t c memo united_states tax_court charles and martha mchan petitioners v commissioner of internal revenue respondent docket no filed date r walton davis iii for petitioner martha mchan charles mchan pro_se eric b jorgensen for respondent memorandum opinion parr judge this case is presently before the court on petitioner charles mchan's and petitioner martha mchan's hereinafter sometimes referred to as charles and martha respectively separately filed motions for summary_judgment pursuant to rule charles filed his motion on date followed by the filing of a supplement to his motion on date and second supplement to his motion on date this motion and the first and second supplement will be referred to hereinafter as motion martha filed her motion on date this motion will be referred to hereinafter as motion respondent has not filed an objection to the motions however respondent has filed objections on five different occasions in response to petitioners' prior motions for dismissal those motions raised arguments similar to those raised in the motions presently before the court we do not deem it necessary for respondent to file an objection respondent determined deficiencies in and additions to petitioners' federal income taxes as follows additions to tax sec sec sec deficiency b b a dollar_figure dollar_figure big_number big_number dollar_figure -- -- dollar_figure year all rule references are to the tax_court rules_of_practice and procedure and all section references are to the internal_revenue_code in effect for the taxable years in issue unless otherwise indicated under rule when a motion for summary_judgment is made and supported as provided in the rule an adverse_party may not rest upon mere allegations or denials in his pleadings but his response by affidavits or as otherwise provided in the rule must set forth specific facts showing that there is a genuine issue of fact for trial and if he does not so respond a decision if appropriate may be entered against him rule d however the opposing party need not come forth with affidavits or other documentary_evidence unless the moving party makes a prima facie showing of the absence of a factual issue 61_tc_861 here we are not satisfied that the moving party has made a prima facie case see discussion infra plu sec_50 percent of the interest due on the portion of the underpayment attributable to fraud pursuant to sec_6653 and sec_6653 for tax years and respectively background charles became involved in illegal conduct in the early part of the year on date he was indicted on counts for this illegal conduct charles was charged with various drug trafficking charges filing of false tax returns continuing criminal enterprise and criminal forfeiture at trial charles pleaded guilty to count sec_2 through of the indictment the trial proceeded on certain of the other counts resulting in a jury verdict on date the jury found charles guilty of all counts of the indictment that were considered in the first_phase of the trial conspiracy to unlawfully possess with intent to distribute marijuana in violation of u s c sec_846 possession with intent to distribute marijuana aiding and abetting4 in violation of u s c sec_841 and u s c sec_2 two counts of distribution of marijuana aiding_and_abetting in violation of u s c sec_841 and u s c sec_2 three counts of importation of marijuana aiding_and_abetting in violation of u s c sec_545 and sec_2 and continuing criminal enterprise in the court bifurcated charles' jury trial with the substantive criminal charges presented first to be followed by jury trial on count the forfeiture count charges charles was involved with others in the various drug trafficking violation of u s c sec_848 charles was also charged and found guilty on three counts for filing false tax returns for the years and in violation of sec_7206 charles was subsequently convicted on the final count and was ordered to forfeit his profits from the illicit activities to the u s government the district_court found that charles and the other persons involved in the illegal conduct made profits of dollar_figure and dollar_figure in and respectively and sustained a loss of dollar_figure in united_states v mchan no b-cr-90-41 w d n c date charles was sentenced to prison and he is currently still incarcerated the deficiencies in question and additions to tax for fraud5 arise from respondent's determination that petitioners had unreported income due to charles' sales of illegal drugs principally marijuana in their petition petitioners pleaded that they had no illegal income for the years at issue and that the notice_of_deficiency is without merit martha filed an amendment to amended petition in which she pleaded innocent spouse relief under sec_6013 discussion summary_judgment is intended to expedite litigation and avoid unnecessary and expensive trials 90_tc_678 summary_judgment may be granted with respect to all or any part of the legal issues in the additions to tax for fraud were asserted against charles controversy if the pleadings answers to interrogatories depositions admissions and any other acceptable materials together with the affidavits if any show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law rule b 98_tc_518 affd 17_f3d_965 7th cir 90_tc_753 85_tc_527 the moving party bears the burden of proving that there is no genuine issue of material fact and factual inferences will be read in a manner most favorable to the party opposing summary_judgment 85_tc_812 79_tc_340 a motion for summary_judgment will not be granted if there is a genuine issue of material fact 71_tc_587 the existence of any reasonable doubt as to the facts will result in denial of the motion for summary_judgment 63_tc_18 motion in motion charles argues that the notice_of_deficiency is arbitrary and erroneous and therefore not entitled to a presumption of correctness charles asserts that he was a mere conduit or agent and did not have any ownership in the illegal funds or profits furthermore charles claims that respondent has not produced any predicate evidence that supports her determinations he asserts that respondent's reconstruction_of_income is incorrect specifically charles claims that in the source and application of funds prepared by respondent a source was erroneously listed as an application furthermore he asserts that the starting and ending bank balances were incorrect recognizing that his denials and assertions could be considered merely self-serving statements charles refers to certain documents including financial statements a net_worth calculation and a statement of source and application of funds the main thrust of charles' motion is that respondent has determined a tax_liability against charles which requires him to come into court and attempt to prove a negative ie that he did not receive unreported income charles cites a line of cases wherein the statutory notice was found to be arbitrary and without a presumption of correctness e g 596_f2d_358 9th cir revg 67_tc_672 see also 937_f2d_1548 10th cir affg tcmemo_1989_522 932_f2d_1128 5th cir affg in part and revg in part tcmemo_1990_68 charles' reliance is misplaced the cases cited by him do not support the proposition that if a statutory_notice_of_deficiency is found to be arbitrary then the taxpayer is entitled to a decision as a matter of law instead as we stated in 73_tc_394 what occurs is that as a procedural matter the statutory_notice_of_deficiency is not entitled to the presumption of correctness and therefore the burden of going forward with the evidence is on the commissioner see also dellacroce v commissioner tcmemo_1982_243 if a statutory_notice_of_deficiency is found to be arbitrary we will not enter a decision for the taxpayer without weighing the evidence furthermore the court's summary_judgment procedures are adapted from rule a and b of the federal rules of civil procedure explanatory note to rule tax_court rules_of_practice and procedure 60_tc_1057 rule contemplates a summary_judgment for a part or all of the claim made in the prayer for relief in the complaint it does not contemplate a summary_judgment on evidentiary matters en route to that relief moore moore's federal practice par dollar_figure -2 pincite because charles' motion for summary_judgment contains arguments pertaining to the shifting of the burden of going forward it seemingly falls within the ambit of the rule prohibiting summary judgments on evidentiary matters charles' arguments relating to burden_of_proof and the burden of going forward with the evidence are more appropriately raised in the trial setting they do not entitle him to summary_judgment the pleadings establish that there are issues of fact to be decided eg whether petitioners received the illegal profits and if so whether charles fraudulently intended to avoid payment of income_tax on such money cases in which an issue turns on motivation or intent are generally inappropriate for summary_judgment as are those in which the issues turn on the credibility of the affiants 494_f2d_914 7th cir whether petitioners received unreported income from marijuana sales is a factual question necessitating testimony of witnesses including cross- examination and the examination of evidence regarding the source_and_application_of_funds_method of reconstructing income charles' liability for additions to tax for fraud also presents a factual question to be determined by an examination of the entire record 328_f2d_147 7th cir affg 37_tc_703 to establish fraud it must be shown that the taxpayer acted with a specific intent to evade a tax believed to be owing 86_tc_1253 material facts remain in dispute regarding petitioners' liability for the income_tax deficiencies and additions to tax including the additions for fraud see 78_tc_412 63_tc_18 accordingly charles' motion will be denied motion in motion martha argues that she has stated under oath many times that she knew nothing about charles' involvement in marijuana sales until he was arrested in moreover martha asserts that her argument is supported by the district court's decision in a forfeiture action with respect to certain real_estate owned jointly by petitioners the district_court ordered forfeiture as to charles' interest in the land however martha was found to be an innocent party under federal civil forfeiture law and entitled to retain her interest in the land united_states v acres in cherokee county n c no b-c-88-173 w d n c date affd 940_f2d_654 4th cir martha argues that she had no reason to know of charles' illegal activities to this end martha makes a number of statements as to petitioners' lifestyle her education and her involvement in charles' business finally martha argues that it would be inequitable to hold her liable martha's arguments as were charles' are set forth in an array of self-serving statements and assertions sec_6013 provides that a spouse is relieved from liability for tax where a joint_return has been made for a taxable_year and on that return there is a substantial_understatement of tax attributable to grossly_erroneous_items of the other spouse if the would-be innocent spouse establishes that she did not know and had no reason to know that there was such a substantial_understatement and taking into account all the facts and circumstances it is inequitable to hold that spouse liable for the deficiency in tax attributable to the substantial_understatement martha has the burden of proving that she qualifies as an innocent spouse see 85_tc_824 revd on other grounds 872_f2d_519 2d cir the standard in determining whether a taxpayer had reason to know is whether a reasonable person under the circumstances of the taxpayer at the time of signing the return could be expected to know of the omissions 780_f2d_561 6th cir affg tcmemo_1984_310 the primary ingredients of this test are the circumstances which face the taxpayer and whether a reasonable person in the same position would have reason to know that omissions had been made id pincite whether an individual had reason to know of a substantial_understatement is generally regarded as a question of fact id 705_f2d_336 8th cir affg tcmemo_1981_466 662_f2d_220 4th cir affg in part and revg in part tcmemo_1980_353 509_f2d_162 5th cir we believe that the facts and circumstances relating to whether martha knew or had reason to know of the substantial_understatement have not been adequately developed such that this issue is proper for summary_judgment in addition a genuine issue of material fact remains as to whether it would be inequitable to hold martha liable for that substantial_understatement in making a determination of whether it would be inequitable to hold a taxpayer liable for the substantial_understatement we must take into account all the facts and circumstances sec_6013 in addition congress has expressed a clear intent that in making this determination we consider whether a taxpayer benefited from the erroneous items h rept part pincite2 such a determination is factual in nature see sanders v united_states supra pincite martha would have us decide this issue and grant summary_judgment relieving her of liability based on her unverified assertions however the issue of whether martha is an innocent spouse is not ripe for summary_judgment we conclude that there are genuine issues of material fact which should properly be considered at trial in her motion martha argues that the district court's decision with respect to the federal forfeiture claim supports a finding of innocent spouse in the present action we will briefly discuss the applicability of the district_court action on the current proceeding under the doctrine_of collateral_estoppel the district_court action was a federal civil forfeiture proceeding the proceeding was based on a cause of action entirely different from that which is present in this case namely charles' liability for federal_income_tax under the provisions of the internal_revenue_code however the principles of collateral_estoppel may operate to bar the relitigation of a fact which has actually been found in a prior case even though the causes of action are different where the parties are the same or in privity where the issue is the same and when there has been no change in the law intervening between the time of the first case and the time of the second 440_us_147 333_us_591 91_tc_273 90_tc_162 affd 904_f2d_525 9th cir the prior forfeiture_case before the district_court for the western district of north carolina concerned the forfeiture of specific assets the district_court made no findings_of_fact having any relevancy to the instant case in determining the amount of petitioners' taxable_income the issue of petitioners' taxable_income was not before the district_court however the district_court did hold that martha was an innocent party under u s c sec_881 hereinafter the federal forfeiture law nevertheless such finding is not dispositive the restatement defines collateral_estoppel in the following manner when an issue of fact or law is actually litigated and determined by a valid and final judgment and the determination is essential to the judgment the determination is conclusive in a subsequent action between the parties whether on the same or a different claim restatement judgment sec_2d sec_27 see also 91_tc_273 united_states of the following u s c sec_881 provides for the forfeiture to the all real_property including any right title and interest including any leasehold interest in the whole of any lot or tract of land and any appurtenances or improvements used in any manner or part to commit or to facilitate the commission of a which is used or intended to be violation of this title punishable by more than one year's imprisonment except that no property shall be forfeited paragraph to the extent of an interest of an owner by reason of any act or omission established by that owner to have been committed or omitted without the knowledge or consent of that owner emphasis added under this in the instant case because the factual predicate for an innocent party under the federal forfeiture law is not equivalent to that for an innocent spouse under sec_6013 under the federal forfeiture law an owner's interest_in_real_property is exempt from forfeiture on account of any act performed without the knowledge of that owner u s c sec_881 this section has been interpreted to employ a subjective rather than an objective standard for assessing the owner's knowledge 965_f2d_311 7th cir u s c sec_881 does not inquire whether the owner should have known of illegal activities taking place on the property id pincite instead u s c sec_881 focuses on the owner's actual knowledge id united_states v real_property improvements located pincite palmetto drive 928_f2d_373 11th cir 828_f2d_233 4th cir 762_f2d_895 11th cir therefore u s c sec_881 does not deal with whether a person had reason to know of illegal activity nor does it deal with whether it is inequitable to hold such person liable for tax accordingly a finding in a party's favor under the federal forfeiture law does not preclude a finding that such party is not an innocent spouse under sec_6013 for the reasons stated herein charles' and martha's motions for summary_judgment are denied appropriate orders will be issued


t c summary opinion united_states tax_court rosemary mcdowell and adric mcdowell petitioners v commissioner of internal revenue respondent docket no 973-17s filed date rosemary mcdowell and adric mcdowell pro sese jacob russin for respondent summary opinion panuthos 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 1unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year in issue and all rule references are to continued reviewable by any other court and this opinion shall not be treated as precedent for any other case in a notice_of_deficiency dated date respondent determined a deficiency of dollar_figure in petitioners’ federal_income_tax and a sec_6662 accuracy-related_penalty of dollar_figure after concessions the issues for decision are whether petitioners are entitled to deduct on schedule c profit or loss from business other expenses totaling dollar_figure travel_expenses of dollar_figure and a dollar_figure expense for a dc license background some of the facts have been stipulated and are so found the record consists of the stipulation of facts with attached exhibits exhibits introduced at trial and the testimony of rosemary mcdowell hereinafter petitioner continued the tax_court rules_of_practice and procedure we round some monetary amounts to the nearest dollar 2respondent conceded the sec_6662 accuracy-related_penalty in a response filed date respondent’s adjustment of a mortgage interest_deduction for claimed on petitioners’ schedule a itemized_deductions was computational and is not discussed here 3in petitioners’ amendment to petition discussed infra pp petitioners requested an adjustment to their schedule c other expenses resulting in a revised total of dollar_figure petitioners resided in virginia when the petition was timely filed the facts in the record are somewhat incomplete because of a limited narrative provided by petitioners i petitioners’ business activity and employment during the tax_year in issue petitioner adric mcdowell worked as a systems engineer petitioner operated a sole_proprietorship during the years through consulting with small businesses to assist them in seeking federal government contracts by petitioner’s consulting business had diminished because of a change in government policy that negatively affected her small_business clients’ ability to win contracts while looking for new consulting opportunities in petitioner attended a powerteam international pti seminar in chicago illinois and decided to restructure her consulting business around pti concepts pti appears to be a business education network marketing program that offers speaker training and other business coaching in date petitioners attended a pti training session called rainmaker at this training petitioner was approached about attending a four day speaker training camp speaker camp petitioner was also asked to purchase a washington d c area license dc license that would allow her to recruit other local entrepreneurs to the pti program in exchange for a percentage of any program fees collected petitioner attended a speaker camp in as well as several other pti training sessions petitioner also attended or presented at approximately separate networking events at each event petitioner gave an eight minute speech that she had developed at speaker camp petitioner also answered questions in an attempt to sell pti program packages most of the meetings petitioner attended appear to have been held at private offices restaurants or networking clubs petitioner also attended a weekly lunch meeting with the northern virginia networking club monthly meetings of the sterling women’s club and executive women international and meetings with the executive women roundtable petitioner’s networking organizations additionally petitioner paid sponsorship fees to be recognized on the programs of certain networking meetings petitioner sold one package in and five packages in however petitioner did not sell enough packages to cover expenditures petitioner abandoned the pti activity at the end of because of poor sales combined with personal medical problems ii petitioner’s business_expenses and records petitioner maintained a log of her pti and contracting expenses on a laptop computer petitioner lost a large amount of data in a computer crash including many of her business records from tax_year consequently petitioners did not have all of their business records when they prepared their return in in conjunction with the irs audit of their tax_return petitioner created an excel spreadsheet spreadsheet detailing her business_expenses petitioner did not have all of her records available while creating the spreadsheet at trial petitioner presented the spreadsheet to the court but provided numerous purported corrections to the data based on additional records from she had found the day before trial petitioners also presented bank statements from apple federal credit_union and navy federal credit_union as well as petitioners’ credit card statements from capital one bank to substantiate the schedule c expenses petitioners presented a multitude of receipts and business emails although petitioners used these accounts to pay for some expenses related to the pti activity it appears that most of petitioner’s schedule c other expenses and travel_expenses were paid with her american express card the monthly american express statements are not part of this record iii petitioners’ tax_return and respondent’s adjustments petitioners jointly filed a form_1040 u s individual_income_tax_return for tax_year petitioners reported gross_receipts of dollar_figure from the consulting business on schedule c respondent disallowed deductions for petitioners’ schedule c other expenses dollar_figure and schedule c travel_expenses dollar_figure as claimed on their return respondent determined that petitioners failed to substantiate the claimed deductions on date petitioners filed an amendment to petition providing updated schedule c-7 travel information for tax_year and reporting dollar_figure in travel_expenses petitioners did not provide substantiation for the travel_expenses reported additionally the amendment to petition admitted an error in petitioner’s reported schedule c other expenses reducing the dollar_figure originally reported for training expenses to dollar_figure the amendment to petition also reported an additional dollar_figure in expenses related to the dc license i burden_of_proof discussion in general the commissioner’s determination set forth in a notice_of_deficiency is presumed correct and the taxpayer bears the burden of proving that the determination is in error rule a 290_us_111 pursuant to sec_7491 the burden_of_proof as to factual matters shifts to the commissioner under certain circumstances petitioners have not asserted or otherwise shown that sec_7491 applies see sec_7491 and b therefore petitioners bear the burden_of_proof ii trade_or_business sec_162 generally allows deductions for all ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business in general no deduction is permitted for personal living or family_expenses sec_262 the taxpayer bears the burden of proving that expenses were of a business nature rather than personal and that they were ordinary and necessary rule a welch v helvering u s pincite a prerequisite to claiming deductions under sec_162 is that the expenses directly relate to an active trade_or_business at the time the expenses were incurred glotov v commissioner tcmemo_2007_147 a taxpayer is not carrying_on_a_trade_or_business for sec_162 purposes until the business is functioning as a going concern and performing the activities for which it was organized 345_f2d_901 4th cir vacated and remanded on other grounds 382_us_68 see also glotov v commissioner tcmemo_2007_147 whether a taxpayer’s activities constitute the carrying on of a trade_or_business requires an examination of the facts and circumstances of the case see 480_us_23 see also woody v commissioner tcmemo_2009_93 slip op pincite aff’d 403_fedappx_519 d c cir when determining whether a trade_or_business exists the court focuses on three factors whether the taxpayer undertook the activity intending to earn a profit whether the taxpayer is regularly and actively involved in the 4in order for an activity to qualify as a trade_or_business business operations with respect to the activity must have actually commenced see mckelvey v commissioner tcmemo_2002_63 aff’d 76_fedappx_806 9th cir until that time expenses related to that activity are not ‘ordinary and necessary’ expenses currently deductible under sec_162 but rather are ‘start-up’ or ‘pre-opening’ expenses see woody v commissioner tcmemo_2009_93 slip op pincite quoting 93_tc_684 aff’d in part remanded in part u s app lexis 10th cir date aff’d 403_fedappx_519 d c cir startup expenses although not deductible during the preopening phase may generally be deducted or capitalized and deducted over time upon a taxpayer’s becoming actively_engaged_in_business pursuant to sec_195 sec_1_195-1 income_tax regs petitioners maintain that their business_expenses were not startup expenses and that petitioner’s business activity in should not be classified as a startup petitioners also did not make a sec_195 election to have their business_expense deductions classified as startup expenditures because the court will treat petitioner’s consulting activity as an active trade_or_business during the relevant tax_year see infra pp sec_195 does not apply see sec_195 d activity and whether the taxpayer’s activity has actually commenced woody v commissioner slip op pincite the taxpayer’s activity need not have generated revenue but it must nonetheless have started to function in a particular and identifiable line of work bailey v commissioner tcmemo_2012_96 slip op pincite quoting weaver v commissioner tcmemo_2004_108 slip op pincite aff’d wl 1st cir date the facts surrounding petitioner’s activity and the respective positions of the parties relating to whether petitioner was engaged in a trade_or_business are not entirely clear at trial petitioner appeared to concede that the pti activity was not a trade_or_business in the court understood this as petitioner’s concession and the parties appeared to agree that any deduction for the pti activity in would be governed by the provisions for startup activities despite these concessions petitioners in a posttrial memorandum indicated that at least some of the reported income and reported expenses in related to her ongoing consulting activity which constituted a trade_or_business petitioner asserts that her management consulting business operated from through she further asserts that pti is simply a part of or a continuum of her existing trade_or_business petitioner’s records of her consulting activity including the pti activity were disorganized and incomplete petitioner’s testimony was vague and sometimes inconsistent however respondent did not seriously dispute that petitioner’s consulting and pti activity constituted a trade_or_business in and accordingly the court proceeds to treat the activity as such and considers the issue of whether some of the expense deductions claimed constitute ordinary and necessary business_expenses and if so whether they have been substantiated iii claimed expense deductions deductions are a matter of legislative grace and the taxpayer bears the burden of proving he or she is entitled to any deduction claimed thus the taxpayer is required to maintain records sufficient to substantiate expenses underlying deductions claimed on his or her return sec_6001 sec_1_6001-1 income_tax regs see 292_us_435 if the taxpayer is able to establish that he paid_or_incurred a deductible expense but is unable to substantiate the precise amount the court generally may approximate the deductible amount but only if the taxpayer presents sufficient evidence to establish a rational basis for making the estimate see 39_f2d_540 2d cir see also 85_tc_731 business_expenses specified in sec_274 are subject_to rules of substantiation that supersede the cohan test see 50_tc_823 aff’d 412_f2d_201 2d cir sec_1_274-5t temporary income_tax regs fed reg date sec_274 applies to certain business_expenses including among other things expenses for gifts listed_property and travel including meals_and_lodging while away from home to substantiate a deduction attributable to travel_expenses a taxpayer must maintain adequate_records or present corroborative evidence of the taxpayer’s own statement to show the following for each expense the amount the time the place and the business_purpose sec_1_274-5t temporary income_tax regs fed reg to substantiate a deduction attributable to listed properties such as cars and computers a taxpayer must maintain adequate_records or present corroborative evidence of the taxpayer’s own statement to show the following for each expense the expenditure amount and the percentage of business versus personal_use the time and the business or investment purpose id subpara fed reg a schedule c--other expenses petitioners reported the following schedule c other expenses on the tax_return and in the revisions shown in the amendment to petition schedule c other expenses medical meetings training subscriptions office phone postage services software total amount claimed on return dollar_figure big_number big_number big_number big_number medical_expenses changes in amendment to petition --- --- dollar_figure --- --- --- --- --- big_number petitioners have conceded that the dollar_figure in medical_expenses reported on their schedule c were improperly characterized as business_expenses and are not deductible we sustain respondent’s disallowance of the medical expense deductions meeting expenses petitioner testified that she attended approximately different networking and business meeting events in petitioner reported dollar_figure of expenses relating to meetings she attended petitioner provided some documentation regarding these meetings but did not provide evidence that specific meetings or meeting expenses were ordinary and necessary business_expenses on the basis of petitioner’s testimony and documents the court is unable to distinguish the extent to which the meetings served a business_purpose versus a personal purpose therefore petitioner failed to establish a clear nexus between the multiple meetings she attended and the business_purpose we sustain respondent’s disallowance of the meeting expense deductions training expenses petitioner testified that the dollar_figure originally reported on petitioners’ schedule c under training included both pti trainings and initial payments towards the dc license in the amendment to petition petitioners reported a downward adjustment to the training expenses petitioners provided bank account statements showing cumulative payments of dollar_figure directly to pti and dollar_figure to petitioners’ american express account for a total of dollar_figure allegedly paid towards pti activity petitioner testified that a portion of the american express payments was related to her training activities however petitioners did not provide any further substantiation in the form of american express account receipts petitioners provided a single receipt for dollar_figure paid on date to pti via credit card for speaker camp the court is satisfied that petitioner has substantiated dollar_figure in expenses and that such expenses were ordinary and necessary for her pti activity related to training in respondent is sustained in the balance of the disallowance of the training expense deductions subscription expenses petitioners reported dollar_figure in subscription expenses petitioner’s spreadsheet indicates that these expenses are related to alleged payments for business software online tools newspaper subscriptions and professional dues at petitioner’s networking organizations as shown on the spreadsheet the reported subscriptions also include dollar_figure in alleged payments to the tower club in vienna virginia petitioner testified that the tower club was a private club where as a member she was allowed to host her networking meetings for free petitioner’s alleged subscription fees also include a variety of publication subscriptions including consumer reports and the new york times as well as payments for a godaddy domain name for the rotary club of fairfax county petitioner alleges that she made payments to infusionsoft software related to her pti activity but did not provide substantiation regarding the payments beyond spreadsheet entries petitioner has not established that any of her reported subscription expenses were ordinary and necessary to her business operations consequently we sustain respondent’s determination denying a deduction for her reported subscription expenses remaining other expenses petitioner claimed expense deductions of dollar_figure for an office telephone at trial she testified that the office telephone charges were for her cellular telephone petitioner further testified that after reviewing her records she incurred amounts greater than those reported on her spreadsheet she reflects dollar_figure in cellular telephone payments however she provided only one cellular telephone receipt to corroborate the spreadsheet reflecting a payment of dollar_figure on date the receipt is inconsistent with the data on petitioner’s spreadsheet which lists a payment of dollar_figure on date on the basis of the receipt in the record the court is satisfied that petitioner has substantiated dollar_figure in cellular telephone expenses for tax_year calculated on monthly payments of dollar_figure and that 5as of date cellular telephones and other similar personal telecommunications devices are no longer considered listed_property see sec_280f the cellular telephone expenses were ordinary and necessary for her business activity the court is satisfied that the remaining dollar_figure in postage services and software expenses was ordinary and necessary for petitioner’s business activity in the year indicated b schedule c--travel expenses petitioner traveled in attending seminars and conferences related to her pti activity petitioner reported a total of dollar_figure in travel_expenses on her schedule c related to business activities in the amended petition petitioner provided updated information for her schedule c and revised her reported travel_expenses to dollar_figure petitioner did not supply documentation or substantiation for any of the trips listed on her revised schedule c-7 instead she provided documentation for a number of alternative hotel fees and airline fares in one case petitioner’s substantiation directly contradicted the revised schedule c-7 data in that instance she supplied a receipt from a hotel in blacksburg virginia for january through date dates which she had claimed she was in tampa florida attending small_business training for government contracting 6to the extent these expenses are subject_to the strict substantiation requirements of sec_274 we are satisfied that petitioner has satisfied the requirements of that section with respect to the claimed travel expense deductions on the schedule c petitioner did not substantiate the expenses or satisfy the substantiation requirements of sec_274 therefore the court sustains respondent’s disallowance of all claimed travel expense deductions c dc license in the amendment to petition petitioners reported an additional dollar_figure in expenses for the dc license to substantiate this claim petitioners provided both an order form for the dc license and a receipt from pti reflecting a total of dollar_figure paid via american express sec_197 provides for the recovery_of the acquisition_cost of certain intangibles amortized ratably over a fixed 15-year period sec_197 an amortizable sec_197 intangible may not be depreciated or amortized on any other basis sec_1_197-2 income_tax regs sec_197 intangibles include goodwill information bases franchises and trade names among others sec_197 amortization begins in the later of the month in which the intangible was acquired or the month in which the active_conduct of the trade_or_business began sec_1_197-2 income_tax regs see also 137_tc_46 petitioner’s dc license appears to be akin to a franchise agreement allowing her to use the pti name and branding within the washington d c area in exchange for a portion of the profits from selling pti packages on the basis of these facts the parties can compute the amortization allowable under sec_197 for the dollar_figure paid for the dc license amortized from the date of the three substantiated payments made in dollar_figure installments on march may and june respectively see sec_1_197-2 income_tax regs we have considered all of the parties’ arguments and to the extent not addressed herein we conclude that they are moot irrelevant or without merit to reflect the foregoing decision will be entered under rule


department of the treasury k internal_revenue_service washington d c tax exempt and government entities jan uniform issue list tep na t3 legend taxpayer a ira x insurance_company p amount h amount k amount l amount m dear this is in response to your request dated date and supplemented by correspondence dated march date and date submitted on your behalf by your authorized representative in which you request a ruling to waive the 60-day rollover requirement contained in sec_408 of the internal_revenue_code code the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a owned the individual_retirement_annuity ira ira x maintained by insurance_company p taxpayer a represents thaton september - she received a distribution from ira x of amount h and on september she page received a distribution of amount k taxpayer a asserts that her failure to accomplish a rollover of amount m a portion of amount h within the 60-day period prescribed by sec_408 of the code was due to taxpayer a’s involvement with the medical_condition of her husband prior to taking the distribution from ira x taxpayer a reacted to the events of her husband's diagnosis treatment regimen and expense of a life-threatening illness taxpayer a was in fear for her husband’s survival taxpayer a thought she had to withdraw funds to pay for medical treatments and insurance premiums and requested distributions from ira x to cover medical_expenses because her medical insurance had reached its limits in addition taxpayer a and her husband were in the process of selling their home and moving to a warmer climate taxpayer a represents that she became mentally un-focused to the point she made a rash decision to withdraw monies from her ira taxpayer a represents that she questioned her financial advisor about her ira withdrawal shortly before the expiration of the 60-day period and learned about the tax consequences of the distribution taxpayer a further represents that she took steps to create a rollover ira taxpayer a has provided a form_5498 ira contribution information showing a contribution of amount m into ira y in taxpayer a has also submitted account statements for ira x showing that amount m was redeposited into ira x in december taxpayer a has submitted documentation evidencing her husband's illness during the 60-day period based on the facts and representations you request a ruling that the service waive the 60-day rollover requirement contained in sec_408 of the code with respect to the distribution of amount m sec_408 of the code provides that except as otherwise provided in section ’ d any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if page i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the rollover provisions of sec_408 do not apply to any amount required to be distributed under sec_408 sec_408 of the code provides that the secretary may waive the 60-day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 of the code revproc_2003_16 2003_4_irb_359 date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to section d i of the code the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the service has the authority to waive the 60-day rollover requirement for a distribution from an ira where the individual failed to complete a rollover to another ira within the 60-day rollover period but was prevented from doing so because of one of the factors enumerated in revproc_2003_16 for example errors committed by a financial_institution death hospitalization postal error incarceration and or disability taxpayer page a has acknowledged that she took the distribution in order to pay medical_expenses and insurance premiums and not with an intention of rolling the money over into another ira in addition taxpayer a has not provided sufficient evidence as to where and when amounts were rolled over and that any of the factors enumerated in revproc_2003_16 prevented her from timely completing the rollover therefore pursuant to sec_408 of the code the service hereby declines to waive the 60-day rollover requirement with respect to the distribution of amount m from ira x no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto pursuant to a power_of_attorney on file with this office a copy of this letter_ruling is being sent to your authorized representative this letter is directed only to the taxpayer who requested it sec_61 k of the code provides that it may not be used or cited as precedent if you have any questions please contact se t ep ra t3 please address all correspondence to sincerely yours laura b warshawsky manager employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose cc


t c memo united_states tax_court t-star engineering and technical services inc petitioner v commissioner of internal revenue respondent docket no 1549-17l filed date ray s kemerer an officer for petitioner erin k neugebaur for respondent memorandum findings_of_fact and opinion ruwe judge this collection_due_process cdp case was brought pursuant to sec_6320 and sec_6330 petitioner challenges respondent’ sec_1unless otherwise indicated all section references are to the internal_revenue_code in effect at all relevant times determination to sustain the filing of a notice_of_federal_tax_lien nftl for the collection of penalties assessed under sec_6702 findings_of_fact petitioner timely filed form sec_941 employer’s quarterly federal tax_return for the taxable periods ending march and date petitioner had made total federal tax deposits of dollar_figure and dollar_figure for these periods on date petitioner sent a letter to respondent in which it argued among other things that petitioner is not subject_to employment_taxes and federal_income_tax withholding requirements because petitioner is a private sector non-federally-connected company the letter further argued that petitioner is not an employer or taxpayer or a withholding_agent as defined by the internal_revenue_code petitioner enclosed with the letter forms 941-x adjusted employer’s quarterly federal tax_return or claim_for_refund for the taxable periods ending march and date these returns were zero returns in which petitioner claimed it had no employment_tax liabilities for the periods at issue and requested refunds of the federal tax deposits previously made on the forms 941-x petitioner stated the amount entered into line of the form_941 for the quarter was incorrectly entered as wages tips and other compensation as defined in title_26 of the usc no federally-connected payments were made t-star engineering technical services is a private- sector company incorporated in the union state of pennsylvania that is not connected with federally-privileged activities t-star engineering technical services does not have employees as defined in title_26 of the u s c per title_26 and related tax law federal taxing authority is limited to the district of columbia portions of union states ceded to the federal government and united_states_possessions including the commonwealth of puerto rico american samoa guam and the us virgin islands in date correspondence examination technician george johnson in respondent’s office in ogden utah reviewed petitioner’s submitted forms 941-x and prepared its account for the assessment of the sec_6702 penalties for the frivolous adjusted returns on date mr johnson’s supervisor supervisory financial technician krista decaria approved the penalties by signing forms assessment and abatement of miscellaneous civil penalties the sec_6702 penalties for the forms 941-x for the taxable periods ending march and date were assessed on date 2the sec_6702 penalties were assessed on two separate dates date and date for three separate returns first quarter form x second quarter form 941-x and third quarter form for a total of dollar_figure respondent concedes four of