t c memo united_states tax_court george tsakopoulos and drousoula tsakopoulos petitioners v commissioner of internal revenue respondent docket nos filed date john gigounas for petitioners daniel j parent for respondent memorandum findings_of_fact and opinion vasquez judge respondent determined the following deficiencies in petitioners’ federal income taxes -- - year deficiency dollar_figure big_number big_number big_number after concessions the issues for decision are whether a preliminary change_of_ownership report filed with the sacramento county assessor’s office is admissible whether petitioners may take a deduction for an abandonment_loss whether petitioners must report income from cancellation of indebtedness with regard to advances received whether petitioners may deduct expenses_incurred on work performed on the roofs of their shopping centers whether petitioners may deduct real_estate_taxes paid and whether petitioners may deduct payments made to royal roofing inc and consolidated klectrical distributors 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 and procedure findings_of_fact 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 at the time they filed their petition george tsakopoulos hereinafter petitioner and drousoula tsakopoulos resided in carmichael california petitioner moved to the sacramento area in and began to buy old houses remodel them and rent them petitioner used this rental income to pay the mortgages to reinvest and as a source_of_income in petitioner began to purchase other types of properties eg ranches farms shopping centers stockton elsie property in petitioner purchased a 14-percent interest in the stockton elsie property stockton elsie from skk exchange for dollar_figure at the time of purchase angelo tsakopoulos hereinafter angelo petitioner’s brother already owned an 18-percent interest in stockton elsie from until stockton elsie operated as a gasoline and diesel dispensing facility a vehicle washing facility and a mechanical repair and maintenance operation facility prior to other entities held the interests in stockton elsie including phillips petroleum co lion oil co and its successor tosco corp from to angelo was principally responsible for managing the property although many other parties held ownership interests amounts are rounded to the nearest dollar angelo often conducted business under the name akt development or akt investments other owners at petitioner’s time of purchase included skk exchange inc dollar_figure percent jack sioukas percent and eppie johnson percent - by angelo owned dollar_figure percent of stockton elsie and petitioner owned the remaining 14-percent interest angelo attempted to sell stockton elsie in the sale however did not occur because the prospective purchaser learned that stockton elsie would need to be cleaned up due to contamination in and angelo received reports which confirmed contamination in stockton elsie’s soil and groundwater on date angelo filed a lawsuit against several oil companies including phillips petroleum former owners and tenants and insurance_companies alleging that they were responsible for the cleanup costs in the california regional water quality control board issued a cleanup and abatement order on stockton elsie to certain past and present owners including angelo petitioner deducted his share e dollar_figure percent of these toxic cleanup expenses on his and tax returns and respondent allowed these expenses angelo advanced these expenses to petitioner by petitioner had not paid these amounts back to angelo on date due to his health problems financial problems and fear of potential lawsuits regarding the contamination of stockton elsie petitioner deeded his entire_interest in this property to angelo this deed was recorded on date the deed indicated that there was no value to stockton elsie - on date karen hayes an escrow assistant at the placer title co filed a preliminary change_of_ownership report with the sacramento county the county assessor’s office regarding the transfer of stockton elsie from petitioner to angelo this form must be filed whenever there is a conveyance of title record in order for the office to assess the property the box on the report indicating that the transfer was a purchase was checked and the box for the total purchase_price was filled in with dollar_figure angelo’s name on the report was signed by ms hayes no one from angelo’s office advised ms hayes that the transfer was a purchase however she filled out the form using the deed given to her by akt and marked what she believed was appropriate in addition the purchase_price which was provided by angelo’s escrow coordinator jean perry represented the assessed value of percent of the property not solely petitioner’ sec_22 14-percent interest on his tax_return petitioner claimed a dollar_figure loss for the abandonment of stockton elsie the amount of the loss represented petitioner’s basis in stockton elsie as calculated by petitioner’s tax preparer norman marcoux in the notice_of_deficiency respondent disallowed the loss respondent determined that petitioner had not established an abandonment_loss and the loss was not allowable because it was the result of a transaction with a related_party in addition respondent - - disallowed an additional deduction of dollar_figure which petitioner claimed on his amended_return as part of the abandonment_loss on stockton elsie respondent also determined that petitioner had dollar_figure of cancellation of indebtedness cod income from the discharge_of_indebtedness upon the disposition of the property this amount represents the advances from angelo to petitioner for expenses related to the cleanup cirby sunrise shopping center roof in date petitioner received a bid from robert graham of gudgel yancey roofing inc for the latter to perform work on the roof of the cirby sunrise shopping center cirby sunrise the bid proposed the following work remove the existing roof and haul same from the premises prepare the deck for the application of the new roof install a rosin sheet on the wood deck nail two layers of malarkey roofing products sbs base sheets to plywood deck each layer embedded with asphalt apply one layer of malarkey roofing products granulated sbs cap sheet in asphalt nail one layer of malarkey roofing products cap sheet and one layer of cap sheet to existing stucco wall remove and reinstall existing cap metal replace cant strip as necessary the proposal was for the entire builtup roof which represents the top flat portion of the roof the proposal did not cover any work on the tile portion of the roof which bordered the builtup roof the plywood deck beneath the builtup roof or the supporting structures in date petitioner paid gudgel yancey roofing dollar_figure for this work mr graham inspected the completed work which had a warranty of years on his return petitioner claimed a deduction for repairs to cirby sunrise of dollar_figure respondent disallowed dollar_figure of this deduction and determined that this amount is a capital_expenditure carmichael village shopping center roof in addition petitioner contacted mr graham because the roof above suites at the carmichael village shopping center carmichael village was leaking mr graham determined that the contractor that put on the original roof had done a poor job and he decided to tear off the original roof and put on a new roof in date petitioner received a proposal from gudgel yancey roofing to perform work on this roof the work detailed in this proposal mirrored the proposal on cirby sunrise except that the roof jacks would be replaced as necessary and the amount of dollar_figure represented petitioner’s 50-percent interest in the shopping center suite sec_1 through comprised about percent of the entire shopping center - - the proposal did not include the work of applying one malarkey roofing products cap sheet and one sheet to existing stucco walls in date petitioner paid gudgel yancey roofing dollar_figure for this work mr graham inspected the completed work which had a warranty of years on his tax_return petitioner deducted dollar_figure as repairs to carmichael village respondent disallowed dollar_figure and determined that these amounts were capital expenditures payment to royal roofing inc in date petitioner paid dollar_figure to royal roofing inc on his tax_return petitioner deducted dollar_figure as repairs for carmichael village respondent reduced this amount by dollar_figure and determined that petitioner had not established that the expenses were ordinary and business_expenses of this amount respondent determined that the dollar_figure paid to royal roofing was not a repair because petitioner had not provided sufficient documentation to establish the nature of the work this amount represented dollar_figure paid to gudgel yancey roofing plus dollar_figure of other repairs which the parties have stipulated are not deductible as repairs or capital items in - real_estate_taxes paid in for calvine in the late 1960s petitioner purchased two properties identified as calvine and calvine calvine when he purchased calvine a dairy and two houses were located on the properties petitioner continued to rent calvine to the same tenant at the time of purchase calvine was zoned for agricultural and residential development purposes petitioner purchased calvine for income purposes in the county condemned the dairy farm because cow urine caused problems with a nearby stream so petitioner used calvine as a cow pasture the county did not fix the drainage on calvine therefore petitioner could not develop these properties in the county changed the zoning for calvine to light industrial in the county again changed the zoning to special planned development spa the spa zoning allowed only certain areas of calvine to be zoned as commercial residential and recreational petitioner did not advocate the zoning changes in however petitioner attempted to change the zoning from spa to residential because calvine consisted of approximately acres at calvine road and calvine consisted of approximately acres at calvine road - the zoning restrictions were depressing the value of calvine petitioner filed a letter with the county outlining his plans to subdivide calvine into single-family lots and other sites on his tax_return petitioner deducted real_estate property taxes of dollar_figure for calvine and dollar_figure for calvine respondent disallowed the deduction and determined that the amounts were capital expenditures payment to consolidated electrical distributors on date petitioner paid consolidated electrical distributors dollar_figure from his greenhaven plaza bank account on his tax_return petitioner deducted this amount as a repairs expense with respect to his greenhaven property respondent disallowed this amount because petitioner did not establish the amount as an ordinary and necessary business_expense opinion i evidentiary issue as a preliminary matter petitioner objects to the admission of the preliminary change_of_ownership report the report as hearsay at trial the court admitted the exhibit under advisement reserving ruling on the objection until parties briefed the issue respondent argues that the report is admissible under the following hearsay exceptions of the federal rules of evidence rule records of regularly conducted activity rule public records and reports and rule statements in documents affecting an interest in property petitioner argues that the report cannot be admitted under fed r evid because the report does not affect an interest in property under fed r evid there are three elements for its application the document must purport to establish or affect an interest in property the statement must be relevant to the purpose of the document and subsequent dealings with the property cannot be inconsistent with the truth of the statement or the purport of the document ’ the document affects an interest in property the court has held that statements imprints and notations of transfer_tax ’ fed r evid provides the following are not excluded by the hearsay rule even though the declarant is available as a witness statements in documents affecting an interest in property --a statement contained in a document purporting to establish or affect an interest in property if the matter stated was relevant to the purpose of the document unless dealings with the property since the document was made have been inconsistent with the truth of the statement or the purport of the document authorities on documents are admissible under fed r evid as statements in documents affecting an interest in property derochemont v commissioner tcmemo_1991_600 similarly the report involves the assessment of taxes on the property further the report is required to be filed in order for the state authorities to assess tax on the property concerned cal rev tax code sec west the statements within the report are relevant to the purpose of the document--to assess the correct_tax in addition subseguent dealings with the property are not inconsistent with the truth of the statement or purport of the document because angelo owns the entire property accordingly we admit this document into evidence under rule of the federal rules of evidence ii stockton elsie property a abandonment_loss respondent argues that petitioner is not entitled to the deduction for an abandonment_loss because petitioner exchanged the property for angelo’s guaranty that he would not be responsible for any expenses that angelo had already paid on the property and future liabilities petitioner held the property for the benefit of angelo and the property was therefore not transferred to angelo because angelo already owned it or petitioner did not abandon the property but transferred it to his - - brother petitioner argues that he is entitled to an abandonment_loss deduction for his interest in stockton elsie property for in the amount of dollar_figure sec_165 allows a deduction for any uncompensated loss sustained during the taxable_year this loss must be incurred_in_a_trade_or_business in any transaction entered into for profit or in a casualty or theft sec_165 the amount of the loss is the adjusted_basis of the property sec_165 to be entitled to an abandonment_loss under sec_165 a taxpayer must show an intention on the part of the owner to abandon the asset and an affirmative act of abandonment 97_tc_200 an affirmative act of abandonment must be ascertained from all the facts and circumstances 41_tc_437 affd per curiam 340_f2d_320 9th cir and the tax_court is entitled to look beyond the taxpayer's formal characterization 671_f2d_1028 7th cir affg tcmemo_1980_355 the loss is allowed for the year in which the act of abandonment takes place see buda v commissioner tcmemo_1999_132 sec_1_165-1 income_tax regs petitioner transferred the property to angelo by deed under california law a deed need not be recorded when delivered to be effective douglas v commissioner tcmemo_1989_592 we have held that abandonment cannot occur if the transferor intends for a particular person to be the transferee strandgquist v commissioner tcmemo_1970_84 we stated abandonment must be made by the owner without being pressed by any duty necessity or utility to himself but simply because he no longer desires to possess the thing and further it must be made without any desire that any other person shall acquire the same for if it were made for a consideration it would be a sale or barter and if without consideration but with intention that some other person should become possessor it would be a gift emphasis added id similarly the california supreme court has stated that abandonment does not result when the property is delivered and accepted by a donee richardson v mcnulty cal see also 387_us_456 the decisions of the state’s highest court are conclusive as to that state’s law that court stated that if the gift be complete--that is to say if the thing given be delivered and accepted by the donee a transfer is the result which transfer as much precludes the idea of abandonment as a transfer resulting from a sale richardson v mcnulty supra in addition the court characterized abandonment as leaving the property free to the occupation of the next comer whoever he may be without any intention to repossess or reclaim it for himself in any event and regardless and indifferent as to what may become of it in the future id pincite -- - petitioner signed a deed conveying his interest in the property to his brother with the intent of his brother possessing the property on the basis of the record before us we find that petitioner did not abandon the property accordingly we hold that petitioner is not entitled to a deduction for an abandonment_loss with regard to the stockton elsie property in b cancellation of indebtedness cod income respondent argues that petitioner must recognize income in of dollar_figure this amount is the total amount angelo paid in and on behalf of petitioner with regard to cleanup expenses related to the stockton elsie property respondent contends that because petitioner has not repaid the amount and angelo has not attempted to collect it petitioner should recognize the amount as cod income in when the property was transferred to angelo petitioner argues that the debt owed to angelo was outstanding in and petitioner had a good_faith intent to repay these advances income_from_discharge_of_indebtedness is included in gross_income sec_61 petitioner and angelo testified at trial regarding these advances having observed petitioner’s and angelo’s appearances and demeanors at trial we find their testimonies on this issue to be honest forthright and credible -- - angelo testified that it was common for him to advance to the other owners the funds to pay the expenses on a property he further testified that he treated the advances as loans and interest accrued on the advances angelo also stated that he does not pursue collection on these loans actively for example angelo testified i got a call a few days ago from a fellow by the name of sammy c actually not him got a call from an agent that says hey sammy has on his financial statement that he owes you money from he says what’s the deal said gee whiz he does owe it to but sammy was--couldn’t pay for a long time well is he going to pay you yeah he’1ll pay me when well when he can he’s not a relation or anything i’ve never filed a lawsuit against him he has sufficient money for me to go after him but i’m not going to break the guy to collection a few hundred thousand dollars in addition petitioner testified that he considered the advances to be loans that he still owed and intended to pay back upon the basis of the record we find the amounts advanced to petitioner by angelo still owing therefore we hold that angelo’s accountant mark enes further testified that angelo did not favor petitioner on the interest rate charged to petitioner petitioner does not have cod income in the amount of dollar_figure for til shopping center roofs a cirby sunrise shopping center roof respondent argues that the cost of replacing the roof on the cirby sunrise shopping center must be capitalized respondent contends that an entire component of the building---the roof--was removed and replaced respondent further argues that the new roof prolonged the life of the property petitioner argues that the work on the roof was of the nature of a repair for the purpose of keeping the roof in ordinary operating condition petitioner argues that because the work on the roof was repairs the cost could be deducted in the year paid sec_162 allows the deduction of all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business sec_1_162-4 income_tax regs further provides the cost of incidental repairs which neither materially add to the value of the property nor appreciably prolong its life but keep it in an ordinarily efficient operating condition may be deducted as an expense repairs in the nature of replacements to the extent that they arrest deterioration and appreciably prolong the life of the property shall be capitalized sec_263 provides that no deduction shall be allowed for any amount_paid out for new buildings or for permanent - - improvements or betterments made to increase the value of any property or estate or any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made sec_263 and 72_tc_1 within the scope of sec_263 are those amounts paid_or_incurred to add to the value or substantially prolong the useful_life of property owned by the taxpayer or to adapt property to a new or different use sec_1_263_a_-1 income_tax regs an important factor in determining whether the appropriate tax treatment is immediate deduction or capitalization is the taxpayer's realization of benefits beyond the year in which the expenditure is incurred 503_us_79 400_f2d_686 10th cir this is not an absolute rule however as the benefits of expenditures considered to be currently deductible as repairs sometimes extend beyond the current_year as would be true for example of the cost of replacing a broken windowpane united_states v wehrli supra whether an expenditure may be deducted or must be capitalized is a question of fact indopco inc v commissioner supra pincite thus courts have adopted a practical case-by-case approach in applying the principles of capitalization and deductibility 108_tc_265 quoting wolfsen land cattle co v commissioner supra petitioner cited several cases to support his argument that the nature of the work on the roof was repairs including vanalco inc v commissioner tcmemo_1999_265 16_tc_1020 thurner v commissioner t c m cch pontel family estate v commissioner tcmemo_1981_303 and revrul_2001_4 in each of these cases and in the revenue_ruling the court held that certain work performed should be characterized as repairs and deducted rather than capitalized these situations are distinguishable from the instant case because they involved instances in which the repairs were of a recurring nature part of a regular maintenance program or necessary due to storm damage none of the situations in the cited cases or revenue_ruling is applicable in the instant case--petitioner did not offer evidence that he performed work on his roof on a recurring basis or that the work was to repair damage caused by a storm therefore we find the cases and revenue_ruling cited by petitioner distinguishable from the instant case petitioner presented an expert witness robert cox who testified that the entire roof was not replaced that many components were reused and that the work was of poor quality so that it did not prolong the life of the roof nor materially add - - to its value mr cox concluded that the work was merely incidental repairs respondent presented robert graham from gudgel yancey roofing inc the person who supervised the roof work on the cirby sunrise shopping center we found mr graham’s testimony to be honest forthright and credible mr graham testified that the work was a re-roofing project in which we go to a roofing system that’s old and needs to be replaced and we go there and we tear it off we remove the roofing from the existing plywood and then by the time everything is torn off we’ll be looking at old plywood we replace whatever needs to be replaced in the way of plywood and then we go--start installing our roofing systems mr graham stated that he replaced the entire builtup portion of the roof but that is the entire roof mr graham stated that he reviewed the work during its application and on completion with the representative of the roofing system manufacturer because the new roof is under warranty for years after considering the work completed and mr graham’s credible testimony we find that petitioner replaced the roof additionally the replacement roof is expected to last years prolonging the roof’s useful_life we believe that the replacement of the builtup portion of the roof was of a --- - substantial nature to render it a capital_expenditure see stark v commissioner tcmemo_1999_1 b carmichael village shopping center roof respondent argues that the cost of replacing the roof on the carmichael village shopping center suites must be capitalized petitioner argues that the work was in the nature of repairs for the purpose of keeping the roof in ordinary operating condition mr graham who also managed this roofing project testified as to the work completed mr graham testified that the contractor of the original roof had done a poor job and we had no choice but to tear it off and completely put a new roof on it mr graham further testified that an entire roof was replaced but only for percent of the entire shopping center mr graham stated that the new roof had a 10-year warranty petitioner contends that our holding in vanalco inc v commissioner supra applies to the case in issue pointing out that the taxpayer in vanalco replaced only percent of the roof we disagree the facts in vanalco are distinguishable from the instant case in vanalco there was no evidence that petitioner’s expert mr cox testified that the tile roof has a longer life expectancy than the builtup roof and should not need to be replaced as often the tile roof is a separate component from the builtup portion with a different useful_life - the work provided a functional improvement to the roof materially added to the value of the property or would appreciably prolong the life of the roof id in the instant case mr graham credibly testified that the new roof had a year warranty prolonging the life of the property additionally in vanalco the work on the roof was performed during ordinary maintenance which occurred almost every year in the instant case however no evidence was presented to indicate that the work performed on the roof was of a recurring nature although petitioner replaced the roof of percent of the entire shopping center we note that the entire builtup roof of that section was replaced this section encompassed the roof above separate suites after considering the evidence we hold that the cost of the work performed on the roof must be capitalized because of the substantial nature of the work performed and the work appreciably prolonged the life of the roof c payment to royal roofing inc respondent argues that petitioner’s dollar_figure payment to royal roofing inc should not be allowed as a deduction for because petitioner presented no evidence as to the business_purpose of the payment petitioner argues that he established the business nature of this payment and it is deductible - - deductions are a matter of legislative grace and petitioner bears the burden of proving that he is entitled to the deductions claimed rule a 292_us_435 the taxpayer bears the burden of substantiating the amount and purpose of the item for the claimed deduction see 65_tc_87 affd per curiam 540_f2d_821 5th cir petitioner testified that he could not obtain the invoices from royal roofing he did not testify as to the purpose of the payment mr cox petitioner’s expert testified that royal roofing performed the work because someone had told him that royal roofing had done the work mr cox did not talk to royal roofing or see any invoices or proposals from royal roofing accordingly we do not place any weight on mr cox’s testimony regarding royal roofing petitioner has not established that the payment to royal roofing was a business_expense accordingly we sustain respondent’s determination on this issue iv payment of real_estate_taxes on calvine respondent argues that petitioner must capitalize the real_estate_taxes paid in on the calvine property because at the time they were incurred it was reasonably likely that petitioner would subsequently develop this property petitioner counters that he is entitled to deduct the real_estate_taxes because sec_263a does not apply petitioner contends - that he acquired and held the property for investment purposes there has been no physical change to the property and it was not reasonably likely that he would subsequently develop the property once he acquired it sec_263a provides a nondeductibility of certain direct and indirect_costs --- in general --in the case of any property to which this section applies any costs described in paragraph -- a in the case of property which is inventory in the hands of the taxpayer shall be included in inventory costs and b in the case of any other_property shall be capitalized allocable_costs --the costs described in this paragraph with respect to any property are- a the direct costs of such property and b such property’s proper share of those indirect_costs including taxes part or all of which are allocable to such property real_estate_taxes qualify as an indirect_cost that must be capitalized under sec_263a if this section applies sec_1_263a-1 l income_tax regs sec_263a applies to property produced_by_the_taxpayer sec_263a sec_263a defines the term produce to include construct build install manufacture develop or improve congress intended the term produce to be broadly construed see reichel - - v commissioner t cc citing 104_tc_207 further the regulations provide if property is held for future production taxpayers must capitalize direct and indirect_costs allocable to such property eg purchasing storage handling and other costs even though production has not begun if property is not held for production indirect_costs incurred prior to the beginning of the production_period must be allocated to the property and capitalized if at the time the costs are incurred it is reasonably likely that production will occur at some future date thus for example a manufacturer must capitalize the costs of storing and handling raw materials before the raw materials are committed to production in addition a_ real_estate developer must capitalize property taxes incurred with respect to property if at the time the taxes are incurred it is reasonably likely that the property will be subsequently developed emphasis added sec_1_263a-2 a income_tax regs in the year in which the real_estate_taxes were paid petitioner filed a document with the county outlining plans to subdivide the property petitioner testified that he filed the application to change the zoning of the property from spa to residential zoning because the spa zoning was depressing the value of his property petitioner also testified i filed this application to give attention to county of sacramento my properties are ready to be developed we have rejected arguments that a physical change to the property is required for the capitalization of costs see von- lusk v commissioner supra pincite in addition we have held that our determination as to whether development will occur is unaffected by local regulations that may delay or eventually - - preclude the development from going forward id pincite we also note that we make this determination at the time the taxes are paid_or_incurred not at the time the taxpayer acquired the property sec_1_263a-2 income_tax regs therefore it is not dispositive to our determination whether calvine had undergone physical changes as of the time those taxes were paid that the zoning restrictions may hinder or ultimately prohibit development or that petitioner initially acquired the property for investment purposes on the basis of the evidence we conclude that it was petitioner’s intention and reasonably likely that calvine would be subsequently developed when the taxes were paid in therefore we hold that the amounts paid for real_estate_taxes for the property must be capitalized during the taxable_year v payment to consolidated electrical distributors respondent argues that petitioner may not deduct a dollar_figure payment to consolidated electrical distributors in because petitioner did not present any evidence as to the business_purpose of the payment although the payment was made from a business account of petitioner’s respondent points to instances in which petitioner paid personal expenses from this bank account petitioner counters that there could have been no other purpose for the payment but for a business_purpose we agree with respondent -- p7 - deductions are a matter of legislative grace and petitioner bears the burden of proving that he is entitled to the deductions claimed rule a new colonial ice co v helvering u s pincite ordinarily a taxpayer is permitted to deduct the ordinary and necessary expenses that he pays or incurs during the taxable_year in carrying_on_a_trade_or_business sec_162 a taxpayer however is required to maintain records sufficient to establish the amounts of his deductions sec_6001 sec_1 l a income_tax regs petitioner conceded that some expenses paid from his business bank account were not for business purposes petitioner presented no evidence to establish the business_purpose of this payment accordingly we hold that petitioner is not allowed to deduct the payment to consolidated electrical distributors in in reaching all of our holdings herein we have considered all arguments made by the parties and to the extent not herein discussed we find them to be irrelevant or without merit to reflect the foregoing decisions will be entered under rule


t c memo united_states tax_court matt l seiffert petitioner v commissioner of internal revenue respondent docket no filed date george w connelly jr for petitioner sara w dalton for respondent memorandum findings_of_fact and opinion kroupa judge respondent determined deficiencies in petitioner’s federal_income_tax for through years at issue we must decide whether petitioner was entitled to deductions under sec_166 for purported bad all section references are to the internal_revenue_code for the years at continued debts associated with a purported consulting activity that offset wage income we hold that petitioner was not we must also decide whether petitioner failed to report certain income for and we hold that he did not report that income we must also decide whether petitioner is liable for the fraud_penalty under sec_6663 we hold that petitioner is liable findings_of_fact the parties have stipulated some facts we incorporate the stipulation of facts and accompanying exhibits by this reference petitioner resided in texas when he filed the petition i petitioner’s employment and dealings a petitioner’s background petitioner is an experienced and savvy businessman petitioner earned a business administration degree from the university of houston in in the 1980s petitioner organized various business entities engaged in residential real_estate projects petitioner then worked as a salaried employee for the better part of the next decade continued issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated b seaboard controls petitioner served as bookkeeper for seaboard controls seaboard from to date and prepared its federal_income_tax returns seaboard was involved in a project for the venezuelan government venezuelan project to that end seaboard tasked petitioner with obtaining financing on seaboard’s behalf petitioner was unsuccessful and seaboard ultimately lost money on the venezuelan project seaboard never had a profit-sharing agreement with petitioner relating to the venezuelan project petitioner never requested seaboard to satisfy any purported debt c bank fraud incarceration petitioner was incarcerated from date to date for a federal bank fraud conviction petitioner was not employed nor did he earn income during his incarceration d houston drywall houston drywall inc houston drywall d b a classic contractors of houston inc classic contractors hired petitioner as a salesman after his incarceration houston drywall paid petitioner wages during each year at issue petitioner also prepared federal tax returns for classic contractors for through classic contractors paid petitioner an additional dollar_figure in dollar_figure in and dollar_figure in classic contractors filed forms 1099-misc miscellaneous income for those years income e kingwood project petitioner proposed a residential real_estate project in kingwood texas kingwood project classic contractors agreed to purchase a tract of land for the kingwood project if petitioner developed marketed and sold the residential lots classic contractors agreed to split with petitioner the net profit classic contractors obtained financing to purchase an undeveloped tract of land petitioner then developed and subdivided the real_property into approximately residential lots petitioner sold about lots but was unable to sell the remainder classic contractors eventually defaulted on the note and the lender took title of the remaining lots the kingwood project thus was unprofitable petitioner was not owed any money related to the kingwood project nor did petitioner ever attempt to collect any purported debt from classic contractors monetary amounts are rounded to the nearest dollar ii federal_income_tax returns for the years at issue petitioner prepared and filed form sec_1040 u s individual_income_tax_return for the years at issue petitioner used the accrual basis of accounting for the years at issue despite being an individual petitioner reported wage income from classic contractors of dollar_figure for dollar_figure for dollar_figure for dollar_figure for dollar_figure for and dollar_figure for petitioner claimed he was exempt from withholding on form_w-4 employee’s withholding allowance certificate he submitted to his employer at the beginning of each year at issue petitioner also reported a consulting business on schedule c profit or loss from business for the years at issue petitioner reported dollar_figure of schedule c income for but no schedule c income for the other years at issue nor did petitioner report the income petitioner claimed bad_debt deductions of dollar_figure for dollar_figure for dollar_figure for dollar_figure for dollar_figure for and dollar_figure for petitioner determined the uncollectible amounts resulting from the venezuelan and kingwood projects at the end of each year at issue respondent requested information regarding the income petitioner claimed that he had reported the income as income for and he asserted that the income classic contractors reported in was a payment on accounts_receivable petitioner asserted that classic contractors made or would make additional payments respondent later requested additional information regarding the income petitioner again claimed that he had reported that income for and and the payment was posted against an outstanding balance on an account receivable petitioner also provided respondent fabricated documents that purportedly corroborated the debts one such document was a letter purportedly issued by classic contractors during petitioner’s incarceration and before his employment with classic contractors respondent’s criminal investigation unit ciu reviewed the returns petitioner filed petitioner provided documents during a voluntary interview each document showed purported net operating losses nols petitioner carried forward and the purported bad_debt that petitioner wrote off each year ciu recommended that the united_states criminally prosecute petitioner iii petitioner’s conviction for filing a false tax_return the united_states indicted petitioner for filing fraudulent_returns and providing materially false documentation for and petitioner agreed to plead guilty to filing a false federal income return for petitioner entered into a plea agreement acknowledging that he had never reported income from classic contractors and that he was not entitled to any bad_debt deduction the parties agreed that petitioner had an unused available and partially offsetting dollar_figure net_operating_loss_deduction for nol resulting in a dollar_figure tax_liability petitioner agreed however that the stated tax_liability was only for criminal prosecution purposes and did not resolve his civil tax_liabilities the plea agreement expressly exclude d and reserve d for subsequent civil proceedings the determination of any_tax interest or penalties due iv deficiency_notice respondent issued petitioner the deficiency_notice disallowing the bad_debt deductions and determining that petitioner failed to report self-employment_income for and respondent also determining that the civil_fraud penalties applied against petitioner for the years at issue respondent attached to the deficiency_notice a statement of income_tax changes and a six-page explanation of examination changes with five exhibits respondent determined that petitioner did not report self-employment_income of dollar_figure for this amount represents the dollar_figure classic contractors reported on the form 1099-misc as paid to petitioner less dollar_figure in schedule c income petitioner reported for explanation respondent detailed in the explanation the reason for each adjustment petitioner filed the petition contesting all determinations in the deficiency_notice opinion we are presented with an individual taxpayer that used the accrual_method of accounting to offset wage income with purported bad_debts we must decide whether respondent correctly disallowed the bad_debt deductions and determined petitioner did not report income we also address a series of procedural challenges petitioner raises we then consider whether respondent demonstrated by clear_and_convincing evidence that petitioner acted with intent to evade tax such that he is liable for the fraud_penalty i burden_of_proof generally we begin with the burden_of_proof the commissioner’s determinations in a deficiency_notice are presumed correct and the taxpayer bears the burden of proving otherwise rule a 290_us_111 deductions are generally a matter of legislative grace and the taxpayer bears the burden of proving he or she is entitled to claimed deductions 503_us_79 new colonial ice co v helvering u s petitioner likewise carries the burden of substantiation 65_tc_87 aff’d per curiam 540_f2d_821 5th cir a taxpayer must substantiate amounts claimed as deductions by maintaining the records necessary to establish that he or she is entitled to the deductions sec_6001 hradesky v commissioner t c pincite the court need not accept a taxpayer’s self-serving testimony when the taxpayer fails to present corroborative evidence beam v commissioner tcmemo_1990_304 citing 87_tc_74 aff’d without published opinion 956_f2d_1166 9th cir the burden may shift to the commissioner if the taxpayer proves that he or she has satisfied certain conditions sec_7491 snyder v commissioner tcmemo_2001_255 petitioner has not complied with the substantiation requirements of sec_7491 see 116_tc_438 nor has petitioner cooperated in this matter such that the burden of production would shift to respondent to produce information see sec_6201 the burden therefore does not shift to respondent under sec_7491 ii bad_debt deductions we turn now to the bad_debt deductions petitioner claimed respondent contends that petitioner failed to show a bona_fide debt existed that became worthless during each year for which petitioner claimed the deduction petitioner contends the nol establishes that he had available net operating losses from earlier years a bad_debt we first consider whether the bad_debt deductions petitioner claimed satisfy sec_166 petitioner contends that he correctly deducted debts classic contractors and seaboard purportedly owed to him respondent asserts that petitioner has not demonstrated that he met the requirements for any deduction under sec_166 we agree a taxpayer may deduct any bona_fide business debt that becomes worthless within a taxable_year sec_166 an accrual_method taxpayer may deduct receivables as bad_debts to the extent that the taxpayer included those amounts in income for that year or a prior year sec_1_166-1 income_tax regs likewise a worthless_debt arising from unpaid wages fees or similar item of taxable_income is not deductible as a bad_debt unless the taxpayer has included the amount in income for the year for which the bad_debt is deducted or for a prior tax_year schnell v commissioner tcmemo_2006_147 petitioner’s contention that he included income as an individual for prior years under the accrual_method is absurd petitioner never included in income the purported profits from the venezuelan project or the kingwood project see id nor did petitioner show a debt existed a bona_fide debt arises from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money 91_tc_575 sec_1_166-1 income_tax regs there is no support that seaboard or classic contractors was indebted to petitioner or a debtor-creditor relationship existed seaboard and classic contractors not petitioner each realized a loss from the unsuccessful ventures petitioner also failed to demonstrate the purported debts became worthless during the years at issue a taxpayer must prove that the debt had value at the beginning of the year in which it allegedly became worthless and that it became worthless during that year estate of mann v united_states 731_f2d_267 5th cir am offshore inc v commissioner 97_tc_579 petitioner testified that he determined the amount of debt that became petitioner provided carbon copies of checks that he claims demonstrate the existence of bad_debts but failed to submit any corresponding receipts or bank statements the checks do not substantiate the existence of bad_debts see miller v commissioner tcmemo_1996_402 carbon copies of checks without corroborating bank statements did not meet substantiation requirements burrell v commissioner tcmemo_1994_574 carbon copies of uncanceled checks and self-made receipts did not meet substantiation requirements worthless each year petitioner provided no credible documentation however corroborating his assertion nor did petitioner ever attempt to collect any of the purported debt we therefore find that petitioner failed to establish there was any debt for sec_166 purposes b collateral_estoppel we now consider whether the nol described in the plea agreement precludes respondent from challenging certain bad_debt deductions petitioner asserts that the nol establishes the purported debt and precludes respondent from challenging the bad_debt deductions for through respondent counters that he is not precluded because the nol was not an essential fact actually litigated in the prior proceeding we agree with respondent collateral_estoppel may preclude a party from litigating previously decided issues of fact or law necessary to a court’s prior judgment 333_us_591 91_tc_273 collateral_estoppel applies only when the parties actually litigated the we note that petitioner never demonstrated an available nol rather petitioner asserted at trial that the plea agreement established the nol and precluded respondent from denying petitioner an nol available for earlier years the burden nonetheless rested with petitioner to demonstrate that he was entitled to nol deductions petitioner acknowledged at trial that he was not attempting to reconstruct the nol nor does the record establish petitioner was entitled to claim any nol deductions issue and resolving that issue was essential to the prior decision 90_tc_162 aff’d 904_f2d_525 9th cir a fact stated in a plea agreement is not established unless that fact was a necessary element for conviction uscinski v commissioner tcmemo_2006_200 the plea agreement does not preclude respondent from challenging the bad_debt deductions petitioner pleaded guilty to filing a false individual tax_return for this establishes an underpayment for that year see sec_7206 laciny v commissioner tcmemo_2013_107 the nol was not a necessary element however of that crime the material fact that constituted the false statement was the bad_debt deduction petitioner claimed the nol was relevant to the tax loss for criminal sentencing purposes and petitioner agreed that the plea agreement did not resolve his civil tax_liability collateral_estoppel does not preclude respondent’s determination iii income we next consider whether respondent correctly determined that petitioner failed to report the income petitioner asserts that the forms 1099-misc alone are insufficient for respondent to determine petitioner had unreported certain conditions must also be met for collateral_estoppel to apply see generally 90_tc_162 aff’d 904_f2d_525 9th cir we need not address the other elements income see 932_f2d_1128 5th cir aff’g in part rev’g in part tcmemo_1990_68 respondent counters that the determination is factually supported because petitioner acknowledged that he received the income see 92_tc_661 fankhanel v commissioner tcmemo_1998_403 aff’d without published opinion 205_f3d_1333 4th cir we agree with respondent petitioner disputes the income’s characterization not his receipt of it the record demonstrates that petitioner acknowledged during examination receiving the income he claimed that he reported the income for an earlier year as repayment of indebtedness from classic contractors we have already rejected petitioner’s assertion that classic contractors was indebted to him and that he previously reported the income petitioner’s admission that he received the income supports respondent’s determination with respect to the income petitioner has not demonstrated the determination is incorrect see petzoldt v commissioner t c pincite see also 181_f3d_1002 9th cir aff’g tcmemo_1997_97 we therefore sustain respondent’s determination that petitioner had unreported income iv procedural challenges to respondent’s determinations petitioner throws a variety of procedural challenges at the deficiency determination we address each argument in turn a adequacy of deficiency_notice petitioner first suggests without any particularity that the deficiency_notice fails to describe the basis for the adjustments see sec_7522 we disagree the deficiency_notice identifies the amounts the tax years and the reasons for the adjustments see health inv corp v commissioner tcmemo_2010_211 and respondent explained the reason for each adjustment in the explanation we hold that the deficiency_notice comports with the requirements of sec_7522 b multiple examinations we next consider petitioner’s assertion that respondent improperly examined returns for certain years multiple times petitioner contends respondent was obligated to issue second_examination notices before doing so see sec_7605 respondent denies conducting multiple examinations we agree with respondent petitioner also argues that respondent did not adequately explain why he allowed petitioner a short-term_capital_loss of dollar_figure for each year at issue petitioner claims that respondent was required to describe the source of the losses petitioner however does not challenge this adjustment the commissioner may review matching information on a tax_return with other records or information in his possession id see ellis v commissioner tcmemo_2007_207 aff’d in part rev’d in part 346_fedappx_346 10th cir revproc_2005_32 sec_4 b 2005_1_cb_1206 a taxpayer’s voluntary provision of information to the commissioner regarding a return is not considered an examination see revproc_2005_32 sec_4 c the record demonstrates that petitioner provided information during a voluntary interview with ciu see 74_tc_516 70_tc_558 we therefore find that respondent was not obligated to issue a notice of second_examination v fraudulent intent we now consider whether respondent demonstrated by clear_and_convincing evidence that petitioner acted with fraudulent intent we do so to decide whether petitioner is liable for the civil_fraud penalty under sec_6663 and whether the limitations_period under sec_6501 bars respondent’s determinations we address each in turn a fraud_penalty we now consider whether petitioner is liable for the fraud_penalty under sec_6663 the commissioner must prove by clear_and_convincing evidence that the taxpayer underpaid his or her income_tax and that some part of the underpayment was due to fraud sec_7454 sec_6663 rule b 102_tc_632 fraud is a factual question to be decided on the entire record and cannot be presumed 80_tc_1111 55_tc_85 for each tax_year respondent must establish fraud through independent evidence see daoud v commissioner tcmemo_2010_282 aff’d ___ fed appx ____ wl 9th cir date badges_of_fraud the commissioner must show that the taxpayer acted with specific intent to evade tax that the taxpayer knew or believed he or she owed by conduct intended to conceal mislead or otherwise prevent the collection of tax sec_7454 91_tc_874 79_tc_995 aff’d 748_f2d_331 6th cir direct evidence of fraud is seldom available and its existence may therefore be determined from the taxpayer’s conduct and the surrounding circumstances 56_tc_213 courts rely on several indicia or badges_of_fraud these badges_of_fraud include understatement of income inadequate records failure_to_file tax returns concealment of assets failure to cooperate with tax authorities filing false documents failure to make estimated_tax payments engaging in illegal activity attempting to conceal illegal activity dealing in cash implausible or inconsistent explanations of behavior an intent to mislead that may be inferred from a pattern of conduct and lack of credibility of the taxpayer’s testimony 317_us_492 796_f2d_303 9th cir aff’g tcmemo_1984_601 although no single factor is necessarily sufficient to establish fraud a combination of several of these factors may be persuasive evidence of fraud 732_f2d_1459 6th cir aff’g per curiam tcmemo_1982_603 a understatement of income petitioner consistently understated his income for each year at issue the understatement of income can be shown by an overstatement of deductions see daoud v commissioner tcmemo_2010_282 petitioner claimed bad_debt deductions that he was unable to substantiate the deduction amounts corresponded with his reported income to offset most or all of his liability for each year petitioner also failed to report income b inadequate and incomplete records petitioner’s inadequate and incomplete records failed to substantiate any bad_debt deductions for the years at issue there was no credible documentation confirming that petitioner held debt that the debt ever became worthless or that the debt became worthless the year he claimed c failure to cooperate petitioner also did not cooperate with respondent respondent repeatedly sought additional information regarding the years at issue petitioner made false statements and produced misleading or fabricated documents purportedly substantiating the claimed deductions d engaging in and concealing illegal conduct petitioner engaged in illegal conduct as he pleaded guilty to filing a false federal_income_tax return for a conviction under sec_7206 is highly persuasive evidence that a taxpayer intended to evade tax for that year see 419_f3d_829 8th cir aff’g tcmemo_2003_332 stefansson v commissioner tcmemo_1994_162 avery v commissioner tcmemo_1993_344 miller v commissioner tcmemo_1989_461 petitioner acknowledged in the plea agreement that there was no bona_fide debt and that he was not entitled to the bad_debt deduction this purported debt was the same that he determined became worthless and claimed as deductions for the other years at issue further petitioner attempted to conceal his illegal activity from respondent by providing fabricated documents and misleading information e inconsistent explanations and incredible testimony petitioner provided inconsistent explanations that demonstrate an intent to mislead respondent respondent examined bad_debt deductions petitioner claimed for multiple years petitioner repeatedly asserted that he was entitled to the deductions he claimed that he reported the income in an earlier year when he had in fact not reported the income petitioner’s testimony lacked credibility he continued to assert that seaboard and classic contractors were indebted to him the record consistently contradicted his testimony f tax expertise petitioner’s experience and understanding of tax law support a finding that he acted with fraudulent intent see 877_f2d_1364 8th cir aff’g tcmemo_1987_412 a taxpayer’s intelligence education and sophistication are relevant in determining fraudulent intent scott v commissioner tcmemo_2012_65 wright v commissioner tcmemo_2000_336 petitioner was a sophisticated and savvy businessman he had worked as a bookkeeper and accountant petitioner independently researched tax issues we find that petitioner understood his conduct was contrary to existing tax law g badges_of_fraud conclusion in toto many badges_of_fraud apply to petitioner we conclude that respondent has proven by clear_and_convincing evidence that there was an underpayment for each year at issue and each underpayment was attributable to fraud petitioner’s burden once the commissioner has established by clear_and_convincing evidence that any portion of an underpayment is attributable to fraud the entire underpayment shall be treated as attributable to fraud except with respect to any portion of the underpayment that the taxpayer establishes by a preponderance_of_the_evidence is not attributable to fraud sec_6663 see foxworthy inc v commissioner tcmemo_2009_203 aff’d 494_fedappx_964 11th cir petitioner asserts that he misunderstood the requirements to claim the bad_debt deductions because his tax professional advised him to use the accrual_method of accounting respondent contends that petitioner failed to show that any portion was not attributable to fraud we agree with respondent petitioner contends he relied on a tax professional’s advice petitioner failed to corroborate however that he received the advice he claims he did the tax professional did not testify and petitioner did not offer any evidence corroborating his assertions further petitioner has not explained how advice purportedly given in the 1970s informed him on whether he could claim bad_debt deductions arising in the 1990s there is no indication that a tax professional reviewed relevant documents and advised petitioner on the years at issue rather petitioner had a strong understanding of tax law and prepared returns for himself and his former employers his assertions are incredible illogical and entirely unbelievable the record demonstrates that petitioner consistently misled respondent and intentionally confused issues to avoid his tax obligations petitioner failed to demonstrate that any portion of the income was not attributable to fraud accordingly we find that petitioner is liable for the fraud_penalty under sec_6663 for each year at issue respondent alternatively requested we impose an accuracy-related_penalty under sec_6662 in light of our fraud finding we need not consider the accuracy- related penalty b statute_of_limitations petitioner also argues that the limitations periods expired before respondent assessed petitioner’s tax for the years at issue respondent contends that the limitations_period does not apply for the years at issue because petitioner acted with the intent to evade tax we agree with respondent the commissioner must generally make such an assessment within a three-year period after a taxpayer files his or her return sec_6501 in the case of a false and fraudulent return with the intent to evade tax however the tax may be assessed at any time sec_6501 we have found that petitioner is liable for the fraud_penalty under sec_6663 for all years at issue respondent’s burden_of_proof under sec_6501 is the same as that imposed under sec_6663 see browning v commissioner tcmemo_2011_261 we therefore hold that the limitations periods for assessing petitioner’s tax are extended indefinitely see sec_6501 paterson v commissioner tcmemo_2007_109 accordingly respondent is not barred from assessing petitioner’s deficiency for any year at issue see sec_6501 vi conclusion we sustain respondent’s deficiency determinations for the years at issue including the fraud_penalty under sec_6663 in reaching these holdings we have considered all arguments and to the extent not addressed here we conclude that they are moot irrelevant or without merit to reflect the foregoing decision will be entered for respondent


internal_revenue_service department of the treasury number release date index number uilc washington dc person to contact telephone number refer reply to cc intl br1-plr-129169-01 date date in re ty a b dear this responds to your letter dated date in which you requested a ruling and closing_agreement under revproc_92_39 1992_1_cb_860 that premiums received by a on policies of insurance or reinsurance of united_states_risks are exempt from the insurance excise_tax imposed by sec_4371 of the internal_revenue_code pursuant to the income_tax treaty between ireland and the united_states the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by penalty of perjury statements 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 a is an irish reinsurance company all of a’s outstanding shares are held by a canadian company b a reinsures the mortality risk with respect to certain individual life_insurance policies held by united_states insurers revproc_92_39 1992_1_cb_860 miscellaneous excise_taxes collected by return establishes procedures for entering into a closing_agreement to establish an exemption from the sec_4371 excise_tax when the foreign insurer is claiming such an exemption under a united_states income_tax treaty where a foreign insurer is a person qualified for benefits under the applicable treaty it may enter into a closing_agreement in a format specified within sec dollar_figure of revproc_92_39 sec_4371 provides as follows plr-129169-01 there is hereby imposed on each policy of insurance indemnity_bond annuity_contract or policy_of_reinsurance issued by any foreign_insurer_or_reinsurer a tax at the following rates casualty insurance and indemnity bonds cents on each dollar or fractional part thereof of the premium paid on the policy_of_casualty_insurance or the indemnity_bond if issued to or for or in the name of an insured as defined in sec_4372 life_insurance sickness and accident policies and annuity_contracts cent on each dollar or fractional part thereof of the premium paid on the policy of life sickness or accident insurance_or_annuity_contract and reinsurance cent on each dollar or fractional part thereof of the premium paid on the policy_of_reinsurance covering any of the contracts taxable under paragraph or sec_4372 defines insured as a domestic_corporation or partnership or an individual resident_of_the_united_states against or with respect to hazards risks losses or liability wholly or partly within the united_states or a foreign_corporation foreign_partnership or nonresident individual engaged_in_a_trade_or_business_within_the_united_states against or with respect to hazards risks losses or liability within the united_states sec_46_4374-1 states that the tax shall be remitted by the person who makes the payment of the premium to a foreign_insurer_or_reinsurer in this case a intends to receive reinsurance premiums from united_states insurers who would otherwise be liable for payment of the excise_tax because they are paying premiums to a a foreign reinsurer to reinsure their united_states mortality risk by requesting to enter into a closing_agreement concerning sec_4371 excise_tax a is seeking the benefits of article business profits of the united_states - ireland income_tax treaty which states in relevant part as follows the profits of an enterprise of a contracting state shall be taxable only in that state unless the enterprise carries on a business in the other contracting state through a permanent_establishment situated therein plr-129169-01 article a taxes covered of the united_states - ireland income_tax treaty includes sec_4371 excise_tax within the scope of the convention as follows the convention shall however apply to the federal excise_taxes imposed on insurance premiums_paid to foreign insurers only to the extent that the risks covered by such premiums are not reinsured with a person not entitled to the benefits of this or any other convention which provides exemption from these taxes paragraph of the protocol amending the tax_convention with ireland protocol requires an irish resident to be subject_to irish income taxes where the irish resident is receiving income or profits that would otherwise be subject_to united_states insurance excise_tax as follows for the purposes of paragraph it is understood that this convention shall not apply to the federal excise_taxes imposed on insurance premiums_paid to foreign insurers where such premiums are not subject_to the generally applicable tax imposed on insurance corporations in the contracting state in which such insurers are resident residence in ireland liable to tax in ireland article residence of the united_states - ireland income_tax treaty states in relevant part that for the purposes of this convention the term resident of a contracting state means a any person who under the laws of that state is liable to tax therein by reason of his domicile residence place of management place of incorporation or any other criterion of a similar nature a states that it is incorporated under the laws of ireland and that its principal_place_of_business is in ireland a has also submitted certification from the office of the revenue commissioners dublin corporation tax district that it is a resident of ireland for tax purposes qualification for benefits under united states- ireland income_tax treaty a asserts that it is a qualified_person under article a limitation_on_benefits of the united_states - ireland income_tax treaty ireland treaty article a states the following plr-129169-01 a company that is a resident of a contracting state shall also be entitled to all of the benefits of the convention if i at least of the aggregate vote and value of all its shares is owned directly or indirectly by seven or fewer qualified persons or persons that are residents of member states of the european union or of parties to the north american free trade agreement nafta or any combination thereof and ii such company meets the base reduction test described in subparagraph c ii of paragraph provided that a resident of a member state of the european union or a party to nafta shall be treated as a qualified_person for the purposes of that test the term resident of a party to nafta is defined in article f as a person that would be entitled to the benefits of a comprehensive income_tax convention in force between any party to nafta and the contracting state from which the benefits of the convention are claimed provided that if such convention does not contain a comprehensive limitation_on_benefits article including provisions similar to those of subparagraphs c and e of paragraph the person would be entitled to the benefits of this convention under the principles of paragraph if such person were a resident of one of the contracting states under article residence a is owned by b therefore we must look to the income_tax treaty between the united_states and canada canada treaty to determine whether b is entitled to benefits thereunder article xxixa of the canada treaty is a comprehensive limitation_on_benefits article b is a resident of canada as defined under article iv residence of the canada treaty because it is incorporated under the laws of canada and is liable to tax in canada by reason of its incorporation and place of management in canada further b is a person qualifying for the benefits under article xxixa c limitation_on_benefits of the canada treaty article xxixa c states that a qualifying person under the canada treaty is a company or trust in whose principal class of shares or units there is substantial and regular trading on a recognized stock exchange a states that the principal class of shares in b is traded on the toronto stock exchange which is a prescribed stock exchange under the income_tax act of canada and therefore a recognized stock exchange under article xxixa a ii of the canada treaty substantially and regularly_traded is not defined in the canada treaty itself under article iii of the canada treaty any term not defined within the treaty shall plr-129169-01 unless the context otherwise requires and subject_to the provisions of article xxvi mutual_agreement_procedure have the meaning which it has under the law of that state concerning the taxes to which the convention applies a concept similar to substantial and regular trading is found in sec_884 which provides a rule for determining whether a publicly traded corporation is a resident of a treaty country under sec_884 a publicly traded corporation may be a resident of treaty country if- i the stock of such corporation is primarily and regularly_traded on an established_securities_market in such country in applying this section sec_1_884-5 defines regularly_traded as follows for purposes of this section stock of a corporation is regularly_traded on one or more established securities markets in the foreign corporation’s country of residence for the taxable_year if- a one or more classes of stock of the corporation that in the aggregate represent percent or more of the total combined voting power of all classes of stock of such corporation entitled to vote and the total value of the stock of such corporation are listed on such market or markets during the taxable_year b with respect to each class relied on to meet the percent requirement noted above - trades in each such class are effected other than in de_minimis quantities on such market or markets on at least days during the taxable_year and the aggregate number of shares in each such class that is traded on such market or markets during the taxable_year is at least percent of the average number of shares outstanding in that class during the taxable_year according to the facts presented both the common and preferred classes of shares of b are listed on the toronto stock exchange b’s common class of shares is worth of its vote and more than of its value b shares were traded above de_minimis levels on each day the toronto stock exchange was open for trading in calendar_year which equaled days and the total number of common shares traded during equaled or more of the average number of common shares outstanding during the year therefore b’s principal class of shares was substantially and regularly_traded on a recognized stock exchange under the canada treaty plr-129169-01 a satisfies the first prong of the article a limitation_on_benefits test under the ireland treaty because at least of the aggregate vote and value of all its shares is owned directly or indirectly by seven or fewer qualified persons or persons that are residents of member states of the european union or of parties to the north american free trade agreement nafta or any combination thereof the second prong of article a limitation_on_benefits of the ireland treaty refers to the base reduction test of article c ii which provides that a company may be a qualified_person for a fiscal_year only if a mounts paid_or_accrued by the person during its fiscal_year a to persons that are neither qualified persons nor residents or citizens of the united_states and b that are deductible for income_tax purposes in that fiscal_year in the persons’s state of residence do not exceed percent of the gross_income of the person article a ii states that a resident of a member state of the european union or a party to nafta shall be treated as a qualified_person for the purposes of the base reduction test as discussed above b is a resident of a party to nafta a asserts that it meets the base reduction test under the second prong of article a of the ireland treaty because payments to persons described in article c ii will not exceed percent of a’s gross_income therefore under the facts as presented a is a resident of ireland that is qualified for the benefits of the income_tax treaty between ireland and the united_states under article a limitation_on_benefits of the treaty pursuant to paragraph a of the attached agreement taxpayer’s liability for federal excise_tax as agreed upon including liability resulting from reinsurance of u s risks with persons not entitled to exemption under the convention or another convention will commence on date the date of taxpayer’s ruling_request the letter_of_credit required by paragraph a of the attached agreement in the amount of dollar_figure must be in effect within days of the date the agreement is finally signed on the commissioner’s behalf any person otherwise required to remit the federal excise_tax on foreign insurance or reinsurance policies issued by taxpayer pursuant to sec_46_4371-1 of the excise_tax regulations may rely upon a copy of this letter and or a copy of the approved closing_agreement as authority that they may consider premiums_paid to taxpayer on and after date as exempt under the convention from the united_states federal excise_tax 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 furthermore this plr-129169-01 ruling does not address the issue of whether taxpayer is an insurance_company or whether premiums_paid to taxpayer are deductible under sec_162 of the code in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to a sincerely yours w edward williams senior technical reviewer branch office of the associate chief_counsel international cc closing_agreement of final_determination covering specific matters under sec_7121 of the internal_revenue_code tin and the commissioner of internal revenue make the following closing_agreement whereas the business profits article article of the united states-ireland income_tax convention the convention exempts insurance or reinsurance premiums_paid to a resident of ireland from the federal excise_tax imposed by sec_4371 et seq of the internal_revenue_code_of_1986 as amended the code only to the extent that the irish insurer or reinsurer does not reinsure such risks with a person not entitled to exemption from such tax under the convention or another convention article a of the convention and only if the insurer or reinsurer qualifies under article of the convention whereas section dollar_figure of revproc_92_39 provides that the person required to remit the tax may consider the premium exempt if prior to filing the return for the taxable_period such person has knowledge that the irish insurer or reinsurer has in effect a closing_agreement to be liable as a united_states taxpayer for federal excise_tax due under sec_4371 et seq of the code on premiums from policies reinsured with reinsurers that are not entitled to exemption from the excise_tax under the convention or any other convention and on premiums_paid or accrued when the irish insurer or reinsurer did not qualify under the convention for exemption from the excise_tax imposed by sec_4371 et seq of the code whereas the irish insurer or reinsurer represents that it is and will continue to be eligible for benefits under the convention and whereas the irish insurer or reinsurer hereinafter referred to as the taxpayer wishes to have its policies of insurance or reinsurance considered exempt from tax under the convention it is hereby determined and agreed that taxpayer shall for purposes of this closing_agreement be liable as a united_states taxpayer for the federal excise_tax due under sec_4371 et seq of the code on premiums from policies reinsured with reinsurers that are not entitled to exemption from the excise_tax under the convention or any other convention and from policies issued or outstanding when taxpayer did not qualify under the convention for exemption from the excise_tax imposed by sec_4371 et seq of the code a returns of federal excise_tax due under and pursuant to this closing_agreement and sec_4371 et seq of the code shall be made by taxpayer or by taxpayer’s authorized representative on taxpayer’s behalf by filing form_720 quarterly federal excise_tax return for each return_period covered by this closing_agreement b if taxpayer reinsures in whole or in part a policy of insurance or reinsurance with any person s not entitled to exemption from the excise_tax under the convention or any other convention or if taxpayer issues or has outstanding a policy or policies when the taxpayer did not qualify under the convention for exemption from the excise_tax imposed by sec_4371 et seq of the code the tax reportable on the return form_720 shall be computed on the basis of the percentage of such policy reinsured or on the basis of the premium accrued or received during the time period when taxpayer did not qualify for exemption under the convention for purposes of the preceding sentence taxpayer may consider a reinsurer to be entitled to exemption from the excise_tax under the convention or another convention if the reinsurer is a party to a closing_agreement with the internal_revenue_service under this convention or another convention or the reinsurer provides evidence that it is a resident_of_the_united_states or of a country with which the united_states has in effect a convention that waives the excise_tax without an explicit anti-conduit clause c forms shall be filed with the director internal_revenue_service center philadelphia pennsylvania u s a d taxpayer or taxpayer’s authorized representative shall make the required federal tax deposits of the federal excise_tax in such manner and at such times as are prescribed by regulations and explained in the instructions for form_720 taxpayer agrees that for purposes of determining its federal excise_tax liability pursuant to this closing_agreement and for purposes of verifying taxpayer’s entitlement to benefits under the convention taxpayer will maintain for a period of years from the end of each taxable_period to which this closing_agreement applies accounts and records of items of insurance and reinsurance that will be made available upon written request by the internal_revenue_service at the place mutually agreed upon by the service and taxpayer taxpayer will also maintain for years and make available for inspection records to establish eligibility for convention benefits taxpayer will be allowed days or other period of time but in no event less than days determined as reasonable by the assistant_commissioner international within which to make available its accounts and records if it is determined that there is an underpayment in respect of any excise_tax determined to be due pursuant to this closing_agreement and sec_4371 et seq of the code the internal_revenue_service shall issue a statement of notice_and_demand for the tax due plus any interest and applicable penalties notice of any underpayment shall be sent to the taxpayer at the name and address shown on the form_720 if a form_720 was filed for the period for which an underpayment is determined by the internal_revenue_service or otherwise to the taxpayer’s registered address in ireland payment of all additional_amounts due shall be made in accordance with the terms specified in the statement of notice_and_demand collection of such amounts not paid per notice_and_demand shall be in accordance with paragraph hereof a as security for payment of tax taxpayer shall cause an irrevocable letter_of_credit to be issued by a united_states bank that is a member of the federal reserve system or by a united_states branch or agency of a foreign bank that is on the national association of insurance commissioners list of banks from which letters of credit may be accepted in favor of the internal_revenue_service in the amount of dollar_figure or such amount as may from time to time be mutually agreed upon by taxpayer and the service such letter_of_credit must be in effect within days of the date that the closing_agreement is signed for the commissioner of internal revenue b the service may issue a statement of notice_and_demand with respect to i any_tax shown on a form_720 original amended or substitute for return that is not paid with such return or ii any proposed additional excise_tax liability sustained by the internal_revenue_service regional_director_of_appeals having jurisdiction over such matter if the time for filing a protest of such proposed liability has expired provided that the statement of notice_and_demand has been issued as provided in paragraph hereof c if after the conditions in paragraph b hereof have been met the tax interest and any applicable penalties are not paid in accordance with the terms of the statement of notice_and_demand collection of such amounts will be made by resorting to such letter_of_credit to the extent thereof before any levy or proceeding in court for collection is instituted against taxpayer d if such letter_of_credit is drawn upon it must be reinstated to dollar_figure within days after the date drawn upon a solely by reason of the execution by taxpayer and the commissioner of this closing_agreement any person otherwise required to remit the federal excise_tax on foreign insurance or reinsurance premiums pursuant to sec_46_4374-1 of the excise_tax regulations may consider premiums_paid to taxpayer after the effective date of this agreement as exempt under the convention from the federal excise_tax b taxpayer agrees that the commissioner or his or her authorized delegate may disclose taxpayer’s name as an insurer or reinsurer that qualifies for exemption from the excise_tax under the convention by publication or otherwise a this closing_agreement shall include as an attachment hereto a statement from the local_tax office with which the insurer or reinsurer files its irish tax returns certifying that taxpayer is a resident of ireland as defined in the convention and a statement from taxpayer that the taxpayer is not disqualified from receiving benefits under the convention by reason of article of the convention taxpayer shall submit such information in its statement as will establish its entitlement to benefits under the convention b the statement from the local_tax office in ireland shall be effective for a period of calendar years beginning with the year of receipt taxpayer agrees to renew the certificate of residency every three years and its own certification of eligibility for benefits under the convention every year on or before the expiration date of the original certificate taxpayer agrees to provide an original and one copy of the recertification along with a photocopy of this closing_agreement to internal_revenue_service constitution avenue n w washington d c u s a attn cc intl taxpayer also agrees to promptly notify the competent_authority of ireland and the internal_revenue_service of any change that may result in its disqualification from receiving treaty benefits a this closing_agreement shall be effective date this agreement shall thereafter continue in effect unless terminated as provided in subparagraph b of this paragraph b this agreement may be terminated by either taxpayer or the commissioner by giving the other written notice of the notifying party’s intent to terminate the decision to terminate is solely at the discretion of the party giving such notice this agreement shall be terminated on the last day of the return_period immediately following the return_period within which the written notice of termination is given c taxpayer hereby agrees to file a return form_720 marked final return for the taxable_period within which this agreement terminates pursuant to paragraph b hereof and to furnish a duplicate of such final return to internal_revenue_service constitution avenue n w washington d c u s a attn cc intl d taxpayer agrees that the letter_of_credit issued pursuant to paragraph hereof shall remain in effect for a period of not less than days after the final return has been filed in accordance with subparagraph c hereof or until the examination of taxpayer’s returns is completed and any additional tax due has been paid whichever is later whereas the determinations set forth above are hereby agreed to by said taxpayer now this closing_agreement witnesseth that the said taxpayer and said commissioner of internal revenue hereby mutually agree that the determinations set forth shall be final and conclusive subject however to reopening in the event of fraud malfeasance or misrepresentation of material fact and provided that any change or modification of applicable statutes or tax conventions will render this agreement ineffective to the extent that it is dependent upon such statutes or tax conventions in witness whereof the above parties have subscribed their names to these presents in triplicate signed this ____ day of ________________ by title by title commissioner of internal revenue by associate chief_counsel international date by assistant_commissioner international date


internal_revenue_service number release date index number --------------------------- --------------------------- ------------------ ------------------------------ - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------ telephone number -------------------- refer reply to cc psi b02 plr-138053-05 date date legend x -------------------------------------- ----------------- ---------------- ------------------ ----------------------- this responds to a letter dated date and subsequent correspondence a -------------------------- --------------------------- date dear ------------ submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code facts shareholder of x intended for x to be an s_corporation however a form_2553 election by a small_business_corporation was not timely filed accordingly x requests a ruling that it will be treated as an s_corporation effective date law and analysis be an s_corporation sec_1362 provides the rule on when an s election will be effective the information submitted states that x was incorporated on date a the sole sec_1362 provides that a small_business_corporation may elect to plr-138053-05 sec_1362 provides in relevant part that if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made under sec_1362 however if an s election is made after the first two and one-half months of a corporation's taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is filed any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply sec_1362 provides that if no sec_1362 election is made for x did not file an election to be treated as an s_corporation under sec_1362 x has however established reasonable_cause for not making a timely s election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and the representations made and provided that x otherwise qualifies as an s_corporation we conclude that x will be treated as an s_corporation effective date within days from the date of this letter x must submit a properly completed form_2553 with a copy of this letter attached to the relevant service_center the federal_income_tax consequences of the transaction described above under any other provision of the code specifically no opinion is expressed concerning whether x is in fact an s_corporation for federal tax purposes except as specifically set forth above no opinion is expressed or implied as to this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely beverly katz senior technician reviewer branch associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number info release date index number ------------------------------------------- ---------------------------------- --------------------------------- ------------------------------ - department of the treasury washington dc person to contact ------------------- id no ------------- telephone number --------------------- refer reply to cc psi b03 - geninf-155803-03 date date dear ------------------ we are answering correspondence submitted on your behalf by vincent polito cpa requesting relief in order to establish as the effective taxable_year for your s_corporation_election automatic late s_corporation relief is unavailable under revproc_97_48 because the internal_revenue_service did not receive your tax_return on time generally a taxpayer is notified of acceptance or nonacceptance of its election within three months of date of filing_date mailed if the irs questions whether the election was filed acceptable proof of filing is a certified or registered mail receipt b form_2553 with an accepted stamp c form_2553 with stamped irs received date or d an irs letter stating the election has been accepted because you failed to prove timely receipt we are unable to respond to your request in its current form however we are furnishing general information relating to your request announcement copy enclosed provides guidance on seeking relief for late s_corporation elections generally to request relief for a late s_corporation_election you must request a private_letter_ruling from the national_office the information forwarded to our office is insufficient for us to process a private_letter_ruling request the procedures for requesting a private_letter_ruling are set forth in revproc_2003_1 copy enclosed in addition taxpayers must submit a user_fee along with their ruling_request the standard user_fee for a private_letter_ruling is dollar_figure however taxpayers with gross_income of less than dollar_figure million on their tax_return for the most recent 12-month taxable_year qualify for a reduced user_fee in the amount of dollar_figure if you qualify for the reduced fee you must include a statement claiming that your gross_income for the last 12-month taxable_year was less than one million dollars if you decide to submit a formal request for a private_letter_ruling please follow the sample format provided in appendix b of revproc_2003_1 your request should include all required procedural statements a check for the user_fee and any documents that substantiate your intent to be an s_corporation from inception please refer your request to our office by adding the following to the address attn cc pa t p o box ben franklin station washington dc direct to cc psi room incidentally the irs has developed two compact discs to help educate small_business owners on their tax responsibilities introduction to federal taxes for small_business self-employed and a virtual small_business workshop these items are free and can be ordered by calling the irs also makes information available to small_business taxpayers online at www irs gov businesses small index please keep this letter with your tax records and feel free to provide a copy of it to your authorized representative we hope that the above information proves helpful sincerely christine e ellison chief branch office of the associate chief_counsel passthroughs special industries enclosures announcement revproc_2003_1