t c summary opinion united_states tax_court danny m knight petitioner v commissioner of internal revenue respondent docket no 1370-08s filed date lawrence d rouse for petitioner wesley j wong for respondent dean special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure respondent determined a dollar_figure deficiency in petitioner’s federal_income_tax the issue for decision is whether petitioner is entitled to his claimed deduction for unreimbursed employee_expenses background some of the facts have been stipulated and are so found the stipulation of facts and the exhibits received into evidence are incorporated herein by reference when the petition was filed petitioner resided in nevada petitioner is a retired inside journeyman wireman electrician drawing a pension from his local union in topeka kansas topeka he is allowed to work only hours per month in kansas otherwise the local union will deduct a certain amount from his pension but petitioner can work for any other non-kansas union as much as he wants therefore he travels for work to places such as fairbanks alaska fairbanks las vegas nevada las vegas and bakersfield castorville and san francisco california during petitioner signed the out-of-work list book at his local union in topeka as a book one member he could sign the book in person or by certified or registered mail as a traveler however he could sign only a nonlocal union’s book two because he was a nonresident he was required to sign a nonlocal union’s book in person and had to be present at the nonlocal union in order to catch a call ie accept an assignment once petitioner accepted an assignment he was not given any guaranty by the contractor as to how long or whether the work would last during petitioner resided for to months in a fifth- wheel travel trailer that was kept at an rv park in las vegas and later in he moved into his then girlfriend’s house at greenhurst in las vegas petitioner also owned a few properties in topeka in before petitioner’s divorce he resided with his then wife and two daughters on 25th street thereafter he resided with his daughter and three grandchildren on 21st street he also owned a piece of his grandfather’s property that he had a structure on petitioner kept certain vehicles at his topeka and las vegas residences for example he kept two motorcycles in topeka for his personal_use he kept a jeep and a ford f-250 pickup in las vegas that were used for driving to and from the union hall or the house and transporting tools safety clothing and whatever during but occasionally he drove the jeep or the ford f- pickup for personal purposes in las vegas during if he went to dinner or something on the weekend petitioner was not reimbursed by his various employers or the unions for the expenditures he made in instead he claimed dollar_figure in unreimbursed employee_expenses on his schedule a itemized_deductions before application of the sec_67 2-percent floor petitioner’s unreimbursed employee_expenses consist of description amount dollar_figure vehicle expense sec_43 parking fees tolls and transportation travel_expenses big_number unspecified business_expenses big_number meals and entertainment big_number big_number safety clothing workingdues union dues tooldep tool repairs big_number 1before application of the 50-percent ceiling of sec_274 petitioner’s vehicle expense is based on big_number business miles at the standard mileage rate of cents petitioner’s travel_expenses consist of dollar_figure for rent dollar_figure for laundry dollar_figure for misc and dollar_figure for heat petitioner’s rent consists of charges incurred at the rv park where he kept his fifth-wheel travel trailer and expenditures he made to maintain his then girlfriend’s house 1petitioner reported expenditures_for laundry of dollar_figure per week except he reported an additional expenditure for laundry of dollar_figure on or about date 2the court notes that the record indicates that petitioner’s misc expenses include expenditures_for personal items such as a birthday card a dollar_figure gun and a sam’s club renewal petitioner’s unspecified business_expenses consist of dollar_figure for licenses dollar_figure for office dollar_figure for postage and dollar_figure for phone petitioner’s meals and entertainment_expenses consist of dollar_figure for meals dollar_figure for water and dollar_figure for entertainment i burden_of_proof discussion the commissioner’s determinations in a notice_of_deficiency are presumed correct and the taxpayer bears the burden to prove that the determinations are in error rule a 290_us_111 but the burden_of_proof on factual issues that affect the taxpayer’s tax_liability may be shifted to the commissioner where the taxpayer introduces credible_evidence with respect to the issue and the taxpayer has satisfied certain conditions sec_7491 petitioner has not alleged that sec_7491 applies and he has neither complied with the substantiation requirements nor maintained all required records see sec_7491 and b accordingly the burden_of_proof remains on him 3although petitioner claimed a dollar_figure deduction for unspecified business_expenses the correct total is dollar_figure ii parties’ arguments petitioner argues that his expenditures in alaska california and las vegas for travel away from home are deductible as unreimbursed employee_expenses because his tax_home is topeka where he maintains a home with his daughter and grandkids two motorcycles his driver’s license and his voter registration alternatively he argues that his expenditures are deductible as job search expenses respondent argues that the expenditures are not deductible as travel away from home expenses because either petitioner is an itinerant or his tax_home is las vegas alternatively he argues that the expenditures are not deductible for lack of substantiation and that the expenditures during july to date are not deductible as job search expenses because petitioner worked primarily for a certain contractor the court however need not decide whether petitioner had a tax_home or its location for purposes of his travel away from home expenditures or whether the expenditures constitute job search expenses petitioner’s expenses are not deductible under sec_162 on either theory because he has not complied with the substantiation requirements of sec_274 or sec_6001 and the regulations thereunder discussed infra except as otherwise noted iii unreimbursed employee_expenses sec_162 authorizes a deduction for all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business but as a general_rule deductions are allowed only to the extent that they are substantiated sec_274 no deductions are allowed for gifts listed_property or traveling entertainment amusement or recreation unless substantiated taxpayers must keep records sufficient to establish the amount of the items required to be shown on their federal_income_tax returns if the taxpayer establishes that he has incurred a deductible expense yet is unable to substantiate the exact amount the court may estimate a deductible amount in some circumstances 39_f2d_540 2d cir but the court cannot estimate a taxpayer’s expenses with respect to the items enumerated in sec_274 50_tc_823 affd per curiam 412_f2d_201 2d cir rodriguez v commissioner tcmemo_2009_22 the strict substantiation requirements of sec_274 preclude the court and taxpayers from approximating expenses specifically sec_274 and the regulations thereunder require taxpayers to substantiate their deductions by adequate 4the term listed_property is defined to include passenger automobiles and cell phones sec_280f v records or sufficient evidence to corroborate the taxpayers’ own testimony as to the amount of the expenditure or use the time of the expenditure or use the place of the expenditure or use the business_purpose of the expenditure or use and the business relationship to the taxpayer of the persons entertained or receiving the gift see also sec_1 5t a and b temporary income_tax regs fed reg date as to the rules of substantiation the temporary_regulation provides that taxpayers must maintain and produce such substantiation as will constitute proof of each expenditure or use sec_1_274-5t temporary income_tax regs fed reg date written evidence has considerably more probative value than oral evidence id to satisfy the adequate_records requirement of sec_274 the taxpayer shall maintain an account book a diary a log a statement of expense trip sheets or a similar record and documentary_evidence that in combination are sufficient to establish each element of expenditure or use sec_1_274-5t temporary income_tax regs fed reg date to substantiate petitioner’s deductions for unreimbursed employee_expenses or job search expenses he has provided his logbook certain receipts his testimony and a letter from his union that explained the application process and stated no reimbursement is made by the local union to an applicant for travel lodging tools or any other expenses that might be incurred while trying to obtain a job a petitioner’s deduction for vehicle expense sec_1 deduction based on the standard mileage rate petitioner admitted that his mileage was a guesstimation or an approximation of the mileage he drove that day or for the trip he would get like a mapquest or something of that nature or a road map to determine his mileage or if he looked at the odometer and it had miles in a full week he divided it by seven he also admitted that his estimates were not accurate because he recorded miles traveled per day round trip from summerlin to various work sites but the mileage from summerlin to the community college was only about to miles round trip and the mileage from summerlin to caesar’s palace was about or miles round trip his business mileage included personal miles if he went to dinner or something on the weekend he recorded miles per day as business miles even for days when he was not working such as the weekends he recorded miles per day as business miles accrued in las vegas but he was actually in topeka on a non- business trip he claimed deductions for mileage from las vegas to fairbanks and back even though it was not his vehicle that was driven to fairbanks and he inaccurately reported his mileage on his form_2106 employee business_expenses eg he reported big_number business miles as total miles driven in and did not include mileage for commuting miles other miles or personal_use miles the court therefore finds that petitioner has not sufficiently substantiated either the business use of his vehicles or the business_purpose of his expenditures or uses see sec_274 sec_1_274-5t c through i temporary income_tax regs fed reg date see also rodriguez v commissioner supra petitioner is not entitled to a deduction for vehicle expenses based on the standard mileage rate and respondent’s determination is sustained deduction based on actual transportation_expenses although petitioner did not claim a deduction for actual costs of his transportation_expenses he has submitted various receipts and statements purporting to substantiate the actual costs of his transportation_expenses see revproc_2003_76 sec_5 2003_2_cb_924 taxpayers generally may deduct an amount based on the standard mileage rate or actual costs the court has concluded that petitioner’s evidence is not sufficient to substantiate either his business use of his vehicles or the business_purpose of his claimed deduction based on the standard mileage rate it also is insufficient to substantiate his business use or business_purpose for a deduction based on the actual costs of his transportation_expenses petitioner therefore is not entitled to a deduction based on the actual costs of his transportation_expenses see sec_274 sec_1_274-5t c through i temporary income_tax regs supra see also sanford v commissioner t c pincite rodriguez v commissioner tcmemo_2009_22 petitioner’s deduction for toll expenses expenditures_for tolls may generally be deducted as a separate item see revproc_2003_76 sec_5 c b pincite petitioner has not provided any receipts to substantiate his expenditures_for tolls petitioner therefore is not entitled to the deduction see sec_6001 respondent’s determination is sustained b petitioner’s deduction for travel expense sec_1 travel_expenses based on per_diem rates in a letter to respondent petitioner asserted that his travel_expenses were based on per_diem rates for travel inside and outside the continental_united_states he listed his travel_expenses as follows las vegas dollar_figure per day california 5although petitioner submitted a ticket stub from a convention center in las vegas for parking the ticket stub does not set forth the amount that he expended the court therefore cannot provide an allowance for parking see 39_f2d_540 2d cir 85_tc_731 an estimate must have a reasonable evidentiary basis average dollar_figure per day fairbanks average dollar_figure per day and canada average dollar_figure per day the evidence indicates however that petitioner’s assertion is incorrect indeed the dollar_figure petitioner claimed is derived from the sum of his actual costs for rent laundry misc and heat as reported in his logbook revproc_2003_80 sec_1 2003_2_cb_1037 states that its purpose is to provide rules under which the amount of an employee’s business_expenses for lodging meal and incidental_expenses incurred while traveling away from home will be deemed substantiated under sec_1_274-5 of the income_tax regulations when a payor the employer its agent or a third party provides a per_diem_allowance under a reimbursement or other expense allowance arrangement to pay for the expenses emphasis added while revproc_2003_80 sec_1 authorizes the per_diem method to substantiate those traveling expenses the per_diem method is available only to employees whose employers pay a per_diem_allowance in lieu of reimbursing the actual expenses an employee pays while traveling away from home moreover irs publication travel entertainment gift and car expenses explains that in the case of an employee there is no optional 6the court also notes that petitioner’s expenses for rent varied as much as dollar_figure on date dollar_figure on date dollar_figure on date dollar_figure on date dollar_figure on date to zero on several days throughout standard lodging amount similar to the standard_meal_allowance your allowable lodging expense deduction is your actual cost petitioner’s claimed travel_expenses do not come within revproc_2003_80 sec_4 c b pincite because he was an employee who did not receive a per_diem_allowance from his employer therefore he is not entitled to his deduction for travel_expenses based on per_diem rates travel_expenses based on actual costs petitioner provided no receipts to substantiate his payment of certain expenses eg laundry heat or the dollar_figure for rv rent reported on january march and date he also reported in his logbook and claimed on his form_1040 u s individual_income_tax_return that he had paid certain travel_expenses in las vegas but he conceded at trial that he was actually in topeka eg he reported rent of dollar_figure on date and rent of dollar_figure and laundry expense of dollar_figure on date like petitioner’s vehicle expenses the actual costs of his travel_expenses are not sufficiently substantiated see sec_1_274-5t temporary income_tax regs fed reg date accordingly petitioner is not entitled to a deduction for travel_expenses based on actual costs c petitioner’s deduction for unspecified business_expense sec_1 dollar_figure deduction for licenses petitioner testified that his deduction for licenses related to a washington state electrician’s license for which he had reciprocity with alaska but he did not submit a copy of his license in addition as reported in petitioner’s logbook and deducted on his form_1040 his expenditures_for licenses actually include amounts paid for auto licenses eg tags of amount date paid in dollar_figure dollar_figure dollar_figure dollar_figure jan june july sept petitioner has provided no receipts or canceled checks substantiating his payment of those amounts see sec_6001 in addition the amounts were paid in relation to listed_property and therefore are subject_to the strict substantiation requirements of sec_274 and the regulations thereunder as discussed supra he has not sufficiently substantiated his vehicle expenses in accordance with those provisions also the amounts paid on july and date bear the notation mc which the court infers to mean in relation to motorcycle tags he testified that his motorcycles were used only in topeka for personal purposes consequently those personal expenditures are also not deductible under sec_262 in sum petitioner is not entitled to a dollar_figure deduction for licenses dollar_figure deduction for office as reported in petitioner’s logbook and deducted on his form_1040 his expenditures_for office include amount dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure date paid in may may july dec dec petitioner submitted copies of an office depot receipt dated date substantiating a dollar_figure purchase of office items he also submitted copies of officemax and kinko’s receipts that are illegible because of the poor copy quality he has not proven that he paid the remaining dollar_figure for office items see sec_6001 accordingly the court finds that petitioner is entitled to a deduction of dollar_figure for office items see cohan v commissioner f 2d pincite in estimating a taxpayer’s deductions the court bears heavily against the taxpayer whose inexactitude is of his or her own making dollar_figure deduction for postage as reported in petitioner’s logbook and