t c memo united_states tax_court muhieddin a ghazawi and ghada ghazawi petitioners v commissioner of internal revenue respondent docket no filed date charles a rose stephen a sherman and james b martin jr for petitioners diana n wells and denise a diloreto for respondent memorandum findings_of_fact and opinion nega judge respondent issued a notice_of_deficiency to petitioners determining deficiencies in income_tax an addition_to_tax and accuracy-related_penalties as follows 1unless otherwise indicated all section references are to the internal continued year deficiency dollar_figure big_number addition_to_tax sec_6651 penalty sec_6662 dollar_figure --- dollar_figure big_number the threshold issues for decision are whether ghada inc ghada muhieddin ghazawi’s mr ghazawi wholly owned s_corporation failed to report dollar_figure of gross_receipts for and is entitled to reduce gross_receipts by dollar_figure and dollar_figure of cost of goods purchased for resale cogs for and respectively the additional issues for decision are whether petitioners failed to report dollar_figure and dollar_figure of nonpassive_income from ghada for and respectively are entitled to deduct dollar_figure and dollar_figure of mortgage interest_expenses reported on schedules e supplemental income and loss for and respectively and are liable for accuracy- related penalties under sec_6662 for and continued revenue code code in effect for the taxable years at issue and all rule references are to the tax_court rules_of_practice and procedure all monetary amounts are rounded to the nearest dollar 2these are the amounts of cogs petitioners claimed they exceed the amounts respondent determined in the notice_of_deficiency of dollar_figure and dollar_figure for and respectively 3at trial respondent conceded that ghada did not fail to report dollar_figure of continued findings_of_fact some of the facts are stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference petitioners resided in kentucky when the petition was filed during and the taxable years at issue mr ghazawi was the sole owner of ghada ghada operated a convenience store dino’s food mart dino which sold gasoline lottery tickets and groceries on date ghada sold all of its assets including dino to samer llc samer ghada ghazawi’s wholly owned s_corporation ghada filed forms 1120s u s income_tax return for an s_corporation for the taxable years at issue and on the forms indicated that it reported income and expenses on an accrual basis for federal_income_tax purposes during the taxable years at issue ghada maintained two checking accounts at republic bank accounts ending in and hereinafter account or account both accounts were held open in ghada’s name for the duration of the taxable years at issue notwithstanding ghada’s sale of assets to samer continued sec_1231 gain for after trial petitioners conceded in their opening brief that ghada failed to report dollar_figure of income from lottery commissions for and in their answering brief that they are liable for an addition_to_tax under sec_6651 for petitioners filed joint returns for the taxable years at issue and reported dollar_figure and dollar_figure of nonpassive_income from ghada’s schedules k-1 shareholder’s share of income deductions credits etc for and respectively petitioners’ returns were prepared by monger co an accounting and bookkeeping firm nyenatee monger an accountant bookkeeper and owner of monger co was either the preparer or the third-party_designee of petitioners’ returns for the taxable years at issue mr monger generated profit and loss summaries for petitioners using ghada’s bank statements and monthly cash register tapes on date respondent sent petitioners a notice_of_deficiency for tax_year sec_2011 and sec_2012 that made no adjustment to ghada’ sec_2011 reported gross_receipts but determined by using a bank_deposits analysis of ghada’s accounts and that ghada had failed to report dollar_figure of gross_receipts for the notice_of_deficiency also disallowed dollar_figure and dollar_figure of ghada’s reported cogs for and respectively on the basis of respondent’s adjustments to ghada’s gross_receipts and cogs the notice_of_deficiency determined that petitioners had failed to report income from ghada 4as stated supra note respondent determined cogs of dollar_figure and dollar_figure for and respectively for the taxable years at issue petitioners claimed mortgage interest_expense deductions for interest_paid on two loans loan accounts and hereinafter loan or loan petitioners claimed schedule e expense deductions of dollar_figure for mortgage interest_paid to banks etc for petitioners claimed deductions of dollar_figure on schedule a itemized_deductions for points not reported to you on form hereinafter schedule a points for respondent’s notice_of_deficiency allowed dollar_figure of petitioners’ interest_paid for 2011--dollar_figure and dollar_figure for interest_paid on loans and respectively--and disallowed all of petitioners’ schedule a points for petitioners timely filed a petition for redetermination of the deficiencies petitioners did not introduce documentation other than bank statements to verify ghada’s reported gross_receipts for we will discuss the gross_receipts issue later in our opinion petitioners introduced documents to substantiate ghada’s claimed cogs for the taxable years at issue petitioners’ documentation included bank statements for accounts and from and with images of checks written from those accounts copies of deposits made to accounts and for a m oil co ’s a m oil customer ledgers for dino from and statements from lambert’s distributors inc lambert reflecting various transactions with dino during invoices from anheuser busch for and modified copies of ghada’s quickbooks reports for account we find that petitioners’ documentation substantiates that ghada incurred dollar_figure and dollar_figure of cogs for and respectively these amounts are less than the amounts petitioners claimed and only cogs for is more than the amount respondent determined cogs for is less than the amount respondent determined before trial petitioners stipulated that they were not entitled to a dollar_figure schedule a points deduction for after trial on date petitioners made a motion to conform the pleadings to the evidence to assert a schedule e interest_paid deduction on date this court under rule b granted petitioners’ motion to conform the pleadings to the evidence which allowed petitioners to assert as though pleaded on their original petition that they were entitled to a dollar_figure schedule e interest_paid deduction for petitioners introduced the following documentation to support their claimed interest_paid deductions for and loan master reports for loans and from and showing the transaction dates principal and interest 5cogs for comprises dollar_figure from a m oil dollar_figure from lambert and dollar_figure from anheuser busch and cogs for comprises dollar_figure from a m oil dollar_figure from lambert and dollar_figure from anheuser busch amounts and a description of the payments various monthly bank statements from petitioners’ personal bank account for and a variety of check images in conjunction with those bank statements hereinafter collectively loan documentation petitioners did not introduce any additional documentation for their claimed interest_paid deductions for we find that petitioners’ loan documentation substantiates that they made the following payments in loan master report transaction date date date date date date date bank account check no interest allocated to loan account dollar_figure big_number big_number big_number big_number big_number no documentation was introduced to substantiate that petitioners were the payors of the remaining interest payments--some payments were made in cash and were not substantiated and other_payments came from check numbers associated with ghada’s bank accounts accordingly we find as fact that petitioners paid interest of dollar_figure and zero for and respectively opinion i burden_of_proof the commissioner’s determinations in a notice_of_deficiency are generally presumed correct and the taxpayer ordinarily bears the burden of proving those determinations erroneous rule a 290_us_111 for cases appealable to the court_of_appeals for the sixth circuit such as the current case the commissioner may not rely on the presumption of correctness with regard to a determination of unreported income unless that determination is supported by a minimal evidentiary foundation 909_f2d_915 6th cir quoting 596_f2d_358 9th cir rev’g 67_tc_672 see 54_tc_742 aff’d 445_f2d_985 10th cir respondent has met this burden by introducing a bank_deposits analysis for ghada’s bank accounts that indicates ghada received unreported income thus respondent’s determinations in the notice_of_deficiency are entitled to their general presumption of correctness and petitioners bear the burden of proving by a preponderance_of_the_evidence that respondent’s determinations of unreported income are arbitrary or erroneous see 293_us_507 64_tc_651 aff’d f 2d 6th cir the taxpayer may prove that the commissioner’s reconstruction of his income is in error in whole or in part by proving that a deposit is nontaxable see 102_tc_632 the evidence does not establish that the burden_of_proof shifts to respondent under sec_7491 as to any issue of fact deductions are a matter of legislative grace the taxpayer bears the burden of proving entitlement to deductions allowed by the code and of substantiating expenses underlying claimed deductions by keeping and producing records sufficient to enable the commissioner to determine the correct_tax liability sec_6001 503_us_79 292_us_435 sec_1_6001-1 e income_tax regs the commissioner bears the burden of production with respect to any accuracy-related_penalties under sec_6662 see sec_7491 116_tc_438 once the burden of production is met the taxpayer bears the burden_of_proof including the burden of proving reasonable_cause for his or her underpayment of federal_income_tax see rule a higbee v commissioner t c pincite ii ghada’s returns a gross_receipts sec_61 defines gross_income as all income from whatever source derived including g ross income derived from business sec_61 this definition is construed broadly and has been held to encompass all ‘accessions to wealth clearly realized and over which the taxpayers have complete dominion ’ 366_us_213 quoting 348_us_426 a taxpayer has dominion and control_over an account when the taxpayer has the freedom to use its funds at will see 343_us_130 petitioners were required but failed to maintain adequate books_and_records establishing the amounts of their gross_income see sec_6001 92_tc_661 sec_1_446-1 income_tax regs when a taxpayer fails to keep adequate books_and_records the commissioner is authorized to determine the existence and amount of the taxpayer’s income and may appropriately employ the bank_deposits method to estimate the taxpayer’s income sec_446 petzoldt v commissioner t c pincite estate of mason v commissioner t c pincite the commissioner has great latitude in reconstructing a taxpayer’s income and the reconstruction need only be reasonable in the light of all surrounding facts and circumstances petzoldt v commissioner t c pincite bank_deposits are prima facie evidence of income 87_tc_74 estate of mason v commissioner t c pincite the bank_deposits method assumes that all deposits into a taxpayer’s account are taxable unless the taxpayer can show that the deposits are nontaxable and the government must take into account any non-taxable source of which it has knowledge 335_f2d_671 5th cir see 96_tc_858 aff’d 959_f2d_16 2d cir respondent’s revenue_agent employed the bank_deposits method to reconstruct ghada’s income because she determined ghada’s records were incomplete as a result of ghada’s significant use of cash the revenue_agent used ghada’s bank account statements which are part of the record to prepare a bank_deposits analysis excluding all nontaxable receipts of which she was aware respondent reasonably relied on the bank_deposits method to determine ghada’s taxable_income on which petitioners’ resulting income_tax deficiencies are based petitioners contend that they did not fail to report dollar_figure of gross_receipts for they maintain that the deposits received in november and december are not attributable to ghada because ghada sold all of its assets to samer on date and therefore those gross_receipts are properly attributable to samer petitioners did not introduce any documentation such as proof of signatory authority over the ghada bank accounts a sales contract or any other credible_evidence to prove that the gross_receipts received in november and date are attributable to samer or were properly included on samer’ sec_2012 tax_return further accounts and were both held open in ghada’s name from date until date including after ghada’s sale of assets to samer on date ghada had complete dominion and control_over the accounts for the taxable years at issue accordingly petitioners failed to prove that respondent’s reconstruction of ghada’s income was in error all taxable deposits into accounts and for are therefore properly included in the calculation of ghada’ sec_2012 gross_receipts and we sustain respondent’s determinations of unreported income consistent with the revenue agent’s bank_deposits analysis b cogs sec_162 allows as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business an accrual basis taxpayer such as ghada is allowed a deduction during the taxable_year in which the expenses are incurred the cost of goods purchased for resale with proper adjustment for opening and closing inventories as determined in accordance with the taxpayer’s method_of_accounting is not a deduction within the meaning of sec_162 but is subtracted from gross_receipts in determining a taxpayer’s gross_income 139_tc_19 n aff’d 792_f3d_1146 9th cir see sec_1_162-1 income_tax regs petitioners’ documentation substantiates that they incurred dollar_figure and dollar_figure of cogs for and respectively we do not find the modified copy of the quickbooks to be credible documentation of petitioners’ cogs we therefore hold that petitioners substantiated and are thus entitled to dollar_figure of cogs for petitioners have not substantiated cogs in excess of respondent’s determination for and are therefore entitled to the amount of cogs respondent determined in the notice_of_deficiency for iii petitioners’ unreported gross_income for and sec_1366 provides that an s_corporation shareholder determines his or her tax_liability by taking into account his or her pro_rata share of the s corporation’s income losses deductions and credits for the s corporation’s taxable_year ending with or in the shareholder’s taxable_year we hold that petitioners received unreported nonpassive_income from ghada as will be determined under rule taking into consideration respondent’s concession as to ghada’s sec_1231 gain for petitioners’ concession as to ghada’s income from lottery commissions for and our holdings regarding ghada’s gross_receipts for and cogs for and iv petitioners’ schedule e mortgage interest_expense for and sec_163 generally permits a deduction for all interest_paid or accrued within the taxable_year on indebtedness cash_basis taxpayers such as petitioners are allowed a deduction for interest_paid during the taxable_year in cash or its equivalent see 429_us_569 70_tc_482 aff’d 652_f2d_598 6th cir petitioners’ loan documentation substantiates that they paid interest of dollar_figure and zero for and respectively we therefore find that petitioners are not entitled to an interest_paid deduction for or in excess of respondent’s determinations in the notice_of_deficiency v sec_6662 penalties for tax_year sec_2011 and sec_2012 sec_6662 and b imposes an accuracy-related_penalty on any portion of an underpayment of federal_income_tax that is attributable to the taxpayer’s substantial_understatement_of_income_tax an understatement of federal_income_tax is substantial if the amount of the understatement for the taxable_year exceeds the greater of of the tax required to be shown on the return or dollar_figure sec_6662 if the rule_155_computations confirm substantial understatements for the taxable years at issue then respondent has met his burden of producing evidence that the penalties are justified see sec_7491 once respondent has met his burden petitioners may avoid sec_6662 accuracy-related_penalties if they can demonstrate reasonable_cause for each underpayment and that they acted in good_faith with respect to each underpayment see sec_6664 a determination of reasonable_cause and good_faith is made on a case-by-case basis taking into account all pertinent facts and circumstances see sec_1_6664-4 income_tax regs for purposes of sec_6664 a taxpayer may establish reasonable_cause and good_faith with respect to the amount of tax_liability reported on a return thereby negating a sec_6662 accuracy-related_penalty by showing his reliance on professional advice sec_1_6664-4 income_tax regs we stated in 115_tc_43 aff’d 299_f3d_221 3d cir that for a taxpayer to rely reasonably upon advice so as possibly to negate a sec_6662 accuracy-related_penalty determined by the commissioner the taxpayer must prove by a preponderance_of_the_evidence that the taxpayer meets each requirement of the following three-prong test the adviser was a competent professional who had sufficient expertise to justify reliance the taxpayer provided necessary and accurate information to the adviser and the taxpayer actually relied in good_faith on the adviser’s judgment petitioners assert that they acted with reasonable_cause and in good_faith with respect to their underpayment for each year by hiring mr monger providing mr monger with information necessary for keeping accurate records and preparing tax filings and ultimately relying on mr monger’s advice when filing their tax returns when interpreting the meaning of advice this court has looked to the definition of the term in sec_1_6664-4 income_tax regs advice defined --advice is any communication including the opinion of a professional tax advisor setting forth the analysis or conclusion of a person other than the taxpayer provided to or for the benefit of the taxpayer and on which the taxpayer relies directly or indirectly with respect to the imposition of the sec_6662 accuracy-related_penalty advice does not have to be in any particular form see 136_tc_585 when a taxpayer asserts reliance on advice from a competent professional as an affirmative defense to an addition_to_tax or a penalty the supreme court has held that advice must consist of substantive advice reflecting an adviser’s analysis or conclusion as opposed to a nonprofessional function which requires no special training see 469_us_241 woodsum v commissioner t c pincite citing neonatology assocs p a v commissioner t c pincite petitioners have not proven that mr monger provided substantive advice with respect to any of the items reported on petitioners’ tax returns for the taxable years at issue both mr monger’s and petitioners’ relevant testimony established that mr monger merely reported ghada’s income from the information that petitioners provided to him mr monger determined ghada’s cogs from ghada’s bank statements and vendor invoices logs and petitioners told mr monger the amounts they wanted to report as rental expenses there is no evidence that mr monger provided substantive advice setting forth an analysis or conclusion on which petitioners relied we find that petitioners have not established reasonable_cause and good_faith as a defense to the accuracy-related_penalties we therefore hold that if rule_155_computations confirm substantial understatements of income_tax petitioners are liable for penalties for underpayments attributable to substantial understatements of income_tax under sec_6662 and b we have considered all the other arguments made by the parties and to the extent not discussed above find those arguments to be irrelevant moot or without merit to reflect the foregoing decision will be entered under rule


t c summary opinion united_states tax_court j drew koester petitioner v commissioner of internal revenue respondent docket no 31028-14s filed date j drew koester pro_se martha jane weber for respondent summary opinion halpern judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed 1hereinafter unless otherwise stated all section references are to the internal_revenue_code_of_1986 as amended pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case respondent determined a deficiency of dollar_figure in petitioner' sec_2012 federal_income_tax petitioner had reported hi sec_2012 federal_income_tax on form_1040 u s individual_income_tax_return respondent examined the return and made an adjustment reducing petitioner's deduction for alimony paid from dollar_figure to dollar_figure an adjustment of dollar_figure respondent made the adjustment because he did not believe that a payment of that amount--equal to a portion of the employment-related bonus that petitioner received in 2012--constituted deductible_alimony petitioner assigned error to the adjustment the only question for decision is whether the dollar_figure payment is deductible as alimony background the parties have stipulated certain facts and the authenticity of certain documents the facts stipulated are so found and documents stipulated are accepted as authentic petitioner bears the burden_of_proof see rule a tax_court rules_of_practice and procedure petitioner resided in tennessee when he filed the petition petitioner's ex-wife filed for divorce with the chancery court for the 30th judicial district of memphis chancery court shelby county tennessee sometime before the year at issue after the filing petitioner and his ex-wife executed a marital dissolution agreement on date mda providing among other things for the distribution_of_property and for support petitioner's ex-wife was represented by counsel during the divorce proceedings but petitioner was not counsel for petitioner's ex-wife drafted the mda the mda provides the following incorporation permanent and pendente lite all such parts of this agreement as might be material except those that might be lessened or destroyed shall be incorporated in the final decree pending the entry of the final decree the parties agree to the filing of this agreement and by said filing specifically consent to and authorize the entry of a consent order binding them to the terms of this agreement by the signing of this agreement the parties stipulate to these terms being enforceable as if they were at the moment of signing an order of this court 2petitioner has not raised the applicability of sec_7491 which shifts the burden_of_proof to the commissioner in certain situations we conclude that sec_7491 does not apply here because petitioner has not produced any evidence that he has satisfied the preconditions for its application the record does not contain a final decree of divorce from the chancery court the parties have not argued that the mda was ineffective for and have proceeded on the premise that it was both binding and enforceable in the mda contains specific provisions regarding the division of the following property real_estate personalty automobiles sec_401 plan benefits brokerage accounts stocks profit interest units and bank accounts petitioner conveyed his interest in the couple's real_estate which was subject_to debt to his ex-wife in turn petitioner's ex-wife was to refinance the debt on the real_estate to remove petitioner from the debt and within days of doing so had to pay petitioner dollar_figure for his marital interest in the real_estate petitioner received and his ex-wife received of the aggregate value of the sec_401 plan benefits brokerage accounts stocks profit interest units and bank accounts the mda also contains specific provisions awarding petitioner's ex-wife two forms of support petitioner was required to pay and hold his ex-wife harmless for three unsecured debts as non-deductible non-dischargeable alimony in solido because payment of the debts was necessary for his ex-wife's support the mda also contains the following provision regarding petitioner's obligation to pay what it describes as transitional alimony alimony provision alimony husband shall pay to wife as transitional alimony in the amount of three thousand three hundred dollars dollar_figure per month on or before the fifth day of each month husband agrees to pay the transitional alimony beginning the first month immediately preceding the entry of the final decree of divorce and each and every month thereafter through date lastly the mda contains a specific provision for the division of petitioner's bonus income bonus provision husband's bonus income wife shall be entitled to a portion of husband's bonus income beginning the month immediately preceding the entry of the final decree of divorce through date as a division of marital property the parties agree that fifty percent sic of each bonus during said time frame will be applied to the parties' minor son's college education fund and the remainder of each bonus will then be split equally between the parties at the time petitioner and his ex-wife executed the mda his monthly gross_income was dollar_figure and her monthly gross monthly income was zero petitioner agreed to pay his ex-wife monthly child_support of dollar_figure and to pay for his son's private school tuition through grade petitioner and his ex-wife agreed to divide equally the expense of an automobile for their son and the balance of any college tuition expenses for their son not covered by an education savings account established for his benefit in petitioner received from his employer a bonus payment net of taxes and deductions of dollar_figure and in that year in accordance with the bonus provision he paid his ex-wife dollar_figure bonus payment respondent denied petitioner the deduction for alimony paid that he claimed on account of the bonus payment discussion sec_215 allows a taxpayer a deduction for alimony payments made during the taxable_year the term alimony is defined for purposes of sec_215 as any payment of alimony that is includible in the income of the recipient under sec_71 see sec_215 in pertinent part sec_71 defines an alimony payment as any payment in cash that satisfies the following four requirements a such payment is received by or on behalf of a spouse under_a_divorce_or_separation_instrument b the divorce_or_separation_instrument does not designate such payment as a payment which is not includible in gross_income under this section and not allowable as a deduction under sec_215 c in the case of an individual legally_separated from his spouse under a decree of divorce or of separate_maintenance the payee spouse and the payor spouse are not members of the same household at the time such payment is made and d there is no liability to make any such payment for any period after the death of the payee spouse and there is no liability to make any payment in cash or property as a substitute for such payments after the death of the payee spouse the bonus payment was made pursuant to the bonus provision respondent concedes that the bonus payment satisfied the requirements of sec_71 b and c that leaves the question of whether petitioner's obligation to make payments under the bonus provision would have continued if his ex-wife had died before date the scheduled end of petitioner's obligation to make the payments if his obligation would have continued then the bonus provision failed to satisfy the requirement of sec_71 that there be no liability to make a payment for any period after the death of the payee ex-spouse and if it failed to satisfy that requirement then the bonus payment would not qualify as the payment of alimony within the meaning of sec_71 on the face of it the bonus provision is absolute as to the term of the ex- spouse's entitlement to a share of petitioner's bonus income viz through date and it does not provide for the earlier termination of petitioner's obligation to make the payments if the ex-wife should die nevertheless to determine whether petitioner's obligation to make payments under the bonus provision would survive the death of petitioner's ex-wife we must look beyond the terms of the bonus provision to the law of the state of tennessee see 309_us_78 state law creates legal interests and rights the federal revenue acts designate what interests or rights so created shall be taxed megibow v commissioner tcmemo_1998_455 wl at payments that cease upon the payee's death by operation of state law can still qualify under sec_71 for special tax treatment under sec_215 despite the parties' failure to specify in the divorce instrument that the payments terminate upon the payee's death 102_f3d_842 6th cir aff'g tcmemo_1995_183 the supreme court of tennessee has characterized a marital dissolution agreement as a contract entered into by a husband and wife in contemplation of 3the court noted in rogers v commissioner tcmemo_2005_50 tax ct memo lexi sec_49 at limiting deductibility to obligations that end with the death of the payee stops taxpayers from disguising property_settlements as alimony but one recurring problem has been how to tell whether a particular obligation to pay alimony really would stop at death for a time the code had a strict bright-line_test deductibility was denied unless there was an express provision in the divorce decree or separation instrument itself ending payments upon the death of the payee spouse sec_71 in though congress softened sec_71 to allow deductibility without such an express provision but only if state law would end the obligation at death anyway divorce e g eberbach v eberbach __ s w 3d __ wl at tenn date as such it provide s a vehicle for divorcing parties to among other things provide 'for the equitable settlement of any property rights between the parties ' altman v altman s w 3d tenn ct app quoting tenn code ann sec b as a contract a mda generally is subject_to the rules governing construction of contracts if approved by the trial_court the mda is incorporated into the decree of divorce once incorporated issues in the mda that are governed by statutes such as alimony lose their contractual nature and become a judgment of the court the trial_court retains the power and discretion to modify terms contained in the mda relating to these statutory issues upon sufficient changes in the parties' factual circumstances eberbach wl at however it is still construed in the same manner as a contract in re estate of steil no m2011-00701-coa-r3-cv wl at tenn ct app date and while the domestic relations law of tennessee provides for the award of alimony see tenn code ann sec subsection m of that section provides that nothing in the section shall be construed to prevent the affirmation ratification and incorporation in a decree of an agreement between the parties as to support and maintenance of a party the court_of_appeals of tennessee has held the alimony statutes are not applicable where the parties agree in a marital dissolution agreement to terms different from those set out in the statutes vick v hicks no w2013-02672-coa-r3-cv wl at tenn ct app date we assume that the mda was approved by the chancery court and was incorporated into petitioner and his ex-wife's divorce decree there is no evidence that the mda has in any way been modified by the chancery court nevertheless petitioner argues that as shown by the nature and intent of the mda the bonus provision obligates him to pay what had the chancery court made the an award on the same terms would have been transitional alimony transitional alimony is a class of alimony that a tennessee court may award see tenn code ann sec d through g it terminates on the death of he recipient id sec g it is described as a sum of money payable by a spouse for a determinate period and awarded when the court finds that rehabilitation is not necessary but the economically disadvantaged spouse needs assistance to adjust to the economic consequences of a divorce id sec g petitioner has failed to persuade us that the bonus payment pursuant to the bonus provision was made to assist his ex-wife to adjust to the economic consequences of divorce or that such payments were to terminate on her death before date we start with the fact that the mda does in the alimony provision specify monthly payments of dollar_figure through date described as transitional alimony petitioner and his ex-wife or at least her attorney thus apparently knew how to describe a stream of payments for a determinable period as being unnecessary for her rehabilitation but necessary to assist her--she being economically disadvantaged--to adjust to the economic consequences of divorce moreover petitioner has not provided any evidence of his ex-wife's expected expenses to allow us to find that the stated transitional alimony under the alimony provision was not sufficient for her to adjust to the economic consequences of her divorce from petitioner additionally other provisions in the mda limit any economic disadvantage to her resulting from her divorce from petitioner she received more than of the division of the liquid assets-- sec_401 plan benefits brokerage accounts stock profits interest units and bank accounts petitioner also paid child_support and was obligated to pay certain unsecured debts 4respondent has accepted petitioner's payment in of dollar_figure dollar_figure ' dollar_figure to his ex-wife as a payment of alimony deductible under sec_215 petitioner and his ex-wife were in the best position to specify how they wanted the payment at issue to be classified for federal_income_tax purposes as the supreme court of tennessee noted in self v self s w 2d tenn in addition to the rights and obligations of the parties with respect to each other the liability for taxes the rights of creditors and other significant consequences may depend upon the preciseness of the language employed in the decree construction by the courts of uncertain and ambiguous language is a poor substitute for careful articulation moreover the bonus provision is without condition as to the ex-wife's entitlement to payments through date petitioner has not convinced us that even were we to find that payments made pursuant to the bonus provision were made to assist his ex-wife to adjust to the economic consequences of divorce a tennessee court would on his ex-wife's death before date allow petitioner to cease making payments to her estate see vick wl at parties may agree in a marital dissolution agreement that a transitional alimony obligation shall not be modifiable and courts should hold the parties to their agreement petitioner has failed to persuade us that his obligation to make payments under the bonus provision would have ceased if his ex-wife had died before date the scheduled end of his obligation to make those payments therefore the bonus provision fails to satisfy the requirement of sec_71 that there be no liability to make such payments for any period after her death and because it fails to satisfy that requirement the bonus payment did not qualify as the payment of alimony within the meaning of sec_71 therefore we sustain respondent's adjustment disallowing petitioner's deduction of dollar_figure as alimony we sustain in full respondent's determination_of_a_deficiency in tax for decision will be entered for respondent


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc corp b03-plr-128564-01 date date purchaser sellerparent seller target state x state y date a date b sellerparent officers purchaser officer this letter responds to a letter dated date submitted by purchaser’s and sellerparent’s authorized representative requesting an extension of time under sec_301_9100-1 through of the procedure and administration regulations to file an election purchaser and sellerparent are requesting an extension to file a sec_338 election under sec_338 and sec_338 of the internal_revenue_code and sec_1_338_h_10_-1 of the income_tax regulations with respect to purchaser’s acquisition of the stock of target sometimes hereinafter referred to as the election plr-128564-01 on date a all citations in this letter to regulations under sec_338 are to regulations in effect on date a the material information is summarized below purchaser is a c_corporation incorporated in state x with a taxable_year ending july and it uses the accrual_method of accounting purchaser is the common parent of a consolidated_group target was a c_corporation incorporated in state y with a taxable_year ending december and it used the accrual_method of accounting target was a subsidiary of seller and both target and seller joined in the filing of a consolidated_return with sellerparent on date a purchaser acquired all of seller’s stock in target for cash in a fully taxable transaction it is represented that purchaser’s acquisition of the stock of target qualified as a qualified_stock_purchase as defined in sec_338 purchaser and sellerparent intended to file the election the election was due on date b but for various reasons a valid election was not filed after the due_date for the election it was discovered that the election had not been filed subsequently this request was submitted under sec_301_9100-1 for an extension of time to file the election the period of limitations on assessment under sec_6501 has not expired for purchaser’s target’s or sellerparent’s taxable years in which the acquisition occurred the taxable years in which the election should have been filed or any taxable years that would have been affected by the election had it been timely filed sec_338 permits certain stock purchases to be treated as asset acquisitions if the purchasing_corporation makes or is treated as having made a sec_338 election or a sec_338 election and the acquisition is a qualified_stock_purchase sec_338 permits the purchasing and selling corporations to elect jointly to treat the target_corporation as deemed to sell all of its assets and distribute the proceeds in complete_liquidation a sec_338 election may be made for target only if it is a member of a selling_consolidated_group a member of a selling affiliated_group filing separate returns or an s_corporation sec_1_338_h_10_-1 under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic plr-128564-01 extensions of time for making certain elections requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 in this case the time for filing the election is fixed by the regulations ie sec_1_338_h_10_-1 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant an extension of time for purchaser and sellerparent to file the election provided purchaser and sellerparent show they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by purchaser sellerparent purchaser officer and sellerparent officers explain the circumstances that resulted in the failure to timely file a valid election the information establishes that a competent tax professional was responsible for the election and was aware of all relevant facts that purchaser and sellerparent relied on the tax professional to make the election and that the interests of the government will not be prejudiced if relief is granted see sec_301_9100-3 based on the facts and information submitted including the representations made we conclude that purchaser and sellerparent have shown they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly an extension of time is granted under sec_301_9100-1 until days from the date on this letter for purchaser and sellerparent to file the election with respect to the acquisition of the stock of target as described above the above extension of time is conditioned on the filing within days of the date on this letter of all returns and amended returns if any necessary to report the transaction in accordance with the election and the taxpayers’ purchaser’s sellerparent’s consolidated group’s and target’s tax_liability if any being not lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money no opinion is expressed as to the taxpayers’ tax_liability for the years involved a determination thereof will be made by the applicable director’s office upon audit of the federal_income_tax returns involved further no opinion is expressed as to the federal_income_tax effect if any if it is determined that the taxpayers’ tax_liability is lower sec_301_9100-3 purchaser and sellerparent must file the election in accordance with sec_1_338_h_10_-1 that is a new election on form_8023 must be executed on or after the date on this letter which grants an extension and filed in accordance with the instructions to the form a copy of this letter must be attached to the election form plr-128564-01 purchaser and sellerparent must file or amend as applicable their returns to report the transaction as a sec_338 transaction for the taxable_year in which the transaction was consummated and for any other affected_taxable_year and to attach to the returns a copy of this letter and a copy of the election we express no opinion as to whether the acquisition sale of the target stock qualifies as a qualified_stock_purchase under sec_338 whether the acquisition sale of target stock qualifies for sec_338 treatment or any other tax consequences arising from the election in addition we express no opinion as to the tax consequences of filing the election late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or resulting from filing the election late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-1 we relied on certain statements and representations made by taxpayers however the director should verify all essential facts in addition notwithstanding that an extension is granted under sec_301_9100-1 to file the election penalties and interest that would otherwise be applicable if any continue to apply this letter is directed only to the taxpayer s who requested it sec_6110 provides that it may not be used or cited as precedent purchaser must provide sellerparent with a copy of this letter pursuant to powers of attorney on file in this office copies of this letter are being sent to your authorized representatives sincerely yours associate chief_counsel corporate by ken cohen senior technician reviewer branch cc


internal_revenue_service number release date index number ----------------------------- ----------------------------------- -------------------- -------------------------- ---------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc psi b02 plr-132284-05 date date --------- --------------------- --------------------------------------- legend x ----------------------------- ---------------- country date dear ------------ this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting that the service grant x an extension of time under sec_301_9100-3 of the procedure and administration regulations to elect to be treated as an association_taxable_as_a_corporation under sec_301_7701-3 facts x represents that x is a foreign_entity eligible to elect to be treated as an association_taxable_as_a_corporation due to inadvertence x failed to file a timely form_8832 entity classification election electing to treat x as an association_taxable_as_a_corporation effective date law and analysis corporation under sec_301_7701-2 or an eligible_entity can the information submitted states that x was formed under the laws of country sec_301_7701-3 provides that a business_entity that is not classified as a plr-132284-05 elect its classification for federal tax purposes a business_entity is any entity recognized for federal tax purposes that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the internal_revenue_code sec_301_7701-2 sec_301_7701-3 provides that except as provided in sec_301 sec_301_9100-1 provides that the commissioner may grant a reasonable b unless the entity elects otherwise a foreign eligible_entity is- a a partnership if it has two or more members and at least one member does not have limited_liability or b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single owner that does not have limited_liability sec_301_7701-3 provides that to elect to be classified other than as provided in ' b an eligible_entity must file form_8832 with the designated service_center sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to seventy-five days prior to the date the form is filed or up to twelve months after the date on which the form is filed extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief 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 granting relief will not prejudice the interests of the government conclusion conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center and elect to be treated as an association_taxable_as_a_corporation effective date a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose based solely on the information submitted and the representations made we sec_301_9100-1 through provide the standards the except as specifically set forth above no opinion is expressed concerning the plr-132284-05 federal tax consequences of the facts described above under any other provision of the code provides that it may not be used or cited as precedent being sent to x’s authorized representative pursuant to a power_of_attorney on file with this office a copy of this letter is this ruling is directed only to the taxpayer requesting it sec_6110 sincerely enclosures cc copy of this letter copy for sec_6110 purposes heather c maloy associate chief_counsel passthroughs and special industries


t c summary opinion united_states tax_court donald brown petitioner v commissioner of internal revenue respondent docket no 23554-07s filed date donald brown pro_se kathleen k raup for respondent ruwe judge this case was heard pursuant to the provisions of section of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case 1unless otherwise indicated all section references are to the internal_revenue_code as amended and all rule references are to the tax_court rules_of_practice and procedure respondent determined a dollar_figure deficiency and a dollar_figure accuracy-related_penalty in petitioner’s federal_income_tax after concessions the issues we must decide are whether pursuant to rule and sec_7491 the burden_of_proof has shifted to respondent regarding the disputed deficiency whether petitioner had unreported gross_receipts or sales self-employment_income whether petitioner is entitled to deduct certain business_expenses claimed on schedule c profit or loss from business sole_proprietorship and whether petitioner is liable for an accuracy-related_penalty under sec_6662 background some of the facts have been stipulated and are so found the stipulated facts and the attached exhibits are incorporated herein by this reference at the time the petition was filed petitioner provided a post office box mailing address in new jersey petitioner graduated from college and law school and he has been practicing law since from to petitioner wa sec_2all figures have been rounded to the nearest dollar 3respondent has allowed and or conceded a number of issues and expenses that were previously disallowed we discuss only those issues and expenses that remain in dispute 4the parties stipulate that petitioner’s current address is also in new jersey employed by the law firm fox rothschild in petitioner became a managing partner at fox rothschild at which time fox rothschild had approximately attorneys during his tenure as managing partner which ended in or about the number of attorneys working for the firm increased to during petitioner engaged in the practice of law as a sole practitioner petitioner maintained and operated a law office in bala cynwyd pennsylvania bala cynwyd office and used this address on his federal_income_tax return on his business letterhead for court proceedings and for billing purposes in addition to the bala cynwyd office petitioner asserts that he also maintained a home_office during petitioner maintained two checking accounts at commerce bank commerce bank accounts petitioner was the only person with signature_authority and exercised complete control_over the commerce bank accounts petitioner deposited both personal funds and funds from the operation of his law practice into the commerce bank accounts petitioner also paid both personal and law-practice-related expenses from the commerce bank accounts during petitioner’s deposits into the commerce bank accounts totaled dollar_figure respondent concedes that deposits totaling dollar_figure were from nontaxable sources petitioner timely filed a form_1040 u s individual_income_tax_return on which he reported gross_receipts or sales of dollar_figure and claimed schedule c expenses of dollar_figure petitioner used the cash_method_of_accounting for his law practice in in preparing his federal_income_tax return petitioner contemporaneously created ledger sheets to aid in preparing the schedule c on date respondent issued to petitioner a notice_of_deficiency the deficiency was the result of increased gross_receipts pursuant to a bank_deposits analysis and disallowed schedule c business_expenses which also resulted in computational adjustments respondent’s bank_deposits analysis resulted in a determination that petitioner underreported his schedule c gross_receipts by dollar_figure the notice_of_deficiency also reflects that respondent made the following adjustments to petitioner’s claimed schedule c deductions amount amount expense per return per exam adjustment car and truck expenses dollar_figure dollar_figure dollar_figure depreciation -0- office expenses big_number big_number rent lease--vehicles big_number big_number big_number rent lease--other business property big_number big_number big_number repairs and maintenance big_number -0- big_number supplies big_number big_number -0- travel big_number -0- big_number meals and entertainment big_number -0- big_number utilities big_number big_number other expenses--filing costs big_number big_number big_number other expenses big_number -0- big_number total big_number big_number big_number 1on his schedule c petitioner labeled the dollar_figure of other expenses as outsourcing temp secretary service which allegedly represents payments to petitioner’s son seth brown for work performed for petitioner’s law practice 2the difference between what was reported on petitioner’s federal tax_return dollar_figure and this figure is due to rounding on brief respondent concedes that petitioner’s unreported gross_receipts should be reduced to dollar_figure and that petitioner may deduct schedule c expenses of dollar_figure ie respondent has decreased the disallowed schedule c expenses to dollar_figure the following table summarizes the schedule c expenses petitioner reported and the amounts respondent has conceded amount amount expense per return allowed car and truck expenses dollar_figure dollar_figure depreciation office expense big_number big_number rent lease--vehicles big_number big_number rent lease--other business property big_number big_number repairs and maintenance big_number -0- supplies big_number big_number travel big_number -0- meals and entertainment big_number -0- utilities big_number big_number other expenses--filing costs big_number big_number other expense sec_1 big_number big_number total big_number big_number 1respondent allowed some expenses which were claimed as other expenses--filing costs as other expenses additionally respondent allowed an expense of dollar_figure as other expenses which petitioner did not claim on the schedule c attached to his federal tax_return a burden_of_proof discussion in general the commissioner’s determinations in a notice_of_deficiency are presumed correct and the taxpayer bears the burden of proving by a preponderance_of_the_evidence that these determinations are erroneous rule a 290_us_111 the taxpayer is required to maintain records that are sufficient to enable the commissioner to determine his correct_tax liability see sec_6001 sec_1 a income_tax regs additionally the taxpayer bears the burden of substantiating the amount and purpose of each item claimed as a deduction see 116_tc_438 65_tc_87 affd per curiam 540_f2d_821 5th cir sec_7491 provides that if in any court_proceeding the taxpayer introduces credible_evidence with respect to factual issues relevant to ascertaining the taxpayer’s liability for tax the burden_of_proof with respect to such factual issues will be placed on the commissioner see higbee v commissioner supra pincite in order for sec_7491 to place the burden_of_proof on respondent the taxpayer must first provide credible_evidence for the burden to shift to the commissioner however the taxpayer must have complied with the substantiation and recordkeeping requirements of the code and have cooperated with reasonable requests by the commissioner for witnesses information documents meetings and interviews sec_7491 and b petitioner argues that he has met the requirements to shift the burden_of_proof to respondent because as he alleges he has introduced credible_evidence regarding the schedule c expenses and has not run afoul of the limitations under sec_7491 and b more specifically petitioner argues that his ledger of business_expenses coupled with copies of bank statements and canceled checks from the commerce bank accounts amounts to credible_evidence respondent argues that petitioner has neither provided credible_evidence nor cooperated with reasonable requests for witnesses information documents meetings and interviews thus respondent states while the ledger along with the bank records supplied by respondent may support that petitioner made expenditures no evidence was introduced to substantiate that these expenditures were ordinary and necessary and were for the purpose indicated in higbee v commissioner supra pincite we recognized that sec_7491 does not state what constitutes credible_evidence the conference committee’s report provides a glimpse into congress’ intent for_the_use_of the term credible_evidence in sec_7491 credible_evidence is the quality of evidence which after critical analysis the court would find sufficient upon which to base a decision on the issue if no contrary evidence were submitted without regard to the judicial presumption of irs correctness a taxpayer has not produced credible_evidence for these purposes if the taxpayer merely makes implausible factual assertions frivolous claims or tax protestor- type arguments the introduction of evidence will not meet this standard if the court is not convinced that it is worthy of belief if after evidence from both sides the court believes that the evidence is equally balanced the court shall find that the secretary has not sustained his burden_of_proof h conf rept pincite 1998_3_cb_747 see higbee v commissioner supra pincite the conference_report also explains the purpose of the limitations set forth in sec_7491 nothing in the provision shall be construed to override any requirement under the code or regulations to substantiate any item accordingly taxpayers must meet applicable substantiation requirements whether generally imposed or imposed with respect to specific items such as charitable_contributions or meals entertainment travel and certain other expenses substantiation requirements include any requirement of the code or regulations that the taxpayer establish an item to the satisfaction of the secretary taxpayers who fail to substantiate any item in accordance with the legal requirement of substantiation will not have satisfied the legal conditions that are prerequisite to claiming the item on the taxpayer’s tax_return and will accordingly be unable to avail themselves of this provision regarding the burden_of_proof thus if a taxpayer required to substantiate an item fails to do so in the manner required or destroys the substantiation this burden_of_proof provision is inapplicable h conf rept supra pincite c b pincite fn refs omitted as discussed in greater detail below while we recognize that petitioner’s ledger coupled with his bank statements and canceled checks tends to establish that certain expenditures were made we are not persuaded that petitioner’s uncorroborated self-serving testimony which we need not accept see 87_tc_74 establishes that the disputed deposits were not includable in gross_receipts nor does it establish the amount and business_purpose of the disputed expenditures see higbee v commissioner supra pincite accordingly we hold that to the extent that the issue of who bears the burden_of_proof is dispositive in the determination of whether petitioner had unreported gross_receipts or sales and whether petitioner is entitled to deductions for expenses claimed on his schedule c the burden remains with petitioner b unreported gross_receipts or sales self-employment_income sec_61 defines gross_income for purposes of calculating taxable_income as all income from whatever source derived courts have long recognized that the definition of gross_income includes accessions to wealth clearly realized and over which the taxpayer has complete dominion and control 348_us_426 where a taxpayer fails to maintain records adequate to determine his correct_tax liability the commissioner is entitled to reconstruct his income by any reasonable method see erikson v commissioner 937_f2d_1548 10th cir affg tcmemo_1989_552 courts have long sanctioned the use of the bank_deposits method as a reasonable method for computing income 64_tc_651 affd 566_f2d_2 6th cir furthermore where a bank_deposits analysis is used the bank_deposits are prima facie evidence of the receipt of income tokarski v commissioner supra pincite where the commissioner has determined that certain deposits are income the taxpayer has the burden of showing that the determination is incorrect estate of mason v commissioner supra pincite the parties have stipulated that the aggregate deposits into the commerce bank accounts totaled dollar_figure during respondent conceded that dollar_figure of the aggregate deposits was from nontaxable sources thus respondent contends that petitioner underreported gross_receipts by dollar_figure dollar_figure in taxable deposits minus dollar_figure reported by petitioner petitioner argues that certain deposits or a portion of them are not includable in gross_income because the deposits included reimbursement for costs associated with litigation petitioner’s allegations concern the following deposits amount petitioner source amount alleges is date of deposit of deposit not includable mammuth rosenberg dollar_figure dollar_figure pa land dev l p big_number big_number tig insurance big_number big_number david skolnick big_number big_number noor flooring inc royal floor n construction mammuth rosenberg big_number noor flooring big_number estate of snyder big_number big_number noor flooring total big_number big_number 1the parties stipulate that respondent has conceded this deposit is nontaxable 2we note that the parties stipulate that respondent allowed this amount as a deduction for other expenses petitioner’s contention is misplaced the bank statements establish that the contested deposits were made into the commerce bank accounts petitioner commingled business and personal funds in the commerce bank accounts and he had complete dominion and control_over these funds without restriction as to their disposition to the extent petitioner has shown that any portion of the deposits was actually used for litigation costs respondent has allowed a deduction accordingly we hold that petitioner underreported his gross_receipts or sales ie his self-employment_income on his schedule c by dollar_figure c schedule c expenses deductions deductions are strictly a matter of legislative grace and the taxpayer bears the burden of proving entitlement to the deductions claimed rule a 503_us_79 292_us_435 sec_162 authorizes a deduction for business_expenses if a taxpayer proves that the expenses were paid_or_incurred during the taxable_year were incurred to carry on the taxpayer’s trade_or_business and were ordinary and necessary expenditures of the business see 403_us_345 an expense is ordinary if it is customary or usual within a particular trade business or industry or relates to a transaction of common or frequent occurrence in the type of business involved 308_us_488 an expense is necessary if it is appropriate and helpful for the development of the business see 320_us_467 however personal living or family_expenses generally are not deductible see sec_262 a taxpayer must substantiate amounts claimed as deductions by maintaining the records necessary to establish that he or she is entitled to the deductions sec_6001 sec_1_6001-1 income_tax regs thus under sec_162 the recordkeeping requirement under sec_6001 not only requires petitioner to keep records sufficient to establish that an expense was paid during the taxable_year such as his business_expense ledger coupled with bank statements and copies of canceled checks see sec_162 but also requires that the records establish that the expenses were ordinary and necessary in carrying on petitioner’s trade_or_business see sec_162 and petitioner claimed schedule c expenses of dollar_figure respondent has conceded that petitioner is entitled to dollar_figure in deductions for schedule c expenses we now address those expenses petitioner claimed at trial and on brief automobile expenses under sec_274 a taxpayer is required to meet heightened substantiation requirements for inter alia travel meals lodging entertainment computer automobile gifts and cellular telephone expenses sec_274 requires the taxpayer to establish by adequate_records or by sufficient evidence corroborating the taxpayer’s own statement a the amount of such expense or other item b the time and place of the travel entertainment amusement recreation or use of the facility or property or the date and description of the gift c the business_purpose of the expense or other item and d the business relationship to the taxpayer of persons entertained using the facility or property or receiving the gift on his federal_income_tax return petitioner claimed a dollar_figure deduction for car and truck expenses and an additional dollar_figure deduction for the rent or lease of a vehicle in the notice_of_deficiency respondent allowed petitioner’s parking expenses in full but disallowed percent of all other expenses related to automobiles at trial petitioner continued to contend that he was entitled to deduct percent of his automobile expenses automobile expenses are subject_to the heightened substantiation requirements of sec_274 as described above petitioner however has failed to meet these heightened substantiation requirements other than indicating on his schedule c that he drove his car big_number miles for business and big_number miles for commuting petitioner has not provided a contemporaneous mileage log gasoline receipts or anything more than his self-serving testimony to establish what portion of his use of the car was for business purposes petitioner has failed to prove that he is entitled to any automobile expense deduction in excess of the amount respondent allowed aol expense on line of his schedule c petitioner claimed an office expense of dollar_figure which he contends includes dollar_figure for payments made to aol for internet and email service although petitioner testified that internet and email service was necessary for communication purposes he has not established whether the aol expense was for internet and email service to his office or to his home nor has he established what portion of the use if any was for business versus personal_use consequently we find that petitioner has failed to adequately substantiate the portion if any of the aol expense attributable to business use 5when taxpayers establish that they have incurred deductible expenses but are unable to substantiate the exact amounts we can estimate the deductible amounts in some circumstances but only if the taxpayers present sufficient evidence to establish a rational basis for making the estimates see 39_f2d_540 2d cir 85_tc_731 in estimating the amount allowable we bear heavily upon taxpayers whose inexactitude is of their own making see cohan v commissioner supra pincite there must be sufficient evidence in the record however to permit us to conclude that a deductible expense was paid_or_incurred 245_f2d_559 5th cir the cohan doctrine however is not available to estimate expenses that fall under the purview of sec_274 see 50_tc_823 affd 412_f2d_201 2d cir sec_1_274-5t temporary income_tax regs fed reg date accordingly we hold that petitioner is not entitled to an office expense deduction beyond that already allowed by respondent telephone service on line of his schedule c petitioner claimed a dollar_figure deduction for utilities including what petitioner contends is a dollar_figure expense for telephone service in the notice_of_deficiency respondent allowed a utilities expense for percent of petitioner’s cell phone bill petitioner via the statements from his commerce bank accounts has established that he made payments to at t and verizon but he has failed to establish that the payments were ordinary and necessary to carrying on his trade_or_business it remains unclear whether the payments to at t and verizon were for telephone service to his office his home or both and if to his home what portion of the telephone service was for personal versus business use at trial petitioner asserted that the at t service was to his bala cynwyd office and that he did not have any at t service to his home petitioner however has failed to provide any evidence such as an invoice or bill establishing that the at t service was to his bala cynwyd office corroborating his self- serving statement consequently we find that petitioner has failed to adequately substantiate a business_purpose for his payments to at t and verizon accordingly we hold that petitioner is not entitled to a deduction for utilities expenses beyond that already allowed by respondent deductions related to the business use of a taxpayer’s home sec_280a provides as a general_rule that no deduction otherwise allowable to an individual shall be allowed with respect to the use of a dwelling_unit which is used by the taxpayer during the taxable_year as a residence this seemingly prohibitory rule is ameliorated by sec_280a which provides exceptions for certain business use as relevant herein sec_280a provides sec_280a exceptions for certain business or rental use limitation on deductions for such use -- certain business use --subsection a shall not apply to any item to the extent such item is allocable to a portion of the dwelling_unit which is exclusively used on a regular basis-- a as the principal_place_of_business for any trade_or_business of the taxpayer b as a place of business which is used by patients clients or customers in meeting or dealing with the taxpayer in the normal course of his trade_or_business or c in the case of a separate structure which is not attached to the dwelling_unit in connection with the taxpayer’s trade_or_business thus for a deduction to be allowed under sec_280a the taxpayer must establish that a portion of his dwelling_unit is exclusively used on a regular basis and for the purposes enumerated in subparagraphs a b or c of sec_280a 94_tc_348 petitioner did not claim a home_office deduction on line of his schedule c nor did he attach to his return a form_8829 expenses for business use of your home rather petitioner claimed his alleged home_office expenses in other areas of his schedule c eg on line 20b as rent or lease of other business property and on line as repairs and maintenance in this regard petitioner testified that his home_office expenses included items such as cable television to his home paid to comcast internet and email service to his home through aol mortgage payments which petitioner stated he treated as rent since neither he nor his wife owned the home other home maintenance items such as cutting and maintaining the lawn and utilities in the notice_of_deficiency respondent disallowed in full petitioner’s claimed repairs and maintenance expense of dollar_figure because petitioner had not established business use of his home furthermore respondent disallowed all of petitioner’s claimed utilities expense except for percent of the cell phone expense as previously discussed because petitioner had not established business use of his home respondent did allow dollar_figure of the dollar_figure petitioner claimed for rent or lease of other business property as it was verified as rent for the bala cynwyd office the remaining dollar_figure purportedly relates to mortgage or rent payments for petitioner’s home on the basis of the record before us we find that petitioner has not established the portion of his home that was used exclusively on a regular basis for business as required by sec_280a consequently we need not determine whether petitioner’s home_office was his principal_place_of_business see sec_280a or whether his home_office was used by clients in meeting with petitioner in the normal course of his trade_or_business see sec_280a accordingly we hold that petitioner is not entitled to any deductions related to the business use of his residence beyond those which responded has already allowed other expenses on line of his schedule c petitioner claimed a dollar_figure deduction for other expenses the dollar_figure claimed deduction included dollar_figure for outsourcing temp secretary service and dollar_figure for court stenographers transcripts filing costs expert fees duplication of records filing costs at trial and on brief petitioner also asserted that certain deposits made into his commerce bank accounts included reimbursements for litigation costs he paid litigation costs see supra p in the notice_of_deficiency respondent disallowed the full dollar_figure deduction for other expenses as reported on schedule c explaining that the expenses were for payments made to petitioner’s son or cash withdrawals from an automatic teller machine and that no business_purpose has been established the only indication that petitioner gave at trial or on brief that he paid any person for services rendered to his law practice other than a referral fee was that he made payments to his son seth brown petitioner testified that his son is a graduate of widener law school that his son set his own hours and that his son worked for him performing such tasks as contacting clients doing research and running my computer system petitioner provided weekly time sheets that were allegedly prepared by his son the commerce bank accounts statements also tend to establish that petitioner wrote numerous checks made payable to seth brown during upon review of the record before us we are unable to reconcile the copies of canceled checks payable to seth brown with the alleged weekly time sheets and petitioner has not made an attempt to reconcile them at trial or on brief despite petitioner’s testimony that his son had told him that he prepared a form_1099 to be filed for the payments made to him the record is devoid of any such evidence petitioner’s son did not testify furthermore petitioner testified that he wrote checks to his son drawn on the commerce bank accounts for both personal and work-related purposes petitioner has failed to prove what portion if any of the payments to his son was ordinary and necessary business_expenses accordingly we hold that petitioner is not entitled to deduct any of the payments made to his son as to the remaining dollar_figure of filing costs respondent disallowed dollar_figure because petitioner established neither a business_purpose nor that it was paid during the taxable_year respondent allowed a dollar_figure deduction for filing costs at trial and on brief petitioner continues to contend that he is entitled to the disallowed filing costs reported on the schedule c and the additional litigation costs he claimed at trial and on brief petitioner however has failed to establish that he actually paid these costs during the taxable_year respondent however has agreed to allow petitioner a dollar_figure deduction for his schedule c line other expenses dollar_figure as other expenses dollar_figure of which was not claimed by petitioner on his federal_income_tax return we hold that petitioner is not entitled to a deduction for other expenses including filing and litigation costs beyond that which respondent has allowed d accuracy-related_penalty in the notice_of_deficiency respondent determined that petitioner is liable for a dollar_figure accuracy-related_penalty under sec_6662 pursuant to sec_7491 respondent bears the burden of production with respect to petitioner’s liability for any penalty or addition_to_tax if respondent meets this burden then petitioner bears the burden of establishing that an exception to imposition of the penalty applies see higbee v commissioner t c pincite sec_6662 and b and provides for an addition_to_tax equal to percent of the portion of the underpayment attributable to inter alia negligence or disregard of rules or regulations or any substantial_understatement of tax the term negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal_revenue_code and the term disregard means any careless reckless or intentional disregard sec_6662 see also matthies v commissioner t c ___ ___ slip op pincite negligence is the failure to exercise due care or the failure to do what a reasonable and ordinarily prudent person would do under the circumstances matthies v commissioner supra at ___ slip op pincite citing 92_tc_1 affd 925_f2d_348 9th cir and 85_tc_934 an understatement of income_tax is defined as the excess of the amount of the tax required to be shown on the return for the taxable_year over the amount of the tax_shown_on_the_return see sec_6662 for purposes of sec_6662 there is a substantial_understatement_of_income_tax for any taxable_year if the amount of the understatement for the taxable_year exceeds the greater of percent of the tax required to be shown on the return for the taxable_year or dollar_figure see sec_6662 on his federal_income_tax return petitioner reported zero taxable_income and therefore zero tax owed respondent has shown that petitioner failed to keep adequate books_and_records or to substantiate properly the items in question such a failure is evidence of negligence see sec_1_6662-3 income_tax regs furthermore after accounting for the concessions made before and at trial petitioner’s deficiency has been preliminarily recalculated at dollar_figure thus the understatement of income_tax dollar_figure exceeds the greater of percent of the tax required to be shown on petitioner’s federal_income_tax return dollar_figure tax dollar_figure dollar_figure of dollar_figure dollar_figure or dollar_figure therefore petitioner’s understatement is substantial consequently we conclude that respondent has met his burden of production for the determination of an accuracy- related penalty based on either negligence or disregard of rules or regulations or a substantial_understatement_of_income_tax on brief other than a broad assertion that he contests the accuracy-related_penalty petitioner fails to dispute the imposition of the accuracy-related_penalty petitioner did not set forth or discuss the points of law and any disputed questions regarding this issue and he has neither contended nor established that he qualified for an exception to the imposition of the accuracy-related_penalty eg the reasonable_cause exception found in sec_6664 on the basis of the record we hold that petitioner is liable for the accuracy-related_penalty in reaching our holdings herein we have considered all arguments made and to the extent not mentioned above we find them to be moot irrelevant or without merit to reflect the foregoing decision will be entered under rule


department of the treasury internal_revenue_service washington d c wta-n-122232-98 cc intl br5 uilc number release date date internal_revenue_service national_office field_service_advice memorandum for from subject jeffrey l dorfman branch chief cc intl br5 fsa - foreign exchange loss this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be used or cited as precedent legend taxpayer corporation a corporation b corporation c_corporation d corporation e corporation f country a year a year b currency a x y z issue s whether debt instruments issued by taxpayer denominated in currency a were paid within the meaning of sec_1_988-2 when such instruments were refinanced with new debt having the same terms as the original debt thus entitling the taxpayer to claim a foreign exchange loss under sec_988 if it is determined that the loans were in fact paid under sec_1_988-2 what is the character of the loss conclusion under the standard set forth in sec_1_1001-3 the instruments were paid for purposes of sec_1_988-2 giving rise to an exchange loss pursuant to sec_988 the loss is ordinary in character facts during the taxable_year b taxpayer reported a foreign exchange loss in the amount of dollar_figurez the loss represents exchange loss recognized by taxpayer with respect to the principal repaid on currency a denominated loans taxpayer is a u s_corporation which is owned by five country a corporations corporations a b c d and e corporations a and b own and of taxpayer respectively although taxpayer intended on forming a manufacturing business in the united_states taxpayer’s sole business activity was holding stock in corporation f a publically held country a corporation together with its affiliated corporations taxpayer owns approximately of corporation f beginning in year a taxpayer borrowed fixed rate currency a funds from corporations a c and f at the end of taxable_year b there were loans with a currency a balance of x equal to dollar_figurey with regard to most of the loans in question the interest rates on the loans were periodically adjusted pursuant to an index set forth in the instrument during the period interest rates on the loan went from in year a to in year b during taxable_year a the loans came due taxpayer paid off the loans with proceeds from new loans entered into with the same lenders having the same terms as the old loans law and analysis regulation sec_1_988-2 provides that the obligor under a nonfunctional_currency debt_instrument shall realize exchange gain_or_loss with respect to the principal_amount of such instrument on the date principal is paid or the obligation to make payments is transferred or extinguished including a deemed disposition under sec_1001 that results from a material_change in terms of the instrument generally in determining the meaning of paid in the context of a currency loss the appropriate standard is the standard set forth under sec_1_165-1 under sec_1 a losses are allowed in the year they are sustained pursuant to sec_1_165-1 losses are allowed only if evidenced by a closed and completed transaction fixed by identifiable events and actually sustained substance and not mere form shall govern in determining a deductible loss in the context of the facts of this case regulations issued under sec_1001 of the code are also relevant with respect to whether the currency loss claimed by taxpayer was actually sustained under sec_1_1001-1 the exchange of property for other_property that differs materially either in_kind or in extent is a realization event reg sec_1_1001-3 prescribes the tax treatment for modification of debt instruments and is effective for alterations of the terms of a debt_instrument on or after date taxpayers however may rely on sec_1_1001-3 for alterations of the terms of a debt_instrument after date and before date see sec_1_1001-3 the modification to all the loans at issue in this case occurred before date--ie prior to the effective date of the sec_1_1001-3 regulations however we assume that the taxpayer will apply the regulation to the pertinent years since it is in its interest to do so the economic_effect of paying the old loans with proceeds from the new loans that have identical terms and conditions was to extend the maturity_date of the original loans thus the issue is whether this was a material modification that would give rise to a realization event under sec_1_1001-3 e a modification that changes the timing of payments due under a debt_instrument is a significant modification if it results in the material deferral of scheduled payments under a safe-harbor rule in the regulations the deferral of one or more scheduled payments within the safe-harbor period is not a material deferral if the deferred payments are unconditionally payable no later than at the end of the safe-harbor period the safe-harbor period is the lesser_of five years or percent of the original term of the instrument the old loans had a year term and were replaced with new loans with the same term accordingly these new loans would fall outside the safe_harbor and must be treated as significant modifications to the old loans since the debt refinancing results in a realization event under sec_1_1001-3 taxpayer has realized and may deduct the currency losses at issue under sec_988 the currency losses are characterized as ordinary losses while not raised in your request for field_service_advice you may want to consider the effect of the change in interest rates for the small number of loans which did not have interest reset features in the terms of the instrument in those instruments the change in rates may give rise to a realization event in years that may be closed see sec_1_1001-3 and revrul_81_169 1981_1_cb_429 if you have any further questions please feel free to call me jeffrey l dorfman branch chief


internal_revenue_service number release date index number --------------------------------- ------------------------------ ----------------------------------------- ------------------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------------ telephone number ---------------------- refer reply to cc psi plr-140710-15 date date ------------------- legend x ------------------------------------------------------------------------------------------------------ -------------------------- state ------------- dear --------------- this letter responds to your letter dated date submitted on behalf of x by its authorized representative requesting a ruling under sec_7704 of the internal_revenue_code code facts according to the information submitted x is a publicly traded limited_partnership organized under the laws of state x is engaged in certain midstream operations and as a part of that business provides fluid solids and oilfield waste handling treatment and disposal services to customers engaged in the exploration for and development and production of oil and natural_gas as a part of its fluid management services x supplies and transports drilling and fracturing fluids including fresh water brine and other chemical injectants for use in drilling and hydraulic fracturing the brine and other injectants are obtained by x through fluid separation and chemical recovery activities as part of its recycling and disposal services and then marketed by x exclusively to producers for use in the exploration and production of oil and natural_gas through the fracturing process x transports the fluids to producers via trucks tanks and in some cases related to fresh water supply pumps and pipelines these pipelines include temporary pipelines owned operated maintained and controlled by x and dedicated specifically to the plr-140710-15 transportation of fluids to producers for use in fracturing water delivery pipeline systems that will be developed constructed owned operated maintained and controlled by x for the specific purpose of transporting fluids to producers for use in the fracturing process or water delivery pipeline systems that are managed and operated-but not owned-by x during the provision of these services employees of x or employees of an affiliate of x working under the supervision direction and control of x remain present at both the fluid source and the well site to oversee the process and ensure proper functioning of the pipelines and related equipment as a part of its transportation services x also provides inter-well site transportation via pipelines when requested by its oil and natural_gas producer customers these transfer services include a transporting fluids between producers’ well sites on a single producing property b transporting fluids between frac tanks for a producer at a single well site and c transporting fluids for a producer between one or more well sites and or a treatment plant x also treats recycles and disposes of flowback produced water pit water and other drilling and production wastes so that such wastes can be recycled or disposed of consistent with environmental regulations flowback and produced water may be transported to x’s recycling facilities or disposal sites by truck or pipelines x’s recycling activities produce water and fluids that are cleaned and purified for reuse in the oil and natural_gas production process such activities also result in certain materials eg brine and other chemical injectants being separated from the contaminated water and fluids during the recycling_process which are then marketed to oil and natural_gas producers for reuse drilling mud fracturing fluid waste drill cuttings tank bottoms and norm naturally occurring radioactive material constitute the majority of the waste treated at x’s existing disposal facilities which may include in the future special-waste landfills that are authorized to accept certain hazardous waste materials such as norm in addition x also provides truck and tank washout services and recycling or disposal services related to the resulting fluids storage tanks trucks and other equipment that store and transport flowback produced water and other drilling and production waste must be properly cleaned and maintained to prevent rust and corrosion failing to properly clean these items could result in damage to tanks and potential leakage of hazardous fluids also in connection with its fluid management and disposal services x earns income through the provision of frac tanks for temporary storage of water flowback produced water pit water drill cuttings and other drilling and production wastes x represents that x must provide a substantial level of ongoing service to each customer during the term of such customer’s use of the frac tank and must maintain a regular presence at the customer worksite plr-140710-15 x also provides hydrocarbon remediation services as a part of these services x removes hydrocarbons from the drilling waste at its facilities during the waste treatment and disposal process and sells such reclaimed hydrocarbons x makes the following representations x supervises directs and controls personnel for its fluid management transportation disposal washout and storage services these activities require personnel with specialized knowledge unique training and experience such as training in drill site maintenance fluid pressure monitoring and spill prevention operating mechanical and pressure pumps as well as safety training critical to the operation of x’s recycling and disposal facilities the provision of fluids as well as water transfer services are essential to the completion of oil and natural_gas drilling and fracturing operations processing and treatment of flowback fluids and produced water is required in order to comply with governmental regulations and industry standards x’s fluid management services require daily involvement and are performed on an ongoing basis throughout the exploration and production life cycle of each producing property x’s recycling and disposal facilities and related service equipment are staffed on a continuous hour per day basis and are equipped with remote monitoring capabilities law analysis sec_7704 provides that except as provided in sec_7704 a publicly_traded_partnership will be treated as a corporation sec_7704 provides that the term publicly_traded_partnership means any partnership if interests in that partnership are traded on an established_securities_market or interests in that partnership are readily_tradable on a secondary market or the substantial equivalent thereof sec_7704 provides that sec_7704 does not apply to a publicly_traded_partnership for any taxable_year if such partnership meets the gross_income requirements of sec_7704 for the taxable_year and each preceding_taxable_year beginning after date during which the partnership or any predecessor was in existence sec_7704 provides that a partnership meets the gross_income requirements of sec_7704 for any taxable_year if percent or more of the gross_income of the partnership for the taxable_year consists of qualifying_income sec_7704 provides that the term qualifying_income includes income and gains derived from the exploration development mining or production processing refining transportation including pipelines transporting gas oil or products thereof or plr-140710-15 the marketing of any mineral_or_natural_resource including fertilizer geothermal_energy and timber conclusion based solely on the facts submitted and the representations made we conclude that gross_income derived by x from its fluid management transportation disposal washout and storage services constitutes qualifying_income within the meaning of sec_7704 in addition income derived by x from its hydrocarbon remediation services performed as part of the disposal process constitutes qualifying_income within the meaning of sec_7704 so long as x does not sell the recovered hydrocarbons to end users at the retail level this ruling is not applicable to any income derived by x from the delivery and transportation of water brine or other injectants where x does not also collect and clean recycle or otherwise dispose_of the resulting produced water and drilling production waste after use except as expressly provided herein no opinion is expressed or implied concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter in particular no opinion is expressed as to whether x meets the percent gross_income requirement of sec_7704 in any taxable_year for which this ruling may apply the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request_for_ruling it is subject_to verification on examination this ruling is directed only to the taxpayer requesting it however in the event of a technical_termination of x under sec_708 the resulting_partnership may continue to rely on this ruling in determining its qualifying_income under sec_7704 sec_6110 of the code provides that this letter may not be used or cited as precedent plr-140710-15 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely s holly porter chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes