t c memo united_states tax_court david w and connie l swanson petitioners v commissioner of internal revenue respondent fsh services r richard evans trustee petitioner v commissioner of internal revenue respondent docket nos filed date joe alfred izen jr for petitioners erin k salel and jolene itakura for respondent memorandum findings_of_fact and opinion cohen judge in these consolidated cases respondent determined the following deficiencies additions to tax and penalties with respect to petitioners’ federal income taxes david w and connie l swanson docket no year deficiency addition_to_tax sec_6651 penalty sec_6662 dollar_figure big_number big_number -- -- dollar_figure dollar_figure big_number big_number fsh services r richard evans trustee docket no year deficiency dollar_figure big_number big_number addition_to_tax sec_6651 penalty sec_6662 dollar_figure big_number -- -- -- dollar_figure unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice of procedure respondent concedes that if fsh services is disregarded for federal tax purposes it should not be subject_to deficiencies additions to tax or penalties after trial respondent submitted the following revised computations of the amounts at issue attributing the income in issue to david w and connie l swanson collectively the swansons and taking into account respondent’s concessions as to deductions year deficiency dollar_figure big_number big_number addition_to_tax sec_6651 penalty sec_6662 -- -- -0- dollar_figure dollar_figure dollar_figure after concessions the issues for decision are whether the burden_of_proof has shifted to respondent under sec_7491 whether fsh services is disregarded for federal tax purposes and its income for the years in issue is attributed to the swansons whether the periods of limitations on assessment expired before the deficiency notices were sent whether the swansons are liable for self-employment_tax on income from fsh services whether the swansons are entitled to deductions in excess of those allowed by respondent whether the swansons are liable for the accuracy-related_penalty under sec_6662 and whether the swansons are liable for a penalty under sec_6673 the terms trust trustee settlor and other related terms are used in this opinion for convenience and are not intended to be conclusive as to the characterization of fsh services for federal tax purposes findings_of_fact some of the facts have been stipulated and the stipulated facts are incorporated in our findings by this reference the swansons resided in california and fsh services had a mailing address in california at the time their petitions were filed david w swanson mr swanson and connie l swanson mrs swanson are married and have five children the swansons are well educated each having a bachelor of science degree in mechanical engineering from california polytechnic state university san luis obispo from to mr swanson worked for hewlett-packard co hewlett-packard first as an engineer and then as an engineer manager wanting to start his own engineering consulting business the business mr swanson began investigating which form of business_entity would best suit his needs in the summer of mr swanson met with r richard evans evans to discuss the possibility of running the swansons’ forthcoming business through an unincorporated organization in trust form the swansons decided to establish their business in this trust form and on date cache properties unlimited cache as named settlor created fsh services for this purpose one hundred shares called capital units represented the beneficial_interest in fsh services and were memorialized on a document called the trust certificate in exchange for all capital units cache purportedly transferred a corpus to the board_of trustees which at that time consisted only of marcia doerr doerr according to the trust instrument referred to as the declaration of trust and indenture indenture fsh service’s corpus consisted of personal_property received dollar_figure received dollar_figure paid out dollar_figure the record is not clear as to many details of the transaction including who received the dollar_figure paid out it appears that cache contributed the dollar_figure received and doerr transferred all capital units to cache at this time the swansons contributed the dollar_figure received also in exchange for the capital units even though the trust certificate designated all capital units to cache no other money or property was put into the trust at its creation shortly thereafter the swansons further funded the trust with approximately dollar_figure to get it going on date doerr transferred capital units to the swansons and capital units to three of the swansons’ children from the capital units held by cache there is no record that cache received remuneration for transferring its capital units also on date doerr appointed the officers of fsh services as follows mr swanson general manager mrs swanson treasurer vernon tritchka tritchka assistant manager and secretary and gary mcleod mcleod protector the indenture provided that no officer could be removed without thirty days written notice given prior to such removal the indenture also provided that mcleod as protector is the internal guardian of the fiduciary obligation of the trustees toward the capital unit holder s and that he has the power to access all the records of the trust at the same time doerr appointed evans cotrustee of fsh services and he served in that capacity for the years in issue while still serving as treasurer mrs swanson replaced tritchka as assistant manager on date on date evans replaced doerr as executive trustee and he appointed susan o’brien o’brien cotrustee with respect to appointment of trustees the indenture provided the following should there remain no board to appoint a successor trustee the protector shall appoint one trustee or else the capital unit holders may apply to a court of competent jurisdiction to appoint one trustee who shall then have power to appoint other trustees the indenture and additional trust provisions contained within the minutes granted all the officers and trustees authority to manage operations of the trust and have signature_authority of its bank accounts the indenture also provided that full health coverage and educational expenses of the officers and certificate holders could be paid for by the trust the business initially operated out of a converted bedroom at the swansons’ residence in the swansons built a freestanding workshop on their property that fsh services used for the business and mr swanson used for his own commercial enterprise fsh services paid rent for its use of the residence and workshop and also paid one-quarter of the swansons’ utility bills fsh services treated the swansons as independent contractors and not as its employees personal expenses of the swansons were nonetheless paid_by fhs services including family meals medical and dental expenses braces for at least one child’s teeth and their children’s school tuition these personal expenses were claimed as deductible expenses of fsh services mrs swanson did the bookkeeping and kept the records for fsh services for the years in issue fsh services had six bank accounts including an income account and an operations account and all the accounts used the swansons’ home address as their mailing address mrs swanson earned dollar_figure a year in her capacity as bookkeeper treasurer and assistant manager of fsh services mr swanson quit his job with hewlett-packard in early to concentrate on the business full time as the general manager of fsh services mr swanson found customers made proposals and reviewed contracts he also found and hired other engineers for fsh services whom he managed and assigned work on many contracts he worked as an engineer as well mr swanson’s reputation as an engineer manager and his expertise contacts and goodwill attracted the clients of fsh services for the years in issue mr swanson secured contracts with large companies such as hewlett-packard gradco usa inc and proxima corp mr swanson earned dollar_figure a year in his capacity as general manager of fsh services during the years in issue mr swanson also worked outside of fsh services in his personal engineering business mr swanson decided which engineering jobs he worked through fsh services and which jobs he personally performed in the same workshop shared by fsh services mr swanson invented products that he patented to himself he received substantial licensing fees through his patents during this time after the business was up and running evans purportedly introduced mr swanson to an englishman named bernard putz putz putz claimed to represent an offshore_trust in gibraltar called the loire trust he allegedly offered to capitalize fsh services up to dollar_figure if the swansons would transfer their capital units to the loire trust on date the swansons transferred one of their capital units to another of their children for a total of capital units in their children’s names and their remaining units to the loire trust in exchange for an oral promise from putz of a loan the loan never occurred and the swansons never attempted to get their units back from putz or the loire trust the o’brien group a tax services business owned and operated by o’brien prepared fsh services’ tax returns for the years in issue fsh services was listed as a simple_trust on its form sec_1041 u s income_tax return for estates and trusts for and and the type of entity box was left unchecked for as of date internal_revenue_service irs records did not show these tax returns as having been filed by fsh services schedules k-1 beneficiary’s share of income deductions credits etc attached to the tax returns showed fsh services as having made beneficiary income distributions to the loire trust as follows dollar_figure in dollar_figure in and dollar_figure in however there is no record that fsh services ever made any distributions to the loire trust fsh services reported no other beneficial distributions and the swansons waived their children’s rights to trust income for the years in issue on their form sec_1040 u s individual_income_tax_return the swansons reported the following year gross_income taxable_income total_tax dollar_figure big_number big_number dollar_figure big_number big_number dollar_figure big_number big_number the swansons wrote the phrase coactus feici sic in the jurat box of their tax returns for the years in issue the o’brien group prepared the swansons’ tax_return the irs audited petitioners’ returns for the years in issue the irs recomputed fsh services’ gross_receipts using a bank deposit analysis the irs determined that fsh services’ net taxable deposits were dollar_figure for dollar_figure for and dollar_figure for after concessions these amounts were reduced to dollar_figure dollar_figure and dollar_figure for and respectively for reasons set forth below and in relation to petitioners’ statute_of_limitations argument these reduced amounts represent amounts properly includable on but omitted from the swansons’ returns revenue_agent higgins higgins conducted audit interviews with mr swanson and his agent o’brien when asked questions regarding fsh services mr swanson refused to explain the swansons’ close connections with the trust other than his position as general manager in a followup interview mr swanson and o’brien refused to talk with higgins and demanded that he be replaced on the grounds that mr swanson had filed a lawsuit against him revenue_agent lee lee replaced higgins and conducted a third interview mr swanson and o’brien refused to answer many of lee’s questions and they made insulting comments to and about lee higgins also conducted an interview with evans accompanied by o’brien as his agent regarding fsh services evans refused to answer many questions at the interview asserting his fifth_amendment right against self-incrimination the irs sent a notice_of_deficiency to the swansons on date deficiencies were determined for the years in issue on conclusions that the swansons improperly assigned their income to fsh services or alternatively fsh services is a sham trust with no economic_substance and is disregarded for federal tax purposes or alternatively fsh services is determined to be a grantor_trust under sections and its income is taxable to the swansons the adjustments reflected in the notice included unreported gross_receipts derived from the bank deposit analyses and disallowance of itemized_deductions by a separate notice_of_deficiency sent to fsh services the irs determined deficiencies for the years in issue primarily because of unreported gross_receipts other adjustments for included modifications to expenses claimed on schedule c profit or loss from business and disallowance of the income distribution_deduction after the years in issue the swansons discovered checks disappearing and unexplained amounts being withdrawn from the fsh services’ bank accounts evans refused to respond to questions regarding these matters mr swanson brought a copy machine to evans’s home and copied the fsh services records that were stored there upon investigation the swansons found that evans had written several checks that were unaccounted for in the bookkeeping the swansons objected to evans’s behavior and along with o’brien requested that evans resign as trustee because evans did not agree to resign they demanded that he surrender fsh services’ checkbooks which he did the swansons later transferred the business out of fsh services and into a new entity maxim automation products l l c maxim which acquired all subsequent contracts fsh services provided capital for the new venture and became a partner in maxim on date the u s district_court for the southern district of california found o’brien guilty of count of conspiracy to defraud the united_states counts of tax_evasion counts of tax evasion--aiding and abetting and counts of aiding and assisting the filing of false income_tax returns the court sentenced her to over years in prison on date the district_court found evans guilty of count of conspiracy to defraud the united_states counts of tax evasion--aiding and abetting and counts of aiding and assisting the filing of false income_tax returns the court sentenced him to over years in prison joe alfred izen jr izen petitioners’ counsel in these cases represented evans in his trial petitioners were aware of and consented to izen’s representation of evans in spite of potential conflicts of interest between petitioners and evans because of these criminal convictions evans and o’brien no longer served as trustees the swansons chose a friend mark corcoran corcoran as the new trustee of fsh services opinion petitioners argue that fsh services is a valid entity independent of the swansons and that all transactions involving fsh services should be respected for federal tax purposes respondent argues that the swansons should be taxed on income of fsh services and adduces three alternative theories as to why fsh services is a sham trust that has no economic_substance the assignment_of_income_doctrine applies or the grantor_trust provisions apply we agree with respondent on the first theory burden_of_proof petitioners bear the burden_of_proof in these cases and it has not shifted under sec_7491 see rule a 290_us_111 petitioners did not cooperate during irs examinations but obstructed them by refusing to produce certain documents or to answer questions see sec_7491 petitioners were confrontational and insulting to the revenue agents moreover even though their testimony and exhibits are voluminous petitioners did not present credible_evidence that fsh services had economic_substance see sec_7491 the evidence that they did produce was undermined by their implausible claims their testimony about events and their explanations of improper deductions were not credible for example mrs swanson during her testimony attempted to justify the fsh services deduction of the costs of family meals and a trip by petitioners to hawaii as management expenses we are not required to accept testimony that is improbable or vague see 440_f2d_688 9th cir affg tcmemo_1969_159 sanderlin v commissioner tcmemo_2008_209 the swansons’ testimony was improbable they claim that the trust they established with the effect of their reporting minimal tax_liability on substantial profits of the business was not tax motivated petitioners contend that they created their business within the trust for asset protection purposes yet the swansons according to their testimony inexplicably gave away their capital units of fsh services for nothing more than a stranger’s promise of a loan petitioners present no evidence of this transaction or of the unknown off-shore loire trust it is not plausible or credible that the swansons gravely concerned about protecting assets would have given away their legal and beneficial interests in the business that was their livelihood the swansons closely interacted with evans and o’brien but deny that they ever discussed tax_avoidance evans however has long been involved with the abusive trusts and both he and o’brien promoted tax_evasion schemes to their clients see buckmaster v commissioner tcmemo_1997_236 see also united_states v evans no 03cr1110-l s d cal date finding evans guilty of tax_evasion aiding_and_abetting among other crimes united_states v o’brien no 03cr1110-l s d cal date finding o’brien guilty of tax_evasion aiding_and_abetting among other crimes affd sub nom 261_fedappx_52 9th cir we do not believe that evans did not promote tax_avoidance as a primary objective when proposing his trust schemes to the swansons the swansons also directly demonstrated tax-protester actions including writing coactus feici in the jurat boxes of their tax returns for the years in issue mrs swanson understood that coactus feci meant something like signing the return but under protest or not protest but reserving my rights kind of thing mr swanson’s hostile actions against the examining agents were consistent with protester attitudes their associates playing roles in these cases maintained similar positions in other cases see corcoran v commissioner tcmemo_2002_18 corcoran a trained accountant brought standard tax-protester arguments before the court which imposed a sec_6673 penalty for his insistence in pursuing frivolous contentions affd 54_fedappx_254 9th cir caralan trust v commissioner tcmemo_2001_241 doerr was the trustee of trusts used by taxpayers to avoid tax and shift income and as a result the court determined a penalty of dollar_figure was warranted for frivolous claims and positions given their antitax position implausible claims and dearth of credible_evidence we do not accept petitioners’ assertion that they established the trust for nontax business reasons they have not satisfied the prerequisite to shifting the burden_of_proof under sec_7491 disregard of fsh services tax motivation alone is not a ground to disregard fsh services for federal tax purposes a taxpayer has the right to elect a business form to minimize or altogether avoid the incidence of taxation by any means that the law permits see 293_us_465 this right however does not grant the taxpayer leeway to structure a paper entity to avoid tax when that entity is without economic_substance 79_tc_714 affd 731_f2d_1417 9th cir nor is the government required to simply accept a taxpayer’s election of business form where that form is a sham 308_us_473 instead the government should disregard the sham as any other result would allow the schemes of the taxpayer to supersede the law id application of these principles requires us to look beneath the surface of a purported trust and examine its economic reality see 79_tc_888 if a_trust has no economic_substance apart from tax considerations the trust is not recognized for federal tax purposes 73_tc_1235 we consider the following factors to determine whether fsh services lacks economic_substance whether the swansons’ relationship as settlors to the property differed materially before and after the trust’s creation whether the trust had trustees who could act independently of the swansons whether any economic_interest passed to other trust beneficiaries and whether the swansons respected the restrictions placed on the operation of fsh services as set forth by the indenture or the law of trusts id pincite4 accord 509_f3d_1149 9th cir affg tcmemo_2005_136 with respect to the first factor we look beyond the named settlor to the economic reality of the purported trust in order to determine the true settlor see zmuda v commissioner supra pincite cache the named settlor appeared out of nowhere and transferred dollar_figure to create fsh services once it had served this purpose cache conveniently disappeared from the record this exact scenario occurred in another case involving evans where we determined cache to be a straw_man buckmaster v commissioner supra here too cache was a nominal settlor petitioners contend that the swansons never transferred any property to fsh services and therefore cannot be its settlors the economic reality of the creation of fsh services however is that only the swansons funded the trust in any meaningful way first with an initial dollar_figure then more funds amounting to dollar_figure these amounts along with the use of the swansons’ residence are the only physical assets that started fsh services and the business within petitioners state that fsh services started with nothing but they ignore these assets with which the swansons initially funded fsh services petitioners also disregard the intangible assets that the swansons supplied to fsh services the trust had no potential value without the services of the swansons especially mr swanson’s skills and resources the combination of dollar_figure in capital and the swansons’ talents was the principal asset and income producer for fsh services as the only persons to put anything of value into the trust the swansons are the true settlors of fsh services we now look to whether the swansons’ relationship to trust property differed materially before and after creation of fsh services petitioners argue that the business was formed within and not transferred to the trust thus they claim the swansons could not have had a relationship with the business before the trust because the business did not exist at that point the business of fsh services however was nothing more than mr swanson’s array of income-producing skills these service skills cannot be transferred solely to the trust and they remain as inherent to mr swanson after the creation of the trust as they were before moreover the swansons’ access to their residence their tools and their initial funds did not materially change because of the trust the line between trust property and personal_property was often blurred as the swansons used trust funds to pay for clearly personal expenses of themselves and their children the swansons’ relationship to the property did not differ in any material aspect before and after the creation of the trust the second factor is whether fsh services had trustees who could act independently of the swansons this factor would include the power to prevent the swansons from acting against the interests of the beneficiaries see markosian v commissioner supra pincite the failure of a trustee to have any meaningful role in the operation of the trust has been repeatedly cited by this court as evidence that the entity lacks economic_substance see zmuda v commissioner supra pincite para techs trust v commissioner tcmemo_1994_366 affd without published opinion sub nom anderson v commissioner 106_f3d_406 9th cir petitioners interpret this factor as satisfied because the trustees especially evans were actively involved in the business petitioners argue that evans signed multiple business letters and minutes of fsh services the name on the documents however is not persuasive evidence of evans’s independent control evans paid what he was told by the swansons to pay and signed what he was told to sign mr swanson not evans decided what contracts would be accepted and which ones he would perform as an individual and which would be attributed to fsh services when the swansons disagreed with evans’s use of an fsh services bank account apparently to his own benefit and not that of the trust they forced evans to surrender the trust’s checkbook the swansons transferred the main asset of fsh services the business to maxim along with all new engineering contracts and the accompanying income no trustee had the power to prevent this from happening and fsh services funded the swansons’ new business the swansons could not be removed from their positions as management officers without prior notice while the trustees were not entitled to such notice the evidence establishes that the swansons held perpetual control of fsh services and that fsh services lacked independent trustees see 37_f3d_1564 10th cir as to the third factor petitioners failed to prove that an economic_interest ever passed to any beneficiary of fsh services for the years in issue the purported beneficiaries were the loire trust units and the swanson children units fsh services as a simple_trust was required to distribute all of its current income for the taxable_year to the beneficiaries see sec_1_651_a_-1 income_tax regs fsh services’ form sec_1041 and schedules k for the years in issue reflect substantial income distributions to the loire trust however none of these distributions can be substantiated from the evidence to the contrary the income of fsh services remained under the control of petitioners there is no persuasive corroboration that the loire trust exists as an entity with respect to the children the swansons provided letters to evans that waived their children’s beneficial distributions for the years in issue while the children did receive benefits paid from the trust such as school tuition medical insurance braces and other personal expenses they did not receive them in their capacity as beneficiaries of fsh services the payments for the benefit of the children were disguised as deductible expenses of the trust mrs swanson admitted during her testimony that fsh services paid and deducted as expenses tuition for the children and all medical costs for the family moreover the trust certificate shows that cache was initially assigned the capital units of fsh services two months later cache transferred its units to the swansons and their children the swansons transferred their units a little over a year later to the loire trust these transfers took place with no evidence that the previous beneficiaries ever received any consideration for their capital units this paper shuffling further shows the lack of economic reality of these arrangements see sparkman v commissioner tcmemo_2005_136 we conclude that no economic_interest passed to any of the alleged beneficiaries of fsh services in considering the fourth factor we look to whether the swansons were bound by any restrictions imposed by the indenture of fsh services or the law of trusts the record shows that the swansons disregarded the purported separateness of the trust several properties were used interchangeably between the swansons and the trust including the swansons’ residence the workshop and tools the swansons had and used access to trust bank accounts and used trust income to pay their personal expenses the trust_indenture states that a successor trustee can be appointed by another trustee the protector or a court through the request of the capital unit holders the swansons who held none of those titles disregarded the indenture and chose their friend corcoran as successor trustee the swansons allegedly pursued evans over missing funds of fsh services supposedly on behalf of their children’s 4-capital- unit interest and through a self-proclaimed fiduciary duty the indenture grants the protector mcleod the fiduciary responsibility to proceed against the trustees on behalf of the beneficiaries it also grants the protector the right to access trust records again the swansons ignored the trust instrument and acted as the owners of trust assets the swansons’ actions were inconsistent with the restrictions set forth in the indenture or the laws of trust the four factors for testing the economic reality of fsh services weigh heavily against petitioners in accordance with 73_tc_1235 we conclude that fsh services is a sham trust lacking economic_substance for federal tax purposes having found the trust structure of fsh services to be a sham we hold that the income in issue is taxable wholly to the swansons because we reach this holding under a sham trust theory we need not consider respondent’s alternative arguments applying grantor_trust provisions or the assignment_of_income_doctrine petitioners alternatively argue that if fsh services is not recognized for federal tax purposes then evans should be liable for the amounts at issue under a theory of attribution of income petitioners contend that evans and not the swansons received maintained and enjoyed the income in issue a well-established principle of tax law is that income is taxed to the person who earns it 281_us_111 this taxing of income cannot be escaped by anticipatory arrangements and contracts however skil l fully devised to prevent the salary when paid from vesting even for a second in the man who earned it id pincite the determination of the proper taxpayer depends upon which person or entity in fact controls the earning of the income rather than who ultimately receives the income see 621_f2d_1318 8th cir affg tcmemo_1979_164 the swansons used their expertise labor goodwill and money to start_up and maintain the business that earned_income through fsh services for the years in issue mr swanson made all the business decisions free from demands or direction by anyone else he decided who fsh services would work with how many jobs to take how much to charge and even which jobs would be done through the auspices of fsh services and which jobs he would take on personally he sought customers hired and managed contractors made proposals and reviewed contracts the swansons controlled who received the money earned by their services be it fsh services maxim or the swansons themselves through mr swanson’s own work that the swansons placed evans in a figurehead position with signature_authority over their accounts does not alter their control_over the earnings_of the income in issue anymore than does their giving away all their beneficial interests to the loire trust that evans well after the years in issue may have diverted funds does not alter the swansons’ control_over the earnings_of that income during the years in issue the swansons ultimately directed when where and with whom their earnings would be placed consequently the swansons and not evans are liable for the amounts at issue as the income they earned through their services can be attributed only to them period of limitations without ever having pleaded the issue petitioners almost as an afterthought in their briefs argue that the deficiencies are barred by the 3-year statute_of_limitations under sec_6501 we need not consider an issue not properly raised see rule 101_tc_374 affd without published opinion 40_f3d_385 5th cir the answer here however is clear sec_6501 provides that tax may be assessed within years after a return is filed where as here a taxpayer omits_from_gross_income an amount properly includible therein which is in excess of percent of the amount of gross_income stated in the return because the swansons omitted income in the amounts set forth in our findings sec_6501 applies self-employment_tax petitioners contend that the swansons are not liable for self-employment taxes solely because the income in issue is not attributable to them because we hold that the swansons earned the income they are liable for the self-employment_tax imposed by sec_1401 and entitled to the related deduction under sec_164 deductions petitioners argue that the swansons are entitled to schedule c deductions in excess of those allowed by respondent for the years in issue taxpayers bear the burden of proving that they are entitled to any deductions claimed 292_us_435 512_f2d_882 9th cir affg tcmemo_1972_133 taxpayers are required to maintain records that are sufficient to enable the irs to determine their correct_tax liability see sec_6001 sec_1_6001-1 income_tax regs taxpayers must substantiate both the amount and the purpose of the claimed deductions 116_tc_438 taxpayers must also show that the irs’s determinations as to deductions are in error rule a welch v helvering u s pincite in their reply brief petitioners specify items and amounts that they still claim are deductible petitioners however do not cite evidence that substantiates these deductions or shows any error in the irs’s determinations for example petitioners claim dollar_figure should be allowed as a deduction for fsh services continuing education in the first dollar_figure of this business_expense was for beneficiary education which apparently was the tuition payments for the private education of the swansons’ children the remaining dollar_figure was for officer education which apparently was a subscription to an undisclosed newsletter and law books no effort is made to explain how this tuition reimbursement an untitled newsletter and tersely described law books relate to the ordinary and necessary expenses of the swansons’ business see sec_162 moreover the documents petitioners submitted ie self-generated or generic receipts scrawled notes and a copy of the front of one check are unreliable the record establishes only that petitioners are trying to claim personal expenses as business deductions see sec_262 it