t c memo united_states tax_court gary gealer petitioner v commissioner of internal revenue respondent docket no filed date lon b isaacson for petitioner irene scott carroll and gary m slavett for respondent memorandum opinion dawson judge this case was assigned to special_trial_judge john j pajak pursuant to the provisions of sec_7443a in effect when this case commenced and rule sec_180 sec_181 and sec_183 all section references are to the internal_revenue_code as amended and all rule references are to the tax_court rules_of_practice and procedure the court agrees with and - - adopts the opinion of the special_trial_judge which is set forth below opinion of the special_trial_judge pajak special_trial_judge this case is before the court pursuant to petitioner's motion for administrative and litigation costs under sec_7430 and rules through petitioner seeks to recover administrative and litigation costs of dollar_figure allegedly incurred in contesting respondent's determination of an income_tax deficiency of dollar_figure and a penalty of dollar_figure for the taxable_year petitioner filed his motion for administrative and litigation costs on date respondent filed an objection to petitioner's motion petitioner filed a reply to respondent's objection and respondent filed a response to petitioner's reply in accordance with rule a we will dispose_of the motion before us without a hearing accordingly we rule on petitioner's motion on the basis of the parties' submissions and the record in this case the underlying issues raised in the petition were settled by a stipulation of settlement background at the time the petition in this case was filed petitioner resided in los angeles california much of the dollar_figure of administrative and litigation costs petitioner seeks and much of the voluminous record do not relate to the matter to be decided by this court but instead relate to work done by petitioner's attorneys with regard to petitioner's attempts to participate in the audit of the fourth dreamer inc related litigation in the district_court and an appeal arising out of the district_court litigation we set forth the facts which are relevant to the decision of this court from until date petitioner was a percent shareholder of the fourth dreamer a c_corporation engaged in the sale of golf clubs and sportswear the other percent shareholder was michael weiner weiner in date respondent began an audit of the fourth dreamer for the fiscal_year ending date weiner informed petitioner about the audit a dispute arose as to who could properly represent the fourth dreamer in audit respondent took the position that return_information of the fourth dreamer could not be disclosed to petitioner under sec_6103 because petitioner did not have a material interest under sec_6103 e d petitioner asked weiner if he could examine and copy all the records of the fourth dreamer and promised to return them within a few days weiner allowed petitioner to take the records but petitioner failed to return them to him notwithstanding numerous requests to have them returned on date the internal_revenue_service irs was q4e- notified that petitioner after being told of the corporate audit had taken the records relating to the audit the irs requested the records from petitioner the records were not given to the irs or weiner on date the irs issued a summons to petitioner for the records of the fourth dreamer on date petitioner filed a motion to quash the summons in the district_court on date the district_court dismissed petitioner's motion to quash on date a second summons filed by respondent requested the books_and_records of the fourth dreamer for the fiscal years ending date and petitioner filed a new motion to quash the summons on date the district_court dismissed the motion with prejudice on date in date respondent began to audit petitioner’s income_tax return on date respondent requested that petitioner appear on date to give testimony and produce the records of the fourth dreamer requested in the summons petitioner declined because he was involved in an appeal arising out of the district_court litigation respondent offered petitioner a conference with respect to his audit on or before date that date was set because the period of limitations was running a letter from the irs suggested that someone representing petitioner meet with the irs by date or in the alternative that petitioner - - sign an extension of the limitations_period on date on the basis of the irs's understanding that there would be no meeting before date the audit file was forwarded to the review section because the period of limitations was running the notice_of_deficiency for petitioner's tax_year was issued on date respondent determined a deficiency of dollar_figure in petitioner's federal_income_tax and a sec_6662 a penalty of dollar_figure the adjustments contained in the notice_of_deficiency resulted primarily from respondent's determination that dollar_figure of expenses paid_by the fourth dreamer were personal and benefited petitioner and thereby constituted constructive_dividend income to him the notice stated that petitioner did not provide any information to substantiate whether the expenses deducted on the corporate return were personal or business related and that no books_or_records for the corporation were provided adjustments were made to petitioner's personal_exemption and itemized and standard deductions on date the district_court ordered petitioner to provide the information requested in the second summons petitioner finally began to do so on or about date petitioner claimed in his petition to this court that the business deductions claimed by the fourth dreamer were legitimate business deductions he further claimed that he was denied an - - opportunity to explain and provide documentation establishing the legitimacy and deductibility of the expenses on date this court set the case on a date trial calendar at los angeles on date respondent sent a branerton_letter see 64_tc_191 to petitioner's representative requesting that additional information necessary for respondent to analyze the constructive_dividend issue be sent by date no response was received by date around date petitioner's counsel served formal discovery requests on respondent respondent objected to petitioner's use of formal discovery without using informal_discovery first but responded to two of the three requests on date respondent requested that the parties meet the meeting was set for date on date respondent received the additional information from petitioner that had been requested on date on date petitioner's representative and respondent met on date respondent agreed to concede the case the court entered an agreed decision document in this case on date on date the court received petitioner’s motion for litigation and administrative costs consequently the court sua sponte vacated the agreed decision - filed the decision as a stipulation of settled issues and filed petitioner’s motion discussion under sec_7430 a taxpayer may be awarded a judgment for reasonable administrative and litigation costs if the taxpayer establishes that he was the prevailing_party unless the commissioner establishes that the commissioner’s position was substantially justified sec_7430 a and b we review the commissioner’s position as of the earlier of the date of the receipt by the taxpayer of the notice of decision by the office of appeals or the date of the notice_of_deficiency to determine whether the commissioner was substantially justified with respect to the recovery_of administrative costs sec_7430 b in deciding the merits of a motion for litigation costs we consider the reasonableness of the commissioner’s position from the date the answer to the petition was filed sec_7430 a 930_f2d_759 9th cir we consider the reasonableness of each of these positions separately huffman v commissioner 978_f2d_1139 9th cir affg in part revg in part and remanding on other issues tcmemo_1991_144 whether the commissioner’s position was substantially justified turns on a finding of reasonableness based upon all the facts and circumstances as well as the legal precedents relating to the case 487_us_552 106_tc_76 a position is substantially justified if the position is justified to a degree that could satisfy a reasonable person pierce v underwood supra pincite the court must consider the basis for respondent's legal position and the manner in which the position was maintained 86_tc_962 deciding whether the commissioner’s position and conduct were reasonable necessarily requires considering the facts available to the commissioner at that time 94_tc_685 85_tc_927 the fact that the commissioner eventually loses or concedes a case does not establish an unreasonable position 92_tc_760 respondent's position in the notice_of_deficiency and in the answer was that the fourth dreamer had unsubstantiated expenditures which because they were not proven to be ordinary and necessary business_expenses inured to the benefit of the two shareholders of record in one of whom was petitioner petitioner claims that to have been substantially justified in his position respondent must have been able to prove that petitioner actually received benefits which were constructive dividends from the fourth dreamer - under sec_61 gross_income includes the receipt of any dividend a dividend is defined in sec_316 as any distribution_of_property made by a corporation to its shareholders there is no requirement that the dividend be formally declared or even intended by the corporation l577_f2d_1206 5th cir it is well settled that expenditures made by a corporation for the personal benefit of a shareholder are constructive distributions to the shareholder in amounts equal to the fair value of the benefits involved roy v commissioner tcmemo_1997_562 affd without published opinion 182_f3d_927 9th cir halpern v commissioner tcmemo_1982_31 the test for constructive dividends is twofold the expenses must be nondeductible to the corporation and they must represent some economic gain benefit or income to the taxpayer 725_f2d_1183 9th cir the mere fact that expenses have been disallowed as deductions to the corporation does not necessarily make the payments constructive_dividend income to the shareholder under sec_61 598_f2d_525 9th cir affg in part and revg in part tcmemo_1976_ 50_tc_409 donnelly v commissioner tcmemo_1974_226 however if this court found that it was impossible to determine whether the disallowed -- - expenses were ordinary business_expenses or constructive dividends because of the inadequacy of the record we could find that the expenses were for the benefit of the taxpayer halpern v commissioner supra donnelly v commissioner supra it is well established that taxpayers must keep permanent records sufficient to establish gross_income deductions or other matters reguired to be shown on the return sec_6001 sec_1_6001-1 income_tax regs in this case petitioner took the records of the fourth dreamer and would not give them to respondent even after respondent made requests and filed two summonses while petitioner contends that he offered to give the records to respondent the offers to provide the records were contingent on petitioner’s receiving information that respondent believed petitioner was not allowed to receive under sec_6103 a because the fourth dreamer could not substantiate the expenses as ordinary and necessary business_expenses respondent was justified in contending that the expenses were not made for business purposes donnelly v commissioner supra it was not unreasonable for respondent to determine that if the expenditures were not for business purposes then the expenditures probably inured to the benefit of the two shareholders equally respondent based that determination on the general principle that a taxpayer who fails to produce evidence within his possession has evidence which is not favorable to him 91_tc_874 6_tc_1158 affd 162_f2d_513 10th cir we find that respondent's position was substantially justified during the time petitioner failed to produce evidence to substantiate the expenditures of the fourth dreamer mills v commissioner tcmemo_1999_60 cooper v commissioner tcmemo_1999_6 with regard to the administrative costs we examine the period beginning at the time respondent issued the notice_of_deficiency to petitioner on date the relevant date in this case at that time respondent had not received any records from petitioner that would substantiate the business_expenses of the fourth dreamer and corroborate that petitioner had no constructive dividends petitioner had repeatedly refused to provide respondent with the records of the fourth dreamer since date on date petitioner began to provide the requested information we find that respondent's position throughout that period was substantially justified with respect to the litigation costs respondent filed his answer on date respondent agreed to concede the case on date petitioner contends that respondent had all the information upon which to base a concession by date and respondent's position was therefore not substantially justified whenever there is a factual determination the commissioner is not obliged to concede a case until the commissioner receives the necessary documentation which proves the taxpayer's contentions brice v commissioner tcmemo_1990_355 affd without published opinion 940_f2d_667 9th cir currie v commissioner tcmemo_1989_23 moreover after the documentation is received the commissioner is provided a reasonable period of time in which to analyze it and modify his position accordingly sokol v commissioner t c pincite here respondent first had to analyze the documentation with regard to the pending trial for the fourth dreamer respondent had the information in his possession for months and was in the process of reviewing the material with regard to the corporate return when the answer was filed in this case at that time the records were associated with the fourth dreamer audit moreover respondent requested further information relating to the constructive_dividend issue in date and did not receive that information until date only a month before respondent conceded the constructive_dividend issue and related issues respondent was entitled to a reasonable amount of time to review the documents and other information under the circumstances we find that the period of review was reasonable and that respondent's position was substantially justified during that time 854_f2d_263 7th cir concession about months after the answer was filed after the government had an opportunity to verify information held reasonable affg tcmemo_1987_52 740_f2d_843 11th cir 11-month delay in conceding case not unreasonable because respondent's position was substantially justified throughout these proceedings it is not necessary to address the remaining issues under sec_7430 therefore we shall deny petitioner's motion for administrative and litigation costs to the extent that we have not addressed all of petitioner's arguments in this voluminous record we have considered them and conclude they are without merit we note that if petitioner had given respondent the corporate books_and_records when he was initially asked for them even though he believed he should not have been excluded from the audit of the fourth dreamer he would have had fewer legal fees and no deficiency would have been determined against him to reflect the foregoing an appropriate order and decision will be entered


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division number release date date date uil dear contact person identification_number contact number employer_identification_number form required to be filed tax years this is our final_determination that you do not qualify for exemption from federal_income_tax as an organization described in internal_revenue_code sec_501 recently we sent you a letter in response to your application that proposed an adverse determination the letter explained the facts law and rationale and gave you days to file a protest since we did not receive a protest within the requisite days the proposed adverse determination is now final you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file with their instructions and do not send them to this office failure_to_file the returns timely may result in a penalty file the returns in accordance we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions follow the instructions in notice if you agree with our deletions you do not need to take any further action if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter federal_income_tax status and responsibilities please contact irs customer service at if you have any questions about your or the irs customer service number for businesses the irs customer service number for people with hearing impairments is sincerely lois g lerner director exempt_organizations enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division date date contact person uil identification_number contact number fax number employer_identification_number o e v w w_i a e w d o n d t d a d u we have considered your application_for recognition of exemption from federal_income_tax under internal_revenue_code sec_501 based on the information provided we have concluded that you do not qualify for exemption under code sec_501 the basis for our conclusion is set forth below u o f dear facts you are a non-profit corporation incorporated in state you submitted an application_for recognition of tax exempt status under sec_501 of the internal_revenue_code code and requested public charity status as a church under sec_170 of the code according to your bylaws you intend to provide christian spiritual leadership and pastoral care to individuals and fellowships in the international community of believers that visit your ministry website in furtherance of these purposes you provide free spiritual services through the website including but not limited to sermon preparation outlines and spiritual illustrations bible study prayer group and leadership training materials membership statement of faith and other church-building materials articles and fictional reading materials etc in your narrative statement you describe yourself as an online ministry according to you t hree groups of people have been identified as using your spiritual services these groups are ijndividuals who need access to a spiritual community for their own purposes i nternational individuals who need more spiritual sources in english than their local community provides and i eaders of international christian groups who lack trained christian leadership that need materials found on this website to help them to provide spiritually for their group in the form_1023 you state that you would receive funds through the sale_of_goods or services in your date‘ letter you state that your founder previously performed seminars entitled seminar your website provides an overview of the seminar according to your date2 letter the seminar focuses on self love and serves mostly as a self-help course for leading a happier life the seminar is not specifically religious but draws from religion and religious concepts you intend to provide these seminars at a rate of price1 per person additionally you state in your date1 letter that you anticipate selling future books by your founder at approximately price2 a book plus shipping and taxes currently your founder is not selling any books nor is she currently offering the seminar you state in your date2 letter that the last time your founder offered the seminar was in year you clarify in your date3 letter that the writing and sale of books and the preparing and conducting of the seminar may take up to fifty percent of your time the same letter also states that any such book or seminar would be substantially_similar to the representative samples provided in articles on your website according to your date3 letter the copyright of any books you sell or promote would remain with the author and you would get ten percent of the proceeds with the remainder going to the author you completed schedule a to the form_1023 in your attachment to schedule a you provide a statement of faith and a code of doctrine and discipline in your attachment to schedule a you state that your form of worship evident in the materials that appear on the website published by you are christian protestant and evangelical you explain that you do not have a regularly scheduled religious service rather your activities are conducted over the internet you state that you are a virtual church with materials available at all times you do not have an established place of worship rather all activities are conducted through your website you do not conduct baptisms weddings funerals or religious instruction of the young you have an invitation to membership however you urge all members of your ministry and all visitors to your website to become active members in a local church in their areas that teaches from the bible you state that anyone can become a member of this ministry while keeping their membership and staying active in their local church the certificate of formation that you filed with your state declares that you are organized for any or all lawful purposes the certificate does not contain a dissolution clause or a prohibition against inurement but in your date‘ letter you committed to making the necessary changes your board_of directors consists of three related individuals your chairman of the board is also your founder and minister one board member is the brother of the founder while the other is the daughter of the founder you expect that the board_of directors will grow and change as the website ministry becomes better known the chairman of the board will be compensated at a rate comparable to executives in organizations of similar size or fifty percent of gross revenue whichever is less the chairman is currently not compensated however due to lack of any funds and the starting salary of the chairman is currently projected at salary the other two board members are uncompensated you state that you have no connection with organizations related to your officers or directors law sec_501 of the code provides that organizations may be exempted from tax if they are organized and operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes and no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 of the income_tax regulations regulations provides that in order to be exempt under sec_501 of the code an organization must be both organized and operated exclusively for one or more of the exempt purposes specified in that section sec_1_501_c_3_-1 states an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 provides that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest to meet the requirement of this subsection the burden_of_proof is on the organization to show that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests sec_1_501_c_3_-1 example denies exemption to an art museum whose principal activity is exhibiting art created by a group of unknown but promising local artists including organizing tours of the exhibited art the artist the museum sales the art under consignment whereby the artists keep ninety percent of the proceeds providing ten percent to the museum to cover costs none of the artists exhibited were on or related to the board_of trustees that determined who was shown the organization is denied exemption since a substantial purpose of the museum is to advance the private interests of the artists shown all of the art exhibited is offered for sale at prices set by sec_1_501_c_3_-1 example denies exemption due to substantial private benefit to an organization that is operated primarily to educate others using a program developed by its founder the organization pays a for profit organization owned by the found for the rights to use the program the program was previously used to educate others on a for profit basis under the for profit organization revrul_56_262 1956_1_cb_131 provides that an organization qualifies as a church only if its principal purpose or function is that of a church an organization whose activities include the conducting of religious services and or the ministration to the sick or mentally retarded may have characteristics of a church and a hospital and an educational_institution but where the principal purpose or function of such an organization is not that of a church or association of churches or an educational_organization or a hospital it will not qualify under any of the classes of organizations set forth in sec_170 ii or iii revrul_61_170 1961_2_cb_112 provides than an organization is operated for a private rather than public benefit in part because the organization had no public participation in management this ruling is distinguished from revrul_55_656 1955_1_cb_262 765_f2d_1387 cir affg 48_tcm_471 the tax_court found it unnecessary to consider the reasonableness of payments made by the applicant to a business owned by its officers the 9th circuit_court of appeals in affirming the tax court's decision stated the critical inquiry is not whether particular contractual payments to a related for-profit organization are reasonable or excessive but instead whether the entire enterprise is carried on in such a manner that the for-profit organization benefits substantially from the operation of the church in this case the executives of the church were also the executives and owners of a for profit publishing company that exclusively published and sold items from the chruch the publishing company and the executives made profits from selling the works of the church the publishing company was deemed to receive a substantial benefit from the efforts of the church since all of its profits derived from selling products of the church in 490_fsupp_304 d d c aff'd in an unpublished opinion d c cir the court upheld the irs’s determination that a nonprofit corporation failed to qualify as a church for purposes of exemption under sec_501 faced with the difficult task of determining whether or not religious organizations are in fact churches the court explained the irs has developed fourteen criteria which it applies on an ad hoc basis to individual organizations that is in applying the analysis to determine whether a religious_organization may properly be characterized as a church the service considers whether the organization has the following characteristics a distinct legal existence a recognized creed and form of worship a definite and distinct ecclesiastical government a formal code of doctrine and discipline a distinct religious history a membership not associated with any other church or denomination an organization of ordained ministers ordained ministers selected after completing prescribed studies a literature of its own established places of worship regular congregations regular religious services schools_for the religious instruction of the young schools_for the preparation of its ministers the court added that no single factor is controlling in making this determination although some are relatively minor’ in importance while others are of central importance including the existence of an established congregation served by an organized ministry the religious education of the young the dissemination of a doctrinal code and the provision of regular religious services at a minimum the court concluded a church includes a body of believers or communicants that assembles regularly in order to worship in foundation of human understanding v u s fed ci fed cl aff'd f 3d ee fed cir the court stated that the associational test is a threshold standard that a religious_organization must satisfy in order to obtain church status the court went on to determine the extent to which foundation brings people together to worship is incidental to its main function which consists of a dissemination of its religious message through radio and internet broadcasts coupled with written publications when bringing people together for worship is only an incidental part of the activities of a religious_organization those limited activities are insufficient to label the entire organization a church 48_tc_358 held that an organization of dentist missionaries formed to spread the gospel and improve dental care in foreign countries was a not a church where the organization was not affiliated with any church drew its members from various christian denominations and did not attempt to promote membership in any particular christian denomination a concurring opinion notes that the organization failed to bring people together as the principal means of accomplishing its religious purpose 71_tc_1067 the tax_court held that compensation need not be unreasonable or exceed fair_market_value to be private benefit stating njor can we agree with petitioner that the critical inquiry is whether the payments made to international were reasonable or excessive regardless of whether the payments made by petitioner to international were excessive international and est inc benefited substantially from the operation of petitioner in 74_tc_531 affd 670_f2d_104 9th cir the tax_court explained that an organization that is closely-controlled by related individuals must clearly demonstrate that private interests will not be served and that net_earnings will not inure to the benefit of insiders given the control_over the petitioner organization by related individuals the court could not conclude from the information in the administrative record that part of the net_earnings did not inure to the benefit of the controlling family or stated another way that petitioner was not operated for the family’s private benefit in reaching this conclusion the court noted that the situation calls for open and candid disclosure of all facts bearing upon petitioner's organization operations and finances so that the court should it uphold the claimed exemption can be assured that it is not sanctioning an abuse of the revenue laws if such disclosure is not made the logical inference is that the facts if disclosed would show that petitioner fails to meet the requirements of sec_501 t c pincite in the 86_tc_916 an organization with only two members that pursued a policy discouraging membership was held to not be a church since it failed to serve any associational role for purposes of worship first church of in theo v commissioner 56_tcm_1045 held that an organization was not a church where its principal activity was publishing religious literature and it had no plans for membership although it conducted some religious services the organization did not have a formal creed other than the bible and a belief that god dwells in all people no sacerdotal functions no membership unassociated with other churches no regular congregations or services no established place of worship no organized ministry for ministering to the congregation and no youth instruction an exempt religious_organization it was uncontested however that petitioner was analysis organizations may be exempted from tax if they are organized and operated exclusively for religious among other purposes sec_501 an organization is considered organized for exempt purposes if its articles of incorporation limit its purposes to one or more exempt purposes and dedicates the assets to an exempt_purpose upon the dissolution of the organization sec_1_501_c_3_-1 b statement in your certificate therefore you are not currently organized for an exempt_purpose however you have committed to adding the necessary language in this case you have not included either more importantly you have not demonstrated that you are exclusively operated for an exempt_purpose see sec_1_501_c_3_-1 while some of your activities are educational and religious you also have a significant non-exempt purpose of promoting the works of your founder you anticipate conducting seminars previously offered by your founder and selling books that may be created by your founder your founder previously sold her seminar and books for profit through her personal website the regulations clearly regard transfers of for-profit activity to an exempt_organization as indicative of private benefit the regulations contain two examples of organizations denied exempt status because the organizations provided similar support for a founder's private activity sec_1_501_c_3_-1 example sec_2 and you have said that up to of your president's time which you expect to compensate could be spent on writing books and seminar materials you have represented that you will not acquire copyrights to the books or seminars that you plan to market and produce rather your founder or other authors will retain the rights to books and materials that you will promote and sell on your website you anticipate that they will direct ten percent of the proceeds to you thus you will pay to produce and promote material from which your founder and other authors will primarily benefit a similar retention of copyrights by artists when an organization sold their work is described as private benefit in another example in the regulations sec_1_501_c_3_-1 example we need not determine whether the proceeds from books and seminar sales are reasonable or above fair_market_value the critical inquiry is not whether particular contractual payments to a related for-profit organization are reasonable or excessive but instead whether the entire enterprise is carried on in such a manner that the for-profit organization benefits substantially church by mail f 2d pincite compensation need not be unreasonable or exceed fair_market_value to be private benefit control an organization deserve special scrutiny you will be the primary advertiser and purveyor of your founder's books and seminars thus as in church by mail and est_ of hawaii you are creating substantially_all of the market for the founder's products both cases deemed this benefit to be substantial for the private interests involved 71_tc_1067 benefits directed to those who while an organization may have an insubstantial non-exempt purpose a substantial non- exempt_purpose will prevent recognition for exemption regardless of the other exempt purposes sec_1_501_c_3_-1 furthermore sec_1_501_c_3_-1 provides that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest you anticipate that creating and promoting your founder’s book and seminar activities may take up to fifty percent of your staff time which is certainly a substantial part of your activities therefore we cannot find that you are organized exclusively for an exempt_purpose a community based board_of people with no financial interests in the entity can help prevent it from operating for private rather than public benefit see eg revrul_61_170 supra see also bubbling well church t c pincite however your board_of directors is small and closely related by family ties as your founder her brother and her daughter are the sole directors while this factor alone is not enough to deny exemption bubbling well church t c pincite combined with the private benefit demonstrated above it creates greater cause to believe that you are operated for private rather than public interests church status you have also requested public charity status as a church under sec_170 but even if exemption were recognized you would not qualify as a church religious purposes alone are not enough to establish an organization as a church church of eternal life t c pincite test which was upheld in 490_fsupp_304 the characteristics reviewed in making the determination of whether a religious_organization is a church are in determining whether a taxpayer qualifies as a church the irs applies a fourteen part - a distinct legal existence a recognized creed and form of worship a definite and distinct ecclesiastical government a formal code of doctrine and discipline a distinct religious history a membership not associated with any other church or denomination an organization of ordained ministers ordained ministers selected after completing prescribed studies a literature of its own established places of worship regular congregations regular religious services schools_for the religious instruction of the young schools_for the preparation of its ministers in reviewing these characteristics no single factor is controlling although some are relatively minor’ in importance while others are of central importance id pincite a church's principal means of accomplishing its religious purposes must be to assemble regularly a group of individuals related by common worship and faith church of eternal life t c at924 ata minimum a church includes a body of believers or communicants that assembles regularly in order to worship american guidance foundation f_supp pincite see also church of eternal life t c pincite chapman t c pincite tannenwald j concurring you lack the most important associational characteristics of a church as well as most of the other factors deemed important to church identity a website on the internet does not qualify as a place of worship nor do individuals accessing that website constitute a congregation assembled to worship foundation of human understanding f 3d pincite additionally you do not ordain ministers do not have regular congregations or services do not have schools_for religious instruction and do not perform any sacraments such as weddings baptisms or funerals also you encourage members to maintain membership in other churches and be baptized by other ministers therefore although your purposes and activities would be religious we cannot recognize you as a church for the purposes of public charity status conclusion you do not qualify as a church or as an exempt_organization your certificate of formation does not currently meet the organizational_test you also do not meet the operational_test because your sale of books and seminars created by and profiting your founder combined with your small related board lead to the conclusion that you are operated for private rather than public benefit you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if the information affects our determination your protest statement should be accompanied by the following declaration under penalties of perjury declare that have examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all the relevant facts and such facts are true correct and complete you also have a right to request a conference to discuss your protest this request should be made when you file your protest statement an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you want representation during the conference procedures you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications for more information about representation see publication practice_before_the_irs if you if you do not file a protest within days you will not be able to file a suit for declaratory_judgment in court because the internal_revenue_service irs will consider the failure to protest as a failure to exhaust available administrative remedies code sec_7428 provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted all of the administrative remedies available to it within the irs if if you do not intend to protest this determination you do not need to take any further action we do not hear from you within days we will issue a final adverse determination_letter that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 and any supporting documents to this address internal_revenue_service te_ge constitution ave n w washington dc you may also fax your statement using the fax number shown in the heading of this letter you fax your statement please call the person identified in the heading of this letter to confirm that he or she received your fax if if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely lois g lerner director exempt_organizations


t c memo united_states tax_court franklin and janetta hubbart petitioners v commissioner of internal revenue respondent docket no 18722-04l filed date jaret r coles and terri a merriam for petitioners gregory m hahn and thomas n tomashek for respondent memorandum findings_of_fact and opinion haines judge petitioners filed a petition with this court in response to a notice_of_determination concerning collection actions under sec_6320 notice_of_determination for through pursuant to sec_6330 petitioners seek unless otherwise indicated all section references are to continued review of respondent’s determination the issue for decision is whether respondent abused his discretion in sustaining the proposed collection action findings_of_fact some of the facts have been stipulated and are so found the first second third fourth and fifth stipulations of fact and the attached exhibits are incorporated herein by this reference continued the internal_revenue_code as amended and all rule references are to the tax_court rules_of_practice and procedure amounts are rounded to the nearest dollar petitioners also dispute respondent’s determination that they are liable for the increased rate of interest on tax- motivated transactions under sec_6621 i r c as to this dispute the parties filed a stipulation to be bound by the court’s determination in ertz v commissioner tcmemo_2007_15 which involves a similar issue respondent reserved relevancy objections to many of the exhibits attached to the stipulations of fact fed r evid provides the general_rule that all relevant evidence is admissible while evidence which is not relevant is not admissible fed r evid defines relevant evidence as evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence while the relevance of some exhibits is certainly limited we find that the exhibits meet the threshold definition of relevant evidence and are admissible the court will give the exhibits only such consideration as is warranted by their pertinence to the court’s analysis of petitioners’ case respondent also objected to many of the exhibits on the basis of hearsay even if we were to receive those exhibits into evidence they would have no impact on our findings_of_fact or on the outcome of this case petitioners resided in valley springs california when they filed their petition petitioners have been married for years at the time of trial petitioner franklin hubbart mr hubbart wa sec_66 years old and petitioner janetta hubbart mrs hubbart wa sec_64 mr hubbart retired in and mrs hubbart retired in in petitioners became partners in shorthorn genetic engineering ltd sge a cattle breeding partnership organized and operated by walter j hoyt iii hoyt from about through hoyt organized promoted and operated more than cattle breeding partnerships hoyt also organized promoted and operated sheep breeding partnerships from to his subsequent removal by the tax_court in through hoyt was the tax_matters_partner of each hoyt partnership from approximately through hoyt was a licensed enrolled_agent and as such he represented many of the hoyt partners before the internal_revenue_service irs in petitioners were also partners in another hoyt-related partnership identified as hoyt and sons trucking hs truck the details of hs truck are not in the record though unclear it appears that all adjustments made to petitioners’ income_tax_liability for the years in issue arose from their involvement in sge only hoyt’s enrolled_agent status was revoked hoyt was convicted of various criminal charges in beginning in until at least petitioners claimed losses and credits on their federal_income_tax returns arising from their involvement in the hoyt partnerships petitioners also carried back unused investment credits to and as a result of these losses and credits petitioners reported overpayments of tax for through and received refunds in the amounts claimed petitioners ask the court to take judicial_notice of certain facts in other hoyt-related cases and apply judicial estoppel to facts respondent has asserted in previous hoyt- related litigation we do neither a judicially noticeable fact is one not subject_to reasonable dispute in that it is either generally known within the territorial jurisdiction of the trial_court or capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned fed r evid b petitioners are not asking the court to take judicial_notice of facts that are not subject_to reasonable dispute instead petitioners are asking the court to take judicial_notice of the truth of assertions made by taxpayers and the commissioner in other hoyt-related cases such assertions are not the proper subject of judicial_notice the doctrine_of judicial estoppel prevents a party from asserting in a legal proceeding a claim that is inconsistent with a position successfully taken by that party in a previous proceeding new 532_us_742 among the requirements for judicial estoppel to be invoked a party’s current litigating position must be clearly inconsistent with a prior litigating position id pincite petitioners have failed to identify any clear inconsistencies between respondent’s current position and his position in any previous litigation respondent issued notices of final partnership administrative adjustments fpaas to sge for its through taxable years after completion of the partnership-level proceedings respondent sent petitioners a form 4549a-cg income_tax examination changes reflecting changes made for petitioners’ through tax years respondent determined deficiencies in petitioners’ income_tax of dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure respectively on date respondent issued petitioners a notice_of_federal_tax_lien and your right to a hearing under sec_6320 notice of lien the notice of lien informed petitioners that a federal_tax_lien had been filed to secure payment of their outstanding tax_liabilities for through on date petitioners submitted a form request for a collection_due_process_hearing petitioners argued that the federal_tax_lien was inappropriate and caused them financial hardship on date petitioners’ case was assigned to settlement officer linda cochran ms cochran ms cochran scheduled petitioners’ sec_6330 hearing for date during the hearing petitioners’ representative terri a merriam ms merriam requested additional time to submit information the fpaas and other information specific to sge 84-3’s partnership-level proceedings are not in the record while ms cochran normally required documents to be submitted before the sec_6330 hearing she extended petitioner’s deadline for producing information to date on date petitioners submitted to ms cochran a form_656 offer_in_compromise a form 433-a collection information statement for wage earners and self-employed individuals one letter explaining the offer amount and other payment considerations and three letters setting out in detail petitioners’ position regarding the offer-in-compromise petitioners’ letters included several exhibits the form_656 indicated that petitioners were seeking an offer-in-compromise based alternatively on doubt as to collectibility with special circumstances or effective tax_administration petitioners offered to pay dollar_figure to compromise their outstanding tax_liability for through at the time of the sec_6330 hearing dollar_figure had been assessed against petitioners with respect to their through tax years on the form 433-a petitioners listed the following assets asset checking accounts savings accounts life_insurance ford f350 nissan maxima 5th wheel camper boat trailer house total current balance value dollar_figure big_number big_number -0- big_number big_number big_number loan balance n a n a dollar_figure big_number -0- -0- -0- -0- big_number the reported value of the life_insurance reflected its then- current cash_value the reported value of the house reflected both the value of the land dollar_figure and the value of the house dollar_figure petitioners reported gross monthly income of dollar_figure representing mr hubbart’s pension social_security income of dollar_figure and mrs hubbart’s pension social_security income of dollar_figure petitioners also reported the following monthly living_expenses expense item food clothing misc housing and utilities transportation health care taxes income and fica court ordered payments life_insurance other expenses total monthly expense dollar_figure big_number big_number big_number big_number the transportation expense included the cost of gas to and from mr hubbart’s medical treatments described below the court- ordered payments represented an installment_agreement with the state of california franchise tax board to resolve petitioners’ outstanding state tax_liabilities the other expenses represented attorney’s fees petitioners paid to ms merriam’s law firm in connection with the present litigation in the letter explaining the offer amount petitioners stated that they were offering to pay dollar_figure for all hoyt-related years through to be paid in ninety days from the acceptance of the offer we have attached an estimate of the tax due it does not include any penalties including the tax_motivated_transaction interest penalty or failure to pay penalty the letter also included medical and retirement considerations and a retirement analysis petitioners’ medical and retirement considerations included petitioners were retired mrs hubbart had a history of ulcerative colitis and has to have a colonoscopy each year for which she has to pay dollar_figure and mr hubbart suffered from heart problems had an angioplasty and an angiogram during required sessions of a treatment called external counterpulsion system beginning april and ending date and would likely require heart bypass surgery in the future the retirement analysis outlined the likelihood of increased housing and medical costs as petitioners age in the remaining three letters petitioners alleged that they were victims of hoyt’s fraud and asserted various arguments regarding the appropriateness of an offer-in-compromise on date petitioners submitted another letter to ms cochran which included exhibits not provided with the date letters on date respondent issued petitioners a notice_of_determination in evaluating petitioners’ offer-in- compromise respondent made the following changes to the values of assets reported by petitioners on the form 433-a determined that the house was worth dollar_figure instead of dollar_figure based on the value assigned to the property by the calaveras county assessor’s office in included the quick-sale value of the nissan maxima of dollar_figure instead of the fair_market_value petitioners reported included the quick-sale value of the boat and carrier of dollar_figure instead of the fair_market_value petitioners reported and estimated that the quick-sale value of the fifth wheel camper was dollar_figure respondent did not include the value of the life_insurance or the ford f350 because the loans on the items exceeded their value respondent concluded that petitioners had a total net realizable equity of dollar_figure respondent accepted petitioners’ reported gross monthly income of dollar_figure respondent made the following adjustments to petitioners’ monthly expenses reduced the housing and utilities expense from dollar_figure to dollar_figure to reflect the actual documented costs reduced the transportation expense from dollar_figure to dollar_figure because mr hubbart’s medical treatments were completed by the time of the sec_6330 hearing and thus an additional allowance for gas was not needed reduced medical_expenses from dollar_figure to dollar_figure to reflect actual documented out-of- pocket expenses and allowed the payments to the state of california franchise tax board only through date because petitioners estimated that their state tax_liability would be paid_by that time regarding the possible future increases in expenses outlined in petitioners’ date letters respondent determined that these were general projections from the taxpayers’ representative and may never in fact be incurred and thus did not take them into account after making adjustments to petitioners’ monthly expenses respondent determined that dollar_figure was collectible from petitioners’ future income because petitioners’ state tax debt would be satisfied by date respondent determined that there was an amount collectible from retired debt over the period remaining on the collection statute of dollar_figure respondent concluded that petitioners had a reasonable collection potential of dollar_figure because petitioners had the ability to pay substantially more than the amount offered respondent rejected their offer-in- compromise based on doubt as to collectibility with special circumstances respondent also rejected their effective tax_administration offer-in-compromise based on economic hardship because they had the ability to pay their tax_liability in full finally respondent rejected their effective tax_administration offer-in-compromise based on public policy or equity ground because the case fails to meet the criteria for such consideration respondent concluded that petitioners did not offer an acceptable collection alternative that all requirements of law and administrative procedure had been met and that the federal_tax_lien represented the most efficient means to protect the respondent determined that petitioners had monthly disposable income of dollar_figure and multiplied this by the number of months remaining on the collection statute government’s interest in petitioners’ assets until their outstanding tax_liabilities are satisfied in response to the notice_of_determination petitioners filed a petition with this court on date opinion sec_7122 provides that the secretary may compromise any civil case arising under the internal revenue laws whether to accept an offer-in-compromise is left to the secretary’s discretion 447_f3d_706 9th cir affg tcmemo_2004_13 sec_301_7122-1 proced admin regs the regulations under sec_7122 set forth three grounds for the compromise of a tax_liability doubt as to liability doubt as to collectibility or promotion of effective tax_administration sec_301_7122-1 proced admin regs doubt as to liability is not at issue in this case the secretary may compromise a tax_liability based on doubt as to collectibility where the taxpayer’s assets and income are less than the full amount of the assessed liability sec_301_7122-1 proced admin regs generally under the commissioner’s administrative pronouncements an offer-in- while petitioners disputed their liability for sec_6621 interest see supra note they did not raise doubt as to liability as a grounds for compromise compromise based on doubt as to collectibility will be acceptable only if it reflects the taxpayer’s reasonable collection potential revproc_2003_71 sec_4 2003_2_cb_517 in some cases the commissioner will accept an offer of less than the reasonable collection potential if there are special circumstances id special circumstances are circumstances demonstrating that the taxpayer would suffer economic hardship if the irs were to collect from him an amount equal to the reasonable collection potential or circumstances justifying acceptance of an amount less than the reasonable collection potential of the case based on public policy or equity considerations see internal_revenue_manual irm sec_5 however in accordance with the commissioner’s guidelines an offer-in-compromise based on doubt as to collectibility with special circumstances should not be accepted even when economic hardship or considerations of public policy or equity circumstances are identified if the taxpayer does not offer an acceptable amount see irm sec_5 and the secretary may also compromise a tax_liability on the ground of effective tax_administration when collection of the full liability will create economic hardship or exceptional circumstances exist such that collection of the full liability would undermine public confidence that the tax laws are being administered in a fair and equitable manner and compromise of the liability would not undermine compliance by taxpayers with the tax laws sec_301_7122-1 proced admin regs petitioners proposed an offer-in-compromise based alternatively on doubt as to collectibility with special circumstances or effective tax_administration petitioners offered to pay dollar_figure to compromise their outstanding tax_liability for through which totaled dollar_figure at the time of the sec_6330 hearing petitioners argued that collection of the full liability would create economic hardship and would undermine public confidence that the tax laws are being administered in a fair and equitable manner respondent determined that petitioners’ reasonable collection potential was dollar_figure and that their offer-in-compromise did not meet the criteria for an offer-in-compromise based on either doubt as to collectibility with special circumstances or effective tax_administration the federal_tax_lien was filed to secure repayment of petitioners’ outstanding tax_liability for only petitioners estimated that their outstanding tax_liability for was dollar_figure however petitioners sought to compromise their outstanding tax_liability for not only but also for to accurately compare their offer amount to their outstanding tax_liability we must therefore consider the total assessed amount for and not for only because the underlying tax_liability is not at issue our review under sec_6330 is for abuse_of_discretion see 114_tc_604 114_tc_176 this standard does not ask us to decide whether in our own opinion petitioners’ offer-in- compromise should have been accepted but whether respondent’s rejection of the offer-in-compromise was arbitrary capricious or without sound basis in fact or law 112_tc_19 keller v commissioner tcmemo_2006_ fowler v commissioner tcmemo_2004_163 because the same factors are taken into account in evaluating offers-in- compromise based on doubt as to collectibility with special circumstances and on effective tax_administration economic hardship or considerations of public policy or equity we consider petitioners’ separate grounds for their offer-in- compromise together see 125_tc_301 ndollar_figure affd 469_f3d_27 1st cir barnes v commissioner tcmemo_2006_150 a economic hardship petitioners assert that ms cochran abused her discretion by rejecting their offer-in-compromise because there is no indication that so cochran gave any substantive consideration to petitioners’ demonstrated special circumstances or that they would experience a hardship if required to make a full-payment in support of this assertion petitioners argue ms cochran failed to discuss petitioners’ special circumstances in the notice_of_determination and ms cochran erroneously determined petitioners’ future income improperly valued petitioners’ assets and failed to take into account their future expenses sec_301_6343-1 proced admin regs states that economic hardship occurs when a taxpayer is unable to pay his or her reasonable basic living_expenses sec_301 c proced admin regs sets forth factors to consider in evaluating whether collection of a tax_liability would cause economic hardship as well as some examples one of the examples involves a taxpayer who provides fulltime care to a dependent_child with a serious long-term illness a second example involves a taxpayer who would lack adequate means to pay his basic living_expenses were his only asset to be liquidated a third example involves a disabled taxpayer who has a fixed income and a modest home specially equipped to accommodate his disability and who is unable to borrow against his home because of his disability see sec_301_7122-1 examples and proced admin regs none of these examples bears any resemblance to this case but instead they describe more dire circumstances 454_f3d_782 8th cir affg 124_tc_165 see also barnes v commissioner supra nevertheless we address petitioners’ arguments discussion of special circumstances in the notice_of_determination petitioners argue that ms cochran failed to follow proper procedure by discussing petitioners’ special circumstances what equity was considered in relation to their special circumstances and how the special circumstances affected her determination of their ability to pay petitioners infer that because the special circumstances were not discussed in detail in the notice_of_determination ms cochran failed to adequately take their circumstances into consideration we do not believe that appeals must specifically list in the notice_of_determination every single fact that it considered in arriving at the determination see barnes v commissioner supra this is especially true in a case such as this where petitioners provided ms cochran with multiple letters and hundreds of pages of exhibits as discussed below ms cochran considered all of the arguments and information presented to her given the amount of information it would be unreasonable to put the burden on ms cochran to specifically address in the notice_of_determination every single asserted fact circumstance and argument presented the fact that all of the information was not specifically addressed in the notice_of_determination was not an abuse_of_discretion petitioners’ income assets and future expenses petitioners assert that ms cochran erroneously determined their reasonable collection potential by considering months of petitioners’ future income instead of months failing to adequately consider their age health retirement status medical costs and the likelihood of future increases in medical and housing costs and improperly valuing petitioners’ house petitioners’ arguments are not persuasive sec_5 of the irm provides that when a taxpayer makes a cash offer to compromise an outstanding tax_liability only months of future income should be considered petitioners made a cash offer but ms cochran used months of future income at trial ms cochran acknowledged that she should have used only months of future income ms cochran recomputed petitioners’ reasonable collection potential using months and determined that it was dollar_figure instead of dollar_figure as reflected in the notice_of_determination ms cochran testified that the change would not have had an effect on her final_determination because using either calculation petitioners’ reasonable collection potential was greater than their offer amount dollar_figure we find that ms cochran’s error did not amount to an abuse_of_discretion because even when the error is corrected petitioners’ reasonable collection potential of dollar_figure far exceeds their offer amount of dollar_figure with regard to age health and retirement status petitioners’ argument is not supported by the record in the information submitted to ms cochran petitioners represented that they were retired and due to their medical conditions could not obtain employment ms cochran did not dispute this in calculating petitioners’ reasonable collection potential she used only their reported pension income ms cochran allowed only dollar_figure of petitioners’ reported monthly medical_expenses of dollar_figure as reflected in the notice_of_determination the allowable medical_expenses were based on documentation for out-of-pocket expenses provided by petitioners and reflect costs for date through date months the petitioners’ expenses totaled dollar_figure which divided by months equals dollar_figure while petitioners dispute the reduction of their allowable medical_expenses they have not disputed the accuracy of ms cochran’s determination that petitioners’ actual documented monthly medical_expenses were only dollar_figure given her inclusion of pension income as the only source of future income and her acceptance of petitioners’ documented medical_expenses we reject petitioners’ assertion that ms cochran failed to consider their age health retirement status and current medical costs petitioners’ argument is also unavailing with regard to the likelihood of future increases in medical and housing costs petitioners did not inform ms cochran with any specificity that they would have to pay a greater amount of unreimbursed medical_expenses in the future or that their housing_expenses would increase instead they made general assertions about the increase of medical costs as people age and about the need for some seniors to seek in-home care or nursing home care or to make their houses handicapped accessible as reflected in the notice_of_determination ms cochran took into consideration the information petitioners presented but concluded that these possible future expenses are general projections from the taxpayers’ representative and may never in fact be incurred the present offer therefore must be considered within the framework of present facts given the information presented to her it was not arbitrary or capricious for ms cochran to ignore these speculative future costs in making her final_determination petitioners dispute ms cochran’s determination that their house was worth dollar_figure instead of dollar_figure they argue that if ms cochran did not agree with their reported value she should have hired a professional valuation expert instead of making her own determination ms cochran did not arbitrarily assign a value to petitioners’ house but instead used the value determined by the calaveras county assessor’s office in we find that ms cochran’s use of the county assessor’s valuation was not arbitrary or capricious petitioners raise various other challenges and arguments including ms cochran abused her discretion by taking into consideration only future decreases in expenses and not future increases ms cochran improperly disallowed petitioners’ actual housing and utility expenses and ms cochran improperly disallowed petitioners’ actual transportation_expenses we need not discuss in detail these and other minor disputes raised by petitioners even assuming arguendo that petitioners’ income expenses and value of assets should have been accepted as reported we would not find that ms cochran abused her discretion in rejecting petitioners’ offer-in- compromise ms cochran testified that had she accepted the income expenses and value of assets as reported petitioners’ reasonable collection potential would have been dollar_figure petitioners offered to pay only dollar_figure to compromise their outstanding tax_liability in some situations respondent may accept an offer amount of less than petitioners’ reasonable collection potential however given all other considerations discussed herein we do not believe that ms cochran abused her discretion by rejecting an offer-in-compromise that bore no relationship to petitioners’ ability to pay based on their own calculations encouraging voluntary compliance with the tax laws we are also mindful that any decision by ms cochran to accept petitioners’ offer-in-compromise due to doubt as to collectibility with special circumstances or effective tax_administration based on economic hardship must be viewed against the backdrop of sec_301_7122-1 proced admin regsdollar_figure see barnes v commissioner tcmemo_2006_150 that section requires that ms cochran deny petitioners’ offer-in- compromise if its acceptance would undermine voluntary compliance with tax laws by taxpayers in general thus even if we were to assume arguendo that petitioners would suffer economic hardship a finding that we decline to make we would not find that ms cochran’s rejection of petitioners’ offer-in-compromise was an abuse_of_discretion as discussed below in our discussion of petitioners’ equitable facts argument we conclude that the prospect that acceptance of an offer-in-compromise will undermine compliance with the tax laws militates against its acceptance whether the offer-in-compromise is predicated on promotion of effective tax_administration or on doubt as to collectibility with special circumstances see revproc_2003_71 2003_2_cb_517 irm sec_5 see also barnes v commissioner tcmemo_2006_150 acceptance of petitioners’ offer-in-compromise would undermine voluntary compliance with tax laws by taxpayers in general b public policy and equity considerations petitioners assert that there are so many unique and equitable facts in this case that this case is an exceptional circumstance and respondent abused his discretion by not accepting those facts as grounds for an offer-in-compromise in support of their assertion petitioners argue the longstanding nature of this case justifies acceptance of the offer-in-compromise respondent’s reliance on an example in the irm was improper and respondent failed to consider petitioners’ other equitable facts longstanding case petitioners assert that the legislative_history requires respondent to resolve longstanding cases by forgiving penalties and interest which would otherwise apply petitioners argue that because this is a longstanding case respondent abused his discretion by failing to accept their offer-in-compromise petitioners’ argument is essentially the same considered and rejected by the court_of_appeals for the ninth circuit in fargo v commissioner f 3d pincite see also keller v commissioner tcmemo_2006_166 barnes v commissioner supra we reject petitioners’ argument for the same reasons stated by the court_of_appeals we add that petitioners’ counsel participated in the appeal in fargo as counsel for the amici on brief petitioners suggests that the court_of_appeals knowingly wrote its opinion in fargo in such a way as to distinguish that case from the cases of counsel’s similarly situated clients eg petitioners and to otherwise allow those clients’ liabilities for penalties and interest to be forgiven we do not read the opinion of the court_of_appeals in fargo to support that conclusion see keller v commissioner supra barnes v commissioner supra respondent’s rejection of petitioners’ longstanding case argument was not arbitrary or capricious the irm example petitioners argue that respondent erred when he determined that they were not entitled to relief based on the second example in irm sec_5 petitioners assert that many of the facts in this case were not present in the example and therefore any reliance on the example was misplaced petitioners’ argument is not persuasive irm sec_5 discusses effective tax_administration offers-in-compromise based on equity and public policy grounds and states in the second example in the taxpayer invested in a nationally marketed partnership which promised the taxpayer tax benefits far exceeding the amount of the investment immediately upon investing the taxpayer claimed investment tax_credits that significantly reduced or eliminated the tax_liabilities for the years through in the irs opened an audit of the partnership under the provisions of the tax equity and fiscal responsibility act of tefra after issuance of the final_partnership_administrative_adjustment fpaa but prior to any proceedings in tax_court the irs made a global_settlement offer in which it offered to concede a substantial portion of the interest and penalties that could be expected to be assessed if the irs’s determinations were upheld by the court the taxpayer rejected the settlement offer after several years of litigation the partnership level proceeding eventually ended in tax_court decisions upholding the vast majority of the deficiencies asserted in the fpaa on the grounds that the partnership’s activities lacked economic_substance the taxpayer has now offered to compromise all the penalties and interest on terms more favorable than those contained in the prior settlement offer arguing that tefra is unfair and that the liabilities accrued in large part due to the actions of the tax_matters_partner tmp during the audit and litigation neither the operation of the tefra rules nor the tmp’s actions on behalf of the taxpayer provide grounds to compromise under the equity provision of paragraph b i b of this section compromise on those grounds would undermine the purpose of both the penalty and interest provisions at issue and the consistent settlement principles of tefra administration internal_revenue_manual cch sec_5 at big_number ms cochran testified that i determined that this example was very similar and on point with petitioners’ case these were similar years that petitioners were associated with this had to do with a tefra proceeding with an fpaa issued with a settlement offer proposed by irs and subsequently rejected subsequent litigation petitioners now offered to compromise all penalties and interest than those contained in the original settlement offer it involved issues relative to the tmp’s actions and those seemed to be issues--all of the details of the settlement offer are not in the record those were issues that in fact were being raised wholly or in part in this case we agree with ms cochran that the example presents circumstances similar to those in petitioners’ case petitioners are correct in asserting that not all of the facts in their case are present in the example however it is unreasonable to expect that facts in an example be identical to facts of a particular case before the example can be relied upon the irm example was only one of many factors respondent considered given the similarities to petitioners’ case respondent’s reliance on that example was not arbitrary or capricious petitioners’ other equitable facts petitioners argue that respondent abused his discretion by failing to consider the other equitable facts of this case petitioners’ equitable facts include reference to petitioners’ reliance on bales v commissioner tcmemo_1989_ petitioners’ reliance on hoyt’s enrolled_agent status bales v commissioner tcmemo_1989_568 involved deficiencies determined against various investors in several hoyt partnerships this court found in favor of the investors on several issues stating that the transaction in issue should be respected for federal_income_tax purposes taxpayers in many hoyt-related cases have used bales as the basis for a reasonable_cause defense to accuracy-related_penalties this argument has been uniformly rejected by this court and by the courts of appeals for the sixth ninth and tenth circuits see eg 471_f3d_1021 9th cir affg tcmemo_2004_269 440_f3d_375 continued hoyt’s criminal conviction hoyt’s fraud on petitioners and other letters and cases the basic thrust of petitioners’ argument is that they were defrauded by hoyt and that if they were held responsible for penalties and interest incurred as a result of their investment in a tax_shelter it would be inequitable and against public policy petitioners’ argument is not persuasive while the regulations do not set forth a specific standard for evaluating an offer-in-compromise based on claims of public policy or equity the regulations contain two examples see sec_301_7122-1 examples and proced admin regs the first example describes a taxpayer who is seriously ill and unable to file income_tax returns for several years the second example describes a taxpayer who received erroneous advice from the commissioner as to the tax effect of the taxpayer’s actions neither example bears any resemblance to this case unlike the exceptional circumstances exemplified in the regulations petitioners’ situation is neither unique nor exceptional in that his situation mirrors those of numerous other taxpayers who claimed tax_shelter deductions in the 1980s and continued 6th cir affg tcmemo_2004_279 439_f3d_1243 10th cir affg tcmemo_2004_275 1990s see keller v commissioner tcmemo_2006_166 barnes v commissioner tcmemo_2006_150 of course the examples in the regulations are not meant to be exhaustive and petitioners have a more sympathetic case than the taxpayers in fargo v commissioner f 3d pincite for whom the court_of_appeals for the ninth circuit noted that no evidence was presented to suggest that taxpayers were the subject of fraud or deception such considerations however have not kept this court from finding investors in the hoyt tax_shelters to be liable for penalties and interest nor have they prevented the courts of appeals for the sixth ninth and tenth circuits from affirming our decisions to that effect see 471_f3d_1021 9th cir affg tcmemo_2004_269 440_f3d_375 6th cir affg tcmemo_2004_279 439_f3d_1243 10th cir affg tcmemo_2004_275 ms cochran testified that she considered all of ms merriam’s and petitioners’ assertions including the numerous letters and exhibits nevertheless ms cochran determined that petitioners did not qualify for an offer-in-compromise the mere fact that petitioners’ equitable facts did not persuade respondent to accept their offer-in-compromise does not mean that those assertions were not considered the notice_of_determination and ms cochran’s testimony demonstrate respondent’s clear understanding and careful consideration of the facts and circumstances of petitioners’ case we find that respondent’s determination that the equitable facts did not justify acceptance of petitioners’ offer-in-compromise was not arbitrary or capricious and thus it was not an abuse_of_discretion we also find that compromising petitioners’ case on grounds of public policy or equity would not enhance voluntary compliance by other taxpayers a compromise on that basis would place the government in the unenviable role of an insurer against poor business decisions by taxpayers reducing the incentive for taxpayers to investigate thoroughly the consequences of transactions into which they enter it would be particularly inappropriate for the government to play that role here where the transaction at issue is participation in a tax_shelter reducing the risks of participating in tax_shelters would encourage more taxpayers to run those risks thus undermining rather than enhancing compliance with the tax laws see barnes v commissioner supra c petitioners’ other argument sec_1 compromise of penalties and interest in an effective tax_administration offer-in-compromise petitioners advance a number of arguments focusing on their assertion that respondent determined that penalties and interest could not be compromised in an effective tax_administration offer-in-compromise petitioners argue that such a determination is contrary to legislative_history and is therefore an abuse_of_discretion these arguments are not persuasive the regulations under sec_7122 provide that if the secretary determines that there are grounds for compromise under this section the secretary may at the secretary’s discretion compromise any civil liability arising under the internal revenue laws sec_301_7122-1 proced admin regs in other words the secretary may compromise a taxpayer’s tax_liability if he determines that grounds for a compromise exist if the secretary determines that grounds do not exist the amount offered or the way in which the offer is calculated need not be considered petitioners’ arguments regarding the compromise of penalties and interest do not relate to whether there are grounds for a compromise instead these arguments go to whether the amount petitioners offered to compromise their tax_liability was acceptable as addressed above respondent’s determination that the facts and circumstances of petitioners’ case did not warrant acceptance of their offer-in-compromise was not arbitrary or capricious and was thus not an abuse_of_discretion because no grounds for compromise exist we need not address whether respondent can or should compromise penalties and interest in an effective tax_administration offer-in-compromise see keller v commissioner supra information sufficient for the court to review respondent’s determination petitioners argue that respondent failed to provide the court with sufficient information so that this court can conduct a thorough probing and in-depth review of respondent’s determinations petitioners’ argument is without merit generally a taxpayer bears the burden of proving the commissioner’s determinations incorrect rule a 290_us_111 dollar_figure the burden was on petitioners to show that respondent abused his discretion the burden was not on respondent to provide enough information to show that he did not abuse his discretion nevertheless we find that we had more than sufficient information to review respondent’s determination deadline for submission of information petitioners argue that ms cochran abused her discretion by not allowing their counsel additional time to submit information while sec_7491 shifts the burden_of_proof and or the burden of production to the commissioner in certain circumstances this section is not applicable in this case because respondent’s examination of petitioners’ returns did not commence after date see internal_revenue_service restructuring and reform act of publaw_105_206 sec c 112_stat_727 to be considered petitioners argument is not supported by the record petitioners assert that they were initially only given weeks to provide all information however they ignore the fact that ms cochran granted their requested extension and allowed them until date to submit information additionally petitioners have not identified any documents or other information that they believe ms cochran should have considered but that they were unable to produce because of the deadline for submission given the thoroughness and the amount of information submitted it is unclear why petitioners needed additional time we do not believe that ms cochran abused her discretion by establishing a deadline for the submission of information efficient collection versus intrusiveness petitioners argue that respondent failed to balance the need for efficient collection_of_taxes with the legitimate concern that the collection action be no more intrusive than necessary see sec_6330 petitioners’ argument is not supported by the record petitioners have an outstanding tax_liability in their sec_6330 hearing petitioners proposed only an offer-in- compromise because no other collection alternatives were proposed there were not less intrusive means for respondent to consider we find that respondent balanced the need for efficient collection_of_taxes with petitioners’ legitimate concern that collection be no more intrusive than necessary d conclusion petitioners have not shown that respondent’s determination was arbitrary or capricious or without sound basis in fact or law for all of the above reasons we hold that respondent’s determination was not an abuse_of_discretion and respondent may proceed with the proposed collection action in reaching our holdings herein we have considered all arguments made and to the extent not mentioned above we find them to be moot irrelevant or without merit to reflect the foregoing decision will be entered for respondent


internal_revenue_service department of the treasury index number number release date washington dc person to contact telephone number refer reply to cc dom corp 1-plr-106863-99 date date re legend sub sub 3-b1 llc sub 3-b1a llc sub 4-a1 llc sub llc sub 3-b1 sub 3-b1a sub 4-a1 sub sub llc dear this letter contains the rulings that were severed form the other rulings made in a letter to you dated date the facts set forth in the date letter are supplemented as follows step iv - add sub will own the single interest in sub 3-b1 llc and sub 3-b1 llc will own the singe interest in sub3 - b1a llc step vi - add sub will own the single interest in sub 4-a1 llc step xi - add sub will own the single interest in sub llc based solely on the above facts as well as the information and representations set forth in the date letter it is held as follows subsequent to the liquidations of sub 3-b1 and sub3-b1a into sub as described in step iii sub 4's transfer of the former assets of sub 3-b1 and sub 3-b1a to sub 3-b1 llc step iv will be disregarded for federal tax purposes provided that sub 3-b1 llc does not elect to be taxed as an association under sec_301_7701-3 of the procedure and administration regulations sub 3-b1 llc’s subsequent transfer of sub 3-b1a’s former assets to sub 3-b1a llc step iv will be disregarded for federal tax purposes provided that sub 3-b1a llc does not elect to be taxed as an association under sec_301_7701-3 subsequent to the liquidation of sub 4-a1 into sub as described in step iv sub 4’s transfer of the former assets of sub 4-a1 to sub 4-a1 llc described in step vi will be disregarded for federal tax purposes provided that sub 4-a1 llc does not elect to be taxed as an association under sec_301_7701-3 after sub acquires all of sub 8's stock as described in step viii-b and step x sub 4's transfer of sub 8's stock to sub8 llc step xi will be disregarded for federal tax purposes provided that sub llc does not elect to be taxed as an association under sec_301_7701-3 we express no opinion about the tax treatment of the transactions under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the transactions that are not specifically covered by the above rulings this ruling is directed only to the taxpayer who requested it sec_6110 k of the code provides that it may not be used or cited as precedent a copy of this letter should be attached to the federal_income_tax returns of the taxpayers involved for the taxable_year in which the transactions covered by this ruling letter are consummated a copy of this letter has been sent to the taxpayer sincerely assistant chief_counsel corporate by alfred c bishop jr chief branch