipulated substantially the same facts concerning the underlying transactions that were described in provizer v commissioner supra the transactions involving the sentinel epe recyclers leased by plymouth are substantially identical to the transactions involving the same type of recyclers leased by clearwater group clearwater the partnership that was involved in provizer v commissioner supra in transactions closely resembling those in the provizer case packaging industries of hyannis massachusetts pi manufactured and sold seven sentinel epe recyclers to eci corporation eci for dollar_figure each pi manufactures thermoplastic and other types of packaging machinery as well as energy saving devices eci in turn resold the recyclers to f g corporation f g for dollar_figure each f g then leased the recyclers to plymouth which licensed the recyclers to fmec corporation fmec which sublicensed them back to pi the sales of the recyclers from pi to eci were financed with nonrecourse notes approximately percent of the sales_price of the recyclers sold by eci to f g was paid in cash with the remainder financed through notes these notes provided that percent of the notes were recourse but that the recourse portion terms such as lease sale license and their derivatives are used solely for convenience and their use in this opinion should not be understood to imply that the transactions described herein constitute leases sales or licenses for federal tax purposes of the notes was only due after the nonrecourse portion percent was paid in full no arm's-length negotiations for the price of the sentinel epe recyclers took place among pi eci and f g all of the monthly payments required among the entities in the above transactions offset each other these transactions occurred simultaneously pi allegedly sublicensed the recyclers to entities that would use the recyclers to recycle plastic scrap these agreements provided that the end-users would transfer to pi percent of the recycled scrap in exchange for a payment from fmec based on the guality and amount of recycled scrap both clearwater and plymouth leased sentinel epe recyclers from f g and licensed those recyclers to fmec for convenience we refer to the series of transactions among pi eci f g plymouth and fmec as the plymouth transactions in addition to the plymouth transactions a number of other limited_partnerships entered into transactions similar to the plymouth transactions some of which involved sentinel epe recyclers and others of which involved sentinel eps recyclers one such partnership was taylor which leased four sentinel eps recyclers we refer to the transactions involving taylor and the eps recyclers as the taylor transactions the taylor transactions were substantially_similar to the plymouth transactions described above and the clearwater transactions described in provizer v commissioner supra taylor was a first-tier tefra partnership in a partnership proceeding captioned taylor recycling associates dl k associates a partner other than the tax_matters_partner v commissioner docket no the taylor case was commenced in this court in respect of the taylor transactions petitioner filed a notice of election to participate in the taylor case in date subseguently on date the court entered decision in the taylor case pursuant to the commissioner's motion for entry of decision under rule b all deductions and credits claimed by taylor in connection with its plastics recycling activities were disallowed paragraph of the motion stated in pertinent part that stanley m ulanoff agree s to the proposed decision in the taylor case b individuals involved richard roberts roberts was the general_partner of both plymouth and taylor and owned a l1-percent interest in each partnership roberts was also the general_partner in a number of other limited_partnerships that leased and licensed sentinel recyclers he also was a 9-percent shareholder in f g the corporation that leased the recyclers to plymouth from through roberts and raymond grant grant were in the business of promoting tax sheltered investments grant was the president and 100-percent owner of eci roberts and grant together were general partners in other partnerships prior to the plymouth transactions roberts and grant were clients of the accounting firm h w freedman co freedman co harris w freedman freedman a certified_public_accountant and the named partner in freedman co was the president and chairman of the board_of f g freedman was experienced with leveraged leasing and he owned percent of a sentinel epe recycler freedman co prepared the tax returns for eci f g and the partnerships as well as for clearwater group it also provided tax services to john d bambara bambara bambara was the 100-percent owner of fmec as well as its president treasurer clerk and director bambara was also the president of pi and a member of its board_of directors he his wife and his daughter also owned directly or indirectly percent of the stock of pi anthony giovannone giovannone was the executive vice president of pi and a member of its board_of directors elliot i miller miller was the corporate counsel to pl in miller was also a shareholder of f g john y taggert taggert was a well-known tax attorney and an adjunct professor at the new york university law school taggert was acquainted with miller for about years prior to miller recommended that roberts employ taggert and his firm as counsel taggert and other members of his firm prepared private offering memoranda tax opinions and other legal documents for the partnerships taggert owned a 66-percent interest in a second-tier plastics recycling partnership robert gottsegen gottsegen was a businessman active in the plastics industry and a long-time business_associate of bambara cc the private offering memoranda plymouth and taylor each distributed to potential limited partners a private_placement memorandum each offering memorandum listed significant business and tax risk factors associated with an investment in the particular partnership specifically each offering memorandum stated there was a substantial likelihood of audit by the internal_revenue_service irs and the purchase_price paid_by f g to eci probably would be challenged as being in excess of fair_market_value the partnership had no prior operating history the general_partner had no prior experience in marketing recycling or similar eguipment the limited partners would have no control_over the conduct of the partnership's business there was no established market for the sentinel recyclers there were no assurances that market prices for virgin resin would remain at their current costs per pound or that the recycled pellets would be as marketable as virgin pellets and certain potential conflicts of interest existed the private offering memorandum for plymouth stated that the projected tax benefits for the initial year of investment for an investor contributing dollar_figure would be investment credits and -- - energy credits in the aggregate amount of dollar_figure plus deductions in the amount of dollar_figure the private offering memorandum for taylor stated that the projected tax benefits for the initial year of investment for an investor contributing dollar_figure would be investment credits and energy credits in the aggregate amount of dollar_figure plus deductions in the amount of dollar_figure the offering memoranda represented that the sentinel recyclers were unique machines however they were not several machines capable of densifying low density materials were already on the market in and other plastics recycling machines available at that time ranged in price from dollar_figure to dollar_figure including the foremost densilator the nelmor weiss densification system regenolux the buss--condux plastcompactor and the cumberland granulator see provizer v commissioner tcmemo_1992_177 and the discussion regarding expert testimony infra d expert testimony the parties did not agree on the value of either the sentinel epe or eps recyclers and petitioner did not stipulate to be bound by the value of the sentinel epe recyclers that we found in provizer v commissioner supra or the value of the eps recyclers that we found in gottsegen v commissioner tcmemo_1997_314 at trial petitioner did not offer expert testimony regarding the value of either the sentinel epe or eps recyclers in contrast respondent offered expert testimony from steven grossman grossman and richard s lindstrom lindstrom grossman grossman is a professor in the plastics engineering department at the university of massachusetts at lowell he has a bachelor of science degree in chemistry from the university of connecticut and a doctorate degree in polymer science and engineering from the university of massachusetts he also has more than years of experience in the plastics industry including more than years of experience as a research_and_development scientist at the upjohn company in its polymer research group grossman is also a partner in the