the penalty assessments respondent is defending the sec_6702 penalties assessed on date regarding petitioner’ sec_2012 first quarter form 941-x and second quarter form 941-x both of which were submitted on date respondent argues that dollar_figure of the sec_6702 penalties against petitioner should be sustained on date respondent issued petitioner a letter notice_of_federal_tax_lien filing and your right to a hearing under sec_6320 on date petitioner submitted a request for a cdp hearing settlement officer so stephen j mccarrick was assigned to petitioner’s case so mccarrick obtained copies of petitioner’s adjusted returns on which the sec_6702 penalties had been assessed he also obtained the forms which showed that the penalties had the proper managerial approval so mccarrick determined that the sec_6702 penalties were properly assessed that repondent had followed the proper procedures that final notice_and_demand for payment had been made and a balance was due when the nftl was filed mr mccarrick sent petitioner copies of the forms and informed it that the collection action would be sustained on date respondent issued petitioner a notice_of_determination sustaining the nftl opinion the conduct of the cdp hearing is governed by sec_6320 and sec_6330 sec_6330 requires the so to verify that the requirements of applicable law and administrative procedure have been met at the hearing the taxpayer may raise any relevant issue relating to the unpaid tax or the filing of the nftl sec_6330 sec_6330 provides that a challenge to the existence or amount of the underlying tax_liability may be raised only if the taxpayer did not receive a notice_of_deficiency or otherwise have an opportunity to dispute the liability pursuant to sec_6330 the determination of an so must take into consideration the verification that the requirements of applicable law and administrative procedure have been met issues raised by the taxpayer and whether any proposed collection action balances the need for the efficient collection_of_taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary so mccarrick complied with all of these requirements petitioner challenges only the underlying liabilities for the sec_6702 penalties these are assessable_penalties that are not subject_to deficiency procedures sec_6703 see 130_tc_44 petitioner did not receive and could not have received a notice_of_deficiency for the underlying liabilities and respondent does not contest petitioner’s right to challenge the underlying liabilities accordingly we review so mccarrick’s determination de novo see callahan v commissioner t c pincite pursuant to sec_6702 a person shall pay a penalty of dollar_figure for a frivolous tax_return in any proceeding involving the issue of whether a person is liable for the sec_6702 penalty the burden_of_proof with respect to such issue shall be on the secretary sec_6703 the sec_6702 penalty can be assessed when three conditions are met first the taxpayer must have filed a document that purports to be a return of tax imposed by title_26 sec_6702 the penalty can also apply to amended returns 902_f2d_1462 9th cir crites v commissioner tcmemo_2012_267 at second the purported return must have either not contained information on which the substantial correctness of the self-assessment may be judged or contained information that on its face indicated that the self-assessment was substantially incorrect sec_6702 and b third the taxpayer’s conduct must have been based on a position which was frivolous or reflected a desire to delay or impede the administration of federal tax laws sec_6702 and b petitioner submitted what purported to be a return for its employment_tax liabilities for the taxable periods ending on march and date the purported returns were submitted on the official forms 941-x and included the signature of petitioner’s authorized corporate representative these returns were filed in an effort to obtain a refund of federal tax deposits and requested abatement of previously assessed tax for the taxable periods the forms x included assertions that were clearly erroneous and frivolous with respect to the third requirement petitioner’s conduct was based on a position which the secretary has identified as frivolous sec_6702 as an explanation for the corrections petitioner states directly on the third page of the forms 941-x that federal taxing authority is limited to the district of columbia portions of union states ceded to the federal government and united_states_possessions including the commonwealth of puerto rico american samoa guam and the us virgin islands the commissioner has determined this type of argument to be frivolous and that determination has been upheld by courts 920_f2d_619 10th cir citing 240_us_1 136_tc_498 ulloa v commissioner tcmemo_2010_68 wl at see also notice_2010_33 2010_17_irb_609 revrul_2006_18 2006_1_cb_743 petitioner’s conduct in filing these returns with respondent clearly reflects a desire to delay or impede the administration of federal tax laws other arguments petitioner may have alluded to at trial or in its posttrial memorandum are without merit we will not painstakingly address petitioner’s tax-protester type arguments with somber reasoning and copious citation of precedent to do so might suggest that these arguments have some colorable merit 737_f2d_1417 5th cir we sustain respondent’s determination with respect to the sec_6702 penalties assessed on date regarding the forms 941-x for the first quarter of and the second quarter of respondent concedes the remaining assessments in reaching our decision we have considered all arguments made by the parties and to the extent not mentioned or addressed they are irrelevant or without merit to reflect the foregoing an appropriate decision will be entered


t c memo united_states tax_court amy ndiaye delia petitioner v commissioner of internal revenue respondent docket no filed date amy ndiaye delia pro_se william j gregg for respondent memorandum findings_of_fact and opinion lauber judge the internal_revenue_service irs or respondent deter- mined a deficiency in petitioner’ sec_2011 federal_income_tax of dollar_figure and an all statutory references are to the internal_revenue_code code for the year in issue and all rule references are to the tax_court rules_of_practice and procedure we round all monetary amounts to the nearest dollar accuracy-related_penalty of dollar_figure under sec_6662 the deficiency stems from respondent’s disallowance of the deductions petitioner claimed with respect to her sole_proprietorship to the extent those deductions exceeded her income therefrom on the ground that such activity wa s not engaged in for profit see sec_183 we conclude that petitioner engaged in this activity during with the genuine if optimistic intent to earn a profit but find that she failed to substantiate certain of the expenses in question we will sustain the penalty only with respect to the portion of the underpayment attributable to these unsubstantiated expenses findings_of_fact the parties filed a stipulation of facts with accompanying exhibits that is incorporated by this reference petitioner was born to a large family in senegal where she learned and practiced the art of hair braiding although she had no formal training in this field she continued to practice it after arriving in the united_states in she opened a salon near her home in laurel maryland called nanou’s african braiding this salon was housed in a booth inside a shopping mall that included numerous other hair-braiding and beauty-related businesses petitioner initially signed a five-year lease for the salon space by its terms the lease was to renew automatically at the end of five years petitioner did not have a clear understanding of this fact when she entered into the lease when the lease came up for renewal in in the midst of the financial crisis petitioner’s business was doing poorly and she was not eager to renew the lease but her landlord insisted that she honor her commitment and she feared damage to her credit rating if she refused as a concession to petitioner’s faithful performance of her obligations to that point the landlord agreed to limit the renewal_period to three years petitioner undertook reasonable if limited marketing efforts in connection with her salon she initially took out yellowbook ads but found that these were ineffective in reaching her intended market she later created brochures and ad- vertising fliers that she circulated by hand at neighborhood grocery stores and shopping centers she had the name of her salon painted on the side of her van in the hope of attracting clients petitioner maintained a web site for the salon and it was equipped with landline telephone service she kept distinct business records for the salon inclu- ding spreadsheets showing income and expenses and hard copies of some expense receipts she maintained a separate bank account for the salon during but closed that account in in an effort to cut costs petitioner had a full-time job during as an event planner with compass group usa inc she spent most weekends at the salon in the hope of getting walk-in customers and she spent weekday evenings there to meet customers who had called for appointments the salon had fewer than customers during some of whom were repeat customers petitioner earned revenues in only five months of that year producing total gross_receipts of dollar_figure she closed the salon in when the landlord let her out of her lease petitioner has never reported a profit from her salon business the salon generated revenues in excess of dollar_figure in and petitioner described the early years as much better than that but she reported a loss on her schedule c profit or loss from business for every year from through petitioner credibly testified that her business failed for three main reasons the first was the financial crisis of which had a very severe impact on the african-american community in suburban maryland the second was a change in taste among african-american women away from hair braiding the third was an over-concentration in her community of braiding salons and beauty salons providing braiding services the salons best situated to survive in this environment were those run by licensed cosmetologists who could offer a full array of beauty services petitioner did not have a license and could not compete effectively with those businesses for petitioner timely filed form_1040 u s individual_income_tax_return reporting wages of dollar_figure from compass group on schedule c she reported gross_receipts of dollar_figure and expenses of dollar_figure attributable to the salon her reported expenses consisted of dollar_figure for rent on the salon lease dollar_figure for hair products used in the salon dollar_figure for salon landline service dollar_figure for web site maintenance dollar_figure for cell phone expenses and dollar_figure for supplies following examination of this return the irs issued her a timely notice_of_deficiency which determined that she had failed to establish that the business_expenses shown on her tax_return were paid_or_incurred during the taxable_year and that the expenses were ordinary and necessary to her business the notice denied petitioner’s schedule c deductions to the extent they exceeded the salon’s income and determined an accuracy-related_penalty while residing in maryland she timely petitioned this court for review petitioner was before this court previously in delia v commissioner t c dkt no 8853-14s date stipulated decision which involved her tax_year on date the court in that case entered a stipulated decision determining a deficiency of dollar_figure and no penalty under sec_6662 opinion a burden_of_proof the commissioner’s determinations in a notice_of_deficiency are generally presumed correct and the taxpayer bears the burden of proving those determina- tions erroneous rule a 290_us_111 the taxpayer bears the burden of proving his entitlement to deductions allowed by the code and of substantiating the amounts of claimed deductions 503_us_79 sec_1_6001-1 income_tax regs peti- tioner does not contend and the evidence does not establish that the burden_of_proof shifts to respondent under sec_7491 as to any issue of fact b schedule c deduction sec_1 trade_or_business the first question is whether petitioner’s hair-braiding activity during was a trade_or_business engaged in for profit if an activity is not engaged in for profit sec_183 generally disallows deductions except to the extent of the gross_income derived from such activity for the taxable_year sec_183 b sec_162 allows as a deduction all the ordinary and necessary ex- penses paid_or_incurred during the taxable_year in carrying on any trade or busi- ness to be entitled to business-expense deductions without limitation by section the taxpayer must show that she engaged in the activity with an actual and honest objective of making a profit 91_tc_371 78_tc_642 aff’d without pub- lished opinion 702_f2d_1205 d c cir deductions are not allowable for activities that a taxpayer carries on primarily as a sport as a hobby or for recrea- tion sec_1_183-2 income_tax regs in assessing the taxpayer’s profit_motive we accord greater weight to objective facts than to subjective statements of intent 94_tc_41 sec_1_183-2 income_tax regs the taxpayer must es- tablish that she engaged in the activity with ‘the predominant primary or prin- cipal objective’ of realizing an economic profit independent of tax savings giles v commissioner tcmemo_2006_15 91_tcm_684 quoting 4_f3d_709 9th cir aff’g t c memo see hulter t c pincite although a reasonable expectation of a profit is not required the taxpayer’s profit objective must be actual and honest dreicer t c pincite sec_1_183-2 income_tax regs whether a taxpayer has an actual and honest profit objective is a question of fact to be resolved from all the relevant facts and circumstances hulter t c pincite hastings v commissioner tcmemo_2002_310 sec_1_183-2 income_tax regs the regulations set forth a nonexclusive list of nine factors relevant in as- certaining whether a taxpayer conducts an activity with the intent to earn a profit the factors listed are the manner in which the taxpayer conducts the activity the expertise of the taxpayer or his advisers the time and effort spent by the taxpayer in carrying on the activity the expectation that assets used in the activity may appreciate in value the success of the taxpayer in carrying on other similar or dissimilar activities the taxpayer’s history of income or loss with respect to the activity the amount of occasional profits if any the financial status of the taxpayer and elements of personal pleasure or recre- ation sec_1_183-2 income_tax regs no factor or group of factors is controlling nor is it necessary that a major- ity of factors point to one outcome see 544_f3d_900 8th cir aff’g tcmemo_2007_309 94_tcm_383 72_tc_659 sec_1_183-2 income_tax regs certain factors may be accorded more weight in a particular case because they have greater salience or persuasive value as applied to its facts see vitale v commissioner tcmemo_1999_131 77_tcm_1869 aff’d without published opinion 217_f3d_843 4th cir green v commissioner tcmemo_1989_436 57_tcm_1333 noting that all nine factors do not necessarily apply in every case we regard several of the regulatory factors as neutral in this case the only factor that weighs heavily against petitioner is the salon’s persistent history of losses despite that fact we are convinced that she conducted her hair-braiding business with an actual and honest if unduly optimistic objective of making a profit it is clear to us that petitioner had a genuine profit_motive when she opened her salon in she credibly testified that this business failed for reasons be- yond her control including the financial crisis an over-concentration of similar businesses in her community and a marked change in taste among her prospective customers it might have been prudent for her to have exited this business before she did but the long-term rental contract posed a serious obstacle she concluded not unreasonably that trying to salvage as much profit as she could was preferable to risking damage to her credit rating by defaulting on her lease commitment she closed the business promptly after extricating herself from the lease petitioner had very little money and the salon did not generate much she kept business records and undertook marketing efforts that seem reasonable rela- tive to the scale of her activity operating the salon during was not a source of great personal pleasure or recreation and it was surely not a sport or a hobby sec_1_183-2 income_tax regs although petitioner had a nostalgic fondness for hair braiding sitting in an empty booth in a shopping mall is not as much fun as say riding horses see keating t c m cch pincite finding taxpayer lacked profit_motive in part because she received much enjoyment and satisfaction from her horse activity see also judah v commissioner tcmemo_2015_243 at same outcome where taxpayers got substantial enjoyment seeing their daughter ride horses and petitioner clearly did not engage in this activity with a view to generating tax benefits by sheltering other income her other income was modest and the losses she suffered were genuine out-of-pocket losses that dwarfed any resulting tax benefits we conclude that petitioner conducted her salon business during with an actual and honest objective of making a profit see 91_tc_838 quoting hutler t c pincite she was thus entitled to claim deductions for the expenses of that business to the extent she substantiated them substantiation the burden of substantiating claimed deductions rests on the taxpayer sec_6001 rule a 65_tc_87 aff’d per curiam 540_f2d_821 5th cir petitioner admitted at trial that she lacked substantiation for certain of her reported expenses she claimed a deduction of dollar_figure for supplies but her business records show that amount accrued at a flat rate of dollar_figure per month as being attributable to meals she offered no documen- tation for any meal expense and did not show that meals were an ordinary_and_necessary_expense of her hair-braiding business she claimed a deduction of dollar_figure for hair products used in the salon but she supplied substantiation for only dollar_figure of such expenses with respect to her alleged cell phone expense she did not substantiate the amount claimed dollar_figure and did not prove the extent to which she used that phone for business purposes connected to the salon given the modest scale of her salon activity during any business use of her cell phone was likely to have been quite small in sum we find that petitioner has failed to substantiate dollar_figure of supplies expenses dollar_figure of hair product expenses and dollar_figure of business-related cell phone expenses her allowable schedule c deductions for must thus be reduced by dollar_figure that is from dollar_figure to dollar_figure c penalty sec_6662 imposes a penalty upon the portion of any underpayment attributable to among other things negligence or disregard of rules or regulations the term negligence includes any failure to make a reasonable attempt to com- ply with the tax laws and disregard includes any careless reckless or inten- tional disregard sec_6662 negligence also includes any failure to keep ade- quate books_and_records or to substantiate items properly sec_1_6662-3 income_tax regs see 139_tc_19 aff’d 792_f3d_1146 9th cir with respect to an individual taxpayer’s liability for a penalty sec_7491 places on the commissioner the burden of production thereby requiring the commissioner to come forward with sufficient evidence indicating that im- position of a penalty is appropriate 116_tc_438 once the commissioner meets his burden of production the taxpayer bears the burden of proving that the commissioner’s determination is incorrect ibid see rule a welch v helvering u s pincite we find that respon- dent has discharged his burden of production by showing that petitioner failed to keep adequate_records see sec_1_6662-3 income_tax regs sec_6664 provides an exception to the imposition of the accuracy- related penalty if the taxpayer establishes that there was reasonable_cause for and that she acted in good_faith with respect to the underpayment the decision as to whether the taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all pertinent facts and circumstances see sec_1_6664-4 income_tax regs circumstances that may signal reasonable_cause and good_faith include an honest misunderstanding of fact or law that is reasonable in light of all of the facts and circumstances including the experience knowledge and education of the taxpayer ibid petitioner understood the need to keep records documenting her expenses but her record-keeping was demonstrably incomplete she lacked documentation for several categories of expenses and treated certain items inconsistently report- ing an alleged expense for meals as supplies on her schedule c given the nature of her business her claimed expense for meals was facially implausible we find that petitioner was negligent in preparing her return and will therefore sustain an accuracy-related_penalty on the portion of the underpayment attributable to the unsubstantiated expenses to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index number ------------------------ -------------------------- --------------------------------------------------------- -------------------- -------------------------- ------------------------------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc intl plr-148064-05 date date taxpayer legend legend ------------------------------------------------------------------------------------------ ----------------------- ---------- ------------------- ------------------------------------------------------------- de tax_year one -------------------------- tax_year two -------------------------- tax_year three country y dear -------------- this replies to your letter dated date in which you request on behalf of taxpayer an extension of time under sec_301_9100-3 for taxpayer to file the election and agreement described in sec_1_1503-2 and the annual certification described in sec_1_1503-2t g vi b as follows de tax_year one tax_year two tax_year three a b b legend a election and agreement described in sec_1_1503-2 b annual certification described in sec_1_1503-2t g vi b the information submitted for consideration is substantially as set forth below the ruling contained in this letter is predicated upon facts and representations submitted by taxpayer and accompanied by a penalty of perjury statement executed by plr-148064-05 an appropriate party this office has not verified any of the material submitted in support of the request for a ruling verification of the factual information representations and other data may be required as a part of the audit process taxpayer files a u s consolidated federal_income_tax return taxpayer owned indirectly de a country y corporation de is a disregarded_entity for u s income_tax purposes and accordingly is a hybrid_entity_separate_unit as defined in sec_1 c in tax_year one de incurred a dual_consolidated_loss dcl as defined in sec_1_1503-2 that taxpayer utilized in its u s consolidated_income_tax_return for that tax_year however due to an oversight taxpayer failed to file the election agreement described in sec_1_1503-2 for tax_year one and to the file annual certifications described in sec_1_1503-2t g vi b for tax years two and three with respect to the dcl incurred by de in tax_year one taxpayer states that it has acted reasonably and in good_faith pursuant to sec_301_9100-3 because relief is being requested before the irs has discovered the failure_to_file the election agreement and the annual certifications sec_301_9100-1 provides that the commissioner has discretion to grant a taxpayer a reasonable extension of time under the rules set forth in sec_301_9100-3 to make a regulatory election under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 provides that an election includes an application_for relief in respect of tax and defines a regulatory election as an election whose due_date is prescribed by a regulation a revenue_ruling revenue_procedure notice or announcement sec_301_9100-3 provides that requests for relief subject_to this section will be granted when the taxpayer provides evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith within the meaning of sec_301_9100-3 subject_to the conditions set forth in sec_301_9100-3 and the grant of relief will not prejudice the interests of the government within the meaning of sec_301_9100-3 in the present situation the election and agreement described in sec_1 g i and the annual certification described in sec_1_1503-2t g vi b are regulatory elections as defined in sec_301_9100-1 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant taxpayer an extension of time provided that taxpayer satisfies the rules set forth in sec_301_9100-3 based on the facts and representations submitted we conclude that taxpayer satisfies the standards for relief as set forth in sec_301_9100-3 accordingly taxpayer is granted an extension of time of days from the date of this ruling letter for it to file plr-148064-05 the election and agreement described in sec_1_1503-2 and the annual certification described in sec_1_1503-2t g vi b as set forth above the granting of an extension of time is not a determination that taxpayer is otherwise eligible to file the election and agreement and the annual certifications sec_301_9100-1 a copy of this ruling letter should be associated with the election and agreement and the annual certifications this ruling is directed only to taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent no ruling has been requested and none is expressed as to the application of any other section of the code or regulations to the facts presented sincerely associate chief_counsel international by s meryl silver meryl silver office of the associate chief_counsel international enclosures copy for purposes


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom p si - plr-118583-99 date date x a d1 year dear this letter responds to your letter dated date and subsequent correspondence submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated on d1 of year a is the sole shareholder and president of x a represents that x was intended to be an s_corporation beginning year its first taxable_year x relied on its former accountant to file a form_2553 election by a small_business_corporation with the internal_revenue_service however the service_center does not have a record of a form_2553 for x for year for year and all subsequent years x has filed a form_1120s u s income_tax return for an s_corporation and a has filed individual tax returns consistent with x being an s_corporation sec_1362 of the code provides that if -- a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation for x's year taxable_year accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective for its year taxable_year within days following the date of this letter then such election will be treated as timely made for x’s year taxable_year a copy of this letter should be attached to the form_2553 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 of the code this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to x sincerely yours branch h grace kim assistant to the chief office of the assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes