department of the treasury internal_revenue_service washington d c ve phe ‘a ie p's apr significant index no - oe governmententities division in re company this letter constitutes notice that waivers of the percent excise_tax under sec_4971 of the internal_revenue_code code have been granted for the plan for the plan years ending december conditions set forth below subject_to the and the company reaches an agreement with the pbgc and successfully completes the involuntary termination of the plan including signing the final pbgc settlement agreement and the company reaches an agreement with the service concerning the excise_taxes due under sec_4971 of the code on the funding deficiencies in the plan for the plan years ending december makes any payment required under that agreement within days after the date of this letter and and your authorized representative agreed to these conditions in an e-mail dated if either one of the above conditions is not met the waiver is march retroactively null and void _ the waiver of the percent excise_tax has been granted in accordance with section b of the employee_retirement_income_security_act_of_1974 erisa the amount for which this excise_tax waiver has been granted is equal to percent of the contribution which would otherwise be required to reduce the balance of the funding_standard_account to zero as of the end of each applicable_plan year for which the waiver is granted to the extent such deficiency has not been corrected the company is a contract manufacturer of commercial and for high-profile companies in the are found in the engines of most major their products including the _ and they are involved with production and spare parts manufacture for a - a full range of large engines according to the information submitted by the company's authorized representative the company is facing severe financial challenges and has been unable to meet its funding obligations to the plan as a result the pbgc has assumed responsibility for the plan through an involuntary termination the proposed termination_date is june terms of the termination are still being negotiated with the pbgc but the final termination agreement will require the company to make a substantial initial payment with additional_amounts payable in future years depending on the company’s future profitability this ruling is directed only to the taxpayer that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent we have sent a copy of this letter to your authorized representative pursuant to a power_of_attorney on file in this office to manager ep classification in unit in internal revenue_agent to the and to the manager ep compliance if you have any questions on this ruling letter please contact sincerely a donna m prestia manager employee_plans actuarial group


internal_revenue_service national_office technical_advice_memorandum april number release date third party communication none date of communication not applicable index uil no case-mis no tam-100660-16 chief appeals_office denver co taxpayer's name taxpayer's address taxpayer's identification no year s involved date of conference -------------------------------- -------------------- ----------------------------- ------------------ ---------------- no conference held legend --------------------- ------------------------------------------------- ------------------------------- ------------------------------- ------------------------ ------------------------------------------------------------------------------------------ h p q r w x ------------------------------------------------------------------------------------------------------------- y z center city hospital date1 date2 state1 state2 year1 year2 ----------------------------------------------------------------------- ---------------------- --------------------------------- ---------------------------- ------------------------ ------------------------ --------------------------- ----------------- ----------------- ------- ------- tam-100660-16 ------- ---- ----- -------- -------- ---- ---- ---- -- ------ ----- ----- ----- ------ ----- ---- ----- ----- ---------- ---------- ---- ---------- ---------- ---------- ---------- year3 n1 n2 n3 n4 n5 n6 n7 n8 n9 n10 n11 n12 n13 n14 n15 n16 n17 n18 n19 n20 n21 n22 n23 n24 issue s whether the facts and circumstances of this case as described below support or require a determination that one or more of the taxpayers’ groupings of activities do not constitute an appropriate economic unit within the meaning of sec_1_469-4 of the income_tax regulations regulations for purposes of sec_469 of the internal_revenue_code code such that the taxpayers’ activities must be regrouped under either the general regrouping rule_of sec_1_469-4 or the commissioner’s regrouping authority of sec_1_469-4 to prevent tax_avoidance conclusion s we conclude that the facts and circumstances of this case as presented and analyzed under the five-factor test of sec_1_469-4 suggest that there may be more than one reasonable method for grouping the taxpayers’ activities into appropriate economic units we also conclude that the facts and circumstances as presented do not support a determination that the taxpayers’ grouping of the interests in x y and p as separate tam-100660-16 activities is clearly inappropriate for purposes of either sec_1_469-4 or sec_1_469-4 we further conclude that the facts as presented do not support a determination that h acquired his interest in p and treated it as a separate activity apart from x and y with a principal purpose of circumventing the underlying purpose of sec_469 for purposes of sec_1_469-4 therefore we conclude that the commissioner does not have authority to regroup the taxpayers’ interests in x y and p as a single activity under sec_1_469-4 to prevent tax_avoidance facts the taxpayer husband h is an otolaryngologist an ear nose throat doctor h was an employee of x through date1 x was an s_corporation and h owned n1 of the stock of x in year1 h left the employment of x on date1 and became an employee of y beginning date1 through date2 y was an s_corporation and h owned n2 of y during this period of employment h also held a small ownership_interest in year1 and year2 in p which is classified as a partnership for federal tax purposes h owned an average of n3 of p in year1 and n4 in year2 p in turn owns n5 of r which is classified as a partnership for federal tax purposes the other n6 of r is owned by q which is classified as a partnership for federal tax purposes and which has ownership interests in similar facilities throughout the country a total of n7 physicians from n8 different medical practices in the city area held ownership interests in p in year1 including h_r provides outpatient surgery facilities for qualified licensed physicians while physicians were required to meet certain certification standards in order to use r’s facilities the physicians were not required to be owners of r or be in practice with an owner of r in order to use its facilities r is used extensively by non-owner physicians or surgeons in the city area h has represented that under applicable local law physicians are not permitted to refer patients to an entity in which they have a financial interest instead patients must be given a choice in surgery location however patients will often choose r over a hospital due to its lower cost the charge for surgery at a hospital is generally much higher than at an independent outpatient surgery center such as r according to the taxpayers’ submission the income generated from h’s indirect ownership in r through p is not tied to the number of surgeries he performs at r’s facility or to the revenue generated by those surgeries moreover even if h did not perform any surgeries at r he would still receive the same proportionate share of r’s profits allocable to his ownership_interest in p prior to the opening of r in year3 the surgeries that could not be performed in h’s practice office were performed at the local hospital the opening of r did not affect h’s income from his medical practice but his patients were given a choice as to where to have the surgery performed moreover the tam-100660-16 taxpayers argue that there are no interdependencies between x y and r h was compensated for his surgical services to patients through medical charges made by x or y the revenue generated by r through facility charges are separate from the charges for medical services rendered by h to his patients the number and locations of surgeries performed by h in year1 are as follows n9 surgeries performed at r n10 surgeries performed at hospital n11 surgeries performed at x offices n12 surgeries performed at y offices and n13 surgeries performed at center the number and locations of surgeries performed by h in year2 are as follows n14 surgeries performed at r n15 surgeries performed at hospital n16 surgeries performed at y offices and n17 surgeries performed at center the taxpayers’ submission further states that p is a limited_liability_company that was established by a group of physicians to acquire an interest in r the owners of p tend to be local city area physicians because they saw a benefit to having a surgical facility in the city area which would give city area patients a lower-cost choice for their surgical needs as opposed to hospital being the only available surgical facility the taxpayers represent that h’s investment in p was not made to improve increase or change h’s medical practice the taxpayers h and w filed joint returns for year1 and year2 and treated p as a separate activity from x and y the taxpayers incurred a passive loss of dollar_figuren18 on a rental condo located in state2 in year1 identified on their return as z the taxpayers had dollar_figuren19 in carryover suspended losses for prior years from the z condo the taxpayers had dollar_figuren20 of other passive_income and dollar_figuren21 of income from p that the taxpayers treated as passive_income in year1 accordingly the entire dollar_figuren22 loss from the z condo was deducted in year1 in year2 the taxpayers incurred a dollar_figuren23 passive loss on the z condo the taxpayers reported dollar_figuren24 of passive_income from p allowing the taxpayers to deduct the entire dollar_figuren23 loss in year2 law and analysis sec_469 of the code disallows the passive_activity_loss or passive_activity_credit for the taxable_year of any taxpayer subject_to sec_469 sec_469 provides that for purposes of sec_469 the term passive_activity means any activity a which involves the conduct of any trade_or_business and in which the taxpayer does not materially participate sec_469 provides that the secretary shall provide such regulations as may be necessary or appropriate to carry out provisions of sec_469 including regulations which specify what constitutes an activity material_participation or active_participation for purposes of sec_469 tam-100660-16 sec_1_469-4 provides that trade_or_business activities are activities other than rental activities or activities that are treated under sec_1_469-1t as incidental to an activity of holding property for investment that i involve the conduct_of_a_trade_or_business within the meaning of sec_162 ii are conducted in anticipation of the commencement of a trade_or_business or iii involve research or experimental expenditures that are deductible under sec_174 or would be deductible if the taxpayer adopted the method described in sec_174 sec_1_469-4 provides generally that one or more trade_or_business activities or rental activities may be treated as a single activity if the activities constitute an appropriate economic unit for the measurement of gain_or_loss for purposes of sec_469 sec_1_469-4 provides that except as otherwise provided in sec_1_469-4 whether activities constitute an appropriate economic unit and therefore may be treated as a single activity depends on all the relevant facts and circumstances a taxpayer may use any reasonable method of applying the relevant facts and circumstances in grouping activities the factors listed below not all of which are necessary for a taxpayer to treat more than one activity as a single activity are given the greatest weight in determining whether activities constitute an appropriate economic unit for the measurement of gain_or_loss for purposes of sec_469 - i ii iii iv v similarities and differences in types of trades_or_businesses the extent of common_control the extent of common ownership geographical location interdependencies between or among the activities for example the extent to which the activities purchase or sell goods between or among themselves involve products or services that are normally provided together have the same customers have the same employees or are accounted for with a single set of books_and_records sec_1_469-4 provides that the following examples illustrate the application of sec_1_469-4 sec_1_469-4 example states that taxpayer c has a significant_ownership_interest in a bakery and a movie theater at a shopping mall in baltimore and in a bakery and a movie theater in philadelphia in this case after taking into account all the relevant facts and circumstances there may be more than one reasonable method for grouping c’s activities for instance depending on the relevant facts and circumstances the following groupings may or may not be permissible a single activity a theater activity and a bakery activity a baltimore activity and a philadelphia activity or four separate activities moreover once c groups these activities into appropriate economic units sec_1_469-4 requires c to continue using that grouping in subsequent taxable years unless a material_change in the facts and circumstances make it clearly inappropriate tam-100660-16 sec_1_469-4 example states that taxpayer b an individual is a partner in a business that sells non-food items to grocery stores partnership l b also is a partner in a partnership that owns and operates a trucking business partnership q the two partnerships are under common_control the predominant portion of q’s business is transporting goods for l and q is the only trucking business in which b is involved under this section b appropriately treats l’s wholesale activity and q’s trucking activity as a single activity sec_1_469-4 provides that except as provided in sec_1_469-4 and sec_1_469-11 once a taxpayer has grouped activities under this section the taxpayer may not regroup those activities in subsequent taxable years taxpayers must comply with disclosure requirements that the commissioner may prescribe with respect to both their original groupings and the addition and disposition of specific activities within those chosen groupings in subsequent taxable years sec_1_469-4 provides that if it is determined that a taxpayer’s original grouping was clearly inappropriate or a material_change in the facts and circumstances has occurred that makes the original grouping clearly inappropriate the taxpayer must regroup the activities and must comply with disclosure requirements that the commissioner may prescribe sec_1_469-4 provides that the commissioner may regroup a taxpayer’s activities if any of the activities resulting from the taxpayer’s grouping is not an appropriate economic unit and a principal purpose of the taxpayer’s grouping or failure to regroup under sec_1_469-4 is to circumvent the underlying purpose of sec_469 sec_1_469-4 provides that the following example illustrates the application of sec_1_469-4 sec_1_469-4 example states that taxpayers d e f g and h are doctors who operate separate medical practices d invested in a tax_shelter several years ago that generates passive losses and the other doctors intend to invest in real_estate that will generate passive losses the taxpayers form a partnership to engage in the trade_or_business of acquiring and operating x-ray equipment in exchange for equipment contributed to the partnership the taxpayers receive limited_partnership interests the partnership is managed by a general_partner selected by the taxpayers the taxpayers do not materially participate in its operations substantially_all of the partnership’s services are provided to the taxpayers or their patients roughly in proportion to the doctors’ interests in the partnership fees for the partnership services are set at a level equal to the amounts that would be charged if the partnership were dealing with the taxpayers at arm’s length and are expected to assure the partnership a profit the taxpayers treat the partnership’s services as a separate activity from their medical practices and offset the income generated by the partnership against their passive losses sec_1_469-4 example further states that for each of the taxpayers the taxpayer’s own medical practice and the services provided by the partnership constitute tam-100660-16 an appropriate economic unit but the services provided by the partnership do not separately constitute an appropriate economic unit moreover a principal purpose of treating the medical practices and the partnership’s services as separate activities is to circumvent the underlying purposes of sec_469 accordingly the commissioner may require the taxpayers to treat their medical practices and their interests in the partnership as a single activity regardless of whether the separate medical practices are conducted through c corporations subject_to sec_469 s_corporations partnerships or sole proprietorships the commissioner may assert penalties under sec_6662 against the taxpayers in appropriate circumstances the facts of this case are different from the example in sec_1_469-4 in the example in order to circumvent the underlying purposes of sec_469 the doctors converted a portion of their practices into a single passive_income_generator by contributing equipment to a separate_entity which they controlled but in which they did not materially participate and leasing back the equipment at arms-length rates substantially_all of the partnership’s services were provided to the doctors or their patients roughly in proportion to the doctors’ interests in the partnership in this case an unrelated entity q is majority owner of r and controls the day- to-day management of the surgical facility h and the other partners of p do not have any direct or indirect control_over the day-to-day operations of r unlike h’s clear control_over y in addition the services provided by r to patients of p’s partners likely do not comprise substantially_all of r’s patient services and it is even less clear that the services provided by r to the patients of p’s partners will be roughly in proportion to the partners’ interests in p or their indirect interests in r thus while the example in sec_1_469-4 concludes that the partnership’s activities do not separately constitute an appropriate economic unit it is not necessarily inappropriate to treat p’s activity as a separate economic unit in this case furthermore we do not believe that the facts clearly demonstrate that h acquired his interest in p with a principal purpose of circumventing the underlying purpose of sec_469 accordingly we conclude that the commissioner would not have the authority to regroup the taxpayers’ interests in x y and p as a single activity under sec_1_469-4 to prevent tax_avoidance even if we were to otherwise conclude that taxpayers’ other groupings of activities do not constitute appropriate economic units under sec_1_469-4 we further conclude that an analysis under the five-factor test of sec_1_469-4 demonstrates that there may be more than one reasonable method for grouping the taxpayers’ activities into appropriate economic units in this case while the trade_or_business activities of x y and r held by h through p are similar in that they are all in the medical industry and involve the provision of medical services to patients x y and r provide different types of medical services certain surgeries cannot be performed at x’s or y’s practice office and diagnostic and post-operative care is not provided through p or r h does not have the same kind of management control_over r that h exercises over his own medical practice conducted through x or y h has different ownership tam-100660-16 interests among x y and p it also appears from the facts that x y and r are in different locations and do not share employees or recordkeeping accordingly we conclude that an analysis of the facts and circumstances of this case under sec_1_469-4 does not result in a determination that the taxpayers’ grouping of the interests in x y and p as separate activities is clearly inappropriate for purposes of either sec_1 e or sec_1_469-4 caveat s we express no opinion regarding whether h materially participated in p for any of the years at issue or whether h has appropriately accounted for the hours that he performed surgeries at or with respect to r a copy of this technical_advice_memorandum is to be given to the taxpayer s sec_6110 of the code provides that it may not be used or cited as precedent


t c memo united_states tax_court ekfrain j and josefina xuncax petitioners v commissioner of internal revenue respondent docket no filed date respondent determined a deficiency for petitioners’ taxable_year based primarily on the disallowance of amounts claimed for cost_of_goods_sold and business_expenses on petitioners’ schedule c profit or loss from business held petitioners are liable for a deficiency as redetermined herein held further petitioners are liable for the sec_6662 i r c accuracy-related_penalty efrain j and josefina xuncax pro sese jonathan h sloat for respondent -- - memorandum findings_of_fact and opinion nims judge respondent determined a federal_income_tax deficiency for petitioners’ taxable_year in the amount of dollar_figure respondent also determined an accuracy-related_penalty of dollar_figure for pursuant to sec_6662 after a concession by respondent the issues for decision are whether petitioners are entitled to offset gross_profits reported on their schedule c profit or loss from business by claimed cost_of_goods_sold in an amount in excess of that allowed by respondent whether petitioners are entitled to schedule c business_expense deductions in excess of the amounts allowed by respondent and whether petitioners are liable for the sec_6662 accuracy-related_penalty additional adjustments made by respondent to petitioners’ exemptions itemized_deductions earned_income_credit and self- employment_tax are computational in nature and will be resolved by our holdings on the foregoing issues unless otherwise indicated all section references are to sections of the internal_revenue_code in effect for the year at issue and all rule references are to the tax_court rules_of_practice and procedure - - findings_of_fact some of the facts have been stipulated and are so found the stipulations of the parties with accompanying exhibits are incorporated herein by this reference at the time the petition was filed in this case petitioners resided in los angeles california during petitioners operated a proprietorship under the name of ejx contractor ejx ejx was engaged in the business of sewing materials provided by a contracting manufacturer into a finished product all materials necessary to complete the items with the exception of thread were supplied by the manufacturer through such arrangements ejx was principally involved in the sewing of jeans and shorts ejx’s day-to-day operations during the year at issue were managed by miguel x mendez petitioners’ son on the schedule c attached to their federal_income_tax return petitioners reported gross_receipts from ejx of dollar_figure cost_of_goods_sold of dollar_figure and total expenses of dollar_figure accordingly ejx was reflected as having earned a net profit of dollar_figure such receipts and expenditures were computed using the cash_method_of_accounting as a result of the subsequent examination of petitioners’ return respondent issued a notice_of_deficiency making adjustments to the foregoing schedule c amounts respondent - - disallowed in full or in part amounts claimed by petitioners for cost_of_goods_sold and business_expense deductions as follows item amount claimed _on amount allowed per return notice_of_deficiency cost_of_goods_sold dollar_figure dollar_figure advertising big_number car truck big_number commissions depreciation big_number big_number insurance big_number legal professional big_number office expense big_number rent big_number big_number repairs big_number supplies big_number taxes license sec_803 travel big_number meals big_number utilities big_number wages big_number total dollar_figure dollar_figure ' petitioners’ return shows this figure as comprising dollar_figure for cost of labor and dollar_figure for other costs additionally since issuance of the notice_of_deficiency respondent has conceded that petitioners are entitled to deduct as a schedule c legal and professional expense dollar_figure paid for bookkeeping services the allowances described above were based upon invoices and receipts provided to respondent prior to trial and made a part of the record in this case at trial mr mendez spoke on behalf of his parents who apparently have minimal command of english hdhe testified that ejx’s business deteriorated shortly after the year at issue and closed in the fall of he also indicated that no business records were retained and conceded that petitioners could offer no further substantiation for their claimed costs and expenses in addition he explained that efforts to locate the bookkeeper who had prepared ejx’s business records as well as petitioners’ return had been unavailing in this connection the colloguy set forth below exemplifies mr mendez’s testimony on these matters the court now why don’t you tell the court anything you want to state in regard to your family’s tax problems the witness yeah the only thing i can say is that we had--we were in this business quite a long time and we were doing good since my dad went to--you know like he got sick and almost everything of the business it went down like you know no--there were no--there were my father not working so the business it was not good so what i can tell is that i wish i can have all the proofs we used to--we had for all the other years which is--you know we used to do good things you know keep the files but since we decide not to work with it anymore so we just--actually my dad--we don’t have no proofs we just we cannot come with that proof the only thing i can--the thing only i can say is that if we have some proof---we did our best to look for it we--even we went to our bookkeeper who used to take care of our business but unfortunately he’s not longer in that place so we couldn’t get some--you know like some proofs that we did you know the court who made out the income_tax return-- the witness that’s our bookkeeper aside from mr mendez’s testimony which we note was generally imprecise and difficult to follow the only evidence offered by petitioners at trial was a document dated date that stated i miguel x mendez and efrain j xuncax declare that although we don’t have any further proves of income_tax we affirm that in the year we approximately paid to employees in cash for their weekly labor we came to an agreement with our employees that by the end of the year they would receive from us a form_1099 with this purpose it gave them an opportunity to file their income_tax for the following year the amount that this employees received yearly was approximately ten thousands dollars however we don’t have much proves of these valuable documents therefore we have tried to locate our bookkeeper for further assistant but we apparently found out that he was no longer in the same business we write this testimony in the hope that this matter would be more explicable at the close of the trial the court indicated to petitioners that they would be afforded an opportunity to file a posttrial brief in support of their position petitioners have chosen not to do so opinion i burden_of_proof we begin with a threshold observation regarding burden_of_proof as a general_rule determinations by respondent are presumed correct and taxpayers bear the burden of proving otherwise rule a sec_7491 however may shift the burden to the commissioner in certain circumstances sec_7491 is applicable to court proceedings that arise in connection with examinations commencing after date and reads in pertinent part sec_7491 burden of proof’ a burden shifts where taxpayer produces credible_evidence --- general_rule --if in any court_proceeding a taxpayer introduces credible_evidence with respect to any factual issue relevant to ascertaining the liability of the taxpayer for any_tax imposed by subtitle a or b the secretary shall have the burden_of_proof with respect to such issue limitations ---paragraph shall apply with respect to an issue only if-- a the taxpayer has complied with the requirements under this title to substantiate any item b the taxpayer has maintained all records required under this title and has cooperated with reasonable requests by the secretary for witnesses information documents meetings and interviews --- - c penalties ---notwithstanding any other provision of this title the secretary shall have the burden of production in any court_proceeding with respect to the liability of any individual for any penalty addition_to_tax or additional_amount imposed by this title see also internal_revenue_service restructuring reform act of publaw_105_206 sec c 112_stat_685 regarding effective date although the record in this case does not reveal when the examination of petitioners’ return began respondent asserts that the burden is not placed on him under sec_7491 with respect to the income adjustments at issue and that respondent has met his burden of production under sec_7491 with respect to the penalties we agree as regards the adjustments to cost_of_goods_sold and business_expenses and as further explained below petitioners have failed to offer substantiation for and or maintain adequate_records concerning the disallowed amounts hence the prerequisites of sec_7491 for placing the burden on respondent as to these items have not been met see also 116_tc_438 blodgett v commissioner tcmemo_2001_147 h conf rept pincite 1998_3_cb_747 with respect to the accuracy-related_penalty the commissioner satisfies the sec_7491 burden of production by coming forward with sufficient evidence indicating that it is appropriate to impose the relevant penalty but need not --- - introduce evidence regarding reasonable_cause substantial_authority or similar provisions higbee v commissioner supra pincite rather it is the taxpayer’s responsibility to raise those issues id because as will be more fully detailed infra respondent here has introduced sufficient evidence to render the sec_6662 penalty at least facially applicable the burden rests on petitioners to show their entitlement to an exception therefrom if adjustments to income computation of the income of a schedule c business takes into account both cost_of_goods_sold and other business_expenses cost_of_goods_sold is an offset subtracted from gross_receipts in determining gross_income sec_1_61-3 income_tax regs accordingly such costs are not treated as deductions and are not subject_to the limitations on deductions contained in sec_162 and sec_274 88_tc_654 however any amount claimed as cost_of_goods_sold must be substantiated and taxpayers are required to maintain records sufficient for this purpose sec_6001 newman v commissioner tcmemo_2000_345 wright v commissioner tcmemo_1993_27 sec_1_6001-1 income_tax regs once the gross_income of a business has been calculated business_expense deductions are subtracted in determining net_income sec_162 allows a deduction for all the ordinary - and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business yet as with cost_of_goods_sold amounts deducted must be substantiated and records sufficient to establish such deductions must be maintained by the taxpayer sec_6001 65_tc_87 affd 540_f2d_821 5th cir sec_1_6001-1 income_tax regs when a taxpayer adequately establishes that he or she paid_or_incurred a deductible expense but does not establish the precise amount we may in some circumstances estimate the allowable deduction bearing heavily against the taxpayer whose inexactitude is of his or her own making 39_f2d_540 2d cir there must however be sufficient evidence in the record to provide a basis upon which an estimate may be made and to permit us to conclude that a deductible expense was incurred in at least the amount allowed 245_f2d_559 5th cir 85_tc_731 furthermore business_expenses described in sec_274 are subject_to rules of substantiation which supersede the doctrine_of cohan v commissioner supra 50_tc_823 affd 412_f2d_201 2d cir sec_1_274-5t temporary income_tax regs fed reg date sec_274 provides that no deduction shall be allowed for among other things traveling expenses entertainment_expenses meal expenses and expenses with respect to listed_property as defined in sec_280f and including passenger automobiles unless the taxpayer substantiates by adequate_records or by sufficient evidence corroborating the taxpayer’s own statement the amount of the expenditure or use the time and place of the expenditure or use the business_purpose of the expenditure or use and in the case of entertainment the business relationship to the taxpayer of the persons entertained sec_274 applying the foregoing principles to the costs and expenditures reported on petitioners’ return we consider whether petitioners are entitled to amounts in excess of those allowed by respondent a cost_of_goods_sold petitioners claimed cost_of_goods_sold totaling dollar_figure of which dollar_figure was designated as cost of labor and dollar_figure was labeled as other costs in support of these amounts petitioners provided respondent with payroll invoices and with a collection of receipts and invoices that seem to relate primarily to purchases of thread respondent aggregated all of petitioners’ substantiated compensation-related expenses as deductible wages discussed further below and additionally allowed petitioners cost_of_goods_sold in the amount of dollar_figure half of the figure claimed since the receipts and invoices which supposedly substantiate petitioners’ other costs total only dollar_figure we conclude that they have failed to prove their entitlement to cost_of_goods_sold in excess of what already appears to be a generous allowance by respondent b wages expense on their schedule c petitioners designated dollar_figure as cost of labor and dollar_figure as wages expense these amounts add to a total of dollar_figure for compensation-related expenditures during examination petitioners provided payroll invoices and receipts for totaling dollar_figure respondent allowed as a deduction wages expense of dollar_figure again respondent would appear to have been generous furthermore to the extent that certain portions of mr mendez’s testimony and the written_statement offered by petitioners at trial can be interpreted to mean that additional cash payments were made to employees such representations are insufficient to support a further deduction first the record is entirely devoid of anything which could corroborate the self-serving averments that cash payments were in fact made during the year at issue second even if we were willing to accept that cash had been remitted the record provides no basis for a reasonable estimate of the deductible amount the oral testimony contains no numerical information whatsoever as to either the number or the amount of payments - - and the written_statement is both ambiguous and so blatantly conjectural as to be almost useless for estimation purposes the document states that ejx approximately paid to employees in cash and that the amount that this employees received yearly was approximately ten thousands dollars hence at minimum it is unclear whether to employees received dollar_figure each or whether to employees received dollar_figure in the aggregate if the former we are doubtful of the statement’s veracity wages and labor costs both as reported on the return and as substantiated total less than dollar_figure it thus seems highly unlikely that additional employee payments of dollar_figure to dollar_figure were made through less conventional channels and were mistakenly omitted from petitioners’ return on the other hand if the latter interpretation should hold sway we note that respondent’s generosity already allows for a deduction of more than dollar_figure beyond the substantiated amount thus under any interpretation petitioners’ assertions fall short of showing their entitlement to further wages expense deductions c rent rent expense of dollar_figure was claimed on petitioners’ schedule c the information provided to respondent on this item consisted of rental receipts for the rather than the taxable_year the invoice for december of shows monthly rent of dollar_figure respondent allowed rent expense for at a rate of dollar_figure per month for a total of dollar_figure having no basis upon which to conclude that greater amounts were paid we sustain respondent on this issue d payments due on account of violations the record contains documentation relating to amounts assessed by local state and federal agencies on account of various statutory and regulatory violations although it is not clear whether petitioners deducted these amounts on their return and if so under what classification of expense we assume that inclusion of the documents in the record is based on petitioners’ belief that they support a deduction at the outset we emphasize that sec_162 explicitly provides that no deduction shall be allowed for any fine or similar penalty paid to a government for the violation of any law accordingly to the extent that the aforementioned amounts are of a type within the purview of sec_162 as the majority would appear clearly to be payment thereof is nondeductible in any event however for the sake of completeness we deal briefly with additional reasons why the documentation offered fails to support increased deductions first the evidence includes bills from the los angeles police department for amounts imposed due to violations of sec_103 of the los angeles municipal code for excessive false alarms without the required alarm permit petitioners -- - were charged dollar_figure per occurrence for false alarms on february ’ may june and date the record also contains delinquent status notices dated november and date concerning the may and the august alarms respectively the bills and notices warn that operating an alarm system without a permit is a misdemeanor thus additional impediments beyond sec_162 are present on these facts the delinquency notices call into question whether at least some of the charges were paid in so as to be deductible by a cash_basis enterprise in that year second petitioners provided a garment penalty assessment order from the state of california department of industrial relations division of labor standards enforcement fora violation of section of the california labor code cal lab code sec west supp the assessment was issued on date and the stated grounds involve a failure to maintain accurate records however the evidence also includes a letter from the agency dated date stating that the penalty had not been paid as of that date petitioners therefore are entitled to no deduction in although the pertinent stipulation references date as the date of the alarm the bill specifies an alarm date of the minor discrepancy is immaterial for our purposes -- - third the record contains a citation and notification of penalty from the state of california department of industrial relations division of occupational safety and health for violations of the california labor code in this notice of date the agency cites multiple deficiencies in the brjx facility and working environment yet the record is again devoid of any proof of payment given that another state assessment issued the same date and discussed above remained unpaid in we are unwilling to assume that this penalty was paid during petitioners have not substantiated an expenditure fourth the evidence includes an agreement between ejx and the u s department of labor settling alleged violations of the fair labor standards act therein the bjx agreed to pay back wages of dollar_figure additionally copies of receipts reflecting payments to the department of labor totaling dollar_figure have been made a part of the record nonetheless even if this settlement is more appropriately viewed as a deductible wages expense rather than a nondeductible penalty no further deduction is in order here once again respondent’s allowance for wages is large enough to cover this additional_amount ek license petitioners claimed on their schedule c dollar_figure for taxes and licenses respondent disallowed this expense in full however the record contains a garment manufacturing license fee invoice from the county of los angeles for dollar_figure the invoice recites that unless payment is received before date legal proceedings will be instituted handwritten on the invoice is pagado con check which mr mendez testified he wrote to signify that the fee was paid_by check given this notation and the logical appeal of mr mendez’s testimony that the business would not have been able to continue without the license we are satisfied that ejx did in fact remit the referenced fee in petitioners are entitled to a deduction for licenses in the amount of dollar_figure f advertising petitioners’ schedule c reflects a deduction for advertising of dollar_figure all of which was disallowed by respondent the sole item in the record which would appear to be traceable to an advertising expenditure 1s an invoice from rick swinger photography for studio fashion photography with model and roles color film shot the balance due is shown as dollar_figure nonetheless there are again two barriers to permitting a deduction based upon this document first as with many of the invoices previously mentioned the record is barren of any evidence of actual payment not even a notation on the bill exists to give rise to an inference in petitioners’ favor -- - second the invoice is made out to karat gold jean co when questioned about this document at trial mr mendez explained the witness this---there were a man came to my shop and asked me if i could sew his garment and somehow he start talking about you know our business to start because sewing was to--it was no good anymore so we tried to do like partnership or so like i was wanting to sew the clothes that he--our products to start our own business and we were going to call it karat gold jeans or so but we never get to that mr sloat so whose business--was that a partnership between you and this other person the witness yes because this testimony would seem to confirm that the photography charges were incurred by a business_entity other than kjx namely a partnership between petitioners’ son and an unidentified man we must conclude that the amount cannot be deducted on petitioners’ schedule c g legal and professional services as previously indicated respondent has conceded that petitioners are entitled to include on their schedule c dollar_figure for legal and professional services this position is based upon an invoice and receipt reflecting payment for bookkeeping services we accept respondent’s concession h other expenses with respect to the remaining expenses claimed on petitioners’ schedule c and disallowed by respondent we hold that petitioners have failed to substantiate these deductions the only other evidence in the record consists of miscellaneous receipts many of which provide no information regarding the subject of the underlying transaction or the parties thereto many others are from restaurants eg mcdonald’s taco bell sizzler gas stations and grocery stores a significant portion are obviously for nondeductible personal expenditures moreover to the extent that they might relate to the claimed travel meal and vehicle expenses the receipts fall far short of the strict substantiation requirements of sec_274 we sustain respondent’s position as to all remaining expenses not previously addressed itil accuracy-related_penalty subsection a of sec_6662 imposes an accuracy-related_penalty in the amount of percent of any underpayment that is attributable to causes specified in subsection b subsection b of sec_6662 then provides that among the causes justifying imposition of the penalty are negligence or disregard of rules or regulations and any substantial_understatement_of_income_tax - - negligence is defined in sec_6662 as any failure to make a reasonable attempt to comply with the provisions of this title and disregard as any careless reckless or intentional disregard case law similarly states that ‘ negligence is a lack of due care or the failure to do what a reasonable and ordinarily prudent person would do under the circumstances ’ 89_tc_849 quoting marcello v commissioner 380_f2d_499 5th cir affg on this issue 43_tc_168 and t c memo affd 904_f2d_1011 5th cir affd 501_us_868 pursuant to regulations ‘ negligence’ also includes any failure by the taxpayer to keep adequate books_and_records or to substantiate items properly sec_1_6662-3 income_tax regs a substantial_understatement is declared by sec_6662 d to exist where the amount of the understatement exceeds the greater of percent of the tax required to be shown on the return for the taxable_year or dollar_figure dollar_figure in the case of a corporation for purposes of this computation the amount of the understatement is reduced to the extent attributable to an item for which there existed substantial_authority for the taxpayer’s treatment thereof or with respect to which --- - relevant facts were adequately disclosed on the taxpayer’s return or an attached statement and there existed a reasonable basis for the taxpayer’s treatment of the item see sec_6662 b an exception to the sec_6662 penalty is set forth in sec_6664 and reads no penalty shall be imposed under this part with respect to any portion of an underpayment if it is shown that there was a reasonable_cause for such portion and that the taxpayer acted in good_faith with respect to such portion regulations interpreting sec_6664 state the determination of whether a taxpayer acted with reasonable_cause and in good_faith is made on a case- by-case basis taking into account all pertinent facts and circumstances generally the most important factor is the extent of the taxpayer’s effort to assess the taxpayer’s proper tax_liability sec_1_6664-4 b income_tax regs furthermore reliance upon the advice of an expert tax preparer may but does not necessarily demonstrate reasonable_cause and good_faith in the context of the sec_6662 a penalty see id see also freytag v commissioner supra pincite such reliance is not an absolute defense but it is a factor to be considered see freytag v commissioner supra pincite in order for this factor to be given dispositive weight the taxpayer claiming reliance on a professional must show at minimum that the preparer was supplied with correct information and the incorrect return was a result of the preparer’s error see eg westbrook v commissioner f 3d - 5th cir affg tcmemo_1993_634 101_tc_225 affd 64_f3d_1406 9th cir 70_tc_158 59_tc_473 garcia v commissioner tcmemo_1998_203 affd without published opinion 190_f3d_538 5th cir the notice_of_deficiency issued to petitioners asserted applicability of the sec_6662 penalty on account of both negligence and or substantial_understatement the notice also referenced substantial_valuation_overstatement as an additional alternative ground see sec_6662 but since valuation was not a focus of this case we disregard the apparent boilerplate reference based upon our holdings above the evidence has now established that petitioners understated their taxes by more than the greater of dollar_figure or percent of the tax required to be shown in addition we observe that there exists no substantial_authority for deduction of unsubstantiated expenses and that petitioners’ return disclosed no facts related to their claimed expenses accordingly respondent has satisfied the burden of production under sec_7491 with respect to the sec_6662 penalty for substantial_understatement we also note for the sake of completeness that petitioners’ demonstrated - - failure to keep adegquate records and properly substantiate would be sufficient to sustain respondent’s burden for a negligence- based imposition as well furthermore petitioners have failed to prove their entitlement to relief under the sec_6664 exception an absence of records due to loss or destruction cannot standing alone establish that petitioners’ deductions were founded on reasonable_cause and good_faith when made in addition the explanation offered for why petitioners retained no records from ejx can only be described as vague at best the role of their alleged return preparer who we note did not sign the return is also less than clear more importantly there has been no showing that the return preparer was provided with accurate information such that any errors are attributable to him and not to petitioners we hold that petitioners are liable for the sec_6662 accuracy-related_penalty to reflect the foregoing decision will be entered under rule


internal_revenue_service department of the treasu washington dc soo o i contact person telephone number in reference to t ep ra t3 id date may uics legend taxpayer a taxpayer b taxpayer c taxpayer d date date date date date date date date trust x tra y company z subtrust a page state b dear mr this is in response to the date letter submitted by your authorized representative on your behalf in which you request a series of letter rulings under sec_401 of the internal_revenue_code the following facts and representations support your ruling requests taxpayer a maintained ira y an individual_retirement_arrangement which your authorized representative asserts was qualified within the meaning of code sec_408 with company z taxpayer a’s date of birth was date thus he attained age on date asa result his code sec_401 required_beginning_date was date taxpayer a was married to taxpayer b however taxpayer b died on date on date taxpayer a created trust x your authorized representative has asserted on your behalf that trust x is valid under the laws of state b on or about date taxpayer a named trust x as the beneficiary of his ira y taxpayer a did not change his ira y beneficiary designation prior to his death taxpayer a died on date which was after his code sec_401 required_beginning_date at the time of his death taxpayer a was receiving required distributions from his ira y over his recalculated single life expectancy your authorized representative asserts on your behalf that within two weeks of the date of taxpayer a’s death the trustee of trust x served a copy of the trust x document on company z taxpayer a was survived by his two children taxpayers c and d taxpayer c’s date of birth was date and taxpayer d’s date of birth was date thus taxpayer d is older than taxpayer c the primary beneficiary of taxpayer a’s trust x was taxpayer b however as noted above taxpayer b predeceased taxpayer a furthermore taxpayer b died prior to taxpayer a’s code sec_401 required_beginning_date according to the terms of trust x in the event that taxpayer b did not survive taxpayer a the assets of trust x are payable in equal shares to the children of taxpayer a who are living at the time of taxpayer a’s death a page paragraph second f of trust x provides in relevant part that if the settlor’s spouse does not survive the settlor the balance of the trust estate described in paragraph second c shall be transferred to subtrust a of trust x and held administered and disposed of in accordance with the provisions of paragraph fourth of trust x pursuant to the above the proceeds of ira y payable to trust x were transferred to subtrust a paragraph fourth c of trust x provides in pertinent part that upon the death of the settlor and the settlor’s spouse subtrust a shall terminate and the trustee of trust x shall divide the remaining principal and income of subtrust a into equal shares one share for each child of the settlor then surviving each such share shall forthwith be paid over to such child free and discharged from the trusts hereof paragraph ninth of trust x provides in pertinent part that taxpayer a had the sole power_to_revoke trust x at the time of his death taxpayer a was a resident of state b state b consolidated laws section provides in pertinent part that an individual_retirement_account or individual_retirement_annuity defined in sec_408 or sec_408 of the internal_revenue_code_of_1986 and the payments or distributions from such account or annuity shall be exempt from levy and sale under any execution your authorized representative has asserted that pursuant to this section of the state b statutes iras are exempt from creditors based on the above facts and representations you through your authorized representative request the following letter rulings that taxpayer a timely designated taxpayer d as a beneficiary of his tra y that taxpayer a timely designated taxpayer c as a beneficiary of his tra y _ that with respect to ira y in determining code sec_401 minimum required distributions commencing in the calendar_year following the calendar_year of taxpayer a’s death taxpayer c may use the temaining term-certain life expectancy of taxpayer d since she is the elder of taxpayers c and d reduced by one for each calendar_year thereafter that with respect to ira y taxpayer a’s use of his single life expectancy recalculated to determine minimum required distributions during his lifetime does not preclude the use of the remaining term-certain life expectancy of the older of taxpayers c and d reduced by one for each oll page calendar_year for purposes of computing minimum required distributions for calendar years commencing with calendar_year that taxpayer c as a beneficiary of trust x the beneficiary of ira y may direct that his portion of the trust x assets which consists of his interest in ira y be transferred by means of a trustee-to-trustee transfer into another ira set up and maintained in the name of taxpayer a for the benefit of taxpayer c beneficiary thereof that trust x’s being the named beneficiary of taxpayer a’s ira y at the death of taxpayer a does not preclude the service’s issuing favorable responses to letter_ruling requests through above and _ that trust x’s being the named beneficiary of taxpayer a’s ira y at the death of taxpayer a does not preclude minimum required distributions from ira y or a transferee ira thereof set up in the name of taxpayer a for the benefit of taxpayer c being made directly to taxpayer c after trust x is terminated over taxpayer d’s life expectancy with respect to your ruling requests sec_408 of the code provides that under regulations prescribed by the secretary rules similar to the rules of sec_401 and the incidental death_benefit requirements of sec_401 shall apply to the distribution of the entire_interest of an individual for whose benefit the ira trust is maintained code sec_401 provides in general that a_trust will not be considered qualified unless the plan provides that the entire_interest of each employee- i will be distributed to such employee not later than the required_beginning_date or ii will be distributed beginning not later than the required_beginning_date over the life of such employee or over the lives of such employee and a designated_beneficiary or over a period not extending beyond the life expectancy of such employee and a designated_beneficiary sec_401 of the code provides in relevant part that for purposes of this paragraph the term required_beginning_date means april of the calendar_year following the calendar_year in which the employee ira holder attains age code sec_401 d provides that where distributions have begun over life expectancy cies in accordance with subparagraph a ii a_trust shall not constitute ald page a qualified_trust under this section unless the plan provides that if the employee dies before his entire_interest has been distributed to him the remaining portion of such interest will be distributed at least as rapidly as under the method of distribution being used under subparagraph a ii as of the date of death sec_401 -1 of the proposed income_tax regulations question and answer d-3 provided that for purposes of calculating the distribution period for distributions that begin prior to death the designated_beneficiary will be determined as of the plan participant’s ira holder’s required_beginning_date sec_401 -1 of the proposed_regulations q a e-5 a provided in general that if more than one individual is designated as a beneficiary with respect to an employee ira holder as of the applicable_date for determining the designated_beneficiary the designated_beneficiary with the shortest life expectancy will be the designated_beneficiary for purposes of determining the code sec_401 distribution period sec_401 -1 of the proposed_regulations q a f-1 a provided that where an employee’s benefit is in the form of an individual_account and is to be distributed over a period not extending beyond the life expectancy of the employee or the joint life and last survivor expectancy of the employee and his designated_beneficiary the amount required to be distributed for each calendar_year beginning with the first calendar_year for which distributions are required and for each succeeding calendar_year must be at least equal to the quotient obtained by dividing the employee’s benefit by the applicable life expectancy sec_1_401_a_9_-1 of the proposed_regulations q a f-1 d provided that the term applicable life expectancy means the life expectancy or the joint and last survivor expectancy determined in accordance with e-1 through e-5 of the proposed_regulations reduced by one for each calendar_year which has elapsed since the date on which the life expectancy or joint and last survivor expectancy was calculated however pursuant to e-6 through e-8 life expectancy is recalculated the applicable life expectancy will be the life expectancy so recalculated sec_1_401_a_9_-1 of the proposed_regulations q a e-6 provided in general that the life expectancy of a designated_beneficiary may be recalculated if the designated_beneficiary is the ira holder’s spouse sec_1_401_a_9_-1 of the proposed_regulations q a f-3a provided generally that with respect to individual_account_plans from which distributions have commenced prior to the employee’s death post death distributions will comply with the at least as rapidly as under the method of distribution being used under sec_401gi mule if said distributions are made in accordance with q a f-1 page 200i31032 sec_1_401_a_9_-1 of the proposed_regulations q a e-8 provided in pertinent part that the life expectancy of a non-spouse beneficiary may not be recalculated q a e-8 also provides in pertinent part that if the life expectancy of either a plan participant ira holder or his beneficiary is being recalculated the recalculated life expectancy is reduced to at the end of the calendar_year following the calendar_year of the ira holder’s or beneficiary’s death sec_1_401_a_9_-1 of the proposed_regulations q a d-2a provided that only individuals may be designated beneficiaries for purposes of sec_401 a person who is not an individual such as the employee's estate may not be a designated_beneficiary however q a d-5 of sec_1_401_a_9_-1 provided that beneficiaries of a_trust with respect to the trust's interest in an employee's benefit may be treated as designated beneficiaries if the following requirements are met the trust is valid under state law or would be but for the fact that there is no corpus the trust is irrevocable or the trust contains language to the effect it becomes irrevocable upon the death of the employee the beneficiaries of the trust who are beneficiaries with respect to the trust's interest in the employee's benefit are identifiable from the trust instrument the documentation described in d-7 of this section has been provided to the plan_administrator sec_1_401_a_9_-1 of the proposed_regulations q a d-6 provided that in the case in which a_trust is named as the beneficiary of an employee all beneficiaries of the trust with respect to the trust's interest in the employee's benefit are treated as designated beneficiaries of the employee under the plan for purposes of determining the distribution period under sec_401 and iv if the requirements in paragraph a of d-5 above are satisfied as of the date of the employee's death or in the case of the documentation described in d-7 of this section by the end of the ninth month beginning after the employee's death sec_1_401_a_9_-1 of the proposed_regulations q a d-7 provided in general that the plan_administrator be provided with either a list of all trust beneficiaries as of the date of death or with a copy of the trust document for the trust which is named as beneficiary of the plan as of the employee's date of death in general with respect to required distributions which commence after death the necessary documentation must be furnished no later than the end of the ninth month beginning after the death of the employee ira holder page 200i13 sec_1_401_a_9_-1 of the proposed_regulations q a e-5 f in short provided that the beneficiary of a plan or ira may not change the beneficiary of said plan or ira if such a change occurs the employee plan participant or ira holder will be treated as not having designated a beneficiary with respect to your first and second ruling requests in this case taxpayer a prior to his code sec_401 required_beginning_date named his trust x as the beneficiary of his ira ira y as noted above taxpayer a did not change his beneficiary designations prior to his death the facts of this case summarized above indicate that trust x is a valid trust which became irrevocable at the death of taxpayer a furthermore taxpayers c and d were referenced in trust x as the beneficiaries thereof to take if taxpayer b did not survive taxpayer a taxpayer b who died prior to taxpayer a’s code sec_401 required_beginning_date did not survive taxpayer a finally a copy of trust x has been given to company z the custodian of taxpayer a’s ira y based on the above the service has concluded that trust x is a see-through trust described in sec_1_401_a_9_-1 of the proposed_regulations qs as d-5 and d-6 above as a result with respect to your first two ruling requests the service concludes as follows that taxpayer a timely designated taxpayer d as a beneficiary of his tra y and that taxpayer a timely designated taxpayer c as a beneficiary of his ira y with respect to your third ruling_request as noted above taxpayer d is older than taxpayer c furthermore taxpayers c and d are the children of taxpayer a thus the life expectancy of taxpayer d may not be recalculated for purposes of determining the code sec_401 distribution period after the death of taxpayer a thus with respect to your third ruling_request the service concludes as follows _ that with respect to ira y in determining code sec_401 minimum required distributions commencing in the calendar_year following the calendar_year of taxpayer a’s death taxpayer c may use the remaining term-certain life expectancy of taxpayer d since she is the elder of taxpayers c and d reduced by one for each calendar_year thereafter with respect to your fourth ruling_request the issue presented is whether post death distributions from taxpayer a’s ira y may be made over taxpayer d’s life expectancy although distributions from ira y during taxpayer a’s life were made over page taxpayer a’s recalculated single life expectancy and not over taxpayer a’s and taxpayer d’s joint life expectancy without violating the at least as rapidly rule_of code sec_401 as described in sec_1_401_a_9_-1 of the proposed_regulations q a f-3a in this case as noted above taxpayer a timely designated taxpayer d as his beneficiary for purposes of code sec_401 thus taxpayer a could have received distributions from ira y over his and taxpayer d’s joint life expectancy subject_to the minimum distribution incidental benefit requirement such distributions would have complied with the minimum_required_distribution rules instead taxpayer a chose to receive distributions over his recalculated single life expectancy in effect taxpayer a received distributions in amounts greater than the required minimums or in other words chose to accelerate receipt of lifetime distributions taxpayer a’s election to accelerate distributions does not affect the determination above that taxpayer a’s timely designating taxpayer d beneficiary resulted in code sec_401 required distributions being those computed using taxpayer a’s and taxpayer d’s joint and survivor life expectancy thus although taxpayer d’s life expectancy was not used in computing lifetime distributions to taxpayer a it may be used to determine post-death required distributions to taxpayer a’s beneficiaries in short the at least as rapidly rule will not be violated if post-death distributions are calculated using the life expectancy of taxpayer a’s designated_beneficiary taxpayer d since taxpayer a could have used taxpayer d’s life expectancy to determine the amount of his required lifetime distributions as his in this case as noted above taxpayer a’s life expectancy was being recalculated thus as of the end of the calendar_year following the calendar_year of his death taxpayer a’s life expectancy was reduced to therefore required distributions to taxpayer a’s beneficiaries will be those computed using the life expectancy of taxpayer d his designated_beneficiary thus with respect to your fourth ruling_request the service concludes as follows that with respect to ira y taxpayer a’s use of his single life expectancy recalculated to determine minimum required distributions during his lifetime does not preclude the use of the remaining term-certain life expectancy of taxpayer d the older of taxpayers c and d reduced by one for each calendar_year for purposes of computing minimum required distributions for calendar years commencing with calendar_year with respect to your fifth ruling_request revrul_78_406 1978_2_cb_157 provides that the direct transfer of funds from one ira trustee to another ira trustee does not result in such funds being treated as paid or distributed to the participant and such transfer is not a rollover_contribution the revenue_ruling states that this alb aee conclusion would apply whether the bank trustee initiates or the ira participant directs the transfer of funds revrul_78_406 is applicable if the trustee to trustee transfer is directed by the beneficiary of an ira after the death of the ira owner as long as the transferee ira is set up and maintained in the name of the deceased ira owner for the benefit of the beneficiary with specific reference to your seventh ruling_request as noted above taxpayer a named trust x as the beneficiary of his ira y and as noted above taxpayers c and d are the named beneficiaries of trust x and not of ira y although taxpayer d as the older of taxpayers c and d is the code sec_401 designated_beneficiary of ira y the facts summarized above indicate that after the deaths of taxpayers a and b_trust x is to be terminated and payments of assets otherwise payable to trust x will be made directly to the beneficiaries of trust x taxpayers c and d this trust x termination language is found in the provisions of trust x and reflects taxpayer a’s intent the provision of trust x which provides for its termination does not change either the identity of the individuals who will receive the ira y proceeds or the identity of the designated_beneficiary of ira y who remains taxpayer d furthermore the trust x termination language which results in distributions from ira y being made directly to taxpayers c and d instead of initially to trust x and then to taxpayers c and d was language in trust x approved by taxpayer a during his lifetime which reflects taxpayer a’s intent to pay his children directly instead of through trust x thus it does not give rise to a change in beneficiaries prohibited by sec_1 a - of the proposed_regulations q a e-5 f thus with respect to your fifth through seventh ruling requests the service concludes as follows that taxpayer c as a beneficiary of trust x the beneficiary of ira y may direct that his portion of the trust x assets which consists of his interest in ira y be transferred by means of a trustee-to-trustee transfer into another ira set up and maintained in the name of taxpayer a for the benefit of taxpayer c beneficiary thereof that trust x’s being the named beneficiary of taxpayer a’s ira y at the death of taxpayer a does not preclude the service’s issuing favorable responses to letter_ruling requests through above and of ase _ that trust x’s being the named beneficiary of taxpayer a’s ira y at the death of taxpayer a does not preclude minimum required distributions from ira y or a transferee ira thereof set up in the name of taxpayer a for the benefit of taxpayer c being made directly to taxpayer c after trust x is terminated over taxpayer d’s life expectancy this ruling letter assumes that ira y either is has or will meet the requirements of code sec_408 at all times relevant thereto it also assumes that the transferee ra which will be set up and maintained in the name of taxpayer a taxpayer c will also meet the requirements of code sec_408 finally it assumes that trust x is valid under the laws of state b as asserted for the benefit of this ruling is directed solely to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited by others as precedent pursuant to a power_of_attorney on file in this office the original of this letter_ruling is being sent to your authorized representative sincerely yours ba cer frances v sloan manager employee_plans technical group tax_exempt_and_government_entities_division enclosures deleted copy of letter_ruling form_437 av


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 b1 plr-128148-07 date date ------------------------------------------------ ---------------------------- -------------------------- ------------------ legend x ----------------------------------------------------------- y ----------------------------------------------------------- z ----------------------------------------------------------- a b c m ---------------------- ----------------------------------------------------------- state date date date date ---------------------- ------------------- ------------------- ------------------ ------------------ ------------------ -------------------------- ------- -- plr-128148-07 year a dear --------------- this letter responds to your letter dated date on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts the information submitted states that x was incorporated under the laws of state and x filed an election under sec_1362 to be treated as an s_corporation effective as of date at the time of the election x had three shareholders a b and c additionally on date x formed one wholly owned subsidiary y and on date x formed another wholly owned subsidiary z although as detailed below x’s subchapter_s_election had terminated at the time of the formation of the two wholly owned subsidiaries x filed what would have been timely qsub elections for y and z effective date and date respectively had x’s subchapter_s_election still been in effect beginning on date a made gifts of non-voting stock of x to an irrevocable_trust known as m trust a made a separate gifts of non-voting stock to the trust a’s gifts of stock made to the trust were intended by a to inure to the direct benefit of multiple specifically named beneficiaries each of whom is eligible to be a shareholder of an s_corporation each specifically named beneficiary’s rights under the trust instrument were set forth as rights to separate shares of the trust x represents that a created substantially separate and independent shares of the trust for each named or otherwise described beneficiary when a contributed his shares of x stock to the trust x also represents that at all times after the transfers of stock to the trust each separate and independent share of the trust qualified as a qsst as defined by sec_1361 except that the beneficiaries of each separate and independent share of the trust failed to make qsst elections under sec_1361 as a consequence of the failure to make the qsst elections x’s s_corporation_election terminated on date the date of the first transfer of x stock to the trust in late year x changed accounting firms and the new accounting firm notified x that separate qsst elections were previously required to be filed by each individual beneficiary of separate shares of the trust in a timely manner when the stock was first transferred to the trust in order to maintain x’s status as an s_corporation immediately thereafter x and its shareholders took corrective action to rectify the plr-128148-07 situation and to restore x’s status as an s_corporation this action included the preparation and submission of a request for a ruling under sec_1362 of the code it is represented that the failures to make timely elections under sec_1362 of the code were unintentional and inadvertent and that there was no tax_avoidance motive nor retroactive tax planning motive in either failing to make the elections or in requesting termination relief it is further represented that at all times since date x and its shareholders have treated x as an s_corporation and each separate and individual share of the trust as effective qssts in addition x and the trustees of the trust agree to make such adjustments consistent with the treatment of the x as an s_corporation as may be required by the internal_revenue_service with respect to such period law and analysis sec_1362 provides that except as provided in g a small_business_corporation may elect in accordance with the provisions of to be an s_corporation sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 provides that for the purposes of sec_1361 a_trust all of which is treated under subpart e of part i of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states may be a shareholder of an s_corporation sec_1361 provides that a substantially separate and independent share of a_trust within the meaning of sec_663 shall be treated as a separate trust for purposes of sec_1361 and sec_1361 sec_1361 provides that in the case of a qsst with respect to which a beneficiary makes an election under sec_1361 a the trust is treated as a_trust described in sec_1361 and b for purposes of sec_678 the beneficiary of the trust shall treated as the owner of that portion of the trust that consists of stock in an s_corporation with respect to which the election under sec_1361 is made sec_1361 provides that a beneficiary of a qsst or the beneficiary's legal_representative may elect to have sec_1361 apply sec_1361 provides that plr-128148-07 an election under sec_1361 shall be effective up to days and two months before the date of the election sec_1_1361-1 of the income_tax regulations provides that the current income_beneficiary of the trust must make the election under sec_1361 by signing and filing with the service_center with which the corporation files its income_tax return the applicable form or a statement including the information listed in sec_1_1361-1 sec_1362 provides that an election under sec_1362 terminates whenever the corporation ceases to be a small_business_corporation sec_1362 provides that if an election under sec_1362 by any corporation was terminated under sec_1362 or the secretary determines that the circumstances resulting in termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the termination steps were taken so that the corporation is a small_business_corporation and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the termination the corporation shall be treated as an s_corporation during the period specified by the secretary conclusion based solely upon the facts submitted and the representations set forth above we conclude that x’s s election terminated on date when shares of x stock were first transferred to ineligible shareholders the trust we further conclude that this transfer was inadvertent within the meaning of sec_1362 additionally we conclude that each separate and independent share of the trust is eligible to be treated as a qsst thus under the provisions of sec_1362 x will be treated as an s_corporation from date and thereafter provided that the beneficiaries of each separate and individual share of the trust file qsst elections effective within days following the date of this letter with the appropriate service_center and provided that x’s s_corporation_election is valid and not otherwise terminated under sec_1362 additionally y will be treated as a qsub from date and thereafter and z will be treated as a qsub from date and thereafter a copy of this letter should be attached to the qsst elections x must file any amended returns and make such adjustments which are necessary to properly reflect the reporting of x’s items of s_corporation income additionally the shareholders of x including the beneficiaries of separate and independent shares of each qsst under the trust must make any necessary adjustments and amendments to their tax returns plr-128148-07 this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office we are forwarding a copy of this letter to your authorized representatives sincerely david r haglund senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


o f f i c e o f t h e c h i e f c o u n s e l department of the treasury i n t e r n a l r e v e n u e s e r v i c e w a s h i n g t o n d c date number release date conex-109092-19 uil the honorable amy klobuchar united_states senator washington avenue south minneapolis mn dear senator klobuchar we received i am responding to your inquiry on behalf of your constituent your inquiry as a referral ----------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -------- -------------- asked for help with an issue about a cafeteria_plan subject_to sec_125 of the internal_revenue_code the code your constituent asked whether an election under a sec_125 plan frequently referred to as a cafeteria_plan made pursuant to a court order entered in connection with the employee’s divorce can be changed upon the death of the former spouse although we can’t provide specific advice on your constituent’s particular situation we can provide the following general information that we hope will be useful to your constituent generally the terms of a cafeteria_plan must provide that employees elect benefits before the beginning of the plan_year period of coverage and that the employees cannot change their elections during the period of coverage under sec_1_125-4 a cafeteria_plan may permit an employee to revoke an election during a period of coverage and make a new election for the remaining period of coverage if a change in status occurs and the change to the election satisfies the consistency rule a change to an election satisfies the consistency rule if the change to the election is because of and corresponds with a change in status for example under the consistency rule an election for family_coverage under a health plan generally can be changed to single coverage or no coverage during a period of coverage only if under the facts and circumstances the employee has experienced a change in status that is consistent with a change out of family_coverage --------------- conex-109092-19 only a limited number of events are considered a change in status under the regulations but they include situations in which there is a change in the number of an employee’s dependents under sec_152 of the code in general a dependent means a qualifying_child or qualifying_relative a former spouse is not a dependent as defined under sec_152 of the code because a former spouse is not a dependent under the code the death of a former spouse does not change the number of dependents and is not a change in status under the regulations the regulations also do not provide that the death of an employee’s former spouse that nullifies a court order providing for the former spouse’s health coverage results in a change in status while sec_1_125-4 provides that cafeteria plans may treat certain court orders requiring health coverage for an employee’s child as a change in status the regulations do not include as a change in status a situation in which the death of a former spouse effectively terminates the requirement to provide health coverage under a court order also these regulations do not otherwise provide that the death of a former spouse is a change in status that would permit an employee to change an election during a period of coverage nonetheless employee generally are permitted to change their cafeteria_plan elections including dropping coverage as part of the annual open enrollment period i hope this information is helpful if you have any questions please contact me at -------- ------------- or you may contact -------------------- ------------------ at sincerely s victoria a judson associate chief_counsel employee_benefits exempt_organizations and employment_taxes


number release date id office uilc cca-269060-09 ------------------------------ from -------------------------- sent friday february 06am to ----------------- cc --------------------------------------- subject church discussion yesterday ------- this records our conversation yesterday date regarding ----------------------- --------------------------------------------------------------------and sec_7611 sec_7611 provides that the secretary is required to approve in writing any second inquiry or examination of a church if the second inquiry or examination is to be undertaken within five years of an earlier inquiry or examination and if the earlier inquiry or examination did not result in a revocation a deficiency_notice or an assessment of tax or a request for any significant change in church’s operational practices the secretary’s approval is required only if the second inquiry or examination involves the same or similar issues as the earlier inquiry or examination because the irs is closing the ------ ----------------inquiry without an examination or a request to modify operational practices of the church any subsequent inquiry of the church regarding the same or similar issues involved in this case will implicate sec_7611 if the subsequent inquiry is within the five year period described in sec_7611 please let me know if you want to discuss further thanks ----------


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 intl b01 plr-127343-13 date date ty --------------- legend taxpayer spouse rrsp rrsp rrsp tax preparer tax years year year year year ------------------------------ ------------------------- ------------------------- ------------------------- ------------------------------ ------------------------------------------ ------------------------------ --------------------------------------------------- ------------------------------ ------------------------------------------ ------------------------------------------- --------------- ------- ------- ------- ------- plr-127343-13 dear ----------------------------------------- this responds to a letter from your representative dated -------------------- requesting an extension of time under sec_301_9100-3 for taxpayer and spouse to elect the provisions of revproc_2002_23 2002_1_cb_744 with respect to tax years the ruling contained in this letter is based upon information and representations submitted by taxpayer and spouse 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 requested ruling it is subject_to verification on examination the information submitted for consideration is substantially as set forth below facts taxpayer and spouse were both born in canada they moved to the united_states in late year and became lawful permanent residents of the united_states during year prior to moving to the united_states taxpayer and spouse established rrsp rrsp and rrsp collectively rrsps as of the date of this ruling_request neither taxpayer nor spouse has received any distributions from rrsps taxpayer and spouse have filed a joint u s income_tax return since moving to the united_states and have filed their u s returns on a timely basis for each of the tax years neither taxpayer nor spouse has any u s income tax-related education skills or training after moving to the united_states taxpayer and spouse engaged different certified public accountants cpas to prepare their u s income_tax returns although they provided the cpas with information regarding rrsps none of the cpas advised taxpayer and spouse of the requirement to make an election under article xviii of the united states-canada income_tax convention the treaty to defer recognition of undistributed_income accrued by rrsps taxpayer and spouse engaged tax preparer to prepare their year return and provided tax preparer with information regarding rrsps during year while preparing the year return tax preparer informed taxpayer and spouse of the requirement to make an election under article xviii of the treaty as of the date of the ruling_request the internal_revenue_service has not communicated with taxpayer and spouse in any way regarding rrsps ruling requested plr-127343-13 taxpayer and spouse request the consent of the commissioner of internal revenue for an extension of time under sec_301_9100-3 to make an election pursuant to revproc_2002_23 to defer u s federal income_taxation on income accrued by rrsps during tax years as provided for by article xviii of the treaty law and analysis sec_301_9100-1 provides that the commissioner has discretion to grant a taxpayer a reasonable extension of time under the rules set forth in sec_301_9100-3 to make a regulatory election under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301 -1 b provides that an election includes an application_for relief in respect of tax and defines a regulatory election as an election whose due_date is prescribed by a regulation revenue_ruling revenue_procedure notice or announcement sec_301_9100-3 provides that requests for relief subject_to this section will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government in the present situation the election provided in revproc_2002_23 is a regulatory election within the meaning of sec_301_9100-1 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant taxpayer and spouse an extension of time provided that they satisfy the standards set forth in sec_301_9100-3 based solely on the information submitted and representations made we conclude that taxpayer and spouse satisfy the standards of sec_301_9100-3 accordingly taxpayer and spouse are granted an extension of time until days from the date of this ruling letter to make an election for tax years under revproc_2002_23 as provided in sec_301_9100-1 the granting of an extension of time is not a determination that taxpayer is otherwise eligible to make the above-described election pursuant to dollar_figure of revproc_2002_23 once the election is made it cannot be revoked except with the consent of the commissioner for open tax years taxpayer and spouse must file amended u s income_tax returns to which they attach a separate form_8891 for each rrsp for each subsequent year through the year in which a final distribution has been made from each rrsp taxpayer and spouse must attach to their u s income_tax return a form_8891 for each rrsp from which a final distribution has not been made plr-127343-13 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter a copy of this letter must be attached to the u s income_tax return for the year in which taxpayer and spouse obtained the ruling and should be associated with the amended returns for open tax years this letter_ruling is directed only to the taxpayers who requested it sec_6110 provides that it may not be used or cited as precedent sincerely __________________________________ elizabeth u karzon chief branch office of associate chief_counsel international enclosure copy for purposes cc