t c memo united_states tax_court hans h and cheryl e hammann petitioners v commissioner of internal revenue respondent docket no filed date joellyn r cattell for respondent memorandum findings_of_fact and opinion carluzzo special_trial_judge this case was heard pursuant to sec_7443a and rule sec_180 sec_181 and sec_182 for the 1unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue all rule references are to the tax_court rules_of_practice and procedure years and respondent determined deficiencies in hans hammann's federal income taxes and additions to tax as follows year additions to tax_deficiency sec_6653 sec_6653 sec_6653 dollar_figure dollar_figure --- --- dollar_figure --- this amount i sec_50 percent of the interest due on any part of the deficiency due to negligence respondent also determined deficiencies in petitioners' and federal income taxes and additions to tax as follows additions to tax_year deficiency sec_6653 sec_6653 sec_6661 dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number this amount i sec_50 percent of the interest due on any part of the deficiency due to negligence respondent further determined that the increased rate of interest imposed by sec_6621 was applicable for each year in issue the issues for decision are whether for the years and hans hammann conducted a charter boat service with the requisite profit_motive to allow for deductions under sec_162 and if so whether petitioners can substantiate the deductions claimed in connection with the charter boat service for the years and whether the charter boat service gave rise to investment tax_credits for the years and and if so whether the unused portions of those credits can be carried back to the years and whether petitioners claimed excessive_depreciation deductions for the years and with respect to a condominium owned by cheryl hammann and held_for_the_production_of_income during those years whether state_income_tax refunds petitioners received in and must be included in their income for those years whether for the year petitioners understated their income by omitting dollar_figure of interest whether for the year petitioners are entitled to a deduction for travel and entertainment_expenses in connection with hans hammann's journalism activity whether for the year petitioners overstated their charitable_contribution_deduction by dollar_figure whether hans hammann is liable for the addition_to_tax imposed by sec_6653 for and sec_6653 and for the year whether petitioners are liable for the addition_to_tax imposed by sec_6653 and for the years and whether petitioners are liable for the addition_to_tax imposed by sec_6661 for the years and whether hans hammann is liable for the additional interest imposed by sec_6621 for the years and and 2it appears that respondent's determination was made under sec_6653 notwithstanding the reference to sec_6653 in the notice_of_deficiency whether petitioners are liable for the additional interest imposed by sec_6621 for the years and due no doubt in part to petitioners' departure and continuous absence from the united_states since before the petition was filed in this case the parties were unable to agree upon a stipulation of facts see rule petitioners did not appear at trial nor did anyone appear on their behalf the evidence consists of videotapes produced in connection with a videotaped deposition conducted pursuant to rule j the transcript prepared from those tapes certain exhibits proffered during the deposition the testimony of an expert witness called by respondent and exhibits introduced based upon admission requests served upon petitioners by respondent at the time the petition was filed petitioners resided in poecking germany then west germany general background findings_of_fact petitioners were married in they filed joint federal_income_tax returns for the years and hans hammann filed returns for the years and as a single individual hans hammann is a german citizen and cheryl hammann is a canadian citizen during the years and hans hammann was employed as a union executive in the san francisco metropolitan area he reported earnings from that employment for those years as follows year amount dollar_figure big_number big_number the earnings from hans hammann's employment with the union accounted for the majority of petitioners' income during those years petitioners reported adjusted gross incomes taxable incomes and federal_income_tax liabilities on their and federal_income_tax returns as follows year adjusted_gross_income taxable_income tax_liability dollar_figure dollar_figure -0- big_number big_number -0- big_number -0- cheryl hammann was not employed during or in she enrolled in an undergraduate premedical program at an unspecified school presumably in the san francisco area according to cheryl hammann her husband worked in excess of hours per week as a union official and was under a great deal of stress as a result of his position apparently the pressures of his employment caused hans hammann severe health problems that together with financial setbacks caused petitioners to move from the united_states to germany in prior to leaving the united_states cheryl hammann gave birth to a son andreas hammann on date neither petitioner has returned to the united_states since charter boat service in august of petitioners purchased a used cheoy lee sailboat petitioners named the sailboat the malaguena the malaguena was a 41-foot ketch with a fiberglass hull powered by an in-line four-cylinder perkins diesel engine 3in a promotional brochure published by its manufacturer the sailboat was described as follows with this brochure we introduce a new model a cruising yacht with a difference as soon as you step aboard you will notice the wide and uncluttered side decks teak of course the modern-style tumble home on the cabin trunkings and the three large plexiglass way skylights which allow ample daylight illumination of the cabin interior and you have a choice of three sail plans down below the open-plan layout is on a single level entirely clear of obstructions due to the engine being completely below the floor amidships the spacious public area is dominated by our unique horse shoe shaped dining table which can be lowered when required for use as a berth the cook has really large working surfaces and plenty of stowages the angled sink configuration allowing very easy access to the dining table with the main mast pillar in just the right place to hold on to in heavy weather there are more drawers lockers and general stowages than you think because they are arranged differently standard equipment includes - choice of perkins bhp or volvo md-17c hp diesel engines pedestal and wheel steering system bow and stern pulpits and side stanchions in stainless steel spruce spars roller slab reefing gear deck and spar hardware sheet and or halliard winches depending on rig hardware sheet and or halliard winches depending on rig chosen all hardware in stainless steel or bronze chromium plated navigation and cabin lights electric cold water pressure system suppling shower wash basin and sink sump tank continued based upon cheryl hammann's deposition testimony and a survey of the malaguena it appears that the sailboat was in poor condition when acquired by petitioners numerous conditions were noted in the survey with recommended corrections the sails were in poor shape and the cabin required refurbishing the survey indicated that the sailboat was to be used for pleasure service and concluded that upon completion of the recommended repairs the sailboat would be suitable for use it is unknown whether the recommended repairs were made and if so over what period of time or at what cost petitioners purchased the malaguena from an unrelated third party the exact cost has not been provided to the court however it appears to have been in the dollar_figure range in august of hans hammann borrowed dollar_figure from first interstate the proceeds of which were used for the purchase of the malaguena the loan was characterized as a simple interest personal loan secured_by the sailboat the term of the loan wa sec_15 years at an annual interest rate of dollar_figure percent repayable in monthly installments of dollar_figure continued electric sump pump hand bilge pump marine toilet and more besides at option you may have a diesel generator set electric cooking stove with oven refrigeration unit in the ice box water heater teak overlay on the cabin sides compass and full set of electronics at her deposition cheryl hammann referred to and apparently produced certain books_and_records relating to the operation of the charter boat service according to cheryl hammann the records reflect the amount of income earned and substantiate the expenses claimed for each year the records supposedly were generated from a computerized data base that tracked the various expenses deducted and identified the folder where substantiating documentation could be found on an expense- by-expense basis for reasons not fully understood by the court cheryl hammann did not attempt to place these books_and_records into the deposition record apparently she did not want to part with the originals and did not bring any copies to the deposition whatever her reasons the court has not had the benefit of whatever information might have been contained in those records as no such records were available at trial petitioners also maintained a handwritten log in this log petitioners recorded the dates and times that the engine was started and stopped the dates that the boat was chartered and a summary of the events which took place during the periods that the malaguena was chartered most of the entries in the log reflect usage not tied to a charter during the log reflects that the malaguena was chartered for a total of days excluding those instances where due to some mechanical failure petitioners refunded the fees to the chartering party for the years and the malaguena was chartered a total of days and days respectively with the exception of occasional references to refunds the log contains little financial information regarding the operation of the charter boat service the log also includes entries unrelated to the sailboat such as hans hammann's impressions regarding his employment with the union petitioners attempted to solicit business by circulating flyers to incoming tourists at area airports they also relied upon word of mouth referrals from previous customers other than these two methods petitioners used no advertising they did not offer the charter boat service through brokers or rental agents petitioners would generally charter the boat only on weekends or other times that did not conflict with hans hammann's employment with the union petitioners were always present on the malaguena during the charters they would only allow a member of a charter party to actually sail the boat if the person passed a sailing proficiency test administered by hans hammann who was an experienced sailor when a member of a charter party was sailing the sailboat petitioners described themselves as the crew from time to time cheryl hammann would prepare meals in advance and serve them to the charter party while sailing usually wine was also available but after an unpleasant experience petitioners did not allow the consumption of other alcoholic beverages aboard the sailboat although it is not entirely clear from the record it appears that petitioners initially charged dollar_figure per day to charter the malaguena charter boat services conducted in the manner in which petitioners conducted their activity are known as bare boat charters and boats used for such purposes must be registered with the u s coast guard boats which have not been manufactured in the united_states are not eligible to be registered for such usage the malaguena was not manufactured in the united_states nor was it registered with the u s coast guard apparently hans hammann enjoyed sailing a great deal he was an experienced sailor and had been involved in various activities involving sailing prior to the years in issue as best as can be determined from the record he spent a significant amount of time on the malaguena he wanted to take his son andreas for a sail the day after the child was born but cheryl hammann objected he had to wait until andreas wa sec_3 days old to do so for the years and petitioners reported on schedules c4 the following amounts of income and expenses attributable to the operation of the malaguena 4the schedules c identified hans hammann as the proprietor of the charter boat service gross_income expenses advertising car truck depreciation insurance interest repairs supplies taxes travel ent fuel boat survey berth rental amortization telephone computer sup maintenance misc net_loss dollar_figure --- --- big_number big_number big_number big_number --- --- --- --- big_number dollar_figure --- big_number big_number big_number big_number big_number --- big_number --- --- --- big_number dollar_figure --- big_number big_number big_number big_number --- --- big_number --- --- --- big_number --- --- big_number big_number big_number the net_loss reported for each year was offset against petitioners' other income for those years in addition petitioners claimed investment tax_credits stemming from the charter boat service for the years and in the amounts of dollar_figure and dollar_figure respectively hans hammann claimed and received refunds of federal income taxes paid for the years and as a result of carrying back his share of the unused investment tax_credits from and to those years for the year respondent determined that the charter boat service constituted an activity_not_engaged_in_for_profit within the meaning of sec_183 and allowed expenses only in accordance with the provisions of that section for the years and respondent disallowed all of the expenses claimed for lack of substantiation unlike respondent did not allow any expenses pursuant to sec_183 for the years and due to respondent's characterization of petitioners' charter boat service all investment tax_credits claimed relating to that activity were disallowed cheryl hammann's condominium prior to her marriage to hans hammann cheryl hammann purchased a condominium in augsberg germany she paid big_number german deutschemarks for the property petitioners converted the purchase_price to dollars using a conversion rate of dollar_figure deutschemarks to the dollar resulting in a cost_basis of dollar_figure in computing the depreciation deduction for each year they allocated percent of the cost to land and percent of the cost to the building they used the 125-percent declining- balance method to compute their annual depreciation deduction based upon a 20-year useful_life the condominium was rented to unidentified tenants during the years and after taking into account depreciation_deductions claimed in previous years the following depreciation_deductions were claimed on petitioners' returns with respect to this condominium 5consistent with respondent's determination the allowed expenses were taken into account in respondent's adjustment to petitioners' itemized_deductions year amount of depreciation deducted dollar_figure big_number big_number respondent determined that the appropriate conversion rate from german deutschemarks to dollars at the time of the purchase was dollar_figure deutschemarks to the dollar she further determined that the useful_life of the condominium wa sec_25 years rather than and that current depreciation_deductions should be computed by using the straight-line method_of_depreciation as a result respondent reduced the depreciation deduction for each year as follows year amount dollar_figure big_number big_number the average conversion rate from deutschemarks to dollars during was dollar_figure deutschemarks to the dollar state_income_tax refunds petitioners received refunds of state income taxes as follows year amount of refund dollar_figure big_number petitioners did not include the refunds in income respondent increased petitioners' income for each year by the amount of the 6statistical abstract of the united state sec_887 104th ed see fed r evid state_income_tax refund received during the year explaining that a refund of any part of your state_income_tax that you deducted in prior years and reduced your federal_income_tax in those years is includable in income in the year you receive the income on their and federal_income_tax returns petitioners claimed itemized_deductions for state income taxes in the amounts of dollar_figure and dollar_figure respectively journalism activity on their return petitioners claimed a deduction in the amount of dollar_figure for travel and entertainment_expenses incurred with respect to a journalism activity conducted by hans hammann respondent disallowed the deduction claimed upon the ground that petitioners did not establish that the expenses were ordinary and necessary or were expended for the business_purpose designated no other evidence is included in the record with respect to this activity charitable_contribution_deduction petitioners claimed dollar_figure as a charitable_contribution_deduction on a schedule a filed with their federal_income_tax return respondent disallowed the entire deduction for lack of substantiation no other evidence is included in the record with respect to this deduction opinion the commissioner's determinations in a notice_of_deficiency are presumed correct and the taxpayer bears the burden of proving that those determinations are erroneous rule a 290_us_111 moreover deductions are a matter of legislative grace and the taxpayer bears the burden of proving that he or she is entitled to any deduction claimed rule a 292_us_435 welch v helvering supra pincite this includes the burden of substantiation 65_tc_87 affd per curiam 540_f2d_821 5th cir in addition sec_6001 requires the taxpayer to keep records sufficient to show whether or not the person is liable for tax charter boat service in general sec_162 allows a deduction for all ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business the term trade_or_business is not precisely defined in the internal_revenue_code or the regulations promulgated thereunder according to the supreme court in order for an activity to be considered a 7some sections do define the term for specific purposes for example sec_7701 provides as follows the term 'trade or business' includes the performance of the functions of a public_office taxpayer's trade_or_business the activity must be conducted with continuity and regularity and the taxpayer's primary purpose for engaging in the activity must be for income or profit 480_us_23 in order for an activity to be considered a trade_or_business within the meaning of sec_162 a taxpayer must conduct the activity with the requisite profit_motive or intent absent an intent to make a profit the charter boat service could not be considered a trade_or_business within the meaning of sec_162 see commissioner v groetzinger supra implicit in the manner in which petitioners reported the income and expenses of the charter boat service is their contention that the activity constituted a trade_or_business within the meaning of sec_162 petitioners maintain that hans hammann was planning to terminate his regular employment in order to concentrate his time on the charter boat service they claim that the malaguena was acquired specifically to be used in a charter boat business respondent argues that the charter boat service does not constitute a trade_or_business because hans hammann did not engage in such activity with the requisite profit objective consequently according to respondent petitioners cannot rely upon sec_162 to support the claimed deductions because of respondent's characterization of the charter boat service respondent also denied all investment tax_credits claimed by petitioners with respect to certain assets used in the activity we begin with an examination of whether hans hammann conducted the charter boat service with the intent to make a profit the test for determining whether a taxpayer conducted an activity for profit is whether he or she entered into or continued the activity with the actual or honest objective of making a profit 78_tc_642 affd without opinion 702_f2d_1205 d c cir sec_1_183-2 income_tax regs the taxpayer's expectation of profit need not be reasonable but the profit objective must be bona_fide as judged by all facts and circumstances dreicer v commissioner supra pincite 72_tc_411 affd without published opinion 647_f2d_170 9th cir 45_tc_261 affd 379_f2d_252 2d cir whether hans hammann engaged in the charter boat service with the requisite profit objective must be determined on a year- by-year basis from the facts and circumstances of the case golanty v commissioner supra pincite sec_1_183-2 and b income_tax regs more weight is given to objective facts than to subjective statements of intent sec_1_183-2 income_tax regs petitioners bear the burden of proving that hans hammann engaged in the charter boat service with the actual and honest objective of realizing a profit rule a golanty v commissioner supra pincite the following factors which are nonexclusive should be considered in the determination of whether an activity is engaged in for profit the manner in which the taxpayer carried on the activity the expertise of the taxpayer or his or her advisors the time and effort expended by the taxpayer in carrying on the activity the expectation that assets used in the activity may appreciate in value the success of the taxpayer in carrying on other similar or dissimilar activities the taxpayer's history of income or losses with respect to the activity the amount of occasional profits if any which are earned the financial status of the taxpayer and elements of personal pleasure or recreation sec_1_183-2 income_tax regs no one factor is determinative in and of itself and a profit objective does not hinge on the number of factors satisfied sec_1_183-2 income_tax regs based upon an examination of all the facts and circumstances and taking into account the above factors we are unable to conclude that hans hammann conducted the charter boat service with a bona_fide honest and objective profit_motive we find that the charter boat service was operated not with the requisite profit objective necessary to be considered a trade_or_business but rather as a means to subsidize a recreational activity hans hammann obviously derived a great deal of personal pleasure from sailing as evidenced by his desire to involve his son in the activity shortly after the child's birth it is also obvious based upon the types of expenses reported on the schedules c that sailing can be a financial burden with the exceptions of a de_minimis amount for advertising in and marginal fuel costs the expenses_incurred by petitioners in connection with the ownership and use of the malaguena would have been incurred regardless of the operation of the charter boat service most likely hans hammann was aware of the fixed costs that would be involved in owning maintaining and sailing a boat such as the malaguena given petitioners' financial status at the time the sailboat was acquired he no doubt realized that he would have to offer the charter boat services in an attempt to subsidize such costs because of the demands of his employment with the union hans hammann could only devote limited periods of time to the charter boat service considering such time limitations against hans hammann's practice not to offer the malaguena for charter unless he was present on the boat it would appear to be impossible for the charter boat service to be a profitable operation during the relevant years we conclude that the malaguena was acquired by petitioners for recreational purposes albeit with the intent to offset some of the costs of ownership through the charter boat service such an intent is not a sufficient profit_motive for purposes of sec_162 accordingly for the year respondent's allowance of the expenses attributable to the operation of the charter boat service only to the extent permitted by sec_183 is sustained in addition because petitioners have failed to substantiate any such expenses deducted in and respondent's adjustments disallowing the deductions for those years are likewise sustained sec_6001 because petitioners have failed to persuade us that the charter boat service was conducted as a trade_or_business it follows that respondent's disallowances of the investment tax_credits for the years and must also be sustained and we so hold sec_38 sec_48 it further follows that hans hammann improperly claimed investment_tax_credit carrybacks to the years and and the deficiencies determined by respondent against him for those years are sustained as well cheryl hammann's condominium the dispute on this issue arises primarily from respondent's determination that petitioners used an improper currency conversion rate in computing the depreciable basis of the property the conversion rate used by respondent in making her adjustments is more favorable to petitioners than the average conversion rate for the years involved in any event respondent's determination having been made in the notice_of_deficiency is presumed correct and petitioners have the burden_of_proof to establish that such determination is erroneous rule a welch v helvering u s pincite this they have failed to do accordingly respondent's adjustments to petitioners' depreciation_deductions for the years and are sustained state_income_tax refunds respondent included in petitioners' gross_income state_income_tax refunds in the amounts of dollar_figure and dollar_figure for and respectively sec_111 provides that a refund of taxes for which a deduction was allowed in an earlier year must be included in the year of receipt except to the extent the earlier deduction did not result in a tax_benefit tracy v commissioner tcmemo_1985_40 because petitioners claimed itemized_deductions for the years and for state income taxes paid it would appear that the exception set forth in sec_111 is not applicable consequently respondent's adjustments increasing petitioners' income by the amounts of state_income_tax refunds received in the years and are sustained interest_income respondent determined that petitioners understated their income by omitting dollar_figure of interest_income received in except as otherwise provided gross_income includes all income from whatever source derived including interest_income sec_61 sec_1_61-7 income_tax regs petitioners have presented no evidence to challenge respondent's determination on this issue and accordingly we hold for respondent hans hammann's journalism activity as indicated above deductions are a matter of legislative grace and the taxpayer bears the burden of proving that he or she is entitled to any deduction claimed rule a 503_us_79 new colonial ice co v helvering u s pincite welch v helvering supra pincite this includes the burden of substantiation hradesky v commissioner t c pincite deductions for travel and entertainment are subject_to the more stringent substantiation requirements imposed by sec_274 petitioners have not presented any evidence to show that the travel and entertainment_expenses deducted in were ordinary and necessary expenses_incurred in carrying_on_a_trade_or_business in addition petitioners have not carried their burden_of_proof with respect to the substantiation requirements imposed by sec_274 accordingly we sustain respondent's determination on this point charitable_contribution_deduction sec_170 provides for the allowance as a deduction of any charitable_contribution as defined under sec_170 made within a taxable_year sec_170 sec_1_170a-13 income_tax regs provides that for contributions of cash a taxpayer shall maintain for each contribution a canceled check or receipt from the donee indicating the name of the donee the date of the contribution and the amount of the contribution or in the absence of a check or receipt from the donee reliable written records petitioners have presented no evidence to substantiate the charitable_contribution_deduction claimed for petitioners have failed to satisfy their burden_of_proof accordingly respondent's determination with respect to this issue is sustained additions to tax sec_6653 for the year and sec_6653 for the years and impose an addition_to_tax of percent of the underpayment if any part is due to negligence or intentional disregard of rules or regulations for the years and sec_6653 imposes an additional addition_to_tax equal to percent of the interest payable under sec_6601 with respect to the portion of the underpayment attributable to such negligence or disregard of rules or regulations negligence is a lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances 85_tc_934 petitioners have the burden of proving error in respondent's determination that these additions to tax should be imposed against them petitioners have failed to demonstrate that they were not negligent or that they had a reasonable basis for claiming any of the deductions in dispute petitioners have not satisfied their burden_of_proof and accordingly the additions to tax under sec_6653 and sec_6653 and are sustained sec_6661 provides for an addition_to_tax equal to percent of an underpayment when there is a substantial_understatement_of_income_tax for the taxable_year sec_6661 defines the term understatement as being the excess of i the amount of tax required to be shown on the return for the taxable_year over ii the amount shown on the return sec_6661 provides that an understatement is substantial if it exceeds the greater of i percent of the amount of tax required to be shown on the return or ii dollar_figure for this latter purpose an understatement is reduced to the extent it is either based on substantial_authority or adequately disclosed in the return or in a statement attached to the return sec_6661 petitioners have not presented any evidence to refute respondent's determination under sec_6661 accordingly petitioners have not carried their burden_of_proof and respondent's determination with respect to the imposition of the sec_6661 penalty is sustained sec_6621 respondent also determined that petitioners are liable under sec_6621 for increased interest on all or a portion of their tax deficiencies for all years in issue sec_6621 provides that increased interest is due if a substantial_underpayment is attributable to a tax_motivated_transaction a substantial_underpayment is an underpayment of more than dollar_figure sec_6621 deductions disallowed because an activity was not engaged in for profit are deemed attributable to a tax-motivated transaction sec_301_6621-2t q a-4 temporary proced admin regs fed reg date we have determined that the charter boat service was not entered into for profit accordingly we hold that hans hammann is liable for the increased interest imposed by sec_6621 with respect to the entire amount of the deficiencies for the years and we further hold that petitioners are liable for the increased interest imposed by sec_6621 with respect to the portions of the deficiencies for the remaining years in issue attributable to the deductions disallowed because the charter boat service was not conducted for profit to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index number --------------------------------------- --------------------------------------- ----------------------------------- ------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------------- --------------------------------------------------- telephone number ---------------------- refer reply to cc psi b03 plr-127913-15 date date legend x ------------------------------------------------------------ ----------------------------------------- state d1 d2 --------------- -------------------- ---------------------- dear ---------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code code facts according to the information submitted x was organized as a limited_liability_company under the laws of state on d1 subsequently x made an election to be treated as an s_corporation effective d2 at the time of its s_corporation_election x’s operating_agreement included provisions relating to partnerships that caused x to have more than one class of stock when x’s members later discovered the effect of the partnership provisions they amended the operating_agreement to remove the provisions and provide identical distribution and liquidation rights to x’s members x represents that the ineffective s_corporation_election was inadvertent and not the result of tax_avoidance or retroactive tax planning x further represents that no plr-127913-15 federal tax_return of any person has been filed inconsistent with a valid s_corporation_election having been made for x effective d2 x also represents that all distributions and allocations of income to its shareholders have been made pro_rata in accordance with their interests in x x and its shareholders have agreed to make any adjustments required by the service consistent with the treatment of x as an s_corporation law and analysis sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 defines a small_business_corporation as a domestic_corporation which is not an ineligible_corporation and which does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than one class of stock sec_1362 provides that if an election under sec_1362 or sec_1361 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under sec_1362 or or sec_1361 the secretary determines that the circumstances resulting in the ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the ineffectiveness or termination steps were taken a so that the corporation for which the election was made or the termination occurred is a small_business_corporation or a qualified_subchapter_s_subsidiary as the case may be or b to acquire the shareholder consents and the corporation for which the election was made or the termination occurred and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation or a qualified_subchapter_s_subsidiary as the case may be as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the ineffectiveness or termination the corporation will be treated as an s_corporation or a qualified_subchapter_s_subsidiary as the case may be during the period specified by the secretary sec_1_1361-1 of the income_tax regulations provides in part that a corporation is generally treated as having only one class of stock if all outstanding shares of stock of the corporation confer identical rights to distribution and liquidation proceeds plr-127913-15 sec_1_1361-1 provides that the determination of whether all outstanding shares of stock confer identical rights to distribution and liquidation proceeds is made based on the corporate charter articles of incorporation bylaws applicable state laws and binding agreements relating to distribution and liquidation proceeds collectively governing provisions conclusion based solely on the facts submitted and representations made we conclude that x’s s_corporation_election was ineffective for having more than one class of stock we also conclude that the circumstances resulting in any ineffectiveness of x’s s_corporation_election were inadvertent within the meaning of sec_1362 thus under the provisions of sec_1362 x will be treated as an s_corporation effective on d2 and thereafter provided that x’s s_corporation_election was otherwise valid and not otherwise terminated under sec_1362 except as expressly provided herein we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provisions of the code specifically we express or imply no opinion on whether x was otherwise eligible to be an s_corporation this ruling is directed only to the taxpayer that requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file we are sending a copy of this letter to x’s 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 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 holly porter chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc corp b05 - plr-130959-01 date date in re target acquiring state a a b c d e date a this is in reply to your letter dated date requesting rulings on a proposed transaction the facts submitted for consideration are substantially as set forth below target is a publicly traded state a corporation it is the common parent of an affiliated_group_of_corporations that files a federal consolidated_income_tax_return target uses an annual_accounting_period ending december and the overall accrual_method of accounting for filing its federal_income_tax return target has one active wholly owned subsidiary and four inactive wholly owned subsidiaries as of date a target had a shares of common_stock outstanding its common_stock is currently held by approximately b shareholders and there are no other classes plr-130959-01 of outstanding_stock target’s c largest shareholders currently own approximately d percent of target’s stock pursuant to an overall integrated_plan and for valid business reasons the following transaction has been proposed i target will make a tender offer to all of its shareholders to acquire target stock the tender offer the tender offer will be funded by a loan from a consortium of community banks tender offer borrowing the tender offer is intended to increase the percentage stock ownership of target’s largest c shareholders from approximately d percent to an amount in excess of e percent ii following the tender offer target's c largest shareholders now owning over e percent of target’s common_stock will contribute their target stock to acquiring solely in exchange for acquiring stock the contribution iii acquiring will then form a wholly owned subsidiary which will merge into target under applicable state a law the merger with target surviving the merger as a result of the merger all remaining target shareholders other than acquiring will receive cash which is expected to be at the same price per share as in the tender offer acquiring will fund the purchase of the target shares in the merger through a borrowing from a newly formed subsidiary of acquiring merger borrowing iv following the merger acquiring will elect under sec_1362 of the internal_revenue_code to be treated as an s_corporation and acquiring will make qualified_subchapter_s_subsidiary qsub elections under sec_1_1361-3 of the income_tax regulations on behalf of target and each of target’s subsidiaries the qsub elections will result in the deemed liquidation of target and its subsidiaries for u s federal_income_tax purposes the liquidation in connection with the proposed transaction target acquiring and the target shareholders represent the following a b the fair_market_value of the acquiring stock received by each target shareholder will be approximately equal to the fair_market_value of the target stock surrendered in the exchange during the 5-year period beginning on the date of the proposed transaction there is no plan or intention for acquiring or any person related as defined in sec_1_368-1 to acquiring to acquire with consideration other than acquiring stock acquiring stock furnished in exchange for a proprietary interest in target in the proposed transaction either directly or through any transaction agreement or arrangement with any other person except for cash in lieu of fractional shares distributed to plr-130959-01 target shareholders in the merger c d e f g h i j during the 5-year period ending on the date of the proposed transaction no distributions will have been made with respect to target stock other than ordinary normal regular dividend distributions made pursuant to target’s historic dividend paying practice either directly or through any transaction agreement or arrangement with any other person except for cash paid to dissenters the aggregate value of the acquisitions and distributions described above in b and c will not exceed percent of the value without giving effect to the acquisitions of the proprietary interest in target on the effective date of the proposed transaction the tender offer borrowing and the merger borrowing will be repaid only from future earnings_of target or from capital contributions made to target by acquiring acquiring will acquire at least percent of the fair_market_value of the net assets and at least percent of the fair_market_value of the gross assets held by target immediately prior to the transaction provided that the tender offer borrowing and the merger borrowing are not treated as reducing the net or gross assets acquired from target in the transaction for purposes of this representation amounts paid_by target to dissenters amounts paid_by target to shareholders who receive cash or other_property amounts used by target to pay its reorganization expenses and all redemptions and distributions except for regular normal dividends made by target immediately preceding the transfer will be included as assets of target held immediately prior to the transaction after the transaction acquiring will be in control of target within the meaning of sec_368 acquiring has no plan or intention to reacquire any of its stock constructively issued in the transaction acquiring has no plan or intention to sell or otherwise dispose_of any of the assets of target acquired in the transaction except for dispositions made in the ordinary course of business the liabilities of target assumed as determined under sec_357 by acquiring in the transaction were incurred by target in the ordinary course of its business and are associated with the assets transferred plr-130959-01 k l following the transaction acquiring will continue the historic_business of target or use a significant portion of target’s historic_business_assets in a business at the time of the transaction target will not have outstanding any warrants options convertible securities or any other type of right pursuant to which any person could acquire stock in target that if exercised or converted would affect acquiring’s acquisition or retention of control of target as defined in sec_368 m target and acquiring will pay their respective expenses if any incurred in connection with the transaction n o p q there is no intercorporate indebtedness existing between target and acquiring that was issued acquired or will be settled at a discount no two parties to the transaction are investment companies as defined in sec_368 and iv the total adjusted_basis and the fair_market_value of the assets of target transferred to acquiring will equal or exceed the sum of the liabilities assumed as determined under sec_357 by acquiring target is not under the jurisdiction of a court in a title_11_or_similar_case within the meaning of sec_368 based on the foregoing we rule as follows for federal_income_tax purposes the contribution merger and liquidation will be treated as the transfer by target of substantially_all of its assets to acquiring in exchange for acquiring stock and the assumption by acquiring of all of the liabilities of target followed by the liquidation of target the acquisition by acquiring of substantially_all of the assets of target in exchange for acquiring stock and the assumption by acquiring of the liabilities of target followed by target's distribution of the acquiring stock in liquidation will constitute a reorganization within the meaning of sec_368 for purposes of this ruling substantially_all means at least percent of the fair_market_value of the net assets and at least percent of the fair_market_value of the gross assets with the tender offer borrowing and the merger borrowing not treated as reducing the net or gross assets acquired from target in the transaction target and acquiring will each be a_party_to_a_reorganization within the meaning of plr-130959-01 sec_368 no gain_or_loss will be recognized by target on the transfer of substantially_all of its assets to acquiring solely in exchange for acquiring stock and the assumption by acquiring of its liabilities sec_361 and sec_357 no gain_or_loss will be recognized by acquiring on the receipt by acquiring of target's assets in exchange for shares of acquiring stock sec_1032 no gain_or_loss will be recognized by target upon the distribution of acquiring stock to target’s shareholders sec_361 the basis of the assets of target in the hands of acquiring will be the same as the basis of those assets in the hands of target immediately prior to the transaction sec_362 the holding_period for the assets of target in the hands of acquiring includes the period during which those assets were held by target sec_1223 no gain_or_loss will be recognized by the shareholders of target on the exchange of their stock in target for shares of acquiring stock sec_354 the basis of the shares of acquiring stock to be received by the target shareholders will be the same as the basis of the target stock surrendered in exchange therefor sec_358 the holding_period of the acquiring stock to be received by the target shareholders will include the holding_period of the target stock surrendered in exchange therefor provided the target stock was held as a capital_asset on the date of the exchange sec_1223 the taxable_year of target will end on the effective date of the transaction sec_1_381_b_-1 of the income_tax regulations and as provided in sec_381 and sec_1 a - acquiring will succeed to and take into account those attributes of target described in sec_381 subject_to the provisions and limitations specified in sec_381 sec_382 sec_383 and sec_384 if applicable and the regulations thereunder pursuant to sec_381 and sec_1_381_c_2_-1 acquiring will succeed to and take into account the earnings_and_profits or deficit in earnings and plr-130959-01 profits of target as of the date of transfer any deficit in earnings_and_profits of either target or acquiring will be used only to offset the earnings_and_profits accumulated after the date of the transfer no opinion is expressed about the tax treatment of the proposed transaction under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction that are not specifically covered by the above rulings in particular no opinion is expressed whether acquiring is an ineligible_corporation as defined in sec_1361 at the time an election is made to treat such corporation as an s_corporation and for any periods for which the election is effective in addition no opinion is expressed regarding the federal_income_tax consequences to the shareholders of target other than acquiring this ruling letter is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent it is important that a copy of this letter be attached to the federal_income_tax return of the taxpayer involved for the taxable_year in which the transaction covered by this ruling letter is consummated the rulings contained in this letter are based on the facts and representations submitted under penalties of perjury in support of the request for rulings verification of this information may be required as part of the audit process sincerely yours associate chief_counsel corporate by debra carlisle chief branch


internal_revenue_service number release date index number -------------------------------------------- --------------------------------------------- ---------------------------------- ---------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------- id no ------------- telephone number -------------------- refer reply to cc psi b01 plr-149322-07 date date ------------- ------------------ ----------------------------------------------- legend x ----------------------------------------- d state dear ------------ this responds to a letter dated date submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts according to the information submitted x was incorporated on d under the laws of state x intended to be treated as an s_corporation for federal tax purposes effective d but the proper election was not timely filed law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective sec_1362 provides that if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s plr-149322-07 corporation for the year in which the election is made if the election is made after the first two and one-half months of a corporation's taxable_year then the corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if no election is made pursuant to sec_1362 or if made the election is made after the date prescribed for making such an election and the secretary determines there was reasonable_cause for the failure to timely make the election then the secretary may treat such election as timely made for such taxable_year and effective as of the first day of that year x did not file a timely election to be treated as an s_corporation under sec_1362 effective d x has however established reasonable_cause for not making a timely election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and representations made and provided that x otherwise qualifies as a subchapter_s_corporation we conclude that x will be recognized as an s_corporation effective d within days from the date of this letter x must submit a properly completed form_2553 with a copy of this letter attached to the appropriate service_center 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 specifically no opinion is expressed or implied concerning whether x otherwise qualifies as an s_corporation for federal tax purposes this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer’s authorized representative sincerely s david r haglund senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes cc


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 corp b03 plr-139792-10 date october legend parent ----------------------------------------------------------------------- -------------------------------------------------------------- ---------------------- subsidiary ----------------------------------------------------------------------- --------------------------------------------------------------- --------------------------------------- date date -------------------------- -------------------------- company official ---------------------------------------------------------------------- ------------------ ------------------- tax professional ------------------------------------------------- --------------------------------------------------------------- -------------------------- dear ------------ this responds to your letter dated date requesting an extension of time under sec_301_9100-1 through of the procedure and administration regulations to file an election the extension is being requested for parent and subsidiary to make an election to file a consolidated federal_income_tax return with parent as the common parent under sec_1_1502-75 of the income_tax regulations plr-139792-10 hereinafter referred to as the election effective for their taxable_year ending date the material information submitted for consideration is summarized below on date parent formed subsidiary as a wholly owned subsidiary prior to this transaction parent did not own stock meeting the requirements of sec_1504 in any includible_corporation thus a new affiliated_group that included parent and subsidiary came into existence with parent as the common parent parent intended that parent and subsidiary file a consolidated federal_income_tax return for the taxable_year ending on date but for various reasons a valid election was not filed the period of limitations on assessment under sec_6501 has not expired for parent’s or subsidiary’s taxable_year ending date or any subsequent taxable_year sec_1_1502-75 provides that a group which did not file a consolidated_return for the immediately preceding_taxable_year may file a consolidated_return in lieu of separate returns for the taxable_year provided that each corporation which has been a member of the group during any part of the taxable_year for which the consolidated_return is to be filed consents to the regulations under sec_1502 if a group wishes to exercise its privilege of filing a consolidated_return such consolidated_return must be filed not later than the last day prescribed by law including extensions of time for filing the common parent’s return under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 in this case the time for filing the election is fixed by the regulations ie sec_1_1502-75 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant an extension of time for parent and subsidiary to file the election provided parent and subsidiary show they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by parent company official and tax professional explain the circumstances that resulted in the failure to plr-139792-10 timely file the election the information establishes that parent reasonably relied on a qualified_tax professional who failed to timely make or advise parent to timely make the election and that the request for relief was filed before the failure to timely make the election was discovered by the internal_revenue_service see sec_301_9100-3 and v based on the facts and information submitted including the representations made we conclude that parent and subsidiary have shown they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly an extension of time is granted under sec_301_9100-1 until days from the date on this letter for parent to file the election by filing a consolidated_return with parent as the common parent and attaching a form_1122 for subsidiary for their taxable_year ending date parent and subsidiary having filed a return as though a valid election was made must amend their previously filed return to attach a copy of this letter alternatively if parent and subsidiary file their return electronically this requirement may be satisfied by parent and subsidiary amending their return to attach a statement that provides the date and control number of the letter_ruling the above extension of time is conditioned on the taxpayers’ parent’s and subsidiary’s tax_liability if any being not lower in the aggregate for the taxable_year ending date and all subsequent years than it would have been if the election had been timely made taking into account the time_value_of_money no opinion is expressed as to the taxpayers’ tax_liability for the years involved a determination thereof will be made by the director’s office upon audit of the federal_income_tax returns involved further no opinion is expressed as to the federal_income_tax effect if any if it is determined that the taxpayers’ liability is lower sec_301_9100-3 we express no opinion with respect to whether parent and subsidiary qualify substantively to file a consolidated_return in addition we express no opinion as to the tax effects or consequences of filing the election late under the provisions of any other section of the code or regulations or as to the tax treatment of any conditions existing at the time of or effects resulting from filing the return or the election late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-1 we relied on certain statements and representations made by parent company official and tax professional however the director should verify all essential facts moreover notwithstanding that an extension is granted under sec_301_9100-1 to file the election penalties and interest that would otherwise be applicable if any still apply 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 plr-139792-10 this ruling is directed only to the taxpayer s who requested it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely _ken cohen____________ ken cohen senior technician reviewer branch office of associate chief_counsel corporate


t c memo united_states tax_court tommy owens jr and dawn r owens petitioners v commissioner of internal revenue respondent docket no filed date tommy owens jr and dawn r owens pro sese angela j kennedy for respondent memorandum findings_of_fact and opinion chiechi judge respondent determined deficiencies in additions under sec_6651 to and accuracy-related_penalties under sec_6662 on petitioners’ federal_income_tax tax as follows ‘a111 section references are to the internal_revenue_code in effect for the years at issue all rule references are to the tax_court rules_of_practice and procedure -- - addition_to_tax accuracy--related year deficiency under sec penalty under sec_6651 a a dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number the issues remaining for decision’ are do petitioners have unreported schedule c gross re- ceipts for each of the years at issue in the amount determined in the notice we hold that they do are petitioners entitled to schedule c deductions for each of the years at issue for car and truck expenses schedule c car and truck expenses in excess of the amount that respondent allowed in the notice we hold that they are not are petitioners required to include in income for each of the years and certain insurance proceeds that they received during each such year we hold that they are are petitioners entitled for any of the years at issue to a net_operating_loss_deduction under sec_172 we hold that they are not at trial petitioners conceded that if the court were to sustain respondent’s determinations with respect to schedule c profit or loss from business schedule c of petitioners’ tax_return return for each of the years at issue they would be liable for self-employment_tax for each of those years as determined in the notice_of_deficiency notice in that event they would be entitled to a self-employment_tax deduction for each of those years as determined in the notice at trial petitioners also conceded that if the court’s resolution of the issues remaining for decision were to result in an underpayment for any of the years at issue they would be liable for any such year for the accuracy-related_penalty under sec a - are petitioners liable for each of the years at issue for the addition_to_tax under sec_6651 we hold that they are findings_of_fact some of the facts have been stipulated and are so found at the time the petition was filed petitioners resided in indianapolis indiana indianapolis petitioner tommy owens jr mr owens and petitioner dawn r owens ms owens had moved to indianapolis from toledo ohio toledo in and respectively from january through date petitioners resided ina mobile home and paid lot rent to happy hollow trailer lodge during that period their monthly lot rent was dollar_figure during petitioners paid rent and fees in connection with their mobile home totaling dollar_figure and also paid for their telephone cable and electricity usage at that mobile home starting in date petitioners rented a house on walker street in indianapolis walker street property in which they lived until date petitioners made monthly rent payments of s400 for the walker street property to holly paul during petitioners paid at least dollar_figure of rent and or fees to holly paul and during they paid at least dollar_figure of rent to holly although not expressly stated our findings_of_fact and opinion pertain to the years at issue unless otherwise indicated or expressly stated for clarity q4e- paul throughout the period during which petitioners lived in the walker street property they also paid for their electricity gas and telephone usage at that property in date petitioners moved to east tabor street indianapolis east tabor street property on date mr owens assumed a mortgage on the east tabor street property from douglas h tussey mr tussey on date mr tussey executed a warranty deed conveying the east tabor street property to mr owens on the same date petitioners purchased homeowner’s insurance from state farm insurance_company for which they paid an annual premium of dollar_figure during petitioners paid a total of dollar_figure to mr tussey and a total of dollar_figure to re-max preferred realty toward the purchase of the east tabor street property the mortgagee for the kast tabor street property was amer- ica’s mortgage servicing inc later known as first nationwide mortgage corporation during petitioners made mortgage payments totaling at least dollar_figure to america’s mortgage servicing inc during they made mortgage payments of at least dollar_figure to america’s mortgage servicing inc later known as first nationwide mortgage corporation throughout the period during which petitioners resided at the east tabor street property they also paid for their gas telephone water and electricity usage at that property - - petitioners were the only individuals who lived in the various residences that they occupied during the years at issue during those years they did most of their grocery shopping at sam’s club during the years at issue petitioners did not inherit any money or property nor did they apply for or receive any bank loans petitioners maintained a joint bank account account no at national city bank national city joint account until date when they closed that account as of decem- ber the balance in petitioners’ national city joint account was dollar_figure on date petitioners opened a joint bank account account no at peoples bank peo- ples joint account and made an opening deposit into that account of dollar_figure as of date the balance in petitioners’ peoples joint account was dollar_figure in mr owens started a painting business painting business which he continued to own and operate during the years at issue and which was petitioners’ primary source_of_income during those years ms owens assisted mr owens in his painting business and was paid nonwage compensation of dollar_figure during and dollar_figure during mr owens’ painting business undertook primarily industrial and commercial painting jobs in those jobs mr owens served -- - primarily as a subcontractor who performed painting work for various general contractors although occasionally he performed work directly for various owners of small businesses petitioners who did not maintain a separate bank account for mr owens’ painting business generally deposited receipts from mr owens’ painting business into the national city joint account that they maintained until date and thereafter into the peoples joint account that they maintained mr owens conducted his painting business both inside and outside his home state of indiana he conducted that business outside of indiana in ohio michigan kentucky and illinois while performing painting jobs outside the state of indiana mr owens received a lot of cash payments for his work that was because it would have been virtually impossible for him to have cashed any checks received while conducting his painting business outside the state of indiana during and petitioners owned an astro van a box truck truck and a ford van during petitioners also purchased a minivan mr owens used at least in part one or more of the vehicles that petitioners owned in conducting his painting business petitioners did not keep a contemporaneous log of their business mileage nor did petitioners determine as of the beginning and the end of each of the years at issue the odometer readings for any of the vehicles that they owned - during and petitioners paid cost_of_goods_sold for mr owens’ painting business totaling dollar_figure dollar_figure and dollar_figure respectively during and petitioners paid business_expenses for the painting business excluding amounts paid for schedule c car and truck expenses totaling dollar_figure dollar_figure and dollar_figure respectively during and petitioners incurred dollar_figure dollar_figure and dollar_figure respectively for parts repairs and purchases for their vans and truck during each of those years petitioners also incurred expenses for gasoline for those vehi- cles petitioners received insurance proceeds during and in the amounts of dollar_figure and dollar_figure respectively as reimburse- ments for certain of mr owens’ tools that he had used in his painting business and that had been stolen in prior years petitioners had deducted the cost of those stolen tools on returns that they had filed prior to and during the years at issue petitioners owned rental property located in toledo toledo rental property which constituted another source_of_income to them during those years petition- ers’ mortgage with respect to the toledo rental property was held by mid american national bank and they also had a second mort-- gage on that property with northriver development_corporation - during and petitioners paid rental expenses with respect to the toledo rental property totaling dollar_figure dollar_figure and dollar_figure respectively the only records that petitioners maintained with respect to mr owens’ painting business and the toledo rental property were their bank statements and the checks written on the joint bank accounts that they maintained the national city joint account until date and thereafter the peoples joint account petitioners prepared from those bank statements and checks a monthly listing of the checks petitioners’ monthly listing that they wrote petitioners’ monthly listings when totaled for the months during each of the years at issue showed that petition- ers wrote checks for labor costs on the joint bank accounts that they maintained the national city joint account until date and thereafter the peoples joint account that totaled dollar_figure for dollar_figure for and dollar_figure for during petitioners purchased property located on miller street in indianapolis miller street property for which they paid at least dollar_figure in addition during that year petitioners made downpayments totaling dollar_figure toward the pur- chase of property located on massachusetts street massachusetts petitioners’ monthly listings for that are in the record do not include petitioners’ monthly listing for date instead petitioners’ monthly listings for that are part of the record include petitioners’ monthly listing for date - street property with respect to the massachusetts street property petitioners also made during at least one mortgage payment of dollar_figure a payment of dollar_figure with respect to telephone service and payments totaling dollar_figure for materials ms owens visited her mother in lebanon missouri lebanon at least twice each year ms owens’ visits to her mother usually lasted between one week and one month during ms owens was snowed in during one of those visits as a result ms owens stayed in lebanon for two months when ms owens traveled to visit her mother in lebanon she took money with her for her expenses during when ms owens stayed for two months because of a snowstorm mr owens wired her some money mr owens filed form_1040 u s individual_income_tax_return for taxable_year which showed a loss for that year of dollar_figure mr owens and ms owens jointly filed a return joint_return for each of the taxable years and those joint returns showed losses for and of dollar_figure and dollar_figure respectively the loss that mr owens reported in his return was equal to the loss that he claimed in schedule c of that return reduced by dollar_figure of taxable interest that he reported in that return the loss that petitioners reported in the record does not disclose the location of the massachu- setts street property - their joint_return for was equal to the loss they claimed in schedule c of that return reduced by dollar_figure of taxable interest that they reported in that return the loss that petitioners reported in their joint_return for was equal to the loss that they claimed in schedule c of that return on date petitioners filed a joint_return for taxable_year which showed a loss of dollar_figure on date petitioners filed joint returns for taxable years and which showed losses of dollar_figure and dollar_figure respec-- tively the loss that petitioners reported in their joint_return for each of the years at issue was equal to the total of the loss claimed in schedule c and the loss claimed in schedule e supple- mental income and loss schedule e of each such return in schedules c of petitioners’ joint returns for and petitioners reported schedule c gross_receipts of dollar_figure dollar_figure and dollar_figure respectively schedule c cost_of_goods_sold of dollar_figure dollar_figure and dollar_figure respec- tively schedule c gross_income of dollar_figure dollar_figure and dollar_figure respectively schedule c expenses of dollar_figure dollar_figure and dollar_figure respectively and schedule c losses of dollar_figure dollar_figure and dollar_figure respectively included within the claimed schedule c cost_of_goods_sold for the years and was claimed cost of labor in the amounts of dollar_figure dollar_figure and dollar_figure respectively petitioners included the nonwage compensation of dollar_figure and dollar_figure that ms owens received from mr owens’ painting business during and respec-- tively in calculating the cost of labor claimed in schedules c of their respective joint returns for those years however ms owens did not report the respective amounts of such nonwage compensation in petitioners’ joint returns for and for each of the years at issue petitioners computed the gross_receipts from mr owens’ painting business that they reported in schedule c for each such year by totaling the bank_deposits that they had made during each such year they provided the resulting total of those deposits for each of the years at issue to their tax_return_preparer return preparer for report-- ing in schedule c of their return for each such year for each of the years at issue petitioners computed the expenses with the exception of the schedule c car and truck expenses that they claimed in schedule c for each such year by categorizing the checks they had written during each such year and then totaling each category of expense they provided the resulting total for each such category for each of the years at issue to their return preparer for reporting in schedule c of ‘the amounts of the cost of labor for and that petitioners claimed as part of the claimed schedule c cost_of_goods_sold for those years exceed the respective amounts of labor costs that are reflected in petitioners’ monthly summaries for those years their return for each such year with respect to the schedule c car and truck expenses for each of the years at issue petitioners provided their return preparer with the amount of business miles that they claimed they had driven during each such year and that return preparer used the standard mileage rate to determine the amount of the deduc- tion for such expenses that petitioners claimed in schedule c of their return for each such year in schedule e for and petitioners reported rental income from the toledo rental property of dollar_figure dollar_figure and dollar_figure respectively and rental expenses from that property of dollar_figure dollar_figure and dollar_figure respectively in the notice respondent used an indirect method the so- called source and applications of funds method in order to determine whether petitioners had unreported schedule c gross_receipts for any of the years at issue that was because peti- tioners had not maintained adequate_records for any of those years respondent derived all of the amounts that respondent used in applying the source_and_application_of_funds_method with respect to each of the years at issue from one or more of the following sources petitioners’ joint_return for each such year petitioners’ bank statements for each such year petitioners’ monthly listings for each such year and petitioners’ oral statements made to respondent’s revenue_agent who conducted the examination of each such joint_return in applying the source and applications of fund method for each of the years at issue respondent prepared a so-called cash t cash t for each of those years which reflected debits and credits for various items that respondent derived from one or more of the foregoing sources set forth below is the cash t that respondent prepared for each of the years at issue debits credits schedule c gross_receipts dollar_figure --- cost_of_goods_sold -- dollar_figure schedule c expenses -- big_number less standard mileage rate -- --16 rental income big_number -- rental expenses --- bank account balance big_number personal living_expenses --- big_number checks to ms owens deducted as schedule c cost of labor --- big_number truck expenses big_number totals big_number big_number less total debits --big_number understatement big_number schedule c gross_receipts cost_of_goods_sold schedule c expenses less standard mileage rate rental income rental expenses bank account balance insurance proceeds principal payments on rental property personal living_expenses truck expenses totals less total debits understatement schedule c gross_receipts cost_of_goods_sold schedule c expenses less standard mileage rate rental income rental expenses bank account balance insurance proceeds purchase of massachusetts street property checks to ms owens deducted as schedule c cost of labor personal living_expenses truck expenses totals less total debits understatement in the notice respondent ers’ schedule c gross_receipts and in the amounts of dollar_figure debits dollar_figure big_number debits dollar_figure big_number dollar_figure and dollar_figure credits dollar_figure big_number -big_number big_number big_number big_number big_number big_number -big_number big_number credit dollar_figure big_number -big_number big_number big_number big_number big_number big_number big_number --182 big_number for each of the years determined to increase petition- respec-- - - tively which were the respective amounts determined for those years on the basis of respondent’s application of the source_and_application_of_funds_method in the notice respondent also determined to disallow the claimed schedule c car and truck expenses for and in the amounts of dollar_figure dollar_figure and dollar_figure respectively because it has not been established that more than dollar_figure for dollar_figure for and dollar_figure for was for an ordinary and necessary business_expense or was expended for purpose designated in the notice respondent also determined that the insurance reimbursements of dollar_figure and dollar_figure that petitioners received during and respectively resulted in taxable gain to petitioners because they had deducted the cost of the tools that were stolen in prior years and your basis is zero in the notice respondent also determined that petitioners are liable for each of the years at issue for the addition_to_tax under sec_6651 because they failed to file timely their return for each of those years opinion petitioners bear the burden of proving that the determina-- tions in the notice are erroneous see rule a 290_us_111 schedule c gross_receipts respondent determined that petitioners did not keep adequate_records from which their taxable_income could accurately be calculated the only records of income and expense that peti- tioners maintained with respect to mr owens’ painting business and the toledo rental property were their bank statements the checks written on their joint bank accounts the national city joint account until date and thereafter the peoples joint account and petitioners’ monthly summaries that they prepared from those bank statements and checks we agree with respondent that petitioners did not maintain adequate tax rec-- ords see sec_6001 sec_1_6001-1 income_tax regs in the absence of adequate_records respondent reconstructed petitioners’ income on the basis of the source_and_application_of_funds_method and determined that petitioners have unreported schedule c gross_receipts the source_and_application_of_funds_method of reconstructing income is based on the assumption that absent some explanation the amount by which a taxpayer’s expen- ditures during a taxable_year exceed the taxpayer’s known sources of income is taxable_income see 937_f2d_1548 10th cir 92_tc_661 petitioners contend that respondent’s indirect method of income reconstruction was conducted in a careless malicious ’ on the instant manner and is entirely flawed and deceptive record we reject petitioners’ contentions on that record we find respondent’s method of reconstructing petitioners’ income and the results generated by that method to be reasonable based on our examination of the entire record before us we find that petitioners have failed to establish any error in respondent’s reconstruction of petitioners’ income on the basis of the source_and_application_of_funds_method consequently we sustain respondent’s determinations in the notice to increase ‘petitioners also complain that respondent’s revenue_agent who examined the joint returns at issue did not testify at trial instead another revenue_agent of respondent testified with respect to respondent’s indirect method of income reconstruction in this case according to petitioners they should have the opportunity to face the revenue_agent who examined their joint returns for the years at issue the individual who testified on behalf of respondent respondent’s witness was a revenue_agent who as of the time of the trial had worked for respondent for years having served as a tax_auditor responsible for the examination of individual tax returns for years respon- dent’s witness testified because the revenue_agent who examined petitioners’ returns for the years at issue was not available to testify on the date of the trial in this case respondent’s witness reviewed respondent’s administrative file with respect to the examination of petitioners’ joint returns for the years at issue and was thoroughly familiar with the contents of that file including all of the work papers therein and petitioners’ joint returns for the years at issue respondent’s witness was also thoroughly familiar with the source and applications of funds method that respondent used in reconstructing petitioners’ income we found respondent’s witness to be credible and her testimony to be reliable ‘petitioners make no claims that prior to they had accumulated a large amount of cash or that they received amounts from nontaxable sources during the years at issue - - petitioners’ schedule c gross_receipts for each of the years at issue claimed schedule c deductions respondent disallowed petitioners’ claimed schedule c car and truck expenses for and in the amounts of dollar_figure dollar_figure and dollar_figure respectively ’ deductions are strictly a matter of legislative grace and petitioners bear the burden of proving that they are entitled to any deductions claimed see 503_us_79 sec_162 allows a deduction for ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business sec_274 operates to disallow any deduction otherwise allowable under inter alia sec_162 with respect to inter alia any listed_property unless the taxpayer satisfies the substantiation requirements of that section ’ listed_property is defined in sec_280f to respondent did not disallow the remaining claimed schedule c car and truck expenses for and in the amounts of dollar_figure dollar_figure and dollar_figure respectively sec_274 provides in pertinent part sec_274 disallowance of certain entertainment etc bxpenses d substantiation regquired --no deduction or credit shall be allowed--- continued include passenger automobiles and other_property used as a means of transportation see sec_280f a and petitioners acknowledge that they kept no records of the type required by sec_274 and the regulations thereunder consequently petitioners may establish their entitlement to the schedule c car and truck expenses that respondent disallowed for each of the years at issue only by introducing into the record in this case their own statements and sufficient evidence corrobo- rating such statements see sec_274 sec_1_274-5t temporary income_tax regs fed reg date we find that the general vague and conclusory testimony of petitioners regarding the number of miles that one or more of their vehicles was driven for business purposes during each of the years at issue does not satisfy those substantiation require- ments based upon our examination of the entire record before us we find that petitioners have failed to establish that they are 1’ continued with respect to any listed_property as de- fined in section 280f d unless the taxpayer substantiates by adequate_records or by sufficient evidence corroborating the taxpayer’s own statement a the amount of such expense or other item b the time and place of the use of the facility or property c the business_purpose of the expense or other item - - entitled to deduct the claimed schedule c car and truck expenses at issue consequently we sustain respondent’s determinations disallowing those claimed expenses certain insurance reimbursements respondent determined that petitioners must include in income for and insurance proceeds in the amounts of dollar_figure and dollar_figure respectively that they received as reimburse- ments for certain of mr owens’ business tools which had been stolen in prior years and the cost of which petitioners deducted in returns that they had filed prior to and based on our examination of the entire record before us we find that petitioners have failed to prove that the insurance reimbursements of dollar_figure and dollar_figure that they received during and respectively do not constitute income see sec_1_165-1 income_tax regs consequently we sustain respondent’s determinations with respect to those insur- ance reimbursements claimed net_operating_loss deductions at trial petitioners took the position that they are entitled to a net_operating_loss_deduction for each of the years at issue which is attributable to net_operating_loss carryovers ‘we are not persuaded by petitioners’ general vague and conclusory testimony regarding their alleged purchase of other tools during and that the insurance reimbursements at issue do not constitute income - from the years through the only evidence offered by petitioners in support of that position is their general vague and conclusory testimony mr owens’ return for and peti- tioners’ joint returns for and although each of the returns for and shows a loss attributable to petitioners’ schedule c business petitioners failed to introduce any evidence establishing the loss claimed in each of those returns the returns for through constitute nothing more than the position of petitioners that they had the respec-- tive losses claimed in those returns based on our examination of the entire record before us we find that petitioners have failed to show that they are entitled for any of the years at issue to a net_operating_loss_deduction addition_to_tax under sec_6651 a respondent determined that petitioners are liable for the addition_to_tax under sec_6651 because they filed their joint_return on date and their and joint returns on date sec_6651 imposes an addition_to_tax for failure_to_file timely a tax_return the addition_to_tax does not apply if the failure is due to reasonable_cause and not to willful neglect see sec_6651 as we understand petitioners’ position they contend that they should not be held liable for the additions to tax under -- - sec_6651 because when the return for each of the years at issue was due they were involved in respondent’s examination of their taxable years through and they did not believe that they owed any_tax on the record before us we find that those reasons do not constitute reasonable_cause for pur- poses of sec_6651 based on our examination of the entire record before us we find that petitioners have failed to establish that their failure_to_file timely the joint returns in question was due to reason- able cause and not due to willful neglect consequently we sustain respondent’s determinations that petitioners are liable for each of the years at issue for the addition_to_tax under sec_6651 a we have considered all of the contentions and arguments of petitioners that are not discussed herein and we find them to be without merit and or irrelevant to reflect the foregoing decision will be entered for respondent 12see klyce v commissioner tcmemo_1999_198 likes v commissioner tcmemo_1991_286 see also ferguson v commis-- sioner tcmemo_1994_114 knight v commissioner tcmemo_1984_376