does not support any allowances not already conceded by respondent accuracy-related_penalties respondent determined that the swansons are liable for sec_6662 accuracy-related_penalties for all years in issue sec_6662 imposes a 20-percent accuracy-related_penalty on the portion of an underpayment_of_tax attributable to any one of various factors including any substantial_understatement_of_income_tax see sec_6662 a substantial_understatement exists if the amount of the understatement exceeds the greater of percent of the tax required to be shown on the return or dollar_figure sec_6662 under sec_7491 the commissioner bears the burden of production with regard to penalties and must come forward with sufficient evidence indicating that it is appropriate to impose penalties higbee v commissioner supra pincite however once the commissioner has met the burden of production the burden_of_proof remains with the taxpayer including the burden of proving that the penalties are inappropriate because of reasonable_cause or substantial_authority id pincite respondent’s burden of production is met by proof that the swansons substantially understated their income_tax because they failed to properly report the income they earned sec_6662 penalties are inapplicable to the extent the taxpayers had reasonable_cause and acted in good_faith sec_6664 petitioners argue that they are not liable for this penalty because they did not understate their federal_income_tax this is so petitioners contend because fsh services was a taxable entity separate from them and not a sham we have however already held that fsh services was a sham given the evidence presented we conclude that petitioners neither had reasonable_cause for their underpayments nor acted in good_faith we sustain respondent’s determination on this issue sec_6673 sec_6673 prescribes a penalty not in excess of dollar_figure when a taxpayer institutes or maintains a proceeding primarily for delay pursues a position in this court that is frivolous or groundless or unreasonably fails to pursue available administrative remedies petitioners contend that they brought these cases in good_faith and were able drastically to reduce the determined deficiencies the swansons’ tax_liabilities are reduced from the amounts determined in the notices of deficiency but this aspect alone does not avoid a sec_6673 penalty the reduction was not based on any evidence produced or arguments made by petitioners and respondent’s concessions would have probably occurred during the administrative process if petitioners had cooperated rather than obstructed the examination see sec_6673 suri v commissioner tcmemo_2004_71 affd aftr 2d 2d cir caralan trust v commissioner tcmemo_2001_241 griest v commissioner tcmemo_1995_165 see also ruocco v commissioner tcmemo_2002_91 affd 346_f3d_223 1st cir the arguments petitioners assert regarding the economic reality of their trust have been universally rejected by this and other courts see matrixinfosys trust v commissioner tcmemo_2001_133 affd sub nom 56_fedappx_359 9th cir petitioners claim that the court at the conclusion of the trial recognized the uniqueness of their trust but the court’s statement was that no such trust ever succeeded in avoiding tax on earnings_of a business and allowing individuals to deduct obviously personal expenses petitioners were warned that their arguments lacked merit and had been the basis for sanctions in prior cases e g 898_f2d_455 5th cir petitioners continued to press forward with these cases they created a voluminous paper record but it lacked substance and defied reality their claims were implausible and groundless and their cases are not distinguishable from scores of others penalties had previously been imposed on their chosen associates and others in similar circumstances see 289_f3d_452 7th cir affg 116_tc_111 corcoran v commissioner tcmemo_2002_18 caralan trust v commissioner supra on the record in these cases a penalty of dollar_figure is appropriately imposed on the swansons we have considered the other arguments of the parties and they either are without merit or need not be addressed in view of our resolution of the issues to reflect the foregoing decision will be entered under rule in docket no and an appropriate order will be issued in docket no


internal_revenue_service number release date index number ---------------------------- ------------- -------------------------------------------------- ------------------------- ----------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc ita b03 plr-106160-11 date date ty ------- ty ------- legend taxpayer ------------------------------------------------------------------ parent ------ -------------------------------------------------- subsidiary ------ ---------------------------------------------------- fund group -------------------------------- owning funds ---------------------------------------------------------------------------- -------------------------------------------------------------------------------------------- ------ ----------------------------------------------------------------------------- year ------- extended due_date --------------------------- discovery date ------------------------- dear -------------------- this is in response to your letter dated date in your letter you requested an extension of time to file the forms necessary to make a consent_dividend election under sec_565 of the internal_revenue_code for the tax_year ending december year the request is based on sec_301_9100-1 and sec_301_9100-3 of the procedure and administrative regulations facts taxpayer a corporation is a regulated_investment_company owned by parent subsidiary and the owning funds in parent’s fund group parent administers the various funds in the fund group parent and subsidiary hold shares of each of the funds in the fund group in separate_accounts established for the purpose of funding variable_annuity contracts and variable life_insurance policies investors in parent and subsidiary may select one of the funds in the fund group including taxpayer as an plr-106160-11 investment option for a variable_annuity contract or life_insurance_policy taxpayer must make minimum distributions each tax_year to continue to be subject_to tax as a regulated_investment_company for future tax years parent prepared taxpayer’s form 1120-ric u s income_tax return for regulated_investment_companies for the tax_year ending december year and filed it before the extended due_date before filing taxpayer’s form 1120-ric the board_of directors approved taxpayer’s issuance of consent dividends to parent subsidiary and the owning funds to satisfy the taxpayer’s year distribution_requirements parent’s employees had no prior experience issuing consent dividends after consulting outside accountants and lawyers parent’s employees prepared an internal memorandum outlining the process of how funds in the fund group should issue consent dividends and the tax consequences of issuing them the memorandum stated that parent needed to file a form_973 corporation claim for deduction for consent dividends with each form 1120-ric of each fund in the fund group but the memorandum did not mention the additional regulatory requirement that parent file a form_972 consent of shareholder to include specific amount in gross_income with each fund’s return for each consent_dividend paid to a different shareholder of taxpayer time passed between when parent’s employees prepared the memorandum and when they began preparing the forms 1120-ric for each fund in the fund group when parent prepared form 1120-ric on behalf of taxpayer parent’s employees followed the memorandum’s instructions thus taxpayer’s return included an executed form_973 with the filing but not any executed form sec_972 the form sec_972 were not attached even though parent’s employees possessed two executed originals of form_972 one authorizing the inclusion of consent dividends in parent’s gross_income and the other authorizing the inclusion of consent dividends in subsidiary’s gross_income parent’s employees never obtained executed form sec_972 authorizing the inclusion of consent dividends in the gross_income of the various owning funds because they were inexperienced in issuing consent dividends they believed the law did not require them to obtain form sec_972 for the owning funds because the gross_income would flow through to parent and subsidiary for whom they had obtained executed form sec_972 taxpayer’s shareholders parent subsidiary and the various owning funds each included the appropriate amount of consent_dividend income in their respective gross incomes on parent’s consolidated_income_tax_return for year after the extended due_date but before the discovery date parent’s auditor discovered that no form sec_972 had been attached to taxpayer’s form 1120-ric to taxpayer’s knowledge the irs was not aware of the omission of the form_972 and has not contacted parent about the year consent_dividend election nor has it notified parent that taxpayer’s year form 1120-ric is under examination plr-106160-11 law and analysis sec_852 provides that a regulated_investment_company may claim a deduction for dividends_paid as defined in sec_561 in computing its investment_company_taxable_income sec_852 provides that a regulated_investment_company may claim a deduction for dividends_paid as defined in sec_561 in computing its net capital_gains determined with reference to capital_gain dividends only sec_561 provides that the deduction for dividends_paid includes consent dividends for the taxable_year as determined under sec_565 sec_565 of the code provides that if any person owns consent_stock as defined in sec_565 in a corporation on the last day of the taxable_year of such corporation and such person agrees in a consent filed with the return of such corporation in accordance with the regulations to treat as a dividend the amount specified in such consent the amount so specified shall except as provided in sec_565 constitute a consent_dividend for purposes of sec_561 relating to the deduction for dividends_paid consent_stock which is the type of stock with respect to which consent dividends are allowed sec_565 includes what is generally known as common_stock and participating preferred_stock the participation rights of which are unlimited sec_1_565-6 of the income_tax regulations sec_1_565-1 provides that the dividends_paid deduction as defined in sec_561 includes the consent dividends for the taxable_year a consent_dividend is a hypothetical distribution as distinguished from an actual distribution made by certain corporations to any person who owns consent_stock on the last day of the taxable_year of such corporation and who agrees to treat the hypothetical distribution as an actual dividend subject_to specified limitations by filing a consent at the time and in the manner specified in sec_1_565-1 sec_1_565-1 provides that a consent may be filed no later than the due_date of the corporation's income_tax return for the taxable_year for which the dividends_paid deduction is claimed with such return and not later than the due_date the corporation must file form sec_972 for each consenting shareholder and a return on form_973 showing by classes the stock outstanding on the first and last days of the taxable_year the dividend rights of such stock distributions made during the taxable years to shareholders and give all other information required by the form under revrul_78_296 1978_2_cb_183 the due_date for purposes of sec_1_565-1 includes the extended due_date of a return filed pursuant to an extension of time to file sec_301_9100-1 through of the procedure and administration regulations provide the standards the commissioner uses to determine whether to plr-106160-11 grant an extension of time to make a regulatory election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 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 procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides extensions of time to make a regulatory election under code sections other than those for which sec_301_9100-2 expressly permits automatic extensions requests for extensions of time for regulatory elections will be granted when the taxpayer provides evidence including affidavits described in the regulations 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 sec_301_9100-3 states that a taxpayer will be deemed to have acted reasonably and in good_faith if the taxpayer -- i requests relief before the failure to make the regulatory election is discovered by the service ii failed to make the election because of intervening events beyond the taxpayer's control iii failed to make the election because after exercising due diligence the taxpayer was unaware of the necessity for the election iv reasonably relied on the written advice of the service or v reasonably relied on a qualified_tax professional and the tax professional failed to make or advise the taxpayer to make the election under sec_301_9100-3 a taxpayer will not be considered to have acted reasonably and in good_faith if the taxpayer -- i seeks to alter a return position for which an accuracy related penalty has been or could be imposed under sec_6662 at the time the taxpayer requests relief taking plr-106160-11 into account sec_1_6664-2 and the new position requires or permits a regulatory election for which relief is requested ii was informed in all material respects of the required election and related tax consequences but chose not to file the election or iii uses hindsight in requesting relief if specific facts have changed since the original deadline that make the election advantageous to a taxpayer the service will not ordinarily grant relief taxpayer in this case requested relief before the failure to make the regulatory election was discovered by the service and thus under sec_301_9100-3 the taxpayer will be deemed to have acted reasonably and in good_faith taxpayer has also represented that none of the circumstances listed in sec_301_9100-3 apply sec_301_9100-3 provides in part that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money sec_301_9100-3 provides in part that the interests of the government are ordinarily prejudiced if the taxable_year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under sec_6501 before the taxpayer’s receipt of a ruling granting relief under these criteria the interests of the government are not prejudiced in this case taxpayer has represented that granting relief would not result in a lower tax_liability in the aggregate for all taxable years affected by the election than taxpayer would have had if the election had been timely made taking into account the time_value_of_money furthermore the taxable_year in which the regulatory election should have been made and any taxable years that would have been affected had it been timely made are not closed by the period of assessment conclusion taxpayer's election is a regulatory election as defined under sec_301_9100-1 because the due_date of the election is prescribed in the regulations under sec_1_565-1 in the present situation the requirements of sec_301_9100-1 and sec_301_9100-3 of the regulations have been satisfied the information and representations made by taxpayer establish that taxpayer acted reasonably and in good_faith furthermore granting an extension will not prejudice the interests of the government taxpayer represented that it will not have a lower tax_liability in the aggregate for all taxable years affected by the election if given permission to make the plr-106160-11 election than taxpayer would have if the election were made by the original deadline for making the election taxpayer also represented that the period of assessment for year will not be closed before receipt of a ruling accordingly taxpayer is granted an extension of time for making the election to issue consent dividends until days following the date of this ruling the election should be made by filing the forms necessary to make the sec_565 consent_dividend election for year and by including a copy of this ruling with an amended_return for year this ruling is limited to the timeliness of the consent_dividend election taxpayer wishes to make for year this ruling’s application is limited to the facts representations code sections and regulations cited herein except as expressly provided herein no opinion is expressed or implied concerning the federal_income_tax consequences of any aspect of any transaction or item discussed or referenced in this ruling this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely robert casey acting branch chief branch income_tax accounting cc


t c summary opinion united_states tax_court bradley m mcguigan and shirley w mcguigan petitioners v commissioner of internal revenue respondent docket no 10617-17s filed date maris baltins for petitioners patsy a clarke lisa r jones and melissa d lang for respondent summary opinion vasquez judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed unless otherwise indicated all section references are to the internal_revenue_code in effect at all relevant times and all rule references are to the tax_court rules_of_practice and procedure 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 deficiencies of dollar_figure and dollar_figure in petitioners’ federal_income_tax for and respectively respondent also determined a sec_6662 accuracy-related_penalty of dollar_figure for the issues for decision are whether petitioner husband was an independent_contractor or a statutory_employee entitled to report expenses on schedules c profit or loss from business or a common_law_employee whose expenses were reportable on schedules a itemized_deductions petitioners are entitled to deductions for legal and professional services insurance other than health and rent for vehicles machinery or equipment and petitioners are liable for the sec_6662 accuracy-related_penalty for background some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference petitioners resided in montana when they timely filed their petition during the years at issue petitioner bradley m mcguigan worked as a diesel technology specialist before then mr mcguigan had worked off and on for john knerr for approximately years in or around mr knerr partnered with chad pardee to form pardee excavating llc which later became montana- dakota services inc mds mr knerr invited mr mcguigan to work for mds and he accepted pursuant to an oral agreement with mr knerr mr mcguigan performed gas recovery services for mds at multiple oil well sites across montana and north dakota his duties included moving gas recovery equipment between oil well sites setting up and maintaining the equipment to recapture gas and training oil company employees to ensure continued plant operations much of the equipment was leased directly to mds which entrusted it to mr mcguigan whenever mr mcguigan needed assistance on a job mds sent additional workers to help him mr mcguigan worked at the oil sites without direct supervision he set his own hours which varied with the task at hand each day mr mcguigan filled out reports entitled montana-dakota services inc daily production reporting these reports offered proof that mr mcguigan was providing quality service additionally mr mcguigan submitted equipment logs to mds secretaries who tracked the equipment from site to site because he performed gas recovery in pardee excavating llc brought in a new member and merged with mds mr knerr and mr pardee were part owners of both entities and mr mcguigan kept the same employment agreement following this transition accordingly references to mds are to both companies services on site he sometimes traveled hundreds of miles to do his job accordingly he worked away from home for approximately days in and days in under his agreement with mds mr mcguigan was responsible for work- related expenses including food lodging travel and insurance he was also responsible for any expenses arising from damage to the equipment during transport mds did not reimburse him for these expenses additionally he drove his own truck to the various worksites and took his tools with him in mr mcguigan paid dollar_figure to rent a forklift which he used to move certain equipment mds offered him a rollback truck to perform this task but he opted to use the forklift instead because it would make the job easier mds did not reimburse him for the forklift expense when he was working on site at a refinery plant the oil company trained mr mcguigan to use its privately owned technology some of this information was confidential after speaking with an oil company representative about the issue of privacy laws mr mcguigan sought legal advice on avoiding trade secret infringement disputes accordingly he paid dollar_figure and dollar_figure for attorney’s fees in and respectively mds did not reimburse him for these expenses petitioners timely filed joint form sec_1040 u s individual_income_tax_return for both tax years at issue mr mcguigan reported on the form sec_1040 that mds paid him wages of dollar_figure and dollar_figure in and respectively likewise mds issued mr mcguigan forms w-2 wage and tax statement and withheld federal_income_tax petitioners used a computer_program to prepare their returns and file them electronically they did not hire a tax preparer or an accountant on the returns mr mcguigan declared himself a mechanic and petitioner shirley w mcguigan declared herself retired mrs mcguigan also listed herself as a proprietor of jaws northwest corp on petitioners’ schedules c for and petitioners used these schedules c to report the expenses related to mr mcguigan’s employment with mds under the premise that he was a statutory_employee on date respondent mailed petitioners a notice_of_deficiency with respect to tax_year sec_2014 and sec_2015 disallowing their schedule c deductions for legal and professional fees insurance other than health and rent expenses respondent also recharacterized petitioners’ remaining schedule c deductions a sec_3 the record includes a copy of mr mcguigan’ sec_2015 form_w-2 which does not indicate in box that mr mcguigan was a statutory_employee the record does not include a form_w-2 for tax_year unreimbursed employee_expenses and moved them to schedule a for each year at issue for respondent determined a penalty under sec_6662 and b for an underpayment due to a substantial_understatement_of_income_tax the record includes form_300 civil penalty approval form signed by revenue_agent ra kyle crider’s group manager who approved the ra’s initial determination to impose the penalty for tax_year the group manager’s signature is dated date discussion i burden_of_proof generally the commissioner’s determination_of_a_deficiency is presumed correct and the taxpayer has the burden of proving it incorrect rule a 290_us_111 however under sec_7491 the burden_of_proof may shift to the commissioner as to any factual issue relevant to a taxpayer’s liability for tax if the taxpayer meets certain preliminary conditions see 116_tc_438 petitioners have not claimed or shown that they meet the requirements of sec_4 other adjustments made in the notice_of_deficiency are computational and need not be addressed in this opinion a to shift the burden_of_proof to respondent as to any relevant factual issue accordingly the burden_of_proof remains on petitioners ii employment classification a general rules an individual performing services as an employee may deduct expenses_incurred in the performance of services as an employee as miscellaneous_itemized_deductions on schedule a to the extent the expenses exceed of the taxpayer’s adjusted_gross_income see sec_62 sec_63 d a and b a itemized_deductions may be limited under sec_68 and may have alternative_minimum_tax implications under sec_56 an individual who performs services as an independent_contractor is entitled to deduct expenses_incurred in the performance of services on schedule c and is not subject_to limitations imposed on miscellaneous_itemized_deductions feaster v commissioner tcmemo_2010_157 slip op pincite a statutory_employee under sec_3121 is not an employee for purposes of sec_62 and may deduct business_expenses on schedule c see rosemann v commissioner tcmemo_2009_185 slip op pincite n see also revrul_90_ 1990_2_cb_33 petitioners argue that mr mcguigan was an independent_contractor or a statutory_employee during the years at issue and was thereby entitled to deduct business_expenses on schedules c respondent contends that mr mcguigan was a common_law_employee who could deduct his unreimbursed employee_expenses on schedules a only subject_to the of adjusted_gross_income limitation an individual qualifies as a statutory_employee under sec_3121 only if the individual is not a common_law_employee pursuant to sec_3121 see 117_tc_263 rosemann v commissioner slip op pincite sec_3121 provides that an employee is any individual who under the usual common_law rules applicable in determining the employer-employee relationship has the status of an employee because an individual qualifies as a statutory_employee only if the individual is not a common_law_employee we will first decide whether petitioner was a common_law_employee of mds b common_law_employee the term employee is not defined for purposes of the income_tax issue before us therefore common_law rules must be applied to determine whether an individual is an employee 503_us_318 92_tc_351 aff’d 907_f2d_1173 d c cir 64_tc_974 whether an employer-employee relationship exists is a question of fact 478_f2d_575 8th cir 89_tc_225 aff’d 862_f2d_751 9th cir if an employer-employee relationship exists its characterization by the parties as some other relationship such as principal-independent contractor is of no consequence sec_31_3121_d_-1 employment_tax regs this court has enumerated the following factors in determining whether an employer-employee relationship exists the degree of control exercised by the principal over the details of the work which party invests in the facilities used in the work the opportunity of the taxpayer for profit or loss whether the principal has the right to discharge the taxpayer whether the work is part of the principal’s regular business the permanency of the relationship and the relationship the parties believe they are creating weber v commissioner 103_tc_378 aff’d per curiam 60_f3d_1104 4th cir prof’l exec leasing inc v commissioner t c pincite simpson v commissioner t c pincite no single factor is dispositive simpson v commissioner t c pincite all of the facts and circumstances must be studied prof’l exec leasing inc v commissioner t c pincite degree of control while all of the above factors are important the right-to-control is the master test in determining the nature of a working relationship matthews v commissioner t c pincite both the control exercised by the alleged employer and the degree to which the alleged employer may intervene to impose control must be examined 135_f2d_715 2d cir detorres v commissioner tcmemo_1993_161 n o actual control need be exercised as long as the employer has the right to control prof’l exec leasing inc v commissioner f 2d pincite in order for an employer to retain the requisite control_over the details of an employee’s work the employer need not direct each step taken by the employee prof’l exec leasing inc v commissioner t c pincite gierek v commissioner tcmemo_1993_642 the record does not indicate that mr mcguigan worked for any entity other than mds or hired his own subcontractors to assist him when he serviced mds’ customers as an independent_contractor might rather he performed gas recovery services only for oil companies that were under contract with mds whenever he needed assistance on a job mds sent additional workers to help him mds asserted control_over mr mcguigan by requiring him to monitor the location of the gas recovery equipment he used in addition mr mcguigan submitted daily reports to the oil companies as proof that mds was providing the service for which it was under contract although mr mcguigan set his own hours and worked without direct supervision the record indicates that mds had the right to control mr mcguigan by dictating his worksite monitoring the quality of his performance and tracking the equipment he needed to do his job on the basis of the facts presented this factor indicates that mr mcguigan was an employee investment in facilities the fact that a worker provides his or her own tools or goods generally indicates independent_contractor status ewens miller inc v commissioner t c pincite conversely the fact that a worker has no investment in the facilities used in the work is indicative of an employer-employee relationship see id during the tax years at issue mr mcguigan supplied his own tools and transportation to accomplish his job at each oil well site however it is not clear from the record how much he paid for these tools in addition mr mcguigan did not invest financially in the transport setup or maintenance of the equipment he used to provide gas recovery services rather mds and the oil companies paid for these essential expenses therefore this factor indicates that mr mcguigan was an employee opportunity for profit or risk of loss an opportunity for profit or the risk of loss on the basis of the worker’s own efforts and skill indicates independent_contractor status see simpson v commissioner t c pincite rosato v commissioner tcmemo_2010_39 slip op pincite in contrast earning an hourly wage or fixed salary indicates an employer-employee relationship see robinson v commissioner tcmemo_2011_99 slip op pincite citing 25_tc_1296 aff’d 487_fedappx_751 3d cir for example in juliard v commissioner tcmemo_1991_230 this court held that because the taxpayer earned a salary and was reimbursed for expenses he was not in a position to increase his profit by his own actions and he was not at risk for loss for tax_year sec_2014 and sec_2015 respectively mds paid mr mcguigan annual salaries of approximately dollar_figure and dollar_figure the record indicates that mr mcguigan earned his salary regardless of how well or poorly he performed his duties additionally the record does not show that he received incentive compensation based on whether mds increased its profits on the other hand mr mcguigan credibly testified that the requirement that he pay for repairs on broken equipment could cause him significant losses thus mr mcguigan’s salary could be reduced by the amount he spent on work- related expenses because mds did not reimburse these costs overall this factor is neutral right to discharge the principal’s retention of the right to discharge a worker is indicative of a common_law employer-employee relationship rodriguez v commissioner tcmemo_2012_286 slip op pincite citing weber v commissioner t c pincite see also 55_tc_142 the record is silent on this factor at most this factor is neutral integral part of regular business a type of work that is part of the principal’s regular business is indicative of employee status see simpson v commissioner t c pincite rosemann v commissioner slip op pincite during the years at issue mds offered oil well services to oil companies in north dakota and montana mds assigned mr mcguigan to perform a specific service which the oil companies hired mds to provide accordingly mr mcguigan provided a service that lies within the scope of mds’ regular business therefore this factor indicates that mr mcguigan was an employee permanency of relationship a continuing relationship indicates an employment relationship while a transitory relationship may be indicative of independent_contractor status see ewens miller inc v commissioner t c pincite rosemann v commissioner slip op pincite we believe that the relationship between mr mcguigan and mds was not transient because mr mcguigan worked for mds from through the years at issue furthermore mr knerr who was a member of mds had employed mr mcguigan intermittently for approximately years on the basis of the facts presented this factor indicates that mr mcguigan was an employee relationship the parties thought they created the withholding of taxes is consistent with a finding that an individual is a common_law_employee see 63_tc_621 rosato v commissioner slip op pincite mds provided mr mcguigan with forms w-2 for the years at issue in both and mds withheld federal_income_tax from mr mcguigan’s income and remitted those amounts to respondent mds did not indicate on mr mcguigan’ sec_2015 form_w-2 that he was a statutory_employee on the basis of these facts this factor indicates that mr mcguigan was an employee conclusion several of the above factors indicate that mr mcguigan was a common_law_employee whereas other factors are neutral after weighing these factors the court concludes that mr mcguigan was a common_law_employee of mds for the and taxable years therefore he is precluded from claiming schedule c deductions as a statutory_employee under sec_3121 and the underlying regulations see ewens miller inc v commissioner t c pincite colvin v commissioner tcmemo_2007_157 slip op pincite aff’d 285_fedappx_157 5th cir see also sec_31_3121_d_-1 employment_tax regs iii petitioners’ schedule a deductions we next determine whether petitioners are entitled to deductions for unreimbursed employee business_expenses that respondent disallowed for lack of substantiation a general rules deductions are a matter of legislative grace and the taxpayer generally bears the burden of proving entitlement to any deduction claimed see rule a 503_us_79 292_us_435 a taxpayer claiming a deduction on a federal_income_tax return must demonstrate that the deduction is allowable pursuant to a statutory provision and must further substantiate that the expense to which the deduction relates has been paid_or_incurred see sec_6001 65_tc_87 aff’d per curiam 540_f2d_821 5th cir sec_162 allows a taxpayer to deduct all ordinary and necessary expenses paid_or_incurred by the taxpayer in carrying_on_a_trade_or_business but personal living or family_expenses are not deductible sec_162 sec_262 a trade_or_business expense is ordinary if it is normal or customary within a particular trade business or industry and it is necessary if it is appropriate and helpful for the development of the business 320_us_467 welch v helvering u s pincite a trade_or_business includes the trade_or_business of being an employee 91_tc_352 54_tc_374 the taxpayer bears the burden of establishing that his employer would not have reimbursed him for such expenses see 24_tc_21 benson v commissioner tcmemo_2007_113 slip op pincite putnam v commissioner tcmemo_1998_285 slip op pincite he can do so by showing that he was required or expected to bear these costs see 59_tc_696 see also dunkelberger v commissioner tcmemo_1992_723 finding that management team expected taxpayer to bear expense of business lunches with vendors if the taxpayer is able to establish that he paid_or_incurred a deductible expense but is unable to substantiate the precise amount the court generally may approximate the deductible amount but only if the taxpayer presents sufficient evidence to establish a rational basis for making the estimate cohan_rule see 39_f2d_540 2d cir see also 85_tc_731 for certain kinds of business_expenses including automobile expenses sec_274 overrides the cohan_rule see sec_274 sec_280f 50_tc_823 aff’d per curiam 412_f2d_201 2d cir b legal and professional services for and respectively petitioners claimed deductions of dollar_figure and dollar_figure for legal and professional services respondent disallowed these deductions in full for lack of substantiation it is well established that legal fees stemming from a taxpayer’s employee status are deductible on schedule a test v commissioner tcmemo_2000_ slip op pincite aff’d 49_fedappx_96 9th cir the deductibility depends on the origin and character of the claim for which the legal fees were incurred and whether the claim bears a sufficient nexus to the taxpayer’s business or income-producing activities see 372_us_39 test v commissioner slip op pincite mr mcguigan’s testimony which the court found credible and forthright establishes that he sought legal advice on avoiding trade secret infringement after an oil company representative advised him to do so more specifically the oil company was mds’ client and mds expected mr mcguigan to bear the cost of his employment-related_expenses as a result mr mcguigan paid dollar_figure and dollar_figure in and respectively to protect his employment as an oil mechanic taking into account the record as a whole the court concludes that these expenses originated in mr mcguigan’s conduct as an employee of mds therefore petitioners are entitled to schedule a deductions of dollar_figure and dollar_figure respectively for tax_year sec_2014 and sec_2015 c rent of vehicles machinery or equipment for and respectively petitioners claimed deductions of dollar_figure and dollar_figure for rent of vehicles machinery or equipment respondent disallowed these expenses in full for lack of substantiation a portion of this reported expense for arises from mr mcguigan’s renting a forklift mr mcguigan testified at trial that he had a choice to use a rollback truck that mds would have paid for but he opted instead to rent a forklift for dollar_figure to make his job a hundred percent easier and quicker respondent argues that petitioners are precluded from deducting the forklift rental expense because mds offered other equipment for mr mcguigan to use in the course of his employment as discussed above mr mcguigan must establish that mds either required or expected him to pay for the expense of renting vehicles machinery or equipment see fountain v commissioner t c pincite see also dunkelberger v commissioner tcmemo_1992_723 tax ct memo lexis at the record however shows that mds neither required nor expected mr mcguigan to rent the forklift accordingly petitioners are not entitled to deduct the forklift rental expense other than the forklift rental expense the record contains no evidence of petitioners’ reported rent expenses we therefore sustain respondent’s disallowance of these deductions d insurance other than health we next address respondent’s disallowance of petitioners’ deductions for insurance other than health on their return petitioners deducted dollar_figure for insurance respondent argues that petitioners are precluded from deducting this expense for lack of substantiation the record is devoid of evidence of this reported expense consequently respondent’s determination on this issue is sustained on their return petitioners deducted dollar_figure for insurance respondent contends that this reported expense was for automobile insurance and petitioners have not argued otherwise petitioners were allowed a schedule a deduction for while we do not doubt that the use of the forklift improved his job performance mr mcguigan’s job performance is not the issue before us car and truck expenses using the standard mileage rate see sec_1_274-5 income_tax regs a taxpayer may deduct vehicle expenses using either actual costs or the standard mileage rate see id because petitioners cannot claim deductions for both actual expenses and those calculated using the standard mileage rate we sustain respondent’s disallowance see tesar v commissioner tcmemo_1997_207 slip op pincite automobile expense may be computed using actual costs such as depreciation or using the standard mileage method thus petitioners cannot deduct depreciation expense and use the standard mileage rate iv sec_6662 accuracy-related_penalty we next determine whether petitioners are liable for a sec_6662 accuracy-related_penalty for tax_year sec_6662 imposes a penalty equal to of any underpayment that arises from a substantial_understatement_of_income_tax see sec_6662 an understatement is substantial if it exceeds the greater of of the correct_tax or dollar_figure sec_6662 under sec_7491 respondent has the burden of production with respect to the sec_6662 penalty to meet this burden respondent must produce while petitioners did not address their liability for the accuracy-related_penalty in their petition we find that it was tried by consent see rule b sufficient evidence indicating that it is appropriate to impose the penalty against petitioners see higbee v commissioner t c pincite respondent’s burden of production under sec_7491 includes establishing compliance with the supervisory-approval requirement of sec_6751 see graev v commissioner 149_tc_485 supplementing and overruling in part 147_tc_460 sec_6751 provides that subject_to certain exceptions in sec_6751 no penalty shall be assessed unless the initial determination of the assessment is personally approved in writing by the immediate supervisor of the individual making the determination or such higher level official as the commissioner may designate written approval of the initial penalty determination under sec_6751 must be obtained before the proposed penalty is first formally communicated to the taxpayer in a writing that also advises the taxpayer of his rights to appeal the penalty with the internal_revenue_service office of appeals clay v commissioner t c __ __ slip op pincite date a reasonable-cause exception to the sec_6662 penalty is found in sec_6664 which provides that no penalty is imposed under sec_6662 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 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 the pertinent facts and circumstances sec_1_6664-4 income_tax regs the most important factor is the extent of the taxpayer’s effort to assess his or her proper tax_liability id similarly reasonable_cause and good_faith is not necessarily indicated by reliance on facts that unknown to the taxpayer are incorrect id respondent has complied with the requirements of sec_6751 b and contends that petitioners are liable for a sec_6662 and b penalty for to the extent that there is a substantial_understatement_of_income_tax thus if the rule computation indicates that petitioners’ understatement exceeds the greater of dollar_figure or of the amount of tax required to be shown on the return respondent has satisfied his burden of production the ra in this case recommended the assertion of a substantial_understatement_penalty under sec_6662 that recommendation was approved in writing by his immediate supervisor on date as evidenced by a civil penalty approval form included in the record since respondent has met his burden petitioners must come forward with persuasive evidence that the penalty is inappropriate petitioners may meet their burden by proving that they acted with reasonable_cause and in good_faith with respect to the underpayment see sec_6664 see also higbee v commissioner t c pincite sec_1_6664-4 income_tax regs petitioners however have not argued or even suggested that they acted with reasonable_cause arguing only that their returns were correctly based on their determination that mr mcguigan was a statutory_employee as explained supra petitioners’ determination was incorrect we therefore hold that petitioners are liable for the sec_6662 and b accuracy-related_penalty to the extent the rule_155_computations show there is an underpayment attributable to a substantial_understatement_of_income_tax to reflect the foregoing decision will be entered under rule


significant index number department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division jul se tiep pa aq re - taxpayer dear this letter constitutes notice that approval has been granted for your request for a 5-year automatic_extension for amortizing the unfunded liabilities as of date for the above-named plan which are described in sec_431 and sec_431 of the internal_revenue_code code and sec_304 and sec_304 of the employee_retirement_income_security_act_of_1974 erisa this extension is effective with the plan_year beginning date this extension applies to the amortization charge bases as identified in your application submission established as of may total outstanding balance of dollar_figure as of that date with a the extension of the amortization periods of the unfunded liabilities of the plan was granted in accordance with sec_431 of the code sec_431 of the code requires the secretary to extend the period of time required to amortize any unfunded_liability of a plan for a period of time not in excess of years if the plan submits an application meeting the criteria stated in sec_431 the plan has submitted the required information to meet the criteria in sec_431 including a certification from the plan’s actuary that i absent the extension under subparagraph a the plan would have an accumulated_funding_deficiency in the current plan_year or any of the succeeding plan years ii the plan_sponsor has adopted a plan to improve the plan's funding status 20u94 iii the plan is préjécted to have sufficient assets to timely pay expected benefits and anticipated expenditures over the amortization period as extended and iv the notice required under paragraph a has been provided we have sent a copy of this letter to the _ to the and to your authorized representative pursuant to a power_of_attorney on file in this office this ruling is directed only to the taxpayer that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited by others as precedent if you require further assistance in this matter please contact sincerely yours ncha david m ziegler manager ep actuarial group


internal_revenue_service department of the treasury number release date index numbers washington dc person to contact telephone number refer reply to cc psi b09-plr-156469-02 date date re legend taxpayer date spouse trust a date b year accounting firm year c date d year e plr-156469-02 dear this is in response to your letter dated date on behalf of taxpayer requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to make an allocation of generation-skipping_transfer gst_exemption the facts and representations submitted are summarized as follows on date taxpayer’s spouse spouse established trust an irrevocable_trust for the benefit of her children and their descendants article ii paragraph b of trust provides that until the division date later specified the trustee may pay to or for the benefit of any of spouse’s descendants living from time to time as much of the net_income or principal as the trustee may deem appropriate for any purpose provided the trustee shall not exercise this discretionary power to distribute income or principal so as to discharge spouse’s or taxpayer’s legal obligations article ii paragraph c of trust provides that the division date shall be the date that spouse’s oldest living child reaches age twenty-five or such earlier date that no child of spouse’s is living but in no event shall the division date be later than the termination_date described in article iii paragraph c clause of trust article ii paragraph d of trust provides that at the division date the trustee shall divide the principal and any undistributed_income of the trust into equal shares one share for each child of spouse’s who is then living and one share for each deceased child of spouse’s who has effectively exercised the power_of_appointment granted to the child or who leaves a descendant then living the trustee shall retain each share in a separate trust to be administered or distributed as directed in article iii for the benefit of the child and descendants of the child for whom the share has been set_aside article iii paragraph a of trust provides that subject_to the provisions of article iii paragraph b and until the termination_date the trustees may pay to or for the benefit of the child or any of the child’s descendants as much of the net_income or principal of the trust as the trustee may deem appropriate for any purpose the trustee shall annually add any undistributed_income to principal article iii paragraph b of trust provides that at the child’s death or at the division date if the child is not then living the trustees shall distribute the principal and undistributed_income of the trust as the child may appoint by specific reference to this limited_power_of_appointment in the child’s will the child may appoint to or among any one or more of spouse’s descendants other than the child exercising the power and the child may appoint outright to a custodian or to a trustee to be held in further plr-156469-02 trust following the child’s death or the division date as the case may be the unappointed trust assets shall continue to be administered as directed in article iii paragraph a article iii paragraph c of trust provides that the termination_date shall be the earlier of the date that is twenty years after the death of the last survivor of spouse’s descendants who are living on the date of this agreement or the first date on or after the child’s death that there is no living descendant of the child article iii paragraph d of trust provides that at the termination_date the trustees shall distribute the trust assets to the child’s then living descendants per stirpes or if there are none the trustees shall divide the trust assets into equal shares one share for each child of spouse’s who is then living and one share for each deceased child of spouse’s having a then living descendant or having effectively exercised such child’s limited_power_of_appointment under article iii paragraph b the trustees shall add the share of each then living child for whom a separate trust is then held under this article to such child’s separate trust and the share shall be subject_to the child’s limited_power_of_appointment under article iii paragraph b the trustees shall add the share of each deceased child for whom a separate trust is then held under this article to such child’s separate trust or the share shall be subject_to the child’s limited_power_of_appointment under article iii paragraph b to the extent the child shall have specifically referred to this sentence in the exercise of such power the trustees shall distribute the share of each deceased child for whom no separate trust is then held under this article and who has not exercised such power_of_appointment to such child’s then living descendants per stirpes on date spouse transferred dollar_figurea to trust on date spouse transferred dollar_figureb to trust taxpayer and spouse each reported the transfers to trust along with their other gifts on timely filed year form sec_709 united_states gift and generation-skipping_transfer_tax return and elected to split_gifts made by them to third parties during the calendar_year under sec_2513 of the internal_revenue_code taxpayer’s and spouse’s year gift_tax returns were prepared by accounting firm an accounting firm that has been advising taxpayer and spouse on tax matters and preparing their gift_tax returns since year a notice of allocation was attached to each year gift_tax_return and dollar_figurec an amount equal to one-half of the total value of property transferred to trust in year of each taxpayer’s respective gst exemptions was allocated to trust on date spouse transferred dollar_figured to trust taxpayer and spouse each reported the transfer to trust along with their other gifts on timely filed year form sec_709 united_states gift and generation-skipping_transfer_tax return and elected to split_gifts made by them to third parties during the calendar_year under sec_2513 taxpayer’s and spouse’s year gift_tax returns were also prepared by accounting firm a notice of allocation was attached to spouse’s year gift_tax_return and dollar_figuree an amount equal to one-half the total value of property transferred to trust in year of spouse’s gst plr-156469-02 exemption was allocated to trust accounting firm however mistakenly failed to make a corresponding allocation of dollar_figuree of taxpayer’s gst_exemption to trust on taxpayer’s year gift_tax_return in a recent review of taxpayer’s and spouse’s estate plan taxpayer’s estate_planning attorney discovered that accounting firm failed to allocate taxpayer’s available gst_exemption to the transfer to trust in year taxpayer has requested the following rulings an extension of time under sec_2642 and sec_301_9100-1 and sec_301_9100-3 to make an allocation of taxpayer’s gst_exemption for the transfer to trust in year and that such allocation shall be made based on the value of the property transferred to trust as of date the date of the original transfer sec_2601 imposes a tax on every generation-skipping_transfer gst a gst is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2631 provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure adjusted for inflation under sec_2631 that may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2632 provides that any allocation by an individual of his or her gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual’s estate determined with regard to extensions regardless of whether such a return is required to be filed sec_2642 provides that except as provided in sec_2642 if the allocation of the gst_exemption to any transfers of property is made on a gift_tax_return filed on or before the date prescribed by sec_6075 for such transfer or is deemed to be made under sec_2632 or c the value of such property for purposes of sec_2642 shall be its value as finally determined for purposes of chapter within the meaning of sec_2001 or in the case of an allocation deemed to have been made at the close of an estate_tax_inclusion_period its value at the time of the close of the estate_tax_inclusion_period and such allocation shall be effective on and after the date of such transfer or in the case of an allocation deemed to have been made at the close of an estate_tax_inclusion_period on and after the close of such estate_tax_inclusion_period sec_2642 provides generally that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 or and an election under sec_2632 or c such regulations shall include procedures for plr-156469-02 requesting comparable relief with respect to transfers made before the date of the enactment of sec_2642 which was enacted into law on date sec_2642 provides that in determining whether to grant relief under this paragraph the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief under this paragraph the time for making the allocation or election shall be treated as if not expressly prescribed by statute notice_2001_50 2001_34_irb_189 provides that under sec_2642 the time for allocating the gst_exemption to lifetime transfers and transfers at death the time for electing out of the automatic allocation rules and the time for electing to treat any trust as a generation-skipping_trust are to be treated as if not expressly prescribed by statute the notice further provides that taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election 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_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute under sec_301_9100-1 a regulatory election includes an election whose due_date is prescribed by a notice published in the internal_revenue_bulletin in accordance with sec_2642 and notice_2001_50 taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election plr-156469-02 based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore taxpayer is granted an extension of time of days from the date of this letter to make an allocation of taxpayer’s available gst_exemption with respect to taxpayer’s transfer to trust in year the allocation will be effective as of date the date of the transfer to trust and the gift_tax value of the transfer to trust will be used in determining the amount of gst_exemption to be allocated to trust the allocation should be made on a supplemental form_709 united_states gift and generation-skipping_transfer_tax return and filed with the internal_revenue_service center cincinnati oh a copy of this letter should be attached to the supplemental form_709 a copy is enclosed for this purpose the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as specifically ruled herein we express or imply no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to taxpayer this ruling is directed only to the taxpayers requesting it sec_6110 provides that it may not be used or cited as precedent sincerely heather c maloy heather c maloy associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter