t c memo united_states tax_court ethel miriam putnam petitioner v commissioner of internal revenue respondent docket no filed date ethel miriam putnam pro_se michael a raiken for respondent memorandum opinion ruwe judge this matter is before the court on respondent’s motion to dismiss for lack of prosecution and motion to impose sanctions in a notice_of_deficiency dated date respondent determined deficiencies in petitioner’s federal_income_tax and additions to tax under sec_6651 a sec_1 follows addition_to_tax year deficiency sec_6651 dollar_figure dollar_figure big_number dollar_figure big_number dollar_figure big_number dollar_figure big_number dollar_figure big_number dollar_figure background petitioner resided in maryland when she timely filed her petition with this court respondent’s answer in his answer filed date respondent asserted additions to tax under sec_6651 and sec_6654 as follows additions to tax_year sec_6651 sec_6654 dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure unless otherwise indicated all section references are to the internal_revenue_code in effect for all relevant years and all rule references are to the tax_court rules_of_practice and procedure dollar_figure dollar_figure dollar_figure dollar_figure see infra appendix b alternatively respondent asserts that additions to tax under sec_6651 should apply for the taxable years and years in issue if we decide that the sec_6651 additions to tax do not apply on date petitioner filed a motion to strike alleging that nothing in respondent’s answer proves that the constitution and code apply to her and that a hearing should be conducted in order for respondent to prove his facts the court subsequently denied petitioner’s motion to strike on date respondent filed on date a motion for entry of order that undenied allegations in the answer be deemed admitted pursuant to rule c on date petitioner filed a reply to respondent’s answer in which she generally denied the allegations set forth in respondent’s answer and further asserted that the u s constitution or the internal_revenue_code do not apply to her the court denied respondent’s april motion under rule c on date on date petitioner filed a letter dated date seeking informal_discovery from respondent respondent’s request for admissions on date respondent filed with the court and served on petitioner a first request for admissions see infra appendix a on date petitioner filed a response to respondent’s first request for admissions first response objecting to respondent’s requests because they are not relevant until the respondent provides the evidence to prove its sic allegations against the petitioner in her first response petitioner also states the petitioner has continually asked the respondent to show with evidence and witnesses that the irs has jurisdiction over the petitioner the us constitution and the tax laws apply to the petitioner the petitioner had taxable_income and that the petitioner has a requirement to file given that the irs and respondent have knowingly proceeded with these allegations and collection process without any evidence or witnesses the respondent has shown bad faith and lacks the proper execution of due process on date respondent filed a motion to review the sufficiency of petitioner’s response to first request for admissions motion to review the sufficiency pursuant to rule e shortly thereafter on date petitioner filed an amended response to respondent’s first request for admissions amended response petitioner again asserted in her amended response that on date petitioner also filed a motion to vacate or strike any presumption of correctness which the court denied on date respondent has not shown inter alia that the us constitution and the tax laws apply to the petitioner the petitioner had taxable_income and that the petitioner has a requirement to file because petitioner’s first response and amended response did not comply with rule did not set forth any legitimate objections or grounds for refusing to answer each request for admission and did not demonstrate that petitioner attempted in good_faith to respond to respondent’s first request for admissions by order dated date we granted respondent’s motion to review the sufficiency and directed petitioner to answer each of the admission requests included in respondent’s first request for admissions on or before date petitioner was also advised that failure to comply with our order may be grounds for sanctions including an order that respondent’s requested admissions be deemed admitted on date petitioner filed a response to respondent’s motion to review the sufficiency because we determined that petitioner’s response did not comply with our date order we directed petitioner by order dated date to file and serve on respondent a second amended response to respondent’s first request for admissions we also advised petitioner that the court would not be inclined to provide her with further opportunities to amend her responses to respondent’s first request for admissions before imposing sanctions on date petitioner filed her second amended response to respondent’s first request for admissions on date respondent filed a motion to review the sufficiency of petitioner’s second amended response to respondent’s first request for admissions petitioner filed an objection thereto on date by order dated date we granted respondent’s december motion and directed petitioner to file amended responses to respondent’s first request for admissions on or before date rule g provides for sanctions for failure to properly respond to respondent’s request for admissions including the sanctions in rule c of title x of the rules our date order cautioned petitioner as follows petitioner is advised that failure to comply with this order may result in the imposition of sanctions pursuant to tax_court rule c which states c sanctions if a party or an officer director or managing agent of a party or a person designated in accordance with rule b or c or rule c fails to obey an order made by the court with respect to the provisions of rule or then the court may make such orders as to the failure as are just and among others the following an order that the matter regarding which the order was made or any other designated facts shall be taken to be established for the purposes of the case in accordance with the claim of the party obtaining the order an order refusing to allow the disobedient party to support or oppose designated claims or defenses or prohibiting such party from introducing designated matters in evidence an order striking out pleadings or parts thereof staying further proceedings until the order is obeyed dismissing the case or any part thereof or rendering a judgment by default against the disobedient party petitioner failed to comply with the court’s order to file amended responses to respondent’s first request for admissions respondent’s discovery requests respondent served interrogatories and a request for production of documents on petitioner on date on date respondent filed a motion to compel responses to interrogatories and a motion to compel production of documents motions to compel petitioner filed separate objections to respondent’s motions to compel on date by orders dated date we directed petitioner to furnish respondent answers to the interrogatories and to provide respondent with the documents requested in the request for production of documents on or before date the orders further advised petitioner that failure to comply with this order may result in the imposition of sanctions pursuant to tax_court rule c which states c sanctions if a party or an officer director or managing agent of a party or a person designated in accordance with rule b or c or rule c fails to obey an order made by the court with respect to the provisions of rule or then the court may make such orders as to the failure as are just and among others the following an order that the matter regarding which the order was made or any other designated facts shall be taken to be established for the purposes of the case in accordance with the claim of the party obtaining the order an order refusing to allow the disobedient party to support or oppose designated claims or defenses or prohibiting such party from introducing designated matters in evidence an order striking out pleadings or parts thereof staying further proceedings until the order is obeyed dismissing the case or any part thereof or rendering a judgment by default against the disobedient party petitioner failed to comply with either january order regarding respondent’s motions to compel failure to appear at trial on date the court served on the parties a notice setting case for trial and a standing_pretrial_order which advised that petitioner’s trial was set for date in baltimore maryland the notice setting case for trial states in pertinent part the parties are hereby notified that this case is set for trial at the trial session beginning pincite am on monday february the calendar for that session will be called at that date and time and the parties are expected to be present and to be prepared to try the case your failure to appear may result in dismissal of the case and entry of decision against you the parties should contact each other promptly and cooperate fully so that the necessary steps can be taken to comply with these requirements your failure to cooperate may also result in dismissal of the case and entry of decision against you the standing_pretrial_order requires that all facts be stipulated to the maximum extent possible all documentary and written evidence be stipulated in accordance with rule b and each party prepare and submit pretrial memoranda not less than days before the first day of the trial session the standing_pretrial_order also warns the parties as follows sanctions the court may impose appropriate sanctions including dismissal for any unexcused failure to comply with this order see rule b such failure may also be considered in relation to sanctions against and disciplinary proceedings involving counsel see rule a on date petitioner filed a notice of withdrawal which was recharacterized as a motion to dismiss seeking to withdraw her petition from this court we subsequently denied petitioner’s motion as explained in our order dated date on date petitioner filed a motion for summary_judgment and a motion for continuance by order dated date we denied petitioner’s january motions and reminded the parties that the terms and conditions set forth in our standing_pretrial_order remain in full force and effect on date petitioner filed a second notice of withdrawal informing the court among other things that the petitioner will not comply with the court order and will not attend the trial the petitioner refuses to participate is sic such a dishonest and corrupt proceeding this court is merely a rubber-stamp of irs crimes and no honest adult could participate petitioner did not appear at trial on date respondent appeared and was heard during the course of the court’s session in baltimore maryland respondent filed a written motion to impose sanctions for petitioner’s noncompliance with court orders concerning respondent’s first request for admissions and the motions to compel shortly thereafter on date respondent filed a written motion to dismiss for lack of prosecution the petition in this case is based upon a notice_of_deficiency and therefore petitioner may not withdraw the petition with or without prejudice see 138_tc_372 discussion requests for admission rule a permits a party to serve a written request for admission of relevant and unprivileged matter upon the other party each matter in the request is deemed admitted unless within days after service of the request the party to whom the request is directed serves upon the requesting party a written answer specifically admitting or denying the matter involved in whole or in part or asserting that it cannot be truthfully admitted or denied and setting forth in detail the reasons why this is so or an objection stating in detail the reasons therefor rule c any fact deemed admitted under rule c is conclusively established rule f on date respondent filed with the court and served on petitioner a first request for admissions see infra appendix a petitioner’s responses to respondent’s first request for admissions did not set forth any legitimate objections or grounds for refusing to answer each request for admissions were replete with tax-protester tax-defier rhetoric and did not throughout her pleadings petitioner continually advanced arguments permeated with tax-protester and tax-defier rhetoric that have been universally rejected by this and other courts see arnstein v commissioner tcmemo_1990_591 tax ct memo lexis at we perceive no need to continued demonstrate a good-faith attempt to respond we issued orders directing petitioner to respond to respondent’s first request for admissions in accordance with rule and repeatedly warned petitioner that noncompliance may result in the imposition of sanctions under rule c despite these warnings petitioner failed to make any effort to demonstrate a good-faith attempt to respond to respondent’s first request for admissions therefore all facts in respondent’s first request for admissions are deemed admitted and incorporated herein by this reference see rule c discovery and failure to appear at trial on date respondent filed a motion to impose sanctions and on date filed a motion to dismiss for lack of prosecution rule provides in pertinent part a default if any party has failed to plead or otherwise proceed as provided by these rules or as required by the court then such party may be held in default by the court either on motion of another party or on the initiative of the court thereafter the court may enter a decision against the defaulting party upon such terms and conditions as the court may deem proper or may impose such sanctions see eg rule as the court may deem appropriate continued refute petitioner’s contentions 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 b dismissal for failure of a petitioner properly to prosecute or to comply with these rules or any order of the court or for other cause which the court deems sufficient the court may dismiss a case at any time and enter a decision against the petitioner the court may for similar reasons decide against any party any issue as to which such party has the burden_of_proof and such decision shall be treated as a dismissal for purposes of paragraphs c and d of this rule rule b generally applies to situations where the taxpayer bears the burden_of_proof on the other hand a rule a default would be the proper sanction as to those issues for which the commissioner bears the burden_of_proof see 926_f2d_1470 6th cir aff’g 91_tc_1049 dismissal of a case is a sanction resting in the discretion of the trial_court 87_tc_794 the court may dismiss a case and enter a decision against the taxpayer for failure to properly prosecute or to comply with the rules of this court rule b see also 86_tc_110 the failure to appear at trial and the failure to follow the provisions of our standing_pretrial_order are both grounds upon which we may dismiss for lack of prosecution see gross v commissioner tcmemo_2008_218 tax ct memo lexi sec_214 at similarly the failure to appear at trial is a ground for default and the court may enter a decision against the defaulting party see eg 72_tc_126 tucker v commissioner tcmemo_2012_309 at entry of default has the effect of admitting all well- pleaded facts in the commissioner’s answer see 87_tc_1403 a taxpayer’s failure to appear at trial and failure to comply with the orders of the court are proper bases for deeming the affirmative allegations in the answer to be true and entering a decision against the party in default see smith v commissioner t c pincite7 petitioner has consistently demonstrated her refusal to participate in these proceedings by failing to properly respond to respondent’s first request for admissions not cooperating with respondent in the discovery process not complying with our detailed orders or the standing_pretrial_order and failing to appear at trial on date by doing so petitioner has failed to proceed as provided by our rules and as required by this court moreover as previously discussed petitioner’s pleadings are replete with tax-protester rhetoric the court has shown leniency to petitioner by providing her ample opportunities to comply with the rules of this court and to cooperate with respondent in the discovery process furthermore petitioner was warned numerous times that her failure to comply with our orders and the rules of this court may result in sanctions including deeming certain facts as established for purposes of this case and rendering a judgment by default under the circumstances of this case petitioner’s conduct constitutes a failure to properly prosecute and a default under rule petitioner’s failure to appear at trial and to comply with our rules and the court’s specific orders warrants holding her in default under rule sec_123 and sec_104 accordingly we will deem the affirmative allegations in respondent’s answer true see infra appendix b deficiencies as a general_rule the commissioner’s determinations in the notice_of_deficiency are presumed correct and the taxpayer bears the burden of proving that the determinations are in error rule a 290_us_111 the term gross_income includes all income from whatever source derived see sec_61 and also includes undeniable accessions to wealth clearly realized and over which the taxpayers have complete dominion 348_us_426 sec_6012 requires that every individual having for the taxable_year gross_income which equals or exceeds the exemption_amount with certain exceptions not applicable in this matter file an income_tax return respondent determined that petitioner received substantial gross_income during the years in issue and failed to file federal_income_tax returns sec_6001 requires taxpayers to keep books_and_records which are sufficient to establish their gross_income deductions and credits and which allow the commissioner to verify their correct_tax liability sec_1_6001-1 income_tax regs sec_446 gives the commissioner broad authority to reconstruct a taxpayer’s income using any method that in the commissioner’s opinion clearly reflects income when the taxpayer fails to maintain adequate books_and_records see also 92_tc_661 when the taxpayer fails to maintain or produce adequate_records the internal_revenue_service irs may reconstruct his or her income using an indirect method of proof 379_f3d_638 9th cir aff’g tcmemo_2002_183 the commissioner’s reconstruction of a taxpayer’s income need only be reasonable in light of all surrounding facts and circumstances petzoldt v commissioner t c pincite respondent reconstructed petitioner’s income for the years in issue using the bank_deposits method the bank_deposits method is a well-established and proper method of income reconstruction see 96_tc_858 aff’d 959_f2d_16 2d cir the bank_deposits method assumes that all cash deposited into a taxpayer’s bank accounts during a specific period is gross_income and it requires that the commissioner take into account all nontaxable sources and deductible expenses that the commissioner knows of to arrive at the taxpayer’s taxable_income see 87_tc_74 bank_deposits are prima facie evidence of income id pincite and the taxpayer has the burden of showing that the determination is incorrect 64_tc_651 aff’d 566_f2d_2 6th cir a bank_deposits analysis is not invalidated even if the commissioner’s calculations are not entirely correct dileo v commissioner t c pincite respondent determined using the bank_deposits method that petitioner failed to report taxable_income for the years in issue respondent supports this determination with the affirmative allegations in his answer which have been deemed true as a result of petitioner’s default and the deemed admissions the affirmative allegations in respondent’s answer and the deemed admissions set forth in detail the facts upon which respondent determined petitioner’s gross_receipts for each year in issue and account for nontaxable sources to arrive at taxable_income petitioner did not produce any evidence to refute respondent’s bank_deposits calculations therefore on the basis of respondent’s affirmative allegations in his answer and the deemed admissions we sustain respondent’s determination as to petitioner’s income_tax deficiencies for all years in issue additions to tax a sec_6654 for all years in issue respondent determined that petitioner is liable for additions to tax for failure to pay estimated_tax under sec_6654 sec_6654 imposes an addition_to_tax on an underpayment of