deducted on his form_1040 his expenditures_for postage include amount date paid in dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure feb june feb feb mar mar mar mar dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure apr may may may sept nov july july sept oct nov 1petitioner submitted a ups shipping receipt for dollar_figure on date addressed to a jamie knight at his former residence on 21st street although deductions for the following were not claimed on petitioner’s form_1040 he has submitted a post office receipt for a mailer and postage of dollar_figure paid on date a receipt for postage book of dollar_figure paid on date a receipt for postage stamps of dollar_figure paid on date and a receipt for postage stamps amount illegible paid on date he has not submitted any other receipts to substantiate his expenditures_for postage petitioner has not proven that he paid the postage expenses set forth in the table except as noted supra and he offered no testimony explaining how his postage expenses related to either his trade as an electrician or to job search expenses the record supports an inference that his expenditures_for postage were personal expenses and as such are not deductible see sec_262 indeed he testified that he could sign his local union’s books in topeka either in person or by sending something in by certified or registered mail but there is no evidence that he used the mail option other than his uncorroborated self-serving statements see 294_f2d_328 4th cir affg 34_tc_845 87_tc_74 petitioner testified that as a traveler he had to sign nonlocal unions’ books in person every wednesday to keep his name active and that you have to be present for daily calls at a nonlocal union in order to take the job because petitioner has failed to prove that his postage expenditures were either paid or related to his trade as an electrician or to job search expenses he is not entitled to the deduction see sec_162 sec_262 503_us_79 stating that deductions are strictly a matter of legislative grace and taxpayers bear the burden of proving that they are entitled to any claimed deduction respondent’s determination is sustained dollar_figure deduction for phone as reported in petitioner’s logbook and deducted on his form_1040 his expenditures_for phone include amount dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure date paid in jan feb feb mar mar apr may june dec july dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure aug aug aug sept sept oct nov 1petitioner provided a t-mobile receipt of dollar_figure for the purchase of a vpc with hs and an earbud on date 2although petitioner claimed a deduction of dollar_figure the correct total is dollar_figure petitioner provided no canceled checks or statements of monthly charges to substantiate his payment of his phone expenses in except as noted supra he however provided a statement of monthly charges dated date bearing the name of his then girlfriend he testified that they added another cell phone to her account and he paid the bill petitioner’s deduction for phone relates to listed_property that must be strictly substantiated in accordance with sec_274 and the regulations thereunder see sec_274 sec_280f sec_1_274-5t temporary income_tax regs supra petitioner has provided no evidence establishing the amount of his expenditures the amount of his business and total use the date of the expenditure or use or the business_purpose of his use see sec_1_274-5t temporary income_tax regs supra to the extent that his deduction for phone expenses consisted of charges relating to his then girlfriend’s cell phone use the deduction is not allowable see sec_162 sec_262 sec_274 trujillo v commissioner tcmemo_1992_481 gifts to certain persons are nondeductible personal expenses respondent’s determination is sustained d petitioner’s deduction for meals and entertainment_expenses deductions for meals and entertainment_expenses are generally subject_to the strict substantiation rules of sec_274 and the regulations thereunder but revproc_2003_80 sec_4 c b pincite provides that employees who pay meals expenses may use an amount computed at the federal meals and incidental7 expenses m ie rate for the locality of travel for each calendar day that the employee is away from home in lieu of using actual expenses to compute an allowable_amount as a deduction revproc_2003_80 sec_4 also explains that the amount will be deemed substantiated for purposes of paragraphs b and c of sec_1_274-5 provided the employee substantiates the elements of time place and business_purpose of the travel for that day emphasis added petitioner’s deduction for meals expenses consisted of amounts he expended for groceries and so-called per_diem rates 7the term incidental_expenses means fees and tips given to certain persons certain transportation_expenses between places of lodging or business and places where meals are taken if suitable meals cannot be obtained at the temporary duty site and mailing costs for filing travel vouchers and payment of employer- sponsored charge cards see generally irs publication travel entertainment gift and car expenses as reported in petitioner’s logbook his per_diem rates ranged anywhere from dollar_figure to dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure as reflected in petitioner’s logbook and deducted on his form_1040 his entertainment_expenses were based on his actual costs as reported in his logbook some of his entertainment_expenses consist of amounts for movies of dollar_figure on date in addition he submitted a sam’s club receipt for the purchase of a dvd for dollar_figure on date he also submitted a receipt of dollar_figure for books purchased at barnes noble with titles such as bath floorpl guide to freshw gardens every book of knots and flour eggs as shown on the receipt for which he reported the expenditure as entertainment in his logbook and deducted on his form_1040 because petitioner’s deduction for meals expenses were not based on the federal m ie rates of the various localities he does not come within the provisions of revproc_2003_80 sec_4 in addition he also has not satisfied the requirement of substantiating the business_purpose of his travel since he claimed deductions for meals expenses on december and dates for which he admitted that he was in topeka for personal reasons and not in las vegas for business reasons see id 8this pier diem rate as reflected in petitioner’s logbook on date was his actual cost of dollar_figure for a buffet at riviera hotel casino on date according to the sales draft similarly because he has not substantiated the business_purpose of his travel to allow a deduction for meals expenses based on federal m ie rates he also has not substantiated the business_purpose of his travel to allow a deduction for meals expenses based on actual costs see sec_1_274-5t temporary income_tax regs fed reg date moreover it would strain credulity to believe that petitioner paid the following meals expenses in his trade as an electrician or as job search expenses white zinfandel and ridley sauvignon blanc smirnoff beer miller beer beer cocktails and captain morgans monistat kotex tampons and midol razors deodorant toothpaste chapstick shampoo robitussin broom downy era magazines or candles brandy and cuervo mix and malibu rum and jose cuervo he also admitted that dollar_figure of his meals expenses related to charges for sierra spring water that was billed to his then girlfriend and delivered to her residence petitioner also has not substantiated his deduction for entertainment_expenses as required by sec_274 and the regulations thereunder specifically he has not substantiated certain amounts of his expenditures eg with a receipt the place of the expenditures such as the name address or location and the business_purpose of the entertainment ie the business reason for the entertainment the nature of the business benefit derived or expected to be derived as a result of the entertainment or the nature of any business_discussion or activity see sec_1_274-5t and temporary income_tax regs fed reg date indeed the evidence supports an inference that his expenditures_for entertainment related to personal expenses and were not paid in his trade as an electrician or as job search expenses eg the barnes noble purchase for books and sam’s club purchase for the dvd in sum the court holds that petitioner is not entitled to his deduction for meals and entertainment_expenses respondent’s determination is sustained e petitioner’s deduction for safety clothing petitioner testified that his deduction for safety clothing consisted of amounts expended for fire-retardant work clothing and steel-toed boots petitioner submitted the following receipts to substantiate his expenditures work world of dollar_figure workboot warehouse of dollar_figure american worker of dollar_figure and las vegas country store of dollar_figure clothing is a deductible expense only if it is required for the taxpayer’s employment is unsuitable for general or personal wear and is not so worn see 74_tc_1266 30_tc_757 the court accepts petitioner’s testimony that his fire- retardant work clothing and steel-toed boots were not suitable for general or personal wear but the las vegas country store receipt indicates that the amount was expended for three shirts and a pair of jeans this expenditure was for clothing that is suitable for general and personal wear and petitioner has not proven otherwise therefore the court finds that petitioner is entitled to a deduction of dollar_figure for safety clothing f petitioner’s deduction for union dues petitioner testified that he paid his local union dues yearly at his local union office he also testified that he paid union dues based either on a percentage or a set figure to the nonlocal unions when he worked as a traveler petitioner provided receipts or statements to substantiate his payment of local union dues of dollar_figure and nonlocal union dues for year-to-date of dollar_figure according to the receipt petitioner paid dollar_figure of local union dues on therefore he is not entitled to deduct that amount in see sec_461 sec_1_461-1 and income_tax regs in short the court finds that petitioner is entitled to a deduction of dollar_figure dollar_figure dollar_figure - dollar_figure for union dues see sec_162 sec_1_162-15 sec_1_162-20 income_tax regs g petitioner’s deduction for tool repairs petitioner submitted a receipt from tool service of dollar_figure for the repair of a saw that he uses in his trade he also submitted a sears receipt of dollar_figure for an extractor petitioner has not otherwise substantiated his expenditures_for tools or repairs the court therefore finds that petitioner is entitled to a deduction of dollar_figure to reflect the foregoing decision will be entered under rule 9the court notes again that several receipts are illegible because of poor copy quality


number release date uil control no tam-100832-01 cc fip b4 may internal_revenue_service national_office technical_advice_memorandum taxpayer taxpayer’s address taxpayer’s identification_number years involved date of conference legend x year year year year year year year date date date date date conclusions for purposes of determining premiums earned under sec_832 of the internal_revenue_code for retrospectively rated insurance policies x may not use the accrual_method of accounting for reporting retrospective debits retro debits and retrospective credits retro credits relating to the expired portion of unexpired insurance policies x is required to include retro debits in gross premiums written for purposes of determining premiums earned under sec_832 of the code and x must include retro credits in unearned premiums pursuant to sec_1_832-4 ii 1of the income_tax regulations facts x is a property and casualty insurance_company taxed under the provisions of part ii of subchapter_l of the internal_revenue_code x offers retrospectively rated insurance policies generally retro debits represent premiums due from policyholders on retrospectively rated insurance policies when at the end of the policy year the actual premium calculated based on a formula which takes into account the amount of losses and loss expenses_incurred exceeds the contract’s initial premium retro credits represent amounts owed to policyholders when the contract’s initial premium exceeds the actual premium prior to year x used the reserve_method for determining when to report retrospective adjustments on unexpired policies for both annual_statement and federal_income_tax purposes x began to use the accrual_method of accounting for retrospective adjustments on unexpired policies for tax purposes after this method was proposed by the service in audit adjustments to retrospective credits for year during year x only had retro credits x’s annual statements do not indicate that there were any retro debits in the year tax years x however contends that there were retro debits a technical_advice_memorandum covering year was issued on date the technical_advice_memorandum was the basis for revrul_67_225 1967_2_cb_238 the accrual_method of accounting for the retrospective adjustments was again raised for year the issue for year was settled by the appeals_office on date x agreed to a disallowance of the portion of its liability retro credits for retrospectively rated policies attributable to policies which had not expired as of date x continued to use the reserve all references to the regulations under sec_832 of the code are to the regulations in existence during the tax years in question method for year during these years x had a retro credit balance the examining agent again disallowed a portion of the retro credits to place x on the accrual_method of accounting x agreed with these audit adjustments without protesting the issue to appeals these audits were completed date during the year audit the examining agent did not propose any audit adjustments to the retro credits this audit was completed date the issue of whether an insurance_company could deduct a retro credit reserve as part of the unearned_premium_reserve was litigated in 57_tc_58 acq in result 1973_2_cb_1 in that case the tax_court held that bituminous correctly included reserves for retro credits in the unearned_premium_reserve in addition the court held that the reserves were reasonable estimates of the portions of premiums otherwise earned at the end of each taxable_year which would be required to be returned to policyholders the service acquiesced in result only to the decision and issued revrul_73_302 1973_2_cb_220 which revoked revrul_67_225 at the time of the year audit revrul_73_302 had been issued x represents that for the tax years beginning in year and for all subsequent years all income_tax returns were prepared on the accrual_method as first required in the year audit further the issues of whether x could use the accrual_method of accounting for retro debits and credits and whether x could net the retro debits and retro credits in the unearned_premium_reserve were not raised until year was examined congress enacted in the tax_reform_act_of_1986 sec_832 and c which disallowed a deduction for of the annual change in the unearned_premium_reserve for years after based on this change in law the examining agent proposed a change to x’s method_of_accounting for retrospective adjustments for year during these audit years x’s retrospective adjustments were net retro debits the examining agent could not determine the actual amounts of retro credits that were a part of the net retro debit balance for tax purposes x employed the accrual_method of reporting retrospective adjustments relating to the expired portion of unexpired polices under this method for example if a contract had a policy year of with a contract premium of dollar_figure x would report half of the premium dollar_figure in unearned_premium_reserve for the tax_year end on if x estimated that there was a retrospective debit of dollar_figure x would not report the estimated debit in either the gross premiums written or in the unearned_premium_reserve on the basis that the all_events_test under sec_451 of the code had not been met the examining agent proposed taking the unaccrued retrospective adjustments into account on a reserve_method the same method as x used for the annual_statement the examining agent made an adjustment taking the estimated unaccrued retro debits into account in gross premiums written in calculating the unearned_premium_reserve x included both retro debits and retro credits on expired policies thus if in the tax_year ended x calculated that there was a dollar_figure retro debit earned on the contract_year x would report dollar_figure relating to the expired policies in the unearned_premium_reserve the examining agent removed from the unearned_premium_reserve the retro debits and reported the retro debits in gross premiums written the examining agent represents that x has taken the net retro debits or credits into account as part of the unearned_premium_reserve for both annual_statement and income_tax purposes law analysis issue sec_832 provides in part that the gross_income of an insurance_company subject_to tax under sec_831 includes its investment and underwriting_income computed on the basis of the annual_statement approved by the national association of insurance commissioners plus gains from the sale_or_other_disposition of property and other items constituting gross_income under the general rules of inclusion applicable to all taxpayers sec_832 defines underwriting_income as the premiums earned on insurance contracts during the taxable_year less losses_incurred and expenses_incurred prior to the amendment to sec_832 a premium was not considered to be earned until the risk relating to the premium had expired thus it was only as amounts left the unearned premiums reserve that they became an item_of_gross_income 5_tc_374 acq 1946_1_cb_2 in congress expanded the definition of premiums earned to include of the unearned premiums sec_832 defines premiums earned on insurance contracts during the taxable_year as the gross premiums written on insurance contracts reduced by return_premiums and premiums_paid for reinsurance this amount is increased by percent of the unearned premiums on outstanding business at the end of the preceding_taxable_year and is decreased by percent of the unearned premiums on outstanding business at the end of the current taxable_year sec_1_832-4 of the income_tax regulations provides in part that the underwriting and investment exhibit of the annual_statement is presumed to reflect the true net_income of the insurance_company and insofar as it is not inconsistent with the provisions of the code will be recognized and used as a basis for that purpose this regulation also recognizes however that all items of the underwriting and investment exhibit do not reflect the company’s true net_income under the code sec_1_832-4 provides in computing premiums earned on insurance contracts during the taxable_year the amount of unearned premiums includes in part the liability for return_premiums under a rate credit or retrospective rating plan based on experience under the provisions of sec_832 a property and casualty insurance_company determines its underwriting_income on a reserve_method which includes estimates for such items as losses_incurred and premiums earned thus under this method the insurance_company generally records the gross premiums written for an insurance_policy net of return_premiums and premiums_paid for reinsurance for the taxable_year in which the policy is issued the insurance_company will also establish an unearned_premium liability to reflect the portion of the gross premiums written which relates to the unexpired portion of the insurance coverage the insurance_company receives a deduction for the increase in the unearned_premium liability which serves to defer the portion of the insurance company’s premiums still in force which are attributable to coverage in a future taxable_year the annual_statement was devised for the purpose of regulatory reporting the focus of the annual_statement is the solvency of the company the purpose of the provisions under part ii of subchapter_l of the code is to determine taxable_income of a company although congress enacted provisions relying in part on the annual_statement because of the unique business which takes income in first and then incurs the related claims and expenses the statute does not provide that income is computed as it is on the annual_statement sec_832 indicates that in part the income of a property and casualty insurance_company is computed on the basis of the naic annual_statement the section does not however indicate that the income is taken from the naic annual_statement nor does it state that income is computed as on the same methods approved by naic annual_statement the statute also does not mandate the use of the annual_statement the court in 190_f2d_148 2d cir highlighted a provision of the property and casualty insurance provisions which did not specifically follow the annual_statement for annual_statement purposes the taxpayer was not permitted to adjust its loss and unearned_premium reserves to take into account the effect of reinsurance with unauthorized companies the court determined that the statute provided that reinsurance was to be taken into account without any distinction between authorized or unauthorized reinsurance x contends that sec_803 provides for the inclusion in life_insurance_gross_income of the gross_amount_of_premiums and under sec_807 this includes an adjustment for changes in the unearned_premium_reserve further x contends that sec_811 and the legislative_history of sec_811 make clear that life_insurance_companies must use the accrual_method of accounting thus x argues based on the fact that life companies have a similar methodology of recognizing gross_income with an adjustment for an unearned_premium_reserve it follows that property and casualty insurance_companies may also use the accrual_method however sec_811 specifically states that all computations entering into the determination of taxes imposed by this part shall be made under an accrual_method of accounting or to the extent permitted under regulations prescribed by the secretary under a combination of an accrual_method of accounting with any other method permitted by this chapter other than the cash receipts or disbursements method neither sec_832 nor sec_832 of the statute use the term accrual or refer to the accrual_method of accounting nor are there other provisions under part ii of subchapter_l that refer to the exclusive use of the accrual_method of accounting when congress intended the use of the accrual_method the statute provided so in particular sec_832 provides that expenses_incurred are deductible if they meet the ordinary and necessary provisions of sec_162 the reference to sec_162 in turn incorporates the use of the accrual_method of accounting the concept addressed in sec_832 is how to measure at the end of the annual_accounting_period the premium income from a contract providing coverage for a specific period of time annual_accounting_period therefore at the end of the accounting_period premium income would include estimated retro debits as originally enacted in the act sec_832 formerly sec_246 calculated premiums earned on insurance contracts during the taxable_year as follows from the amount of gross premiums written on insurance contracts during the taxable_year deduct return_premiums and premiums_paid for reinsurance to the result so obtained add unearned premiums on outstanding business at the end of the preceding table year and deduct unearned premiums on outstanding business at the end of the taxable_year thus gross premiums written as drafted in sec_832 was not written suggesting that gross premiums written was determined on a limited basis such as paid as stated on the annual_statement as billed or as accrued this is consistent with the annual_statement which defined gross premiums broadly as the aggregate of all the premiums written in the policies or renewals issued during the year the definition in the annual_statement was broad enough to cover retro debits even though they were not in existence at the time starting with the all-encompassing gross premiums written concept the determination of premiums earned does not result in an accrual_method or necessarily one of the methods allowed for annual_statement purposes the method as prescribed does however result in an insurance_company taking estimates into account the court in bituminous acknowledges that the annual_statement method_of_accounting relies extensively on the use of estimated amounts which would be improper under general tax_accounting thus for example instead of taking into income all of the premiums received or accrued casualty insurance_companies take into account only the portion of those premiums which are estimated to be ‘earned’ 57_tc_58 premiums that are written on a contract are recognized as gross premiums written the premiums related to coverage that has not been provided are set_aside in an unearned_premium_reserve historically the unearned premiums reserve has represented the amount required to be set_aside out of premiums to compensate some reinsurer if in the event of insolvency it is necessary for the reinsurer to fulfill the original insurer’s obligations to policyholders for periods subsequent to the date of reinsurance bituminous casualty pincite x contends that the inherent conservatism of the insurance regulators requires a deferral of recognition of anticipated future income or assets until the actual receipt of such amounts is certain and therefore many states interpret these rules as not permitting estimates of premiums to be included in gross premiums written however it should be noted that in the 1980s the naic manual and instructions were silent as to treatment of earned but unbilled premiums as gross premiums written and in the iasa’s property-liability insurance accounting provided that the earned but unbooked premiums may be recorded as written premium or as a reduction of the unearned_premium reserves or as an offset to loss_reserves or not recorded at all further the naic manual premiums section provides that with respect to earned but not billed premiums a company has an option and may recognize as an asset accrued earned but unbilled premiums sec_446 provides that if the method_of_accounting used by a taxpayer does not clearly reflect income the computation of taxable_income shall be made under such method as in the opinion of the secretary does clearly reflect income x contends that it has consistently followed the accrual_method of accounting for income_tax purposes since it was placed on that method by the examining agents foryear further this method has never been challenged by an examining agent for years x argues that the tax_court in bituminous casualty did not suggest that the accrual_method of accounting did not clearly reflect income nor did it state that the method was impermissible in addition the service did not state that the accrual_method was no longer permissible or prescribe a particular method_of_accounting in revrul_73_302 and did not revoke the prior technical_advice_memorandum in revrul_67_225 the service took the position that an estimated retrospective rate credit with respect to the expired portion of a casualty insurance_policy which does not terminate on or before the end of the taxable_year does not qualify as an unearned_premium within the meaning of sec_1_832-4 defining unearned premiums to include a liability for return_premiums under a rate credit retrospective rating plan based on experience the service took the position that the term liability as used in sec_1_832-4 was limited to accrued liabilities which satisfied the all-events test the court in bituminous casualty rejected the service’s position in revrul_67_225 that under sec_1_832-4 the liability for an estimated retro credit with respect to the expired portion of a casualty insurance_policy that did not terminate on or before the end of the taxable_year did not qualify to be deducted as part of unearned premiums with respect to the taxpayer’s reserve for retro credits the court reasoned that sec_1_832-4 was directly on point and could hardly be more explicit 57_tc_82 the retro credit reserves were therefore expressly allowable under the regulations as a liability for return_premiums the court in analyzing the method_of_accounting for non-life insurance_companies stated that casualty insurance_companies take into account only the portion of those premiums which are estimated to be earned the court continued major deductions from income are ‘losses’ and ‘loss adjustment expenses ’ which are again estimated amounts the deduction of these losses and loss adjustment expense items is fundamentally at odds with the ‘all events’ test the items include amounts for liabilities which are not established but on the contrary vigorously contested they include in the case of the loss adjustment items expenses which will not only be paid in the future both which are attributable to events which will not even occur until the future 57_tc_77 thus it is clear that the earned method under sec_832 is consistent with the method employed in determining the related unpaid_losses and unpaid loss adjustment expenses insurance_companies may estimate these expenses for events that have occurred even though the liability is not fixed and determinable contrary to x’s argument the court made it very clear that revrul_67_225 requiring the accrual_method was not only erroneous but invalid the court stated that the revenue_ruling wa sec_1 inconsistent with the plain language of the regulations seeking to apply an all_events_test to insurance liabilities in a manner inconsistent with the intent of congress the treasury regulations and established industry practice wrong in its interpretation of the regulations and contrary to the legislative_history of the regulations 57_tc_82 n x relies on the 35_fedclaims_138 98_tc_640 and utah medical insurance association v comm’r t c memo to support the proposition that the law precludes the service from changing a taxpayer’s method_of_accounting simply because it prefers one method over another in our opinion these cases are all factually distinguishable from x gerling is distinguishable from x because it is a burden_of_proof case addressing the responsibility of the company to provide gross amounts for premiums losses_and_expenses and a timing issue as to which year gerling should report information shown on its reinsurance statements utah medical is distinguishable because it addressed the reasonableness standard imposed on losses_incurred the court in travelers stated that sec_446 has a 2-prong test first the service has an obligation to prove that the x’s method_of_accounting does not accurately reflect income and second that the service’s method_of_accounting does clearly reflect income thus the service may not change a taxpayer from one permissible method to another permissible method_of_accounting sec_446 provides that taxable_income is computed under the method_of_accounting on the basis of which the taxpayer regularly computes his income in keeping his books sec_1_446-1 provides in part that it is recognized that no uniform method_of_accounting can be prescribed for all taxpayers each taxpayer shall adopt such forms and systems as are in his judgement best suited to his needs however no method_of_accounting is acceptable unless in the opinion of the commissioner it clearly reflects income sec_446 provides that if no method_of_accounting has been regularly used by the taxpayer or if the method used does not clearly reflect income the computation of taxable_income shall be made under such method as in the opinion of the secretary does clearly reflect income the issue in travelers was whether the service abused its discretion under sec_446 in determining that travelers’ profit and loss method for translating its profits and losses from foreign operations into united_states dollars did not clearly reflect income travelers employed a method that was similar to the profit and loss method travelers calculated its taxable gain and income by computing the net amounts in foreign_currency and then translating them into u s dollars according to the year-end exchange rate relying on sec_446 the service recomputed travelers’ income by converting each line-item amount attributable to foreign operations into u s dollars combining that amount with u s dollar amounts from travelers’ other operations and then reporting the total in u s dollars also the service translated certain assets using historic exchange rates and other reportable items using the current end-of-year exchange rate at the time neither the code nor regulations prescribed a method_of_accounting however the service permitted in revrul_75_107 1975_1_cb_32 the profit and loss method and in revrul_75_106 1975_1_cb_32 the net_worth_method the profit and loss method provided that the foreign_income was calculated by translating the collective results of branch operations the court determined that traveler’s method was essentially that described in revrul_75_107 the situation in traveler’s is distinguishable from x’s first as the court ruled in bituminous the statute is clear with respect to the calculation of earned premiums the methods_of_accounting at issue with x involve two distinct methods accrual and reserve the court in bituminous rejected the accrual_method of accounting the court’s decision provided that the reserve_method clearly reflects income under sec_1_446-1 the service affirmed that the accrual_method is an incorrect method_of_accounting and that the reserve_method is the proper method by revoking revrul_67_225 with the issuance of revrul_73_302 the issue in travelers’ was the interpretation of one method - the profit and loss method the court was asked to place travelers’ on the service’s interpretation of the profit and loss method the court indicated that travelers’ method was the crux of the profit and loss method described in revrul_75_107 35_fedclaims_138 the service may change a taxpayer from an impermissible method to a permissible method_of_accounting the commissioner has broad discretion to determine whether in his opinion a taxpayer’s accounting_method clearly reflects income 367_us_687 and 439_us_522 99_sct_773 we agree with the agent that x must employ the reserve_method of accounting as prescribed in sec_832 to determine earned premiums the accrual_method is not a permissible method_of_accounting with respect to the recognition of premiums earned issue the examining agent’s position is that for purposes of determining premiums earned under sec_832 retro debits should be recognized as gross premiums written because they represent premiums to be collected for coverage already provided further by netting the retro debits and credits in the unearned_premium_reserve x is able to defer the recognition of of amounts which are in substance earned when debits are placed in the unearned_premium_reserve they reduce the unearned_premium_reserve balance thus the addition to the gross premiums written is reduced the retro debits would therefore not be recognized until they are paid and placed in gross premiums written x contends that since year it has consistently taken net retro adjustment into account as part of the unearned_premium_reserve because this issue was not raised until the year audit x contends that the service has accepted the netting of debits and credits in the unearned_premium_reserve x believes that the tax_court in bituminous casualty also accepts the netting of debits and credits further x contends if retro debits are excluded from the unearned_premium_reserve the addition to gross premiums written is maximized prior to the treatment of retro debits as either reductions or negative offsets to unearned premiums or as adjustment to written premiums had no impact on a property and casualty insurance company’s taxable_income however sec_832 as enacted by the act requires a property and casualty insurance_company to compute premiums earned by taking into account rather than of the change in unearned premiums’ during the year accordingly the placement of the retro debits and credits in gross written premiums or unearned_premium_reserve change had a significant impact on the computation of a property and casualty insurance company’s taxable_income in the tax_reform_act_of_1986 act congress amended the provisions of sec_832 to reduce a property and casualty insurance company’s deduction for net increases in unearned premiums by percent accordingly for a taxable_year beginning after only of the net increase in unearned premiums during the taxable_year is deductible in computing premiums earned under sec_832 and conversely a net decrease in unearned premiums results in an increase in premiums earned under sec_832 the act included a transition rule whereby of an insurance company’s unearned premiums at the close of which would otherwise not be taken into account in determining premiums earned for taxable years after would be included in premiums earned ratably over a 6-year period beginning in the reduction applied to the unearned premiums is known as the haircut the legislative_history indicates that congress enacted the haircut in order to address a mismatching of income and expenses and a consequent mismeasurement of income that occurred under the prior_law pattern of taxing property an casualty insurance_companies prior to the act property and casualty insurance_companies were generally allowed to deduct agents’ commissions and other premium acquisition expenses in the year incurred and also to exclude the full amount of increase of unearned premiums congress believed that allowing both a deferral of unearned premiums and a current deduction for the corresponding premium acquisition expenses resulted in a significant mismatching of income and expenses for federal_income_tax purposes to correct this mismatching the act amended the provisions of b to reduce the deduction for increases in unearned premiums by although these amendments operate to accelerate the rate in which the unearned premiums are included in taxable_income congress viewed this approach as equivalent to denying current deductibility for a portion of an insurance company’s premium acquisition expenses see h_r conf_rep no 99th cong 2d sess ii-354 c b vol s rep no 99th cong 2d sess c b vol pincite h_r rep no 99th cong 1st sess c b vol congress intended to apply the haircut to all amounts other than life_insurance_reserves and title insurance reserves that were considered unearned_premium reserves for tax purposes as of the house report underlying the amendments to sec_832 states that a ll items which are included in unearned premiums under sec_832 of present law are subject_to this reduction of the deduction h_r rep no c b vol pincite in describing the house bill the conference_report reiterates that a ll items which are included in this reduction in the deduction and describes the senate amendment as the same as the house bill except that the life_insurance_reserves which are included in unearned premiums reserves under sec_832 are not subject_to this reduction h_r conf_rep no c b vol pincite the report’s description of the conference agreement states that the agreement follows the senate amendment but provides special treatment of title insurance unearned_premium reserves id although with the change in law in the placement of retro credits and retro debits had an impact on the computation of premium income the definition of unearned premiums retrospective credits and retrospective debits has not changed premiums are generally earned for annual_statement purposes through the passage of time the premium is earned over the term of the policy an unearned_premium for annual_statement purposes represents the amount of written premium relating to the unexpired potion of all the policies on the insurer’s books which should be excluded from the income statement thus the purpose of the unearned_premium_reserve is to set_aside amounts to met future obligations on behalf of the insurer unearned premiums are generally viewed as having the following characteristics are attributable to the unexpired part of policies in force must be returned to policyholders upon cancellation of the policy and provide funds if the policies are reinsured kpmg peat marwick federal taxation of insurance_companies sec dollar_figure pincite neither the code nor the income_tax regulations under sec_832 define the term unearned premiums the term unearned premiums historically has meant that portion of premiums that had to be returned to the policyholder on the cancellation of the policy and that was also in direct proportion to the unexpired term of the policy buckeye union casualty co v commissioner 448_f2d_230 6th cir aff’g 54_tc_13 n revrul_61_167 1961_2_cb_130 defines the term unearned premiums generally to mean that portion of the premiums which the insurance_company has not yet had time to earn or more precisely that portion of the premiums_paid by the policyholder which must be returned to him on cancellation of the policy and which is in direct proportion to the unexpired term which the policy has to run sec_1_832-4 provides that in computing premiums earned the amount of unearned premiums includes the liability for return_premiums under a rate credit or retrospective rating plan based on experience such as the war_department_insurance_rating_plan and which return_premiums are therefore not earned premiums retro debits are not unearned premiums because they represent amounts earned for coverage already provided retro debits are earned premiums because the related risk period for which the premium is owed has expired 114_f2d_304 1st cir 1941_1_cb_383 these debits are not amounts set_aside for future obligations retro debits represent amounts earned by the insurer and owed by the insured a receivable to the insurer for insurance coverage already provided similarly the naic manual unearned premiums section provides that at the expiration of an insurance_contract or policy the entire premium has been earned at any point prior to expiration the company is required to establish a pro_rata portion of the premium as a liability to cover the remaining policy term the company’s total unearned_premium_reserve represents the unearned_premium liability for all policies in force thus retro debits represent amounts that are earned not unearned companies however have netted retro debits and retro credits in the unearned_premium_reserve for annual_statement purposes although x contends that the annual_statement section of the naic manual provides a company the leeway in its methodology to determine the unearned_premium_reserve x also acknowledges that the regulators are concerned about the undisclosed retro debits accordingly line labeled accrued retrospective premiums based on experience was added to the annual_statement line as described in section of the instructions is the positive amount the total of accrued retrospective debit adjustment based on experience included as negative amounts in column we conclude that retro debits are not includible in unearned premiums under sec_832 x’s retro debits represent estimates of additional premiums expected to be collected from policyholders with respect to coverage that has already been provided under the policy term retro debits are premiums that have already been earned during the period of coverage to which they relate and not amounts held to meet x’s future obligations the treatment of retro debits as reductions to unearned premiums under sec_832 b is contrary to the rationale of the percent haircut the rationale of the percent haircut is to accelerate earned premiums to compensate for the distortion created by the expensing of premium acquisition costs on the annual_statement rather than defer a portion of a nonlife insurance company’s premium acquisition expenses which would have involved difficult measurement issue congress chose to accelerate the rate at which unearned premiums flow into taxable_income if retro debits are treated as reductions to unearned premiums this would reduce the amount of unearned premiums subject_to the percent haircut and defer the recognition of gross premiums written as earned premiums until the retro debits are paid and recognized in gross premiums written we do not believe that congress intended this result x contends that the decision in bituminous casualty acknowledges that retro debits and retro credits are netted in the unearned_premium_reserve the taxpayer in bituminous casualty computed and included in its unearned_premium_reserve a reserve for retrospective rate credits which consisted of its estimate of that portion of its earned premium attributable to retro policies that would thereafter be refundable to policyholders net after deductible additional premiums collectible under the formulas in such policies t c pincite although the court acknowledged the netting of retro credits and debits in arriving at the taxpayer’s reserve the court’s holding was merely directed at the application of sec_1 a ii the netting of retro debits and retro credits was not an issue before the court and would not have made any difference under the provisions of sec_832 then in effect thus this office does not believe that bituminous casualty is controlling authority for purposes of the issue of whether retro debits and retro credits are netted in the unearned_premium_reserve x also contends that if retro debits are included in gross premiums written x must be allowed an offsetting deduction or there is a mismatching of income and expense we disagree x must refer to sec_832 sec_832 and sec_832 each of these provisions provide the method for determining and time for recognizing the income and related expense both sec_832 and sec_832 use the annual_statement as a basis but provide for certain adjustments which take into account estimated amounts sec_832 identifies which deductions are allowed and establishes the time for the deduction by its reference to sec_162 these provisions illustrate as explained in sec_1 a that the intended purpose is to arrive at the true net_income under the code accordingly this office agrees with the agent’s position that gross retro credits are included in unearned premiums under sec_832 and therefore deductible as part of x’s net increase in unearned premiums during the taxable_year and gross retro debits are included in gross written premiums under sec_832 caveat a copy of this technical_advice_memorandum is to be given to x sec_6110 provides that it may not be used or cited as precedent


t c memo united_states tax_court frances l and gary l rambacher petitioners v commissioner of internal revenue respondent docket no filed date frances l and gary l rambacher pro sese andrew m winkler for respondent memorandum opinion goldberg special_trial_judge respondent determined additions to petitioners’ federal_income_tax for the taxable_year of dollar_figure pursuant to sec_6653 and for percent of the interest on dollar_figure the part of the underpayment due to negligence pursuant to sec_6653 unless otherwise indicated all section references are to the internal revenue - - code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure the issue for decision is whether petitioners are liable for additions to tax for negligence or intentional disregard of rules or regulations pursuant to sec_6653 and sec_6653 for the taxable_year this case was submitted fully stipulated pursuant to rule the stipulation of facts and the attached exhibits are incorporated herein by this reference at the time that they filed their petition petitioners resided in ironton ohio on date this court entered a stipulated decision in the underlying partnership proceeding anderson eguip associates v commissioner at docket no pursuant to sec_7481 that decision became final on date and thereafter respondent assessed taxes against petitioners for the and taxable years as computational adjustments the deficiency in the instant case is attributable to adjustments in the underlying partnership proceedings which resulted in automatic adjustments to petitioners' income pursuant to the provisions of the tax equity fiscal responsibility act of publaw_97_248 96_stat_324 on date respondent issued a notice_of_deficiency to petitioners for the taxable_year the question of - petitioners' liability for negligence for was decided by this court in the case of rambacher v commissioner tcmemo_1998_124 affd without published opinion 194_f3d_1313 6th cir rambacher i petitioners were found liable for the additions to tax pursuant to sec_6653 and for pursuant to sec_7481 a a the decision in rambacher i became final on date the date on which the time allowed for filing a petition for a writ of certiorari with the u s supreme court expired ’ in the instant case respondent in a notice_of_deficiency dated date determined that petitioners were liable for additions to tax pursuant to sec_6653 and sec_6653 for the tax_year sec_6653 provides for an addition_to_tax equal to percent of any underpayment if any part of the underpayment is due to negligence or intentional disregard of rules or regulations sec_6653 provides for an addition_to_tax in the amount of percent of the interest payable on the portion of any underpayment_of_tax which is attributable to negligence or intentional disregard of rules or regulations the order of the court_of_appeals for the sixth circuit lists petitioner wife as francis l rambacher in the case caption the unpublished order was entered on date rule rules of the supreme court of the united_states provides that a petition for a writ of certiorari is timely when filed within days after entry of the judgment q4e- in their petition petitioners contend petitioners were not negligent or did not intentionally disregard rules and regulations the internal_revenue_service irs did not respond to petitioners' request to inform petitioners as to how the irs made its negligence determination and that the statute_of_limitations bars respondent's action in this matter petitioners concede that the issue in this case is identical to the issue in rambacher i and have stipulated that record into this case since the issue decided by rambacher i is identical to the issue in this case we issued an order to show cause order on date asking petitioners to demonstrate why this case should not be decided on the same grounds as rambacher i petitioners’ response to the order was filed with this court on date the doctrine_of collateral_estoppel sometimes called issue preclusion generally applies to tax proceedings involving similar claims containing the same legal points or different tax years when there has been no change in the controlling facts or applicable legal principles 80_fsupp_340 w d okla affd 176_f2d_519 cir see also 333_us_591 collateral_estoppel has the dual purpose of petitioners now concede that the statute_of_limitations does not bar an assessment with respect to the tax_year protecting litigants from the burden of relitigating an identical issue and of promoting judicial economy by preventing unnecessary or redundant litigation 91_tc_273 in 440_us_147 the supreme court established the following three-prong test for applying collateral_estoppel the issue presented in the subseguent litigation is in substance the same as the issue presented in the first case the controlling facts or legal principles have not changed significantly since the first judgment and special circumstances do not warrant an exception to the normal rules of preclusion building on the supreme court's analysis in montana this court has identified five criteria that must be satisfied for collateral_estoppel to apply they are the issue in the second suit must be identical in all respects with the one decided in the first suit there must be a final judgment rendered by a court of competent jurisdiction collateral_estoppel may only be invoked against parties and their privies to the prior judgment the parties must have actually litigated the issue and the resolution of the issue must have been essential to the prior decision and the controlling facts and applicable legal rules must remain unchanged from those in the prior litigation see 90_tc_162 affd 904_f2d_525 9th cir on the basis of the record we find that all five conditions have been satisfied in the instant case and pursuant to the doctrine_of collateral_estoppel find that the holding in rambacher i is controlling here we therefore hold that petitioners are liable for the additions to tax pursuant to sec_6653 and for the taxable_year to reflect the foregoing an appropriate order and decision will be entered