t c memo united_states tax_court wayne c mason petitioner v commissioner of internal revenue respondent docket no filed date wayne c mason pro_se john a freeman for respondent memorandum opinion armen special_trial_judge this matter is before the court on petitioner's motion for an award of litigation costs under sec_7430 and rules through unless otherwise indicated all section references are to the internal_revenue_code in effect for the taxable_year continued after concessions by respondent the issues for decision are as follows whether petitioner unreasonably protracted the court_proceeding we hold that he did not whether the litigation costs claimed by petitioner are reasonable we hold that a portion of the litigation costs claimed by petitioner are not reasonable neither party requested an evidentiary hearing and the court concludes that such a hearing is not necessary for the proper disposition of petitioner's motion rule a we therefore decide the matter before us based on the record that has been developed to date background petitioner resided in barnesville ohio at the time that his petition was filed with the court by notice_of_deficiency dated date respondent determined a deficiency in petitioner's federal_income_tax for continued in issue however all references to sec_7430 are to such section in effect at the time that the petition was filed all rule references are to the tax_court rules_of_practice and procedure respondent concedes petitioner exhausted his administrative remedies see sec_7430 petitioner substantially prevailed see sec_7430 respondent's position at the time the notice_of_deficiency was issued and at the time respondent's answer was filed was not substantially justified see sec_7430 and petitioner satisfies the applicable net_worth requirement see sec_7430 the taxable_year in the amount of dollar_figure as well as additions to tax under sec_6651 and sec_6654 in the amounts of dollar_figure and dollar_figure respectively by petition filed date petitioner commenced his case in this court petitioner was not aided by counsel in preparing or filing his petition pursuant to the court's order for amended petition and filing fee petitioner filed an amended petition on date through his attorney robert giffin in this regard attorney giffin charged petitioner hours_of_service for redrafting and proof of tax_court amended petition entry of appearance and request for place of trial and hours for meeting with petitioner at dollar_figure per hour subsequently by motion filed date and granted date petitioner withdrew attorney giffin as counsel by letter dated date respondent's appeals officer requested information in support of petitioner's allegations contained in the amended petition on date respondent filed an answer to petitioner's amended petition denying various allegations made by petitioner for lack of sufficient knowledge petitioner's subsequent counsel james b curtin provided the requested information to the appeals officer by letter dated date in this regard attorney curtin charged petitioner dollar_figure for his services on date respondent conceded the determinations in the notice_of_deficiency and sent a proposed settlement document to petitioner's then former counsel attorney giffin having received no reply respondent mailed petitioner a proposed settlement document reflecting respondent's concession of the deficiency_notice determinations on three subsequent occasions march april and date respondent requested that petitioner sign and return the proposed settlement document so that the parties could avoid an appearance on the designated trial date date petitioner declined to sign the proposed settlement document because no agreement could be reached regarding the recovery_of litigation costs at the calendar call on date respondent orally conceded the determinations in the notice_of_deficiency pursuant to the court's order a stipulation of settled issues was filed on date petitioner filed his motion for litigation costs on date seeking recovery for the following costs dollar_figure postage cost sec_1 dollar_figure filing fee fees paid to attorney giffin dollar_figure fees paid to attorney curtin dollar_figure mileage - big_number mile sec_1to the extent any litigation costs are to be awarded in this case respondent does not contest the postage costs 2actually petitioner claims dollar_figure in fees paid to attorney giffin however the dollar_figure amount includes dollar_figure in filing fee for accuracy we have properly reflected the figures as dollar_figure for attorney's_fees and dollar_figure for filing fee with the exception of miles and dollar_figure in postage costs all of the foregoing costs were incurred on or before date the date on which respondent first mailed petitioner a proposed settlement document all of the costs associated with attorney giffin's services were incurred in apparently attorney curtin provided a portion of his services in and another portion in discussion we apply sec_7430 as amended by the taxpayer bill of right sec_2 tbor publaw_104_168 secs 110_stat_1452 the amendments made by tbor apply in the case of proceedings commenced after date tbor sec_701 sec_702 sec_703 and sec_704 sec_110 stat inasmuch as the petition herein was filed on date the amendments made by tbor apply in the present case a requirements for a judgment under sec_7430 in this regard we ignore the proposed settlement document mailed to petitioner's former attorney because attorney giffin had already been withdrawn and there is no indication that the proposed settlement document mailed to attorney giffin was received by petitioner congress has amended sec_7430 twice since taxpayer bill of right sec_2 publaw_104_168 110_stat_1452 first congress amended sec_7430 in the taxpayer_relief_act_of_1997 tra publaw_105_34 secs 111_stat_788 second congress amended sec_7430 in the irs restructuring and reform act of rra publaw_105_206 112_stat_685 however the amendments made by tra do not apply in the case of proceedings commenced before date and the amendments made by rra apply only to costs incurred more than days after date inasmuch as the petition herein was filed on date and all of the claimed costs were incurred no later than date the trial date the amendments made by tra and rra do not apply in the present case under sec_7430 a judgment for litigation costs incurred in connection with a court_proceeding may only be awarded if a taxpayer is the prevailing_party has exhausted his or her administrative remedies within the internal_revenue_service irs and did not unreasonably protract the court_proceeding sec_7430 and b a taxpayer must satisfy each of these three requirements in order to be entitled to a judgment under sec_7430 rule e upon satisfaction of these requirements a taxpayer may be entitled to reasonable_litigation_costs sec_7430 c respondent concedes that petitioner was the prevailing_party in the court_proceeding respondent also concedes that petitioner exhausted his administrative remedies within the irs respondent contends however that petitioner unreasonably protracted the court_proceeding and that the litigation costs claimed are unreasonable b unreasonable protraction of the court_proceeding pursuant to sec_7430 no award for reasonable_litigation_costs may be made with respect to any portion of the court_proceeding during which the prevailing_party has unreasonably protracted such proceeding respondent mailed petitioner a proposed settlement document on three separate occasions--the earliest on date respondent contends that petitioner unreasonably protracted the court_proceeding by failing to sign and return the proposed settlement document mailed to him on date if petitioner unreasonably protracted the court_proceeding then petitioner may not be entitled to any recovery for litigation costs incurred after receipt of the proposed settlement document with respect to costs incurred after date petitioner claims recovery only for mileage miles and a postage expense of dollar_figure we have previously held that a taxpayer's refusal to sign a stipulated decision does not constitute unreasonable protraction of the proceeding when the taxpayer's refusal is based upon the parties' failure to reach an agreement regarding litigation costs buck v commissioner tcmemo_1993_16 in buck the commissioner sent the taxpayer a proposed stipulated decision about weeks before the scheduled trial date the taxpayer's attorney met with the commissioner's attorney but no agreement was reached regarding the taxpayer's litigation costs under those circumstances we held that the taxpayer did not unreasonably protract the proceeding by refusing to sign the stipulated decision and appearing at the calendar call to request an award of litigation costs similarly in the instant case petitioner's failure to sign the proposed settlement document was based on the fact that no agreement regarding litigation costs could be reached between the parties at the earliest respondent mailed petitioner a proposed settlement document about months prior to the scheduled trial date petitioner declined to sign the proposed settlement document because no agreement had been reached regarding litigation costs rather petitioner appeared at trial to request an award of litigation costs under these circumstances we hold that petitioner did not unreasonably protract the court_proceeding c reasonableness of litigation costs in the case of a prevailing_party sec_7430 provides for the recovery_of reasonable_litigation_costs sec_7430 defines reasonable_litigation_costs to include reasonable court costs and reasonable expenses of expert witnesses studies and attorney's_fees attorney's_fees generally reasonable attorney's_fees are limited to dollar_figure per hour sec_7430 however an adjustment may be made for an increase in the cost of living or the existence of a special factor such as the limited availability of qualified attorneys sec_7430 petitioner claims attorney's_fees for the services of two different attorneys petitioner's first counsel attorney giffin assisted petitioner by meeting with petitioner and drafting the amended petition in this regard petitioner claims recovery for hours at dollar_figure per hour for attorney giffin's services we do not think that hours is an unreasonable amount of time for attorney giffin's services however petitioner may not recover at a rate in excess of dollar_figure per hour for attorney giffin's services there is no persuasive evidence that the availability of qualified attorneys to aid petitioner in redrafting the petition was limited see sec_7430 further after application of the cost-of-living adjustment the statutory rate is nevertheless limited to dollar_figure per hour see sec_7430 revproc_96_59 1996_2_cb_392 accordingly petitioner's recovery for attorney giffin's services will be limited to hours at dollar_figure per hour or dollar_figure petitioner also claims recovery for dollar_figure in attorney's_fees incurred with respect to attorney curtin's services attorney curtin assisted petitioner in providing the appeals officer with the requested documentation that resulted in respondent's concession of the issues raised in the notice_of_deficiency petitioner claims dollar_figure in attorney's_fees for attorney curtin's services we think that petitioner's claim of dollar_figure in this regard meets the applicable standard and is reasonable mileage petitioner claims recovery for mileage with regard to big_number miles of travel allegedly incurred in connection with this case a dollar_figure expense for attorney curtin's services translates into hours_of_service at a rate of dollar_figure per hour sec_7430 defines reasonable costs to include court costs cost of studies expert fees and attorney's_fees mileage incurred by a taxpayer is not within the definition of reasonable costs and is therefore not recoverable under sec_7430 see buck v commissioner tcmemo_1993_16 accordingly petitioner may not recover costs for mileage filing fee and postage costs reasonable_litigation_costs include reasonable court costs sec_7430 petitioner is therefore entitled to recover the dollar_figure tax_court filing fee finally and as previously noted respondent concedes the postage costs if petitioner is entitled to an award of litigation costs because petitioner is entitled to recover reasonable_litigation_costs he may recover the postage costs to reflect our disposition of the disputed issues and respondent's concessions an appropriate order and decision will be entered regardless we note that the majority of the mileage claimed by petitioner is not reasonable


internal_revenue_service number release date index numbers ------------------- ------------------------------------- -------------------------- ------------------------------------------ -------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------- telephone number --------------------- refer reply to cc corp plr-119735-07 date date ----------------------------- ------------------------------- ------------------------------- legend holdings ------------------------------------------------------------------------------------ ----------------------------------------------------------- new parent -------------------------------------------------------------------------------------- ----------------------------------------------------------- llc ------------------------------------------------------------------------------ ----------------------------------------------------------- sub -------------------------------------------------------------------- ----------------------------------------------------------- llc ------------------------------------------------------------------------------------- ----------------------------------------------------------- sub -------------------------------------------------------------------- ----------------------------------------------------------- trust company depository trust nominee ------------------------------------ --------------------------------------------------- ---------------------------- ------------------- -------------------------------------------------------------------------- -------------------------------------------------------------------------------- ------ ------ ---------- ----------------- -------------------------------- ------------------------------------------------------------------ plr-119735-07 business a distribution date a a b c ratio a ratio b x y dear ---------- this letter is in reply to your letter dated date requesting rulings as to the federal_income_tax consequences of a proposed transaction defined below additional information was submitted in a letter dated date the information submitted in the request and later correspondence is summarized below ---- ---- --- --- facts holdings is a limited_liability_company that is treated as a partnership for federal_income_tax purposes holdings is owned by i members of management of llc a limited_liability_company which is a disregarded_entity for federal_income_tax purposes and members of management of sub and their respective affiliates or related parties and ii certain investor partnerships holdings owns i all of the equity_interest in llc and ii all of the outstanding_stock of new parent a corporation formed for purposes of effectuating an initial_public_offering ipo interests in llc a limited_liability_company which is a disregarded_entity for federal_income_tax purposes and iii directly-owned operating_assets which it employs in the conduct of its business sub owns all of the stock of sub which directly and indirectly owns all of the equity interests of several domestic and international corporations as well as interests in certain domestic partnerships llc owns i all of the outstanding_stock of sub ii all of the outstanding equity holdings’ subsidiaries and limited_liability companies are engaged in business a plr-119735-07 the proposed ipo will enable new parent to raise additional capital in order to among other things i finance acquisitions and internal growth ii create a more liquid market for the trading of its equity through access to the public markets and iii optimize its debt-to-equity_ratio based on industry standards proposed transaction i ii iii holdings will form new parent to accomplish the foregoing business objectives holdings has proposed the following steps collectively the proposed transaction holdings will contribute all of the outstanding memberships interests of llc which will be treated as a transfer of all the assets and liabilities of llc to new parent in exchange for shares of new parent common_stock the new parent shares the contribution of common_stock primary shares and holdings will offer and sell shares of its new parent common_stock secondary shares in an ipo each purchaser of primary shares and secondary shares is referred to herein as a public participant holdings and the public participants in the ipo are collectively referred to herein as the transferors depending on the size of the ipo the equity value of new parent and the ratio as defined in below in step iv b the secondary shares may represent more than a of new parent’s outstanding common_stock underwriters and will be consummated in the following manner as part of the same plan new parent will offer and sell newly-issued shares the ipo will be underwritten by a syndicate of underwriters the iv a new parent will deliver a share certificate representing the number of primary shares that it intends to sell certificate and holdings will deliver one or more share certificates representing the number of secondary shares that it intends to sell collectively certificate to trust company an unrelated financial_institution that will act as a depository depository b depository will create depository shares the depository shares representing the total number of shares of new parent stock both primary shares and secondary shares to be sold in the ipo pursuant to a deposit agreement the deposit agreement between depository and new parent each depository share will represent a fraction of both a primary share and a secondary share the depository shares will represent pro_rata interests in the entire pool of primary shares and secondary shares and the ratio of secondary shares sold in the ipo to primary shares issued in the ipo the plr-119735-07 ratio is not expected to exceed ratio a and in no event will exceed ratio b c depository will deposit a global depository receipt a depository receipt evidencing all of the depository shares representing both primary shares and secondary shares to be sold in the ipo with nominee a nominee for the depository trust d the depository shares will be offered and sold to investors in the ipo e depository trust will credit interests in the depository shares to or for the benefit of the public participants f the underwriters will have the right to purchase additional depository shares within x days of the closing of the ipo the over-allotment option if the underwriters exercise the over-allotment option the same procedures described in steps a through e above would be repeated at that time g after the passage of y days from the pricing of the ipo depository will deliver all of the shares of new parent stock represented by certificate and certificate together with any shares of new parent stock deposited in connection with the underwriters’ exercise if any of the over-allotment option to nominee in exchange for the depository receipt h depository trust will credit interests in the shares of new parent stock to or for the benefit of the public participants in exchange for interests in the depository shares on a one-for-one basis new parent will not be in privity of contract with depository trust and will not be able to control the manner in which interests in such shares are credited by depository trust to the public participants such crediting will occur by book-entry i depository will cancel the depository shares and the deposit agreement will be terminated representations holdings makes the following representations with respect to the proposed transaction time of the contribution holdings will have been the sole shareholder of new parent and immediately prior to and immediately following the proposed transaction new parent will have only one class of stock outstanding for federal_income_tax purposes from new parent’s inception through the a c b e d at the time of the ipo new parent will not have outstanding any warrants the shares of new parent stock to be issued by new parent in connection the proposed transaction is being undertaken for the purpose of facilitating plr-119735-07 with the proposed transaction will be i the new parent shares issued to holdings pursuant to the contribution described above and ii the primary shares issued to the public participants pursuant to the ipo described above an initial_public_offering of shares of new parent at a time when it holds the operating business and related assets of llc and its affiliated entities the proposed transaction will consolidate the related business operations currently conducted by llc and its affiliated entities within new parent facilitating a stock offering that positions new parent to capitalize on numerous opportunities by raising additional capital equity in order to among other things make acquisitions and grow internally create a more liquid market for the trading of its equity through access to the public markets making the shares more attractive to new investors and enabling existing investors to dispose_of their interests and optimize its debt-to-equity_ratio based on industry standards other than the sale of secondary shares by holdings in the ipo neither holdings nor any of its direct or indirect owners has any current plan or intention to sell exchange or otherwise dispose_of shares of new parent stock_options convertible securities or any other type of right pursuant to which any person could acquire stock in new parent other than compensatory options to purchase new parent common_stock that may be granted to certain employees of new parent or its subsidiaries pursuant to its equity incentive plan upon the effectiveness of the ipo and that would have an exercise price equal to the price at which shares will be offered in the ipo prior to the ipo new parent is expected to adopt an equity incentive plan that would provide for the grant of stock_options stock appreciation rights restricted_stock and other stock-based awards to directors officers employees and service providers of new parent and its subsidiaries for purposes of attracting retaining and motivating these individuals through a proprietary interest in new parent it is not contemplated that new parent will issue any stock to employees as compensation in connection with the ipo shares issued pursuant to the contribution or the primary shares sold pursuant to the ipo any of the assets acquired in connection with the proposed transaction except for dispositions made in the ordinary course of business parent in the contribution were incurred in the ordinary course of llc 1’s business and are associated with the assets transferred or were otherwise incurred to fund i a distribution on date a to its investors as a return on their initial investment and ii acquisitions unrelated to the proposed transaction undertaken to grow the business new parent has no current plan or intention to sell or otherwise dispose_of the liabilities of llc assumed within the meaning of sec_357 by new new parent has no plan or intention to reacquire any of the new parent g h f i l j k no transferor will receive securities or other_property in the proposed new parent is not under the jurisdiction of a court in a title_11_or_similar_case the primary offering and secondary offering will end when the underwriters plr-119735-07 transaction and the only consideration other than new parent stock to be received will be the assumption within the meaning of sec_357 of the liabilities of llc in the contribution within the meaning of sec_368 complete the sale of all of the depository shares representing shares of new parent common_stock received by the depository from holdings and new parent including any depository shares in respect of the underwriters’ exercise of the over-allotment option the deposit agreement pursuant to which the depository shares are issued will provide that each depository share represents a fraction of a primary share and a fraction of a secondary share the ratio of secondary shares sold in the ipo to primary shares sold in the ipo will not exceed ratio b no stock will be issued to holdings for services rendered to or for the benefit of new parent in connection with the proposed transaction and no stock will be issued for indebtedness of new parent that is not evidenced by a security or for interest on indebtedness of new parent which accrued on or after the beginning of the transferor’s holding_period for the debt investment house parent described in sec_306 the adjusted_basis and fair_market_value of the assets to be transferred by each transferor to new parent in the proposed transaction will be equal to or exceed the sum of the liabilities to be assumed by new parent within the meaning of sec_357 or to which the transferred assets are subject consummation of the proposed transaction transferor to new parent in the proposed transaction will not exceed the fair_market_value of such assets immediately after the contribution transaction will occur under a plan agreed upon before the proposed transaction is consummated and in which the rights of the parties are defined the contribution is not the result of the solicitation by a promoter broker or the transferors will not retain any rights in the property transferred to new none of the stock issued by new parent is other than common_stock as the aggregate adjusted_basis of the assets to be transferred by each the transfers and exchanges made in connection with the proposed new parent will have positive net value both before and after the m p q n o s_r t z y x v u w new parent is not a personal_service_corporation within the meaning of the proceeds received in collection of any income items contributed to new new parent is not an investment_company within the meaning of sec_351 new parent will remain in existence and retain and except for dispositions in each transferor will receive shares of new parent stock approximately equal plr-119735-07 to the fair_market_value of the property transferred in exchange therefor the ordinary course of business use the property transferred to it in its trade_or_business each of the parties to the proposed transaction will otherwise pay their own expenses if any incurred in connection with the proposed transaction provided that new parent will pay legal and registration fees relating to the sec registration process and sec_1_351-1 sec_269a parent in the contribution will be included as ordinary_income in computing the taxable_income of new parent to the extent that any patents patent applications or technical know-how are contributed in the contribution holdings will transfer all substantial rights in such patents or patent applications within the meaning of sec_1235 within the meaning of sec_1253 in the franchises trademarks trade names or technical know-how being transferred if any will transfer all rights title and interests for each copyright in each medium of exploitation sec_351 with respect to the proposed transaction dd provided that the requested ruling is granted to treat the public participants as transferors of property to new parent to the extent of their purchase of primary shares holdings and the public participants ie the transferors will in the aggregate own stock in new parent representing control as defined in sec_368 immediately after the consummation of the ipo nor will be created in connection with the contribution contribution and the ipo will occur pursuant to a single_plan the steps of which will occur on the same day or within close proximity to each other and the exercise if any of the over-allotment option is expected to occur within days of the consummation of the ipo bb to the extent that any copyrights are contributed in the contribution holdings ee no indebtedness will exist between holdings and new parent at the time of cc holdings and new parent will comply with all reporting requirements under aa holdings will not retain any significant_power_right_or_continuing_interest to the best knowledge and belief of management of holdings the ff plr-119735-07 rulings no gain_or_loss will be recognized by the holdings by reason of the provided that the number of primary shares that new parent will offer for sec_304 and not sec_351 and not so much of sec_357 and sec_358 as relates to based on the information and representations submitted we rule as follows with respect to the proposed transaction sale in the ipo will not be less than c of the total number of shares that holdings will offer for sale in the ipo ie that the ratio of secondary shares to primary shares is no greater than ratio b the public participants to the extent of their purchase of primary shares in the ipo will be transferors of property to new parent within the meaning of sec_351 of the code contribution excluding the liabilities sec_351 sec_351 will apply to the acquisition by new parent from holdings of that portion of stock deemed exchanged for liabilities of holdings assumed by new parent attributable to the stock of sub sec_304 the acquisition by new parent from holdings of the portion of the stock of sub1 deemed exchanged for liabilities of holdings assumed by new parent attributable to the stock of sub will be treated as a distribution in redemption of a corresponding portion of new parent stock holdings and new parent will be treated in the same manner as if holdings had transferred the portion of the stock of sub so acquired to new parent in exchange for a corresponding portion of new parent stock in a transaction to which sec_351 applies and then new parent had redeemed the corresponding portion of stock it was treated as issuing sec_304 the deemed redemption distribution will constitute a dividend to the extent of the earnings_and_profits of new parent and sub the balance of the deemed redemption distribution if any will reduce holdings’ basis in the new parent stock sec_301 the remaining balance of the deemed redemption distribution if any will treated as gain from the sale_or_exchange of property sec_301 by holdings pursuant to the contribution will be the same as the basis of the property exchanged by holdings for the new parent shares decreased by the corresponding amount of liabilities assumed by new parent in the exchange and increased by the corresponding amount of gain or dividend if any pursuant to sec_358 and sec_358 the holding_period of the new parent shares received by holdings will include the holding_period of the assets so transferred by holdings provided that such transferred assets were capital assets on the date of the exchange sec_1223 no gain_or_loss will be recognized by new parent upon the receipt of property from the transferors in exchange for new parent stock as described above sec_1032 except as provided in ruling the basis in the new parent shares received the holding_period of the assets received in the contribution will in the hands the basis in the property received by new parent pursuant to the proposed plr-119735-07 transaction will be the same as it would be in the hands of the transferors sec_362 of the new parent include the holding_period during which such assets were held by holdings sec_1223 shares measured by the difference between the basis of the secondary shares sold and the amount of cash received in the secondary offering less any applicable underwriting discounts and commissions sec_1001 holdings will recognize gain_or_loss if any on the sale of the secondary caveats except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any proposed transaction or item discussed or referenced in this letter the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination procedural statements this ruling is directed only to the taxpayer requesting it sec_6110 of the in accordance with the power_of_attorney on file with this office a copy of this letter a copy of this letter must be attached to any income_tax return to which it is relevant code provides that it may not be used or cited as precedent alternatively taxpayers filing their returns electronically must satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling is being sent to your authorized representatives cc _lewis k brickates______ lewis k brickates chief branch associate chief_counsel corporate sincerely


t c memo united_states tax_court james s sparkman petitioner v commissioner of internal revenue respondent mercury solar pto amanda mckeogh trustee petitioner v commissioner of internal revenue respondent docket nos filed date paul j sulla jr for petitioners henry e o’neill for respondent memorandum findings_of_fact and opinion thornton judge respondent determined the following deficiencies additions to tax and penalties with respect to petitioner james s sparkman sparkman additions to tax penalties sec_6651 deficiency dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure --- sec_6662 dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure year respondent determined the following deficiencies additions to tax and penalties with respect to petitioner mercury solar pto pure trust organization additions to tax penaltie sec_1 year deficiency dollar_figure dollar_figure sec_6651 dollar_figure dollar_figure dollar_figure dollar_figure --- sec_6654 --- --- --- dollar_figure sec_6662 dollar_figure dollar_figure dollar_figure dollar_figure --- dollar_figure respondent also imposed a sec_6651 addition_to_tax on mercury solar pto for the tax_year in an amount to be computed later for convenience we use the term trust to reflect the characterization of mercury solar pto and hawaii environmental holdings heh asserted by petitioners and set forth in formation documents and business records the use of this term and of related terms such as trustee and beneficial_owner is not intended to be conclusive as to characterization for tax purposes unless otherwise indicated section references are to the internal_revenue_code as amended rule references are to the tax_court rules_of_practice and procedure after concessions by respondent the issues for decision in these consolidated cases are whether mercury solar pto should be disregarded as an entity separate from sparkman for federal tax purposes and its net_income attributed to sparkman for the years at issue whether in mercury solar pto and hence sparkman had unreported income resulting from certain rebate payments from hawaii electric company heco whether for the years at issue sparkman is liable for self-employment_tax on his earnings from mercury solar pto whether for the years at issue sparkman is entitled to claimed losses from a purported business_trust hawaii environmental holdings heh whether sparkman is entitled to additional itemized_deductions allegedly not claimed on his federal_income_tax returns for interest or charitable_contributions and the amount of sparkman’s liability for self-employment taxes and the amount of the related deduction under sec_164 to which sparkman is entitled are computational matters resolution of these issues depends upon our resolution of the issue whether mercury solar pto should be recognized as an entity separate from sparkman petitioners have not separately challenged such liability and we do not further discuss these items whether petitioners are liable for additions to tax and penalties findings_of_fact the parties have stipulated some facts which we incorporate herein by this reference when the petitions were filed sparkman resided in honolulu hawaii and mercury solar pto had a mailing address in honolulu hawaii sparkman’s sole_proprietorship about sparkman began selling solar water heating systems to homeowners in hawaii for some years he operated as a sole_proprietor under the name mercury solar which he had registered with the state of hawaii hawaii environmental holdings in sparkman purported to transfer his mercury solar business into a newly created entity heh according to a document entitled contract and declaration of creation of unincorporated business organization the heh formation document heh was created on date as an unincorporated respondent appears to concede that if mercury solar pto is disregarded for federal tax purposes it should not be subject_to deficiencies additions to tax or penalties the parties have stipulated the transcripts from trials in the cases of richter v commissioner tcmemo_2002_90 and hvidding v commissioner tcmemo_2003_151 each of which dealt with the tax treatment of heh customers at the trial of the instant cases counsel for both parties agreed that the court may consider testimony given in richter and hvidding as if that testimony was presented to the court in this case business organization domiciled in the sovereign state of nevada this document identifies the creator of the trust as s siegert who is not otherwise identified in the record the document recites that in exchange for twenty-five dollars of silver certificates comprising a total of one hundred units and other full and adequate_consideration the exchanger or exchangers will convey to the creator certain property listed in schedules a and b attached to the document schedule a to the heh formation document recites that sparkman conveyed to the creator in exchange for certificates of evidence of right of distribution comprising a total of fifty units plus twenty-five dollars of silver and other good and valuable consideration real_property described as follows the vehicles belonging to mercury solar trucks tools and necessary business equipment computers etc the real_estate known as the ‘kagel canyon’ properties consisting of seven lots and one house located on one of the seven lots schedule b to the heh formation document recites that sparkman conveyed to the creator in exchange for certificates of evidence of right of distribution comprising a total of fifty units in addition to twenty-five dollars of silver and other good and valuable consideration personalty described as follows mercury solar the business name as registered with business registration all past business files accordingly taking into account the units referenced in schedule a and the units referenced in schedule b sparkman was allocated all units of heh certificates as authorized by the heh formation document the heh formation document and attachments thereto reflect no other contributions to heh and the issuance of no other certificates of heh units the heh formation document recites that upon completion of these exchanges the creator shall constitute and appoint a suitable adult as trustee who may appoint additional trustees to constitute a board_of trustees the document recites that the property of heh will then be assigned to the board_of trustees and the creator will thereafter have absolutely no further obligation to heh the document recites that the trustees will have exclusive management and control of heh’s property and business affairs without any consent of certificate holders and will have the authority to among other things distribute proceeds and income in their discretion and according to the with respect to the certificates the heh formation document states for convenience the certificates used for evidencing right of distribution shall be divided into one hundred units they shall be non-assessable non-taxable and non-negotiable ownership of certificates shall not entitle the holder to any legal or equitable_title in or to the heh property nor any undivided_interest therein nor in the management thereof heh minutes the document recites that the trustees may elect or appoint managing directors or agents to hold funds for specific purposes a document entitled minutes of hawaii environmental holdings signed date states that the creator s siegert appoints lee allan hansen as trustee these minutes also state at a regular meeting of the board_of trustee s it was suggested and unanimously approved that sparkman be appointed agent of heh these minutes further state the nature of his sparkman’s title will be that of president and his responsibilities are to open bank accounts act as the official authorized signature sic on said bank accounts and to operate the company to the same extent as if he were the owner the heh minutes state that one of the goals of heh is the sale of solar_energy the minutes state in part heh shall seek a tax_shelter and advantageous tax structure the trust will own all solar_energy equipment held in trust the trustee will have complete discretion as to the means used to accomplish the trust’s goals this will include distribution of the tax_credits and depreciation lee allan hansen is not otherwise identified in the record inasmuch as the sole trustee was purportedly appointed the same day it seems unlikely that sparkman’s appointment as agent was at the suggestion and unanimous approval of the board_of trustees all profits will be sheltered or passed to the individual beneficiaries as determined by the trustees heh minutes dated date indicate that lee allan hansen appointed mandy wildman as trustee mandy wildman was as amanda jane porter porter testified porter’s film or stage name porter testified that she married sparkman in or for probably about a year after their divorce she moved to california since she has resided in florida where she is in the film business heh minutes dated date and signed by porter who as just indicated was sparkman’s spouse at or about this time as a jane howat ostensibly in her capacity as heh trustee indicate that in heh’s organizational documents all references to an unincorporated business organization would be changed to pure trust organization all references to trustee s would be changed to fiduciary owners s and the number of authorized units of evidence of right of distribution would be increased from to big_number in addition the date heh minutes signed by a jane howat state be it resolved that the board_of trustees shall exchange the assets of hawaii environmental holdings’ dba mercury solar for units of evidence of right of distribution amanda jane porter porter who at the time of trial had been married six times acknowledged using various names at various times including amanda wildman amanda mckeough amanda j mckeough-porter amanda jane porter mandy porter a jane howat and amanda sparkman of a pure trust organization to be named mercury solar heh minutes dated date recite that lee allan hansen appointed cynthia kay mcneff and sparkman as trustees and that mandy wildman was removed as trustee heh minutes dated date recite that cynthia kay mcneff was removed as a trustee of heh and sparkman was assigned complete control regarding the current irs issue james scott sparkman is to act as sole trustee fiduciary in dealing with the internal_revenue_service heh minutes dated date indicate that lee allan hansen resigned as trustee leaving sparkman as sole trustee of heh heh minutes dated date state that sparkman appointed shon gregory as an additional trustee of hehdollar_figure purported creation of mercury solar pto as previously noted in heh purported to transfer the mercury solar business to mercury solar pto the formation documents for mercury solar pto are in key respects identical to those for heh except for different verbiage reflecting the characterization of heh as an unincorporated business organization and of mercury solar pto as a pure trust organization cynthia mcneff is identified in the record only as an attorney the record does not further identify shon gregory according to a document entitled contract and declaration of creation of pure trust organization the mercury solar pto formation document mercury solar pto was created on date as a pure trust organization domiciled in the sovereign state of nevada the document identifies the creator of the trust as s siegert who is not otherwise identified in the record the document recites that in exchange for twenty-five dollars of silver certificates comprising a total of one hundred units and other full and adequate_consideration the exchanger or exchangers will convey to the creator certain property listed in schedules a and b attached to the document schedule a to the mercury solar pto formation document recites that a jane howat who under one name or another was sparkman’s spouse at or about this time ostensibly as trustee of heh conveyed to the creator of mercury solar pto in exchange for certificates of evidence of right of distribution comprising a total of one hundred units in addition to twenty-five dollars of silver and other good and valuable consideration real_property described as follows the business in its entire capacity trucks tools outstanding contracts receivables debts and trade_name as mercury solar ubo schedule b to the mercury solar pto formation document recites that a jane howat conveyed to the creator of mercury solar pto in exchange for certificates of evidence of right of distribution comprising a total of one hundred units in addition to twenty-five dollars of silver and other good and valuable consideration personalty described as follows mercury solar dollar_figure the mercury solar pto formation document recites that upon completion of these exchanges the creator shall constitute and appoint a suitable adult as first fiduciary owner who may appoint additional fiduciary owners to constitute a board_of fiduciary owners the document recites that the property of mercury solar pto will then be assigned to the board_of fiduciary owners and the creator will thereafter have absolutely no further obligation to mercury solar pto the document recites that the fiduciary owners will have exclusive management and control of the pto’s property and business affairs without any consent of certificate holders and will have the authority to among other things distribute proceeds and income in their discretion and according to the pto minutes the document recites that the fiduciary owners may elect or appoint managing directors or agents to hold funds for specific purposes a document entitled minutes of mercury solar states that the creator s siegert appoints j clark atkinson as fiduciary accordingly taking into account the units referenced in schedule a and the units referenced in schedule b it would appear that heh was allocated a total of units of mercury solar pto certificates even though the mercury solar pto formation document authorized only a total of units owner dollar_figure this document was signed by s siegert on date and by j clark atkinson on date mercury solar pto minutes signed by atkinson on date and by sparkman on date state at a regular meeting of the board_of fiduciary owner s it was suggested and unanimously approved that sparkman be appointed agent of mercury solar ptodollar_figure these minutes state the nature of his sparkman’s title will be that of president and his responsibilities are to open bank accounts act as the official authorized signature sic on said bank accounts and to operate the company to the same extent as if he were the owner according to a document entitled certificate record for mercury solar the beneficial units that had purportedly been assigned to heh on date were released on date also on date units were assigned to sparkman mercury solar pto minutes dated date state that j clark atkinson appointed amanda mckeough sparkman’s ex-spouse a sec_12 j clark atkinson is not otherwise identified in the record inasmuch as j clark atkinson purportedly became fiduciary owner on date and inasmuch as the record reflects no other fiduciary owner of mercury solar pto as of that date it seems unlikely that sparkman was suggested as agent and unanimously approved by the board_of fiduciary owner s on date trustee dollar_figure mercury solar pto minutes dated date state that j clark atkinson resigned as fiduciary owner dollar_figure mercury solar pto minutes dated date state at a meeting of the board_of trustees of mercury solar myron thompson was appointed operations manager of mercury solar pto with responsibility for managing the day to day activities of the company myron thompson resigned in date operations of heh and mercury solar pto heh purports to sell solar_energy to customers through a program where heh agrees to sell and the customer agrees to buy the energy produced from solar water heating system components purportedly owned by heh and installed on the customer’s property see hvidding v commissioner tcmemo_2003_151 the participating customer signs an agreement providing that the customer shall become a beneficiary of heh that the heh trustee shall have the discretion to pass solar_energy tax_credits through to the customer and that such passthroughs shall be reported on schedules k-1 beneficiary’s share of income deductions credits etc schedule_k-1 id the purported formation documents of mercury solar pto contain no provision for the appointment of any trustee consequently reading the documents in the record strictly as of date mercury solar pto no longer had any fiduciary owner the mercury solar pto formation documents contain no provision for any board_of trustees according to sparkman’s testimony heh did not sell solar_energy equipment if heh received customer interest in buying equipment rather than entering into an energy contract heh might refer the customer to mercury solar or to another retailer sparkman testified that heh buys its equipment from mercury solar or from one of two other suppliers he testified that heh would sometimes sell used equipment to mercury solar attempting to delineate the different roles of heh and mercury solar myron thompson testified mercury solar is really just a contractor it’s a solar contractor it basically was contracted to put solar panels and hot water heaters in homes and that kind of thing so that’s what our function was heh had another function of contracting mercury solar to do that for the purposes of selling energy and things like that heh had no employees heh and mercury solar pto shared common office space mercury solar pto did not have its own specialty contractor license as required by state law instead it used sparkman’s license rebate income for the tax_year hawaii electric company heco issued to mercury solar pto a form_1099 non-employee compensation reporting payments of dollar_figure federal tax returns on or around date sparkman filed individual federal_income_tax returns for the years through on or around date he filed his federal_income_tax return on schedule e of these returns sparkman reported income or loss from heh and mercury solar pto as follows heh mercury solar pto dollar_figure big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number the dollar_figure loss nets two items shown on sparkman’s schedule e a dollar_figure deduction or loss from heh and dollar_figure other income from heh on date sparkman filed an amended_return for his tax_year on schedule e of this amended_return he reported losses from heh in the amount of dollar_figure income from heh in the amount of dollar_figure and income from mercury solar pto in the amount of dollar_figure mercury solar pto filed federal_income_tax returns for the years through on or around date and returns for the years and on or around date on date it filed amended returns for the tax years through for all years in issue it filed form sec_1041 u s income_tax return for estates and trusts in the entity classification section for each of mercury solar pto’s returns the box for complex_trust is checked attached to mercury solar pto’s tax returns are schedules k-1 for each year at issue except for the mercury solar pto tax_return includes a single schedule_k-1 showing income distributions to sparkman in amounts consistent with those reported on schedule e of his individual federal_income_tax returns for the mercury solar pto tax_return includes two schedules k-1 one showing dollar_figure of income distributed to sparkman and another showing dollar_figure of income distributed to thompson heh filed its federal_income_tax return for on or around date and filed its federal_income_tax return on or around date heh filed federal_income_tax returns for its and tax years on or around date only shortly before the trial in these cases heh filed its federal tax returns using form sec_1041 in the entity classification section for each of heh’s returns the box for complex_trust is checked notices of deficiency respondent issued sparkman a notice_of_deficiency for his taxable years through respondent determined that mercury solar pto is a sham with no economic_substance and should be disregarded for tax purposesdollar_figure in the notice_of_deficiency respondent also raised three alternative arguments in sparkman’s notice_of_deficiency that sparkman’s business income should be increased because mercury solar pto is a grantor_trust whose income is taxable to sparkman individually that if mercury solar pto is recognized for income_tax purposes sparkman’s income should be increased to the extent required by sec_652 or sec_662 and that sparkman’s attempted assignment_of_income to mercury solar pto is not recognized for federal tax purposes respondent has not pressed these alternative arguments in this court_proceeding consequently we continued respondent increased sparkman’s business income by the gross_receipts of mercury solar pto including dollar_figure of rebate income that heco reported on a form_1099 to mercury solar pto in addition respondent disallowed losses that sparkman reported as flowing through from heh on the ground that sparkman had failed to substantiate these amounts respondent determined that the increases to sparkman’s income resulting from these adjustments were subject_to self-employment_tax finally respondent determined penalties and additions to tax pursuant to sec_6651 and sec_6662 by separate notice_of_deficiency issued to mercury solar pto respondent disallowed all of mercury solar pto’s claimed deductions and made other adjustments increasing mercury solar pto’s reported income among other adjustments respondent increased mercury solar pto’s income by dollar_figure to reflect the heco rebate payments opinion i burden_of_proof petitioners have not claimed or established that sec_7491 shifts the burden_of_proof to respondent with respect to any factual issue accordingly petitioners bear the burden of continued do not address them proof and production for all issues except as provided by sec_7491 see rule a ii disregard of mercury solar pto as a separate_entity respondent argues that mercury solar pto should be disregarded as a separate_entity for federal tax purposes because it lacks economic_substance and is a shamdollar_figure we agree if the creation of a_trust lacks economic_effect and alters no cognizable economic relationship we may ignore the trust as a sham see eg 79_tc_714 affd 731_f2d_1417 9th cir 73_tc_1235 238_f3d_860 7th cir to determine whether a_trust lacks economic_substance for tax purposes we consider these factors whether the taxpayer’s relationship to the respondent now concedes all adjustments to mercury solar pto’s income except for dollar_figure of hawaii electric company heco rebate income that respondent claims mercury solar pto failed to report on its federal_income_tax return respondent concedes that sparkman’s income from mercury solar pto does not exceed the amounts sparkman reported therefrom on schedule e for each year at issue plus with respect to tax_year the dollar_figure of disputed heco rebate income consequently respondent’s bottom line is that sparkman should be subject_to self-employment_tax on all amounts that he previously has reported as income from mercury solar pto for the years at issue plus should recognize dollar_figure additional income and pay self- employment_tax with respect to the disputed heco rebate payments as previously noted petitioners have not separately challenged respondent’s positions with respect to sparkman’s liability for self-employment taxes other than to argue that we should reject respondent’s argument that mercury solar pto has no existence apart from sparkman transferred property differed materially before and after the trust’s creation whether the trust had an independent_trustee whether an economic_interest passed to other trust beneficiaries and whether the taxpayer respected the restrictions placed on the trust’s operation as set forth in the trust documents see eg muhich v commissioner supra as discussed below each of these factors supports a conclusion that mercury solar pto had no economic_substance a sparkman's relationship to the mercury solar business for about years sparkman operated his mercury solar business as a sole_proprietorship in he purported to transfer the business to heh about a year later heh purported to transfer it to mercury solar pto insofar as the record reveals the business remained the same apparently doing business under the same name mercury solar as it always had relying on sparkman’s technical expertisedollar_figure as far as the record reveals sparkman’s relationship to the mercury solar business did not differ materially before and after these purported transfers to heh and mercury solar pto as sole in fact mercury solar pto does not even have its own solar contractor’s license but instead uses sparkman’s license as sparkman testified in the trial of richter v commissioner t c memo i’m the one with the technical expertise at mercury solar pto and the license in fact mercury solar uses my solar contractor’s license agent of both heh and mercury solar pto sparkman was authorized to act as president of each purported entity and to operate each to the same extent as if he were the owner insofar as the record reveals he did just that there is no evidence that in the brief interlude between purportedly receiving the mercury solar business from sparkman and retransferring it to mercury solar pto heh did anything other than as connoted by its name hold the mercury solar business for sparkman who continued to run it as he always haddollar_figure as far as the evidence shows nothing much changed when the mercury solar business purportedly was transferred from heh to mercury solar pto porter sparkman’s ex- spouse who in was named trustee of mercury solar pto testified that sparkman as agent of mercury solar pto made the operational decisions during except for when mr myron thompson was the operational operation manager thompson’s testimony shows however that he regarded the mercury in the trial of hvidding v commissioner tcmemo_2003_151 sparkman testified that heh had no employees other than the trustees if those are considered employees in the trial of richter v commissioner supra joseph john miskowiec who was a solar_energy salesman for the mercury solar business testified that sparkman was the overall supervisor at heh but since by sparkman’s own testimony heh had no employees to supervise we surmise that sparkman supervised the mercury solar business that heh purported to hold solar business as sparkman’s business he testified i actually managed his sparkman’s company mercury solar as agent of both heh and mercury solar pto sparkman was authorized to act as the official authorized signature on the bank accounts of those purported entities for the years at issue sparkman also effectively controlled income allocations and distributions of mercury solar pto which were made almost entirely to himself dollar_figure there is no credible_evidence that he meaningfully shared that control with anyone else in a memorandum dated date and addressed to all staff and contractors of mercury solar and heh myron thompson thompson stated effective today i will be assisting scott sparkman in organizing the companies heh and mercury solar for the sake of current and future expansion i will be assuming the role of temporary executive director of both heh and mercury solar scott sparkman will continue as president emphasis added porter who was supposedly one of two trustees of mercury solar pto during the years at issue and sole trustee after date testified that income allocations during those years were made by thompson and sparkman with sometimes it being run by myself she added however it’s certainly not something i had a day to day involvement with we are not persuaded that either porter or thompson had any meaningful role with respect to income allocations or distributions during the years at issue apart from porter’s vague contrived and noncredible testimony all the evidence indicates that she was a mere figurehead for both heh and mercury solar pto the mercury solar pto organizational documents do not authorize thompson to make income allocations or distributions in testifying as to the nature of his duties and activities at mercury solar pto thompson made no mention of making any income allocations or distributions b independence of mercury solar pto trustees when mercury solar pto was purportedly created in someone named j clark atkinson atkinson was named fiduciary owner on the same day atkinson appointed sparkman as agent to operate the company to the same extent as if he were the owner in atkinson appointed porter as trustee notwithstanding that mercury solar pto’s formation documents make no provision for any trustee but only for fiduciary owners and resigned shortly thereafter as fiduciary owner thereby leaving mercury solar pto with no fiduciary owner on the basis of the evidence in the record we are not persuaded that either atkinson or porter served any independent role in mercury solar pto as fiduciary owner or trustee dollar_figure the evidence does not show that atkinson ever did anything except possibly sign some documents we draw an adverse inference from petitioners’ failure to call atkinson as a witness porter’s testimony on the other hand convinced us that she had no meaningful role at mercury solar pto but was merely an absentee similarly there is no indication in the record that the trustees or fiduciary owners of heh apart from sparkman had any meaningful role in that purported entity on date when mercury solar pto was purportedly created the trustees of heh were lee allan hansen and porter there is no indication in the record of what duties if any lee allan hansen performed with respect to heh other than signing some organizational documents nor is there any indication that porter had any significant duties as purported trustee of heh to the contrary her testimony evinced no meaningful knowledge of heh operations figurehead living in florida engaged in the film business doing the bidding of her ex-spouse sparkman in signing some papers for mercury solar pto at trial she evinced practically no knowledge of mercury solar pto’s organizational documents or its operations as evidenced in part by her lack of knowledge about the purported mercury solar pto record of certificate holders discussed in the next section she testified that operational decisions were made by sparkman or thompson and that income allocations were certainly not something i had a day to day involvement with c economic_interest of beneficiaries other than sparkman the stipulated evidence includes a document captioned certificate record for mercury solar beginning thi sec_15th july this purported certificate record shows that on date the date mercury solar pto was purportedly created heh was assigned units of mercury solar pto ie all the beneficial units authorized by the mercury solar pto formation document the purported certificate record shows that these units were released on date and that on that same date sparkman was assigned unitsdollar_figure accordingly sparkman then when asked to explain this evidence porter testified i think you’d have to ask these questions to mr sparkman or somebody else previously she had opined without reference to any evidence in the record that sparkman had owned units and heh had owned units sparkman’s testimony provided no credible insight into this matter sparkman seemed to suggest that both he and heh received units of mercury solar pto on continued held all authorized units of mercury solar pto inasmuch as there is no evidence that sparkman made any separate contribution to mercury solar pto or gave heh any consideration for its purported units of mercury solar pto this paper shuffling of mercury solar pto units to heh and then to sparkman further evidences the lack of economic reality of these arrangements according to the purported certificate in william montgomery and william bright were each assigned one unit of mercury solar pto and these units were also released on porter and sparkman acknowledged in their testimony that these entries were erroneous and that montgomery and bright never received any mercury solar pto units the only other entry on the purported certificate record shows that on date thompson was assigned one unit of mercury solar pto which was released on date porter the nominal trustee of mercury solar pto was unable to explain this entrydollar_figure the mercury solar pto minutes indicate that it was not until date that porter communicated with continued the theory that the signing a release doesn’t mean they are gotten rid of they are just handed out to the particular party sparkman’s theory is incompatible with the terms of the mercury solar pto formation document which authorized the issuance of only units in total with regard to this matter porter testified i can’t explain that it’s the first time i’ve seen the document sparkman about making thompson prospectively a beneficiarydollar_figure accordingly we are unpersuaded that thompson received any beneficial unit in in fact on the basis of all the evidence we do not believe that thompson ever became a beneficiary of mercury solar ptodollar_figure at trial thompson himself showed no prior awareness of being a beneficiary of mercury solar pto when questioned whether he was aware that he had a beneficial share of mercury solar pto thompson replied i am now when questioned what became of the share thompson replied i don’t know actually on the basis of all the evidence we conclude that sparkman was the only holder of beneficial units of mercury solar pto during the years at issuedollar_figure a photocopy of a written communication from amanda j mckeough-porter to sparkman dated date and captioned mercury solar p t o minutes states as we discussed on the phone myron thompson is to be made a beneficiary of mercury solar and issued a single beneficiary certificate to that effect please have the certificate prepared and forwarded to me for perusal and signature we are mindful that mercury solar pto’s federal_income_tax return includes a schedule_k-1 showing a dollar_figure distribution to thompson and that in this proceeding respondent has not sought to include this amount in sparkman’s income we are not persuaded however that this purported beneficiary’s share of mercury solar pto’s income represented anything more than payment for thompson’s services the mercury solar pto federal_income_tax returns for all other years at issue include schedules k-1 only for sparkman indeed in date during the trial of richter v continued d respect for trust restrictions as just discussed as agent of mercury solar pto sparkman was authorized to and did operate the mercury solar business to the same extent as if he were the owner he appears to have made almost entirely to himself the mercury solar pto income allocations and distributions even though the mercury solar pto formation document appears to confer that duty on the fiduciary owners moreover as previously noted mercury solar pto organizational documents were in practice disregarded in various important ways including these porter was named trustee even though the organizational documents made no provision for a trustee the first and only fiduciary owner resigned and was never replaced by another schedules a and b of the mercury solar pto formation document show heh’s being assigned beneficiary certificates twice even though the formation documents authorized only certificates in total the record of certificate ownership is by sparkman’s and porter’s acknowledgments erroneous and shows thompson as having been assigned a mercury solar pto certificate some weeks before porter even requested sparkman to prepare such a certificate continued commissioner tcmemo_2002_90 sparkman testified that he believed he was the only beneficiary of mercury solar pto in sum we conclude and hold that mercury solar pto lacked economic_substance and should be disregarded for federal tax purposes and its income attributed to sparkmandollar_figure iii unreported income from heco rebates the parties stipulated that for heco issued mercury solar pto a form_1099 showing nonemployee compensation of dollar_figure at trial and on brief petitioners seek to repudiate this stipulation on the ground that respondent has not produced a copy of the form_1099 without disputing that heco made payments of dollar_figure as part of a rebate program petitioners contend that only dollar_figure of those payments was made to mercury solar pto which duly reported that amount on its federal_income_tax return petitioners contend that the remaining amount of the heco for the first time on reply brief petitioners argue that if mercury solar pto is to be disregarded as a separate_entity then it should be recognized as not separate from heh and not sparkman as the respondent contends we construe petitioners’ syntactically challenged argument to be that if mercury solar pto is disregarded its income should be attributed to heh rather than to sparkman because petitioners did not raise this argument or position in their pretrial memorandum at trial or on opening brief respondent has had no opportunity to address petitioners’ position we find petitioners’ attempt to raise this argument to be untimely see 108_tc_590 but even if we were to consider petitioners’ argument it would be unavailing on the basis of all the evidence in the record we are unpersuaded that sparkman’s transfer of the mercury solar business to heh had any more economic reality than the subsequent retransfer to mercury solar pto furthermore on the basis of all the evidence we have found that sparkman not heh held all the beneficial interests in mercury solar pto during the years at issue payments was made to heh which they contend reported these amounts on its own returns respondent now concedes that mercury solar pto reported dollar_figure of the heco payment on its federal_income_tax return respondent contends however that the remaining dollar_figure was also income of the mercury solar business and should have been reported by sparkman in we agree the court does not permit a party to a stipulation to qualify change or contradict it except where justice may require rule e justice does not so require in these cases sparkman’s testimony does nothing to impugn his now-disputed stipulation but does much to bolster respondent’s position regarding the heco payments sparkman testified that heco provided rebates for installing solar systems but that heco might take up to months to process the payments sparkman testified that in order to receive the benefit of the heco payments more quickly-- mercury sought a factoring company that would take that receivable and pay it in cash and how it worked was mercury submitted invoices that it was owed by hawaiian electric company to aba funding a factoring company and aba funding took a percentage of the dollar_figure rebate depending on the time period it fronted the money from heco and then heco sent aba funding a check made payable to mercury solar which aba funding cashed via a power_of_attorney that it retained and apparently mid-1999 aba funding or mercury solar or heh decided they wanted the funds directed into the hawaii environmental holdings account instead of the mercury solar account the oft-cited first principle of income_taxation is that income must be taxed to him who earns it 337_us_733 sparkman’s testimony convinces us that the heco payments were income of the mercury solar business and hence sparkman’s income notwithstanding contractual arrangements with a factoring company to direct some of the payments to hehdollar_figure petitioners contend that heh reported the missing dollar_figure of heco rebate payments on its tax returns petitioners concede that heh did not file its federal tax_return until shortly before the trial in these cases but contend that this circumstance should not affect the credibility of the contents of the heh tax_return petitioners’ argument misses the mark in the first instance the evidence is insufficient for us to conclude with any on brief petitioners suggest that the heco rebate payments were divided between heh and mercury solar pto because pursuant to the heco rebate program heh was entitled to a portion of the rebate as the owner of the solar equipment and mercury solar pto was entitled to a portion of the rebate as the contractor of the equipment the premises of this contention are contrary to sparkman’s testimony whenever someone installs a solar system via the hawaiian electric company rebate program either the contractor or the homeowner is entitled to an dollar_figure cash subsidy emphasis added the terms and conditions of the heco rebate program are not otherwise clearly described in the record nor does the record otherwise contain any credible basis to support dividing the rebate income between heh and mercury solar pto the parties have not raised and we do not reach any issue regarding the proper tax treatment of the factoring fee that was allegedly paid to the factoring agent with respect to the heco payments certainty that heh ever reported the dollar_figure more fundamentally even if heh had reported the income that would not affect our conclusion that the income was from the mercury solar business and properly reportable by sparkman iv sparkman’s entitlement to claimed heh losses for each year at issue sparkman offset in whole or part his reported mercury solar pto income with claimed losses from heh the claimed heh losses result largely from claimed depreciation_deductions respondent contends that sparkman has not substantiated his entitlement to these claimed lossesdollar_figure we agree the only evidence introduced at trial in support of the claimed heh losses consists of self-serving figures listed in the no entry on the purported heh federal_income_tax return appears to correspond to the dollar_figure of disputed heco rebate payments if we believed that the dollar_figure of heco payments flowed through heh to sparkman and that he had consequently reported it on his own federal_income_tax return we might be sympathetic to an argument that sparkman should not be taxed twice on the same income petitioners have not raised this argument however and the record does not establish that sparkman reported any of the dollar_figure on his own return alternatively respondent argues that the transactions between heh and its customers whereby heh purportedly sold solar_energy to its customers while retaining title to the solar water heating equipment installed at the customers’ properties were in substance sales by heh of the equipment consequently respondent argues heh had no depreciable basis in the solar water heating equipment because we resolve this issue in respondent’s favor on the ground that petitioner has failed to substantiate the claimed heh losses we need not and do not address respondent’s alternative argument heh returns prepared signed and filed by sparkman less than weeks before trial and attachments thereto and sparkman’s returns for the years at issue we need not accept these figures and we decline to do so petitioners have the burden of demonstrating their entitlement to any deductions claimed rule a 292_us_435 a taxpayer must keep sufficient records to substantiate claimed deductions sec_6001 sec_1_6001-1 income_tax regs in particular to substantiate entitlement to a depreciation deduction the taxpayer must establish among other things the property’s depreciable basis by showing the property’s cost its useful_life and the previously allowable_depreciation see eg 105_tc_324 the record contains no credible_evidence establishing sparkman’s entitlement to the claimed heh losses consequently we sustain respondent’s determination that he is not entitled to the claimed heh losses for the years at issue v additional deductions claimed by sparkman on brief petitioners contend that if mercury solar pto is disregarded for tax purposes or if sparkman is found not to be entitled to his claimed heh losses then he should be permitted to amend his individual income_tax returns for the years at issue to claim additional charitable deductions and mortgage interest deductions petitioners’ brief does not specify what the amounts of these additional deductions should be nor point to any evidence in the record substantiating any such deductions in any event the record does not establish that sparkman is entitled to additional itemized deductionsdollar_figure vi penalties and additions to tax a addition_to_tax for failure to timely file returns respondent determined that sparkman is liable for sec_6651 additions to tax for failure to timely file his federal_income_tax returns for tax years and although the record contains correspondence from the church of scientology and related_organizations purporting to show contributions by sparkman some of which sparkman concedes he has already claimed on his federal_income_tax return sparkman testified that some unspecified amount of the contributions came from heh he testified for some reason they sent it to me it should have been sent to hawaii environmental holdings the church has added a confusion into it that they’ve sent me a statement when it should have been sent to someone else to murphy or to heh petitioners have not argued that we should disregard heh so as to entitle sparkman to deduct charitable deductions made by heh nor have petitioners otherwise shown that sparkman is entitled to deduct charitable_contributions made by heh similarly the record contains certain mortgage interest statements purportedly sent to sparkman by various lenders showing certain interest payments for sparkman’s testimony suggested that the additional interest_expense related to a california kagel canyon property that he claimed to have bought in we note however that in schedule a to the heh formation documents sparkman purported to convey kagel canyon real_estate to heh we also question whether sparkman owned the kagel canyon property at any relevant time evidence in the record shows that in date sparkman e-mailed porter inquiring about buying a farm from her porter testified that the property in question was a property in kagel canyon california sec_6651 imposes an addition_to_tax for failure to timely file a return unless the taxpayer establishes that the failure is due to reasonable_cause and not due to willful neglect a delay is due to reasonable_cause if the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time sec_301_6651-1 proced admin regs it is undisputed that sparkman filed his individual federal_income_tax returns for the years through on or about date accordingly respondent has met his burden of production pursuant to sec_7491 sparkman bears the burden of proving that his failure to timely file is due to reasonable_cause and not to willful neglect see 116_tc_438 sparkman has failed to carry this burden sparkman argues that his late filing was due to reasonable_cause because he had difficulty obtaining bookkeeping and accounting advice a taxpayer has a personal and nondelegable duty to file a timely return reliance on a bookkeeper or accountant does not provide reasonable_cause for an untimely filing 469_us_241 and cases cited therein perforce difficulty in finding a bookkeeper or accountant upon whom to rely does not provide reasonable_cause for an untimely filing sparkman is liable for the sec_6651 addition_to_tax with respect to each year at issue b accuracy-related_penalties respondent determined that sparkman is liable for sec_6662 accuracy-related_penalties for all years at issue sec_6662 imposes a 20-percent accuracy-related_penalty on any portion of a tax underpayment that is attributable to among other things negligence or disregard of rules and regulations negligence includes a failure to make a reasonable attempt to comply with the tax code to exercise ordinary care in preparing a tax_return or to substantiate items properly on a tax_return sec_1_6662-3 income_tax regs the evidence shows that sparkman failed to report income from his mercury solar business specifically dollar_figure of income from heco rebate payments which he purported to transfer to a sham trust and claimed losses from heh that he has failed to substantiate we find that the resulting understatements of sparkman’s income for all years at issue are attributable to sparkman’s negligence in failing to ascertain his correct income_tax_liability and in failing to substantiate claimed deductions accordingly respondent has met his burden of production pursuant to sec_7491 the sec_6662 accuracy-related_penalty is inapplicable to the extent the taxpayer has reasonable_cause and acted in good_faith sec_6664 this determination is made considering all relevant facts and circumstances sec_1_6664-4 income_tax regs generally the most important factor is the extent of the taxpayer’s effort to assess the taxpayer’s proper tax_liability id the taxpayer bears the burden of proving that he falls within this exception higbee v commissioner supra pincite sparkman claims he had reasonable_cause for claiming the heh losses because of ongoing litigation in hvidding v commissioner tcmemo_2003_151 and richter v commissioner tcmemo_2002_ concerning this same issue these cases involved heh customers’ right to claim energy credits these cases do not provide reasonable_cause for sparkman’s failure to substantiate his claimed heh losses sparkman claims he had reasonable_cause for failing to report a portion of the heco payments because the form_1099 was never received and somewhat inconsistently because he reasonably believed that heh had reported the balance of the heco income not reported by mercury solar pto we have found as petitioners stipulated that heco issued a form_1099 to mercury solar pto for all the payments in question the evidence does not establish that heh reported or should have reported the disputed heco payments or that petitioner who prepared the heh returns reasonably believed otherwise more fundamentally the evidence does not establish that sparkman had reasonable_cause to believe that the heco payments were properly considered as income to anyone other than himself we hold that sparkman is liable for sec_6662 accuracy-related_penalties for all years at issue to reflect concessions by respondent decisions will be entered under rule in docket no and for petitioner in docket no


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 ---------------------------------------- telephone number --------------------- refer reply to cc ita b03 plr-138560-05 date date --------- --------------------------- --------------------------- --------------------------------- ein ---------------- -------------------------------------------------------------------- ------------------------------------------------------------------ ein ---------------- parent subsidiary year x date y date z post office building ----------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ----------------------------------------------- agency dear --------------- authorized representative requesting an extension of time pursuant to sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to file on behalf of subsidiary the original form_3115 application_for change in accounting_method for year x the facts as represented by parent are as follows this is in response to a letter dated date submitted by your ---------------------------------------------------- plr-138560-05 parent timely prepared its consolidated federal_corporation income_tax return including the accompanying elections notices and certifications all of which were to be filed on date y the due_date for the return plus an automatic six month extension parent hired a courier service to deliver its returns to post office for mailing on date y the post office is located across the street from building which was in a state of high security on date y as a result of agency having identified building as allegedly targeted by terrorists as a result of a series of unforeseen events arising from this terrorist threat the courier could not and did not timely file parent’s return the return was filed on the following day date z until the morning of date z parent was unaware of the courier delay affidavits submitted substantiate these facts among other required or permitted documents and schedules parent’s return contained an original form_3115 application_for change in accounting_method with respect to the capitalization of intangibles pursuant to sec_1 a of the income_tax regulations the copy of form_3115 was mailed to the irs national_office on date z sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election sec_301_9100-1 defines a 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_9100-1 through set forth the standards to be used by the commissioner in determining whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government based solely on the facts and the representations submitted we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been met accordingly an extension of time is hereby granted for parent to file the original form_3115 for a change in accounting_method for subsidiary in this regard we will consider the form_3115 attached to parent’s consolidated federal_corporation income_tax return for year x and the copy mailed to the irs national_office to be timely filed a copy of this letter_ruling should be associated with the form_3115 except as specifically ruled upon above no opinion is expressed or implied concerning the federal_income_tax consequences of the facts described above specifically no opinion is expressed or implied concerning i whether parent is plr-138560-05 qualified to file the form_3115 for the change in method_of_accounting described above under revproc_2002_9 ii whether parent meets the requirements of that revenue_procedure for the form_3115 described above or iii whether each item of property or expenditure that is the subject of the form_3115 described above meets the requirements of revproc_2002_9 further this ruling letter does not grant an extension of time for filing parent’s consolidated federal_income_tax return for year x this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent in accordance with the provisions of the power_of_attorney on file with this office we are sending a copy of this ruling letter to parent’s authorized representative sincerely _______________________________ christopher f kane chief branch associate chief_counsel income_tax accounting enclosure copy for purposes cc


t c summary opinion united_states tax_court clayton schuyler young petitioner v commissioner of internal revenue respondent docket no 188-13s filed date clayton schuyler young pro_se alicia h eyler for respondent summary opinion cohen judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time that the petition was filed the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless otherwise indicated all section references are to the internal_revenue_code in effect at all relevant times and all rule references are to the tax_court rules_of_practice and procedure this case was commenced in response to a final notice denying petitioner’s request for relief under sec_6015 with respect to unpaid tax on a joint_return filed by petitioner and his former spouse for background some of the facts have been stipulated and the stipulated facts are incorporated in our findings by this reference petitioner resided in california at the time his petition was filed in petitioner worked as a regional manager for a healthcare company he also sold some stock in his personal investment account which resulted in capital_gains on date petitioner and his spouse andrea s young young collectively youngs separated the youngs’ form_1040 u s individual_income_tax_return was prepared by a tax_return preparation service petitioner provided the tax_return preparation service with all tax-related documents the youngs elected to file jointly their federal tax_return their return reported wage dividend and capital_gain income attributable only to petitioner and not to young the return showed tax owed of dollar_figure which was not paid at that time it also reported young’s occupation as homemaker petitioner took the completed tax_return to young which she signed and then he signed the return himself the youngs finalized their divorce in as part of their divorce settlement the youngs agreed to and signed a memorandum of understanding of settlement settlement agreement item of the settlement agreement provides that petitioner would assume the federal and state_income_tax liabilities on the jointly filed returns when collection procedures began towards the youngs’ self-reported tax_liability petitioner entered into an installment_agreement with the internal_revenue_service irs however petitioner also executed a form_8857 request for innocent spouse relief which the irs received on date in an attachment to his request for relief petitioner asserted that the irs was attempting to collect the tax_liability only from him and not equally trying to collect from young petitioner indicated on his request that he was not a victim of spousal abuse the irs considered petitioner’s request for relief on date the irs sent letter 3661c preliminary determination to petitioner proposing to deny relief under sec_6015 because the tax owed derived from his own income petitioner appealed the irs’ preliminary determination to the irs office of appeals appeals_office the appeals_office reviewed petitioner’s request for relief in letter final appeals determination dated date the appeals_office upheld the irs’ determination for the same reason petitioner is not entitled to relief for tax that he owes on his own income discussion generally married taxpayers may elect to file a joint federal_income_tax return sec_6013 after making the election each spouse is jointly and severally liable for the entire tax due for that taxable_year sec_6013 a spouse seeking relief from joint_and_several_liability may follow procedures established in sec_6015 if the disputed liability involves nonpayment of taxes shown on a joint_return the only relief available is under sec_6015 see 120_tc_137 sec_6015 authorizes the commissioner to grant equitable relief from joint_and_several_liability if taking into account all the facts and circumstances it is inequitable to hold the individual liable for any unpaid tax or any deficiency or any portion of either this court applies a de novo scope and standard of review to a taxpayer’s request for innocent spouse relief 132_tc_203 the requesting spouse bears the burden_of_proof with respect to relief under sec_6015 id citing rule a as directed by sec_6015 the commissioner has prescribed procedures to determine whether a taxpayer qualifies for equitable relief from joint_and_several_liability these procedures are set forth in revproc_2013_34 sec_4 2013_43_irb_397 see generally reilly-casey v commissioner tcmemo_2013_292 the court recognizes the use of these procedures in reviewing a sec_6015 determination see washington v commissioner t c pincite reviewing the commissioner’s application of the prescribed guidelines in revproc_2000_15 2000_1_cb_447 a predecessor to revproc_2013_34 supra because of the straightforward nature of the record however we need not address all the threshold conditions circumstances and factors listed in revproc_2013_34 sec_4 instead we focus on one of the seven threshold conditions required to be met before a request under sec_6015 can be considered the income_tax from which relief is sought must be attributable to an underpayment resulting from the nonrequesting spouse’s income unless a specified exception applies see revproc_2013_34 sec_4 i r b pincite thus the key consideration here and the basis for the negative determinations is that petitioner generated all the income himself--none is attributable to young petitioner did not argue or show that any exception to meeting this threshold condition exists without having met this threshold condition petitioner cannot obtain relief at trial petitioner stated that he is not looking for complete relief from his tax_liability but simply that the liability be split equitably between young and himself as previously discussed however a joint_return makes each filer jointly and severally liable for the entire tax the irs can collect fully from either party in view of the entire record we conclude that petitioner is not entitled to relief pursuant to sec_6015 from his joint_and_several tax_liability for we have considered the other arguments of the parties and they are not material to our conclusions to reflect the foregoing decision will be entered for respondent