law firm of hayes soloway hennessey grossman hage p c which firm practices in the area of intellectual_property including patents trademarks copyrights and trade secret protection grossman's reports concerning the value of the sentinel epe and eps recyclers were very similar and we discuss them together these reports discuss the limited market for the recycled plastic material grossman concluded that the sentinel epr and eps recyclers were unlikely to be successful products because of the absence of any new technology the absence of a continuous source of suitable scrap and the absence of any established market grossman suggested that a reasonable comparison of the products available in the polyethylene industry in and the polystyrene industry in with the sentinel epr and eps recyclers respectively reveals that the sentinel recyclers had very little commercial value and were similar to comparable products available on the market in component form for these reasons grossman opined that the sentinel epe and eps recyclers did not justify the one-of-a-kind pricetag that they carried specifically grossman reported that there were several machines on the market as early as that were functionally equivalent to and significantly less expensive than both the sentinel epe and eps recyclers these machines included the japan repro recycler available in for dollar_figure the buss-condux plastcompactor available before for dollar_figure foremost machine builders' densilator available from for dollar_figure and the midland ross extruder available in and for dollar_figure grossman observed that all of these machines were widely available grossman's opinion regarding the sentinel eps recycler was based on personal examination of such recycler as well as the descriptions thereof that were set forth in the writings of other professionals although grossman did not observe the sentinel eps recycler in actual operation he examined both the sentinel eps recycler and the japan repro recycler and found that the construction of the two machines was nearly identical further grossman concluded that the recycled polystyrene produced by both machines would also be nearly identical in grossman's opinion neither the japan repro recycler nor the sentinel eps recycler represented a serious effort at recycling because the end-product from both machines was not completely devolatilized and required further processing it was also grossman's opinion that an individual who seriously wanted to recycle would not purchase either of these machines grossman's opinion regarding the sentinel epe recycler was based on the descriptions of such recycler as set forth in the writings of other professionals grossman neither tested nor examined the sentinel epe recycler finally grossman reported on the relationship between the plastics industry and the petrochemical industry grossman noted that although the development of the petrochemical industry is a contributing factor in the growth of the plastics industry the two industries have a remarkable degree of independence grossman observed that the oil crisis in triggered dire predictions about the future of plastics that had not been fulfilled in grossman stated that the cost of a plastic product depends in large part on technology and the price of alternative materials grossman's studies concluded that a percent increase in oil prices results in a percent increase in the cost of plastic grossman did not specifically value either the sentinel epe recycler or the sentinel eps recycler however as previously stated grossman concluded that existing technology was available that provided equivalent capability of recycling polyethylene and polystyrene specifically regarding the sentinel eps recycler grossman also concluded that recycling_equipment that achieved the same result as the sentinel eps recycler sold for about dollar_figure during the relevant period lindstrom lindstrom graduated from the massachusetts institute of technology with a bachelor's degree in chemical engineering from until lindstrom worked for arthur d little inc in the areas of process and product evaluation and improvement and new product development with special emphasis on plastics elastomers and fibers at the time of trial lindstrom continued to pursue these areas as a consultant in his report lindstrom determined that several different types of equipment capable of recycling expanded polyethylene were available and priced at approximately dollar_figure in similarly lindstrom determined that several different types of equipment capable of recycling expanded polystyrene were available and priced between dollar_figure and dollar_figure in lindstrom found that based on his research there were available in commercial units that could be purchased for dollar_figure or less that were totally equal to the sentinel epe -- - recycler in function product guality and capacity with respect to the sentinel eps recycler lindstrom stated that several machines were available that could reprocess expanded polystyrene into higher quality more useful higher value product and these machines or processing systems cost dollar_figure to dollar_figure in lindstrom examined the japan repro recycler the buss--condux plastcompactor and the nelmor regenolux lindstrom found that these machines were functionally equivalent to the sentinel eps recycler and were available in the years and at the prices reported by grossman detailed supra lindstrom also reported that various equipment companies such as the cumberland engineering division of john brown plastics machinery were willing to provide customized recycling programs to companies at a minimum cost of dollar_figure lindstrom found that in average-use situations the sentinel epe recycler could process pounds of plastic per hour and the sentinel eps recycler could process between and pounds of plastic per hour lindstrom observed a sentinel epe recycler in operation at pi and he was allowed to take photographs of the recycler and look at its blueprints based on his observations and study lindstrom estimated that the manufacturing cost of the sentinel epe recycler was approximately dollar_figure lindstrom concluded that the market_value of the sentinel epe recycler did not exceed dollar_figure lindstrom observed a sentinel eps recycler in operation and was allowed to inspect the machine closely lindstrom estimated that the manufacturing cost of the sentinel eps recycler was approximately dollar_figure and market_value of the machine was approximately dollar_figure be petitioner and his introduction to plymouth and taylor petitioner acquired a 27-percent interest in plymouth in for dollar_figure later that year plymouth closed its business petitioner acquired a 37-percent interest in taylor in for dollar_figure petitioner holds a ph d in marketing during the years in issue petitioner was employed as a marketing professor author and consultant at the time of his retirement in petitioner had been a professor of marketing for more than years petitioner is also an author and has written more than books in addition he has produced approximately documentary films petitioner served in world war ii and in the u s army reserve and has been a consultant to the u s government the postal service and certain private entities since childhood petitioner has been concerned with protecting natural_resources petitioner makes every effort to conserve energy and recycle consumer material before his investment in the partnerships petitioner had no education in plastics recycling or plastics material nor any work experience in that area from to petitioner was a principal in a packaging supply company that had a plastics material and plastics machinery division sometime in petitioner became an evaluator of the plastics recycling transactions petitioner prepared a marketing opinion report for both the epe and the eps recyclers petitioner's report along with that of dr samuel z burstein burstein a mathematics professor and a partner in another recycling partnership that leased sentinel eps recyclers were appended to the offering memoranda used in conjunction with the plastic recycling transactions in his marketing opinion regarding the sentinel epe recycler petitioner opined as follows it is important to note that there are a number of machines on the market for processing rigid and other forms of plastic however to the best of my knowledge the only machine that will process expanded polyethylene foam reduce its bulk increase its density from pound per cubic foot to pounds per cubic foot while maintaining polymer molecular weight and weight distribution with a minimal increase in melt index purify it and vent off gases as well as residual steam and transient foreign particulate is the sentinel recycler recovery system from a marketing perspective i see partnership name 's project as a very feasible and timely one considering the capability of the recycler to effectively reprocess waste into a viable and marketable raw material at a greatly reduced cost -- - in my opinion the marketing strategy worked out by fmec licensee to partnership name is ingenious and bound to succeed partnership name 's license with fmec requires additional royalty payments over and above the minimum annual royalty to be computed as a share of profits on the sale or fair_market_value if used by sublicensees of the resin pellets resulting from further processing the recycled material produced by the recycler petitioner made similar observations in his marketing report regarding the sentinel eps recycler concluding that investment in transactions involving the sentinel eps recycler would be profitable at the time that this report was written petitioner was aware of difficulties faced by pi in placing the epe recyclers with end-users and that only a few such recyclers were operational at that time finally in both marketing opinion reports petitioner relied heavily on the assumption that the price of oil would rise dramatically in the future and that as a result the price of oil resin would also rise petitioner visited the pi plant in hyannis massachusetts on two occasions and spent several hours meeting with pi's personnel at the plant petitioner observed many types of machines and consumer energy-saving products manufactured by pl petitioner also visited a plastic manufacturing plant that used a sentinel recycler to see it in operation he observed a sentinel recycler compress a truck load of plastic scrap into a 4-foot square cube he conducted limited research regarding plastics recycling by visiting the local library for an hour petitioner also read some periodicals discussing the perceived oil shortage finally petitioner discussed the profitability of the recycling transactions with promoters such as bambara taggert and giovannone these individuals assured petitioner that the sentinel recyclers were unique petitioner did not consult an independent consultant or appraiser with respect to the value of the sentinel recyclers petitioner never made any profit from his investments in the partnerships during any year the projected tax benefits for the initial year of investment described in the partnerships' offering memoranda greatly exceeded petitioner's investments in the partnerships in fact the tax benefits actually claimed by petitioner on his tax returns for the initial year of investment in the partnerships greatly exceeded his investments in the partnerships petitioner's federal_income_tax returns for the years in issue were prepared by accountant who had prepared petitioner's returns for many years in date respondent mailed petitioner a so-called no-change letter regarding the taxable_year the letter stated as follows we are pleased to tell you that our examination of your tax returns for the above periods shows no change is required in the tax reported your returns are accepted as filed f ultimate finding of fact at all relevant times the fair_market_value of the sentinel epe recyclers and the sentinel eps recyclers did not exceed dollar_figure per machine opinion we have decided many plastics recycling cases the majority of these cases like the consolidated cases herein presented issues regarding additions to tax for negligence and valuation_overstatement see greene v commissioner tcmemo_1997_296 kaliban v commissioner tcmemo_1997_271 sann v commissioner tcmemo_1997_259 ndollar_figure and cases cited therein we found the taxpayers liable for the addition_to_tax for valuation_overstatement in all of those cases and liable for the additions to tax for negligence in all but two of those cases in a limited number of cases the taxpayers also contested the underlying deficiency arising from the disallowance of the losses and various credits with respect to their plastics recycling investment we sustained the commissioner on the issue of the underlying deficiency in every one of those cases in provizer v commissioner tcmemo_1992_177 6th cir a test case for the plastics recycling group of cases this court found that each sentinel epe recycler had a fair_market_value not in excess of dollar_figure held that the transaction which was almost identical to the transactions in the present cases was a sham because it lacked economic_substance and a business_purpose sustained the additions to tax for negligence under sec_6653 and sustained the addition_to_tax for valuation_overstatement under sec_6659 because the underpayment of taxes was directly related to the overvaluation of the sentinel epe recyclers and held that losses and credits claimed with respect to clearwater group were attributable to tax-motivated transactions within the meaning of sec_6621 in reaching the conclusion that the transaction lacked business_purpose this court relied heavily upon the overvaluation of the sentinel epe recyclers in gottsegen v commissioner tcmemo_1997_314 this court found that each sentinel eps recycler had a fair_market_value not in excess of dollar_figure issue the underlying deficiency for petitioner contends that he is not liable for the underlying deficiency for with respect to his investment in plymouth as already mentioned petitioner has stipulated substantially the same facts concerning the underlying transactions as we found in provizer v commissioner supra the record in the present case regarding the plymouth transaction plainly supports respondent's determination regarding the underlying deficiency petitioner has provided no further evidence nor any novel contention with respect to the underlying deficiency not previously considered in provizer there is a complete failure by petitioner to prove that the plymouth transaction was in any meaningful manner different from the circular transaction found to be an economic sham in provizer we will not revisit our decision in provizer and reconsider whether the plastics recycling leasing program in which plymouth participated was an economic sham as in provizer we rely heavily on the fact that the sentinel epe machines were highly overvalued we therefore sustain respondent's determination regarding the underlying deficiency for issue sec_6621 additional interest for respondent determined that petitioner is liable for additional interest for with respect to the underpayment attributable to petitioner's investment in plymouth sec_6621 formerly sec_6621 provides for an increased rate of interest if the underpayment_of_tax exceeds dollar_figure and is attributable to a tax-motivated transaction as defined in sec_6621 the increased rate of interest is effective only with respect to interest accruing after date notwithstanding that the transaction was entered into before that date see 85_tc_552 as previously mentioned for a detailed discussion of the facts and the applicable law in a substantially identical case see provizer v commissioner tcmemo_1992_177 affd per curiam without published opinion 996_f2d_1216 6th cir - - affd per curiam without published opinion 795_f2d_1005 2d cir provizer v commissioner supra as we held in provizer a tax-motivated transaction includes any sham or fraudulent transaction see sec_6621 c a v we have held that the plastics recycling leasing program to which petitioner's underpayment is attributable was a sham_transaction the tax-motivated increased rate of interest is therefore clearly applicable accordingly we sustain respondent on this issue issue sec_6653 and negligence respondent determined that petitioner is liable for additions to tax under sec_6653 and with respect to the underpayment attributable to petitioner's investments in plymouth for and in taylor for through petitioner contends that he was not negligent because based on his independent investigation he reasonably expected to make a profit from his investment in the transactions he reasonably relied upon advice from certain individuals and he acted reasonably in light of his passion for recycling and his concern for the environment we note that a tax-motivated transaction also includes any valuation_overstatement within the meaning of sec_6659 see sec_6621 a it is apparent that there were such valuation overstatements in the present cases see the discussion under issue infra regarding sec_6659 accordingly respondent's determination could also be sustained on this alternative basis sec_6653 and imposes additions to tax if any part of the underpayment_of_tax is due to negligence or intentional disregard of rules or regulations negligence is defined as the failure to exercise the due care that a reasonable and ordinarily prudent person would exercise under the circumstances see 85_tc_934 the pertinent question is whether a particular taxpayer's actions are reasonable in light of the taxpayer's experience the nature of the investment and the taxpayer's actions in connection with the transactions see 60_tc_728 in this regard the determination of negligence is highly factual when considering the negligence addition we evaluate the particular facts of each case judging the relative sophistication of the taxpayers as well as the manner in which the taxpayers approached their investment turner v commissioner tcmemo_1995_363 petitioner has the burden of proving error in respondent's determination of the additions to tax for negligence see rule a 79_tc_846 58_tc_757 a independent investigation petitioner's first contention is that he was not negligent because he made a thorough independent investigation before he invested in plymouth and taylor petitioner asserts that his knowledge of certain marketing principles led him to conclude that the prices of the sentinel recyclers were reasonable petitioner refers to the marketing axiom that a product may be priced at any amount that the market will bear petitioner points out that the market will sometimes bear a very high price for a unique product because the product satisfies a void in the marketplace although we do not disagree with these general maxims of marketing petitioner has not pointed to any specific facts that would support the conclusion that the sentinel epe and eps machines were reasonably priced in fact if petitioner had conducted an independent investigation his awareness of these marketing principles should have led him to conclude that the sentinel recyclers were not reasonably priced the sentinel epe and eps recyclers were not offered to the general_public and the traditional principles of supply and demand pricing were therefore inapplicable see provizer v commissioner supra the transactions were structured ina manner such that with the exception of a minimal down payment for the machines the majority of the purchase_price was in the form of a series of offsetting payments only realized through bookkeeping entries the purported price tags had nothing to do with traditional principles of supply and demand pricing because the sentinel recyclers never were offered on the open market and there is no evidence that anyone ever intended that the recyclers products would be so offered see gottsegen v commissioner supra provizer v commissioner supra the exorbitant cost of the machines dollar_figure for the sentinel epe recycler and dollar_figure for the sentinel eps recycler would therefore have only been reasonable if there were other factors to justify such cost however other factors indicate that the sentinel recyclers were highly overvalued for instance the sentinel recyclers were not unique respondent's experts identified other machines that were not only functionally equivalent to the sentinel recyclers but were also significantly less expensive we have found that information regarding comparable less expensive recyclers was widely available if a potential purchaser especially an individual sophisticated in marketing and research techniques had conducted a due diligence investigation into the sentinel recyclers such potential purchaser should have learned that comparable less expensive equipment existed and that the sentinel recyclers were overvalued petitioner claims that in determining the value of the recyclers he did not discover any machines capable of performing the functions performed by the sentinel recyclers however there is no indication in the record that petitioner surveyed the then current information regarding recyclers rather in his marketing reports petitioner stated that he independently investigated the value of the recyclers by discussing the matter with nonrelated principals in the continued petitioner's independent research in this regard was limited to a very short visit to a local library and a review of certain articles regarding the so-called oil crisis as already mentioned a marketing professor should have realized that in order to identify comparable recyclers and to determine the value of the sentinel recyclers he would need to investigate the matter further it appears that petitioner relied much more on the representations made by the promoters such as taggert and bambara than he did on any independent research at this point we are reminded that petitioner prepared marketing opinion reports on both the epe and the eps recyclers to promote the plastics recycling leasing programs petitioner represented to potential investors that he had conducted a detailed independent investigation of the matter and that he thought investment in the plastics recycling programs would be profitable in light of this fact petitioner's limited investigation of the alleged uniqueness of the sentinel recyclers and petitioner's allegation regarding the anticipated profitability of the plastics recycling programs appear even less reasonable continued packaging and plastic industries and editors of plastics trade journals based on the record developed at trial however we are not satisfied that petitioner made such independent inquiry petitioner had a financial stake in promoting the plastics recycling leasing programs he was paid dollar_figure each time his report was used in a private offering memorandum this fact provided petitioner with the incentive to assert without much independent investigation that the plastics recycling programs would be profitable petitioner next presents us with the so-called oil crisis argument he asserts that after reading a number of articles discussing the perceived oil crisis of the 1970's and the early 1980's he reasonably concluded that investment in the plastics recycling leasing programs would be profitable he based this conclusion on the fact that plastic is an oil derivative he indicated that during and the prevailing opinion was that due to the so-called oil crisis the price of crude_oil was going to increase significantly finally he relies on 99_tc_132 affd sub nom 28_f3d_1024 10th cir and rousseau v united_states 71a aftr 2d ustc par big_number e d la as support for his contention that his investment in the plastics recycling leasing programs was reasonable in light of rising oil prices petitioner's so-called oil crisis argument has been made in more than of the plastics recycling cases see eg provizer v commissioner tcmemo_1992_177 merino v commissioner tcmemo_1997_385 singer v commissioner t c - - memo sann v commissioner tcmemo_1997_259 we have found this argument to be unpersuassive in every one of those cases petitioner's argument is not different in any substantive manner nor has petitioner relied on any legal authority not previously considered in those cases we will not revisit the oil crisis argument we hold that the oil crisis did not provide a reasonable ground for petitioner to conclude that his investment in the plastics recycling leasing programs would be profitable b reliance on the advice of experts petitioner next contends that he is not liable for the additions to tax for negligence because he relied on the advice of experts under some circumstances a taxpayer may avoid liability for negligence based on the taxpayer's reasonable reliance ona competent professional adviser see 469_us_241 89_tc_849 affd 904_f2d_1011 5th cir affd 501_us_868 however reliance on professional advice standing alone is not an absolute defense to negligence rather it is a factor to be considered see freytag v commissioner supra petitioner claims that he relied on representations by bambara and taggert regarding the uniqueness of the sentinel recyclers ’ bambara and taggert were promoters of the plastics recycling leasing programs reliance on representations by insiders or promoters has been held to be an inadequate defense to negligence see 39_f3d_402 2d cir affg tcmemo_1993_480 94_tc_637 affd without published opinion 956_f2d_274 9th cir affd in part without published opinion sub nom cowles v commissioner 949_f2d_401 10th cir further in general a taxpayer cannot reasonably rely on the advice of the promoter of a tax_shelter with respect to the substantive merits or the tax treatment of items in connection with that program see 88_tc_1086 affd without published opinion 865_f2d_1264 5th cir affd sub nom 868_f2d_865 6th cir affd sub nom 864_f2d_93 9th cir affd per curiam without published opinion sub nom hatheway v commissioner 856_f2d_186 4th cir kleiger v commissioner tcmemo_1992_734 advice from such individuals is better classified as sales promotion vojticek ’ petitioner also claims that he discussed his investment with one of his colleagues a professor knowledgeable in the plastics industry who opined to petitioner that the investment appeared profitable petitioner relied principally on his own testimony in an effort to establish this matter however we do not find petitioners' self-serving testimony sufficient or particularly reliable in this regard see 87_tc_74 hawkins v commissioner tcmemo_1993_517 affd without published opinion 66_f3d_325 6th cir --- - v commissioner tcmemo_1995_444 thus petitioner's reliance on representations made by bambara and taggert was not reasonable petitioner also claims that he relied on the advice of his accountant for reliance on professional advice to excuse a taxpayer from negligence the taxpayer must show that the professional had the requisite expertise as well as knowledge of the pertinent facts to provide informed advice on the particular subject matter see 43_f3d_788 2d cir affg per curiam tcmemo_1993_621 goldman v commissioner supra freytag v commissioner supra a taxpayer may not reasonably rely on the advice of an accountant who knows nothing about the nontax business aspects of the contemplated venture see freytag v commissioner supra 85_tc_557 in the present cases there is no indication that petitioner's accountant had any knowledge of the nontax business aspects of the plastics recycling leasing programs thus although petitioner's accountant prepared the returns for the years in issue there is no indication that petitioner ever discussed the substantive merits of the tax treatment of items in connection with his investments in plymouth and taylor we are not satisfied that petitioner's accountant possessed the complete and necessary information to advise petitioner on the deductibility of the losses or the allowability of the credits - - claimed cf hull v commissioner tcmemo_1991_582 under these circumstances petitioner's alleged reliance on his accountant does not relieve petitioner of liability for the additions to tax for negligence c concern for the environment finally petitioner directs our attention to his interest in recycling and his desire to conserve natural_resources at trial petitioner described in detail his efforts to recycle for instance petitioner pointed out as a child of the great depression ti firmly believed in eliminating waste recycling and protecting valuable and diminishing natural_resources for example i have used the reverse side of incoming mail and of my old manuscripts for years i reuse incoming manila envelops and packaging i shut off lights heat water doors and windows that are not being used we have no reason to doubt petitioner's testimony in this regard yet we fail to see how petitioner's concerns regarding the environment make his investments in two partnerships both of which were designed to shelter income from taxation and produce other tax benefits any more reasonable although petitioner's concern for the environment may have provided some motivation to consider the plastics recycling leasing programs petitioner should have thereafter reasonably investigated his prospective investments as already noted independent investigation would have revealed the true nature of the sentinel recycling programs as economic shams there is no indication that petitioner took any steps to ensure that or even to inquire whether the recyclers were actually placed with end-users surely concern for the environment would have led him to do so based on the record we do not think that petitioner would have invested in the partnerships were it not for the prospect of the sizable tax benefits that the partnerships offered thus even if petitioner were enthusiastic about recycling petitioner did not act reasonably by claiming deductions and credits with respect to the partnerships d conclusion regarding negligence in view of his sophistication and educational background petitioner learned or should have learned that the sentinel recyclers were not unigue that they were not worth in excess of dollar_figure each and that plymouth and taylor lacked economic_substance and had no potential for profit therefore under the circumstances of these cases petitioner failed to exercise due care in claiming loss deductions and tax_credits with respect to the partnerships on his federal_income_tax returns for through taking all of the above factors into consideration we think it is more_likely_than_not that petitioner invested in the partnerships in an effort to generate tax benefits rather than to make a profit upon consideration of the entire record we hold that petitioner is liable for the additions to tax for negligence - -- under sec_6653 and for the years in issue respondent is sustained on this issue issue sec_6659 valuation_overstatement petitioner also contests the addition_to_tax for valuation_overstatement under sec_6659 for the years in issue a value claimed on a return that exceeds the correct value by percent or more constitutes a valuation_overstatement see sec_6659 with respect to the plymouth investment we have found that sentinel epe recyclers valued at dollar_figure each did not have a value exceeding dollar_figure per machine with respect to the taylor investment we have found that sentinel eps recyclers valued at dollar_figure each did not have a value exceeding dollar_figure per machine although petitioner declined to stipulate the value of the sentinel recyclers at issue petitioner presented no evidence by way of expert testimony to contradict the conclusions reached by respondent's experts the record is devoid of any evidence indicating that petitioner conducted a meaningful investigation to value the sentinel recyclers we have extensively considered the value of the sentinel epe recycler and the value of the sentinel eps recycler and have concluded as an ultimate fact that the sentinel epe and eps recyclers did not have a fair_market_value at that time in excess of dollar_figure each see also gottsegen v commissioner tcmemo_1997_314 provizer v commissioner tcmemo_1992_177 having so concluded it follows that there was a valuation_overstatement under sec_6659 finally petitioner contends that respondent abused his discretion in failing to exercise the authority under sec_6659 to waive the addition_to_tax for valuation_overstatement under sec_6659 the commissioner may waive all or any part of the addition_to_tax for valuation_overstatement based on a showing by the taxpayer that there was a reasonable basis for the valuation claimed on the return and that such claim was in good_faith the commissioner's waiver is discretionary and subject_to review for an abuse_of_discretion see 99_tc_132 28_f3d_1024 10th cir on the record before us there is no indication that petitioner requested a waiver from respondent at any time prior to the filing of his posttrial brief given that petitioner failed to establish a timely request for a waiver we cannot hold that respondent abused his discretion in failing to waive the addition_to_tax see haught v commissioner tcmemo_1993_58 in any event there is nothing in the record to establish that there was a reasonable basis for the valuation as required by sec_6659 in light of the stringent standard for abuse_of_discretion we cannot conclude that respondent abused his discretion in failing to exercise the authority under sec_6659 to waive the addition_to_tax for valuation_overstatement - - in view of the foregoing we sustain respondent's determination that petitioner is liable for the addition_to_tax for valuation_overstatement under sec_6659 for each of the years in issue other matters petitioner's final contention to be considered is that respondent is precluded from making an assessment for the taxable_year because respondent initially issued a no-change letter for that year petitioner cites no cases in support of his position we observe that petitioner's position is clearly contrary to well- established law that issuance of a no-change letter generally does not preclude respondent from subsequently issuing a notice_of_deficiency see 64_tc_700 affd without published opinion 552_f2d_368 5th cir 16_tc_725 see also 61_tc_693 fitzpatrick v commissioner tcmemo_1995_548 for respondent's no-change letter to be binding petitioner must show the elements of estoppel see fitzpatrick v commissioner supra however petitioner does not allege or argue estoppel nor does the record provide any basis for such a claim further the no-change letter does not in any manner constitute a closing_agreement see sec_7121 sec_301 d proced admin regs accordingly respondent is not precluded from making an assessment for the taxable_year after having issued a no- change letter for that year petitioner has made other arguments that we have considered in reaching our decision to the extent that we have not discussed these arguments we find them to be without merit to reflect our disposition of the disputed issues as well as the parties' stipulation of settled issues decisions will be entered for petitioner bernice m ulanoff and for respondent as to petitioner stanley m ulanoff in addition we note that at issue for are so-called affected items consisting of additions to tax for negligence and overvaluation see n c f energy partners v commissio89_tc_741 the tefra procedures codified at sec_6221 through segregate adjustments attributable to an individual's interest in a partnership from all other adjustments to the individual's return see 87_tc_783 respondent's examination of petitioner's individual return for would therefore not have focused on affected items


tcmemo_2016_5 united_states tax_court jorge quintanilla petitioner v commissioner of internal revenue respondent docket no filed date jorge quintanilla pro_se thomas t thomas james a nelson catherine g chang and paulmikell a fabian for respondent memorandum opinion and findings_of_fact holmes judge jorge quintanilla grossed more than dollar_figure in and almost dollar_figure in as an exceptionally skilled production worker on approximately commercials shot in southern california he earned this money both in his own name and through his corporation and he says that he earned it as an independent_contractor not as an employee the commissioner disagrees opinion there are only two issues that the parties fought about in this case and the law is settled for each the big issue is whether quintanilla correctly reported his business_expenses on schedule c the schedule that people who are in business for themselves use to report their expenses and not on schedule a the schedule that people who work for somebody else use to report business_expenses the distinction matters because the code limits schedule a deductions more than it limits schedule c deductions the most important of these limits is the rule an employee who incurs unreimbursed business_expenses may deduct them only as miscellaneous_itemized_deductions and only to the extent that they exceed of his adjusted_gross_income sec_62 sec_63 d a and b a other code sections eg sec_68 may limit these deductions even more and then there’s the dreaded alternative_minimum_tax which can be triggered by certain schedule a deductions section references are to the internal_revenue_code as amended and in effect for the years at issue and rule references are to the tax_court rules_of_practice and procedure independent contractors and self-employed persons report business deductions on schedule c see 236_f3d_480 9th cir weber v commissioner 103_tc_378 aff’d 60_f3d_1104 4th cir the code burdens these people in different ways but in his particular circumstances quintanilla would be better off if he were one of them and not someone else’s employee and he makes three arguments for why he is an independent_contractor and not the employee of the various production companies that he worked for he claims first that he reported as an independent_contractor in and nothing changed over the next two years he claims that he passes the multifactor test built up by cases to distinguish common-law employees from independent contractors and he claims that he was a statutory employee--a person who may be a common-law independent_contractor but whom the code treats as if he were an employee for some purposes while still allowing him to deduct business_expenses on schedule c see sec_3121 rosato v commissioner tcmemo_2010_39 we don’t have to spend much time on the first argument each tax_year stands alone and the commissioner may challenge in a later year what he permitted in an earlier one auto club of mich v commissioner 353_us_180 55_tc_28 the commissioner’s failure to challenge quintanilla’s status for the tax_year doesn’t disable him from challenging that status for and the legal distinction between an independent_contractor and a common-law employee is also settled as a general matter though it’s often murky in application we’ll start with the easy part an independent_contractor is one who works for another but according to his own manner and method free from direction or right of direction in matters relating to performance of work save as to results see 89_tc_225 aff’d 862_f2d_751 9th cir 64_tc_974 see also 353_f2d_216 ct_cl we have over the years built up a list of factors that we look at to decide whether a worker has enough autonomy in his work to be an independent_contractor the degree of control exercised by the principal over the worker the worker’s investment in his workplace his opportunity to make a profit or suffer a loss whether the principal can fire him whether the work is part of the principal’s regular business the permanency of his relationship with the principal the relationship the parties believed they were creating and the principal’s provision of employee_benefits see 117_tc_263 weber t c pincite prof’l exec leasing t c pincite simpson t c pincite cole v commissioner tcmemo_2006_44 courts don’t weigh the factors equally and consider their significance differently depending on the particular facts of a case weber t c pincite simpson t c pincite gamal-eldin v commissioner tcmemo_1988_150 aff’d 876_f2d_896 9th cir a secondary issue is whether quintanilla owes a penalty the law here is easy to state as well sec_6662 imposes an accuracy-related_penalty of of the portion of the underpayment_of_tax that is attributable to the taxpayer’s negligence or to his disregard of rules or regulations sec_6662 and b a taxpayer can escape the penalty if he shows that he had reasonable_cause for the underpayment and acted in good_faith sec_6664 whether a taxpayer acted with reasonable_cause and in good_faith is a facts-and-circumstances decision and the most important fact is the extent of the taxpayer’s effort to assess his proper tax_liability in light of his knowledge and experience sec_1_6664-4 income_tax regs findings_of_fact quintanilla timely filed his income_tax returns for the and tax years the commissioner determined that quintanilla had a deficiency of more than dollar_figure for and dollar_figure for he also tacked on an accuracy- related penalty for both years quintanilla a california resident timely filed a petition challenging these determinations quintanilla owned a company named pre call studios inc pre call filed a form_1120 u s_corporation income_tax return for for pre call studios made an s-corporation election and filed a form_1120s u s income_tax return for an s_corporation sec_1362 allows a small_business_corporation to elect treatment as an s_corporation for tax purposes both quintanilla and his accountant credibly testified about their recordkeeping and tax-preparation routine quintanilla diligently collected receipts and made notes about his expenses he then organized them in envelopes by category and handed them over to his mom who acted as his bookkeeper quintanilla or his mom gave the accountant all the documentation that he asked for quintanilla also relied on his accountant and had no reason to question his competency quintanilla may not have been very sophisticated in his business bookkeeping but he was highly skilled in his field which is production work on advertisements and tv commercials in and he worked on a number of projects that lasted from one day to over a month for a variety of production companies we have no doubt that he possesses unique skills that are valuable to this industry his skills don’t fit snugly within the industry’s usual classifications and quintanilla’s titles varied from job to job they included driver hyphenate driver and set dresser each of these titles has a defined meaning in the industry a driver drives people props or other equipment and may or may not provide his own vehicle a hyphenate driver is a driver who can also do a second job such as build sets or provide other services a set dresser can build or paint a set move sets or furniture or act as a foreman and oversee a crew who do these things but the roles on the smaller crews of commercial shoots blur and quintanilla’s title for a job did not always accurately describe what role he filled we find that the production companies that hired quintanilla hired him to build sets they expected him to provide any tools he needed to complete the job quintanilla has an enormous collection of tools--which he stores in two foot steel containers--that travels with him to jobsites these containers are also packed with machinery that quintanilla uses to fabricate pieces of sets on the spot he described these containers and had photos that showed machinery including power tools specialty sanders sledgehammers welders a nail gun and more some were quite expensive he owned a german specialty sander that cost more than dollar_figure and four welders that cost dollar_figure each he also rents some equipment and his choice to buy or rent is his own it’s common practice for production companies to hire people they know to work on their projects but these companies often outsource the paperwork to firms that specialize in back-office chores in and these payroll companies included gep commprod services llc caps inc team alternatives monarch consulting and fsi processing inc production companies typically use the same handful of payroll companies thus quintanilla might be paid_by the same payroll company for six months but actually be working on or more projects run by many different production companies a key question in contractor-v -employee cases is who tells whom to do what and in this industry there’s not an easy answer the production companies describe what they would like the set to look like they will often send a sketch and maybe a verbal description quintanilla then becomes responsible for making the imagined set a reality he has some discretion to alter the sketch to make it work and if a company doesn’t give him a sketch quintanilla creates a workable sketch himself he also has authority to hire workers to help him complete the job quintanilla’s situation is also complicated by his decision to work sometimes in his own name and sometimes through his corporation we find that the production companies didn’t much care--they were hiring quintanilla’s expertise one way or the other and we believed quintanilla when he said it didn’t matter to him whether they asked for pre call or for jorge quintanilla--all the calls went to the same cell phone number he did say that he felt he had a bit more clout and a bit fewer trust issues when he bargained with a production company as a corporation but we find that aside from whom the check was made out to there was little practical difference between the conditions where quintanilla worked as himself and those where he worked through his corporation there was however a difference in the paperwork involved when a production company hired quintanilla as an individual it would generally issue him a form_w-2 wage and tax statement and the company listed on the form_w-2 as the employer was usually a payroll company even a tiny bit of questioning showed that his situation is much different from most taxpayers who get a w-2 from their employer and nobody involved in this case thinks the payroll company had any control whatsoever over how quintanilla did his work indeed quintanilla often performed different jobs for different production companies while being paid_by the same payroll company he was hired for more than different jobs by production companies in but some of these production companies hired him for multiple jobs at different times throughout the year the same was true in to show the bookkeeping tangle of these jobs we list those just from date payee production - jorge quintanilla jorge quintanilla jorge quintanilla -09 jorge quintanilla george quintanilla george quintanilla knucklehead - jc penney digital kitchen - aar big numbers park avenue teleproductio ns park avenue teleproductio ns epoch films - minute maid epoch films - minute maid payroll company job title hours gross pay caps inc driver dollar_figure dollar_figure team alternatives set dresser - driver dollar_figure n a n a construction dollar_figure construction dollar_figure caps inc driver dollar_figure caps inc driver kit rental dollar_figure - check date pre call studio rentals pre call studio rentals jorge quintanilla jorge quintanilla pre call studio rentals jorge quintanilla jorge quintanilla jorge quintanilla jorge quintanilla jorge quintanilla jorge quintanilla jorge quintanilla jorge quintanilla jorge quintanilla chelsea pictures chelsea pictures gep admin services driver gep admin services driver smuggler - usps epoch films - wells fargo caps inc hyphenate driver caps inc driver chelsea pictures gep admin services rent tnt caps inc driver caps inc hyphenate driver caps inc driver caps inc driver dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure caps inc hyphenate driver dollar_figure caps inc driver dollar_figure dollar_figure caps inc hyphenate ton dollar_figure dollar_figure caps inc 5-ton truck driver dollar_figure caps inc set dresser dollar_figure smuggler - domino’s savant film - purina imperial woodpecker - nfl smuggler - best buy smuggler - best buy anonymous content -- cadillac anonymous content -- cadillac anonymous content -- cadillac anonymous content -- comcast jorge quintanilla imperial woodpecker - budweiser jorge quintanilla hsi jc penney tool of north america - wendy’s furlined llc - target smuggler - gatorade anonymous content -- at t anonymous content -- at t anonymous content -- at t anonymous content -- at t anonymous content -- at t anonymous content -- at t jorge quintanilla jorge quintanilla jorge quintanilla jorge quintanilla jorge quintanilla jorge quintanilla jorge quintanilla jorge quintanilla jorge quintanilla no date provided jorge quintanilla caps inc driver gep admin services caps inc driver hyphenate driver caps inc caps inc caps inc hyphenate ton hyphenate driver hyphenate ton dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure caps inc set dresser dollar_figure caps inc set dresser dollar_figure dollar_figure caps inc set dresser travel caps inc driver dollar_figure dollar_figure caps inc set dresser dollar_figure fsi processing inc dollar_figure of the nearly hours for which quintanilla provided detailed work logs he spent as a driver as a hyphenate driver as a set dresser and performing construction in he worked only hours through pre call all as a driver he also earned a bit of income through pre call from renting tools and equipment we conclude that almost all these facts favor finding that quintanilla was an independent_contractor and not an employee the most important is that quintanilla had a large degree of control as to how to accomplish the tasks he had to do throughout the year a production company sometimes gave quintanilla a sketch drawn by a set designer and sometimes it just gave him the director’s vision for the project but in either situation quintanilla had a large degree of independence in determining how to accomplish the project he ordered props and modified them to the specs he had authority to hire additional workers as needed and he had the authority not to use workers that weren’t performing the commissioner asserts that since the producers had a vision of the set in mind the production companies retained a large degree of control_over quintanilla we disagree--we find that quintanilla had a large degree of discretion in how to construct the set he engineered sets from drawings and often told the producers that their initial vision needed to be modified that he was given context for building a set doesn’t translate into a lack of control quintanilla also provided all the tools used and he invested heavily in them he also bought a number of high-dollar items required for his work there is no evidence to suggest that the production company supplied tools or a budget to purchase the necessary equipment the fact that a worker provides his or her own tools or owns a vehicle that is used for his work weighs toward finding him to be an independent_contractor ewens miller inc t c pincite an opportunity to earn a profit or suffer a loss also distinguishes an independent_contractor from an employee simpson t c pincite rosato v commissioner tcmemo_2010_39 the commissioner argues that the real potential for profit or loss lies with the firms hired to plan marketing campaigns and with the production companies that the advertising firms hire to shoot commercials and ads and we agree that the players at these levels have the potential to make greater profits or suffer greater losses but even in the production of commercials hollywood is a pioneer of the gig economy production workers like quintanilla have some real risk of profit or loss quintanilla could accept or decline projects and on occasion could submit a bid at times a production company would give a fixed fee for quintanilla’s services he credibly testified that he would prepare a budget to see if he could perform the work for that amount production companies did sometimes hire quintanilla subject_to hourly union scale rates which are set by collective bargaining but on other projects he would set his own rate depending on the job at hand while some companies paid rent for_the_use_of his tools some refused and he would increase his hourly rate to compensate for their use some companies paid invoices that quintanilla prepared based on his estimates while others paid on the basis of hours he billed and reported to them but on all these we find that he controlled which projects he worked on and whether to accept the amounts he was offered we also find that the production companies had the right to fire quintanilla but there’s a bit of a qualification here--that right would very seldom be exercised as quintanilla credibly explained because of the short-term nature of the jobs if a production company or client were dissatisfied with someone’s work that person would rarely be fired he would instead just never get another phone call to work for that particular production company or client see beth a bechky gaffers gofers and grips role-based coordination in temporary organizations org sci noting that the film people don’t get fired due to the duration of projects and because often the productions need the tools they provide our cases tell us that work that is part of the principal’s regular business indicates employee status simpson t c pincite rosato v commissioner tcmemo_2010_39 but it’s a little bit hard to figure out exactly who is the principal on a commercial shoot if it’s an advertising agency its regular business might be to promote the products of its clients and maybe not to produce commercials if the principal is a production company its business might be said to be the production of commercials but not always set design and construction we think the arguments could go both ways on this factor and find it neutral another factor is the permanency of a working relationship--the more permanent the relationship the likelier it shows an employer-employee relationship ewens miller inc t c pincite rosemann v commissioner tcmemo_2009_185 the commissioner asserts that quintanilla was employed by gep commprod services llc caps inc park avenue teleproductions team alternatives monarch consulting and fsi processing inc quintanilla credibly testified at trial however that gep and caps are payroll companies used by several different production companies multiple production companies may use the same payroll company and thus the wages are totaled for the year see generally 729_f3d_1352 fed cir for instance quintanilla was paid through caps for about six months but that was for over independent projects a review of invoices submitted by the payroll companies shows that the payroll company name was at the top of the invoice the production company was listed below along with a client code that identified the project and then the wages were described while some production companies such as biscuit or arrow films hired him several times in a single year it was always for separate ad campaigns--for example nike starbucks gmc--and often months apart the longest commercial shoot that quintanilla worked on was about one month but most are shorter during the years at issue he worked on jobs per year that the jobs were so short-term also suggests that quintanilla was an independent_contractor rather than an employee throughout the years at issue quintanilla had relationships with many production companies and two unions the relationships with production if two or more related corporations employ the same individual one of the corporations can serve as the common_paymaster for all of the related corporations see sec_31_3121_s_-1 employment_tax regs this allows the group of companies to be treated as a single employer which prevents them from having to pay more in total social_security and medicare taxes than a single employer would have to pay id in this instance however hollywood is again different the corporations that paid quintanilla are not related but many of them use the same third-party payroll company companies appear to have been transitory and task-focused neither party intended to make a permanent or employer-employee relationship so far then the usual factors don’t help the commissioner much but he has one very strong argument left quintanilla is a union member and many of his jobs were priced at rates set through collectively bargained contracts union contracts typically provide that workers are employees and not independent contractors see generally kraus v commissioner tcmemo_2003_10 quintanilla credibly explained that he and many of his peers in the industry join unions mainly to obtain health insurance and to a lesser extent to appear on call boards his experience was typical--he was a member of a union and received his health insurance from it that union required quintanilla to show a minimum number of hours to receive this insurance but neither the union contracts nor the production companies gave him vacation days or sick time as quintanilla somewhere there is probably an economist who’s formulated the equation for defining when the overhead costs saved exceed the transaction costs incurred for an industry like this but sociologists have noticed this peculiarity of economic life in hollywood when systems of activity are assembled anew substantial control of fixed overhead can be achieved through short-term contracting ties are also developed between entrepreneurs and film studios on a per-picture basis robert r faulkner andy b anderson short-term projects and emergent careers evidence from hollywood am j of soc as faulkner and anderson imply however these transaction costs can be kept down with the predictability of individuals performing the same roles from job to job id pincite credibly explained if he wanted a vacation he would just not answer his phone and the union contracts even excluded fixed wages and working conditions from their coverage--they expressly reserved the power of employees to cut better deals if they could quintanilla testified that all of his jobs came from personal connections and not one came from a union call board see susan christopherson michael storper the effects of flexible specialization on industrial politics and the labor market the motion picture industry indus lab rel rev describing the roster system as an intermediary labor market for temporary employment in relation to craft jobs at times he was paid union rates but at other times he negotiated his fee quintanilla credibly testified that everything in hollywood is a negotiation and contracts are discussed daily at times a studio even uses another studio’s stage if the price is lower than the rate for its own stage continual negotiations and ever-changing contracts are evidence that the studios didn’t intend to make a permanent relationship employers don’t negotiate with their employees daily temporary organizations contrast with traditional hierarchical organizations as they are governed through networks of relationships beth a bechky supra n pincite coase r h the nature of the firm economica new series after reviewing the factors we find that quintanilla is an independent_contractor it follows that he appropriately deducted items on his schedule c with our ruling in his favor on the merits the penalty also disappears decision will be entered under rule as for quintanilla’s final argument it is possible to be a statutory_employee if one is a common-law independent_contractor but he doesn’t fit any of the categories of statutory employees listed in sec_3121 and it doesn’t matter because independent contractors and statutory employees can both deduct business_expenses on schedule c instead of schedule a rosato v commissioner tcmemo_2010_39 there is a small issue for which this isn’t true--whether quintanilla had to pay tax on the state income-tax refunds he received in and the law is black letter on this one he must include refunds of state income taxes that he deducted in a previous tax_year see 119_tc_317 aff’d 370_f3d_1228 d c cir kadunc v commissioner tcmemo_1997_92 because he received a form 1099-g certain government payments for each year at issue we find him liable for the deficiency and associated penalties attributable to his failure to include these refunds on his returns he didn’t contest this issue and negligence is strongly indicated when a taxpayer doesn’t report income for which he gets a sec_1_6662-3 income_tax regs see also vezey v united_states 191_f3d_462 9th cir bachmann v commissioner t c memo sec_1_6664-4 income_tax regs


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-129279-09 date december company ------------------------------------------------------------------------------------------------- ------------------------ legend country ---------------------- date ----------------------- dear -------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of company by its authorized representative requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to elect to be treated as a disregarded_entity under sec_301_7701-3 facts company was formed under the laws of country on date company represents that it is a foreign_entity eligible to elect to be classified as a disregarded_entity for federal tax purposes however company inadvertently failed to timely file form_8832 entity classification election electing to treat company as a disregarded_entity effective date plr-129279-09 law sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that except as provided in sec_301 b unless the entity elects otherwise a foreign eligible_entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides in part that for purposes of sec_301_7701-3 a member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member sec_301_7701-3 provides in part that except as provided in sec_301_7701-3 and v an eligible_entity may elect to be classified other than as provided in sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides in part that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the plr-129279-09 internal_revenue_code code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based solely on the information submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied therefore company is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center to elect to be treated as a disregarded_entity effective date a copy of this letter should be attached to the form_8832 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 of the code provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed plr-129279-09 by an appropriate party while this office has not verified any of the material submitted in support of the ruling_request it is subject_to verification on examination sincerely s curt g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes cc