estimated income_tax unless one of the exceptions in sec_6654 applies a taxpayer has an obligation to pay estimated_tax only if she has a required_annual_payment 127_tc_200 aff’d 521_f3d_1289 10th cir the required_annual_payment is equal to the lesser_of of the tax shown on the taxpayer’s return for that year or if no return is filed of her tax for such year see sec_6654 or if the individual filed a return for the immediately preceding_taxable_year of the tax shown on that return see sec_6654 the addition_to_tax is mandatory regardless of extenuating circumstances or reasonable_cause see 96_tc_172 aff’d in part rev’d in part 981_f2d_350 8th cir 75_tc_1 petitioner failed to file federal_income_tax returns for the tax years in issue respondent’s affirmative allegations in the answer which have been deemed true conclusively establish that petitioner failed to make estimated payments for the tax years in issue furthermore the affirmative allegations state that p etitioner did not file a return for taxable years or and that p etitioner and her spouse last filed a joint federal_income_tax return for the taxable_year ended date petitioner did not offer any evidence that she paid estimated_tax for any of the years in issue accordingly we sustain respondent’s determination regarding the sec_6654 addition_to_tax for each of the years in issue b sec_6651 in his answer respondent asserted that petitioner is liable for additions to tax under sec_6651 for failure to timely pay the amount of tax shown on a return for each of the years in issue sec_6651 imposes an addition_to_tax unless the taxpayer establishes that the failure was due to reasonable_cause and not due to willful neglect the addition is calculated as of the amount shown as tax on the return but not paid with an additional for each month or fraction thereof during which the failure to pay continues up to a maximum of id sec_6651 applies only when an amount of tax is shown on a return 120_tc_163 and the commissioner has the burden of production to show an amount shown as tax on a return sec_6651 a substitute for return made by the secretary pursuant to sec_6020 is treated as the return filed by the taxpayer for purposes of determining the amount of the addition under sec_6651 sec_6651 the record shows that on date the irs prepared substitutes for returns for the years in issue pursuant to sec_6020 furthermore the unanswered admissions which we have deemed admitted establish that petitioner failed to pay any amounts of tax due for the years in issue therefore respondent has met his burden of production and petitioner is liable for the addition_to_tax under sec_6651 for each of the years in issue c sec_6651 in the notice_of_deficiency respondent determined that petitioner is liable for an addition_to_tax under sec_6651 for fraudulent_failure_to_file a return for each of the years in issue sec_6651 imposes an addition_to_tax for failure to timely file a tax_return unless the taxpayer can show that the failure is due to reasonable_cause and not due to willful neglect the addition equal sec_5 of the amount_required_to_be_shown_as_tax on the return for each month that the return is late not to exceed id for purposes of sec_6651 the amount required to be shown on the return shall be reduced by the amount of tax which is paid on or before the date prescribed for payment and the amount of credit against the tax which may be claimed on the return sec_6651 the addition_to_tax under sec_6651 provides if any failure_to_file any return is fraudulent paragraph of subsection a shall be applied-- by substituting percent for percent each place it appears and by substituting percent for percent respondent must establish by clear_and_convincing evidence that petitioner underpaid her tax and that petitioner’s failure_to_file was fraudulent see sec_7454 rule b 102_tc_632 as previously explained the underpayments of tax have been clearly established by the deemed admissions to establish fraudulent intent the commissioner must prove that a taxpayer intended to evade a tax known or believed to be owed by conduct intended to conceal mislead or prevent the collection of tax clayton v commissioner t c pincite the existence of fraud is a question of fact to be resolved upon consideration of the entire record and the taxpayer’s entire course of conduct petzoldt v commissioner t c pincite we have held that deemed admissions are sufficient to satisfy the commissioner’s burden_of_proof with respect to the issue of fraud see 77_tc_334 in the case of a default facts alleged by the commissioner in the answer are deemed to be true and judgment for the commissioner is proper if those facts are sufficient to show that the taxpayer fraudulently failed to file tax returns for the years in issue see smith v commissioner t c pincite7 with respect to the addition_to_tax under sec_6651 the entry of a default judgment as a sanction under rule c has the effect of deeming admitted all of the commissioner’s factual and conclusory allegations relating to sec_6651 that are set forth in the answer id pincite courts have developed several objective badges_of_fraud including understatement of income inadequate records failure_to_file tax returns providing implausible or inconsistent explanations of behavior concealment of assets failure to cooperate with taxing authorities engaging in illegal activities a pattern of behavior that indicates an intent to mislead dealing in cash and failure to make estimated_tax payments see 796_f2d_303 9th cir aff’g tcmemo_1984_ clayton v commissioner t c pincite 99_tc_202 no single factor is necessarily sufficient to establish fraud however a combination of several of these factors may be persuasive evidence of fraud 732_f2d_1459 6th cir aff’g tcmemo_1982_603 several badges_of_fraud are present in this case first petitioner engaged in a six-year pattern of failing to report substantial amounts of income second petitioner and her spouse’s various bank accounts show a steady flow of deposits yet petitioner failed to provide records of these amounts third petitioner did not file federal_income_tax returns or make estimated_tax payments for the years in issue finally the affirmative allegations in the answer provide detailed facts supporting the finding of fraud including the following kkk petitioner and mr putnam’s failure to maintain complete and accurate records of their income-producing activities and their failure to produce complete and accurate records to respondent in connection with the examination of petitioner and mr putnam’s income_tax returns for the taxable years and was fraudulent with intent to evade tax lll petitioner and mr putnam fraudulently and with intent to evade tax refused to provide documents and answer respondent’s agent’s questions during the examination of their income_tax returns for the taxable years and mmm petitioner fraudulently and with intent to evade tax failed to file her income_tax returns for the taxable years and and understated the amounts of income as follows unreported inc dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure nnn petitioner fraudulently and with intent to evade tax failed to file her income_tax_liability on her and returns as follows total correct_tax liability dollar_figure dollar_figure dollar_figure less tax shown on return or as previously adjusted dollar_figure dollar_figure dollar_figure understatement_of_tax dollar_figure dollar_figure dollar_figure total correct_tax liability dollar_figure dollar_figure dollar_figure less tax shown on return or as previously adjusted dollar_figure dollar_figure dollar_figure understatement_of_tax dollar_figure dollar_figure dollar_figure ooo petitioner’s failure_to_file her tax returns for each of the taxable years and is due to fraud for the foregoing reasons we conclude that respondent has met his burden with respect to the additions to tax under sec_6651 by relying on the deemed admissions and the affirmative allegations in the answer accordingly we sustain respondent’s determination of the addition_to_tax under sec_6651 for fraud for each year in issue whipsaw respondent issued separate notices of deficiency to both petitioner and her spouse mr putnam based on substitutes for returns prepared under sec_6020 mr putnam did not file a petition with this court in response to his notice_of_deficiency and respondent subsequently assessed the deficiencies against mr putnam because respondent was unable to obtain adequate information from petitioner as to whether the income at issue belongs to petitioner mr putnam or both respondent has determined to attribute the income to both petitioner and mr putnam to the extent that the income could not specifically be attributable to either at trial on date we directed respondent to file a memorandum of law on or before date detailing the government’s whipsaw_position and explain what safeguards are in place to ensure that tax on the same income is not collected twice from both petitioner and mr putnam we begin by noting the functional importance of the government’s whipsaw_position as it applies to the matter before us although mr putnam did whipsaw is a situation where there is one pool of income and two potential taxpayers and the income might escape taxation altogether if respondent were unsuccessful in pursuing only one taxpayer 211_f3d_504 9th cir aff’g tcmemo_1998_297 by asserting inconsistent positions against petitioner and mr putnam respondent can better facilitate the collection of the appropriate income_tax deficiencies and additions to tax not file a petition in this court he is not precluded from paying the determined amounts and filing an administrative claim_for_refund with the irs see sec_7422 once the irs acts upon the administrative refund claim or after six months pass from the date of filing mr putnam can file a refund_suit in the appropriate district_court or in the u s court of federal claims see sec_6532 thus respondent’s whipsaw_position protects the public fisc in the event that mr putnam prevails in a refund_suit by establishing that the income at issue belongs to petitioner in situations such as this the commissioner is entitled to defend against inconsistent results by determining in separate notices of deficiency that two parties are liable for the same deficiency 108_tc_430 91_tc_673 rev’d on other grounds 891_f2d_1167 5th cir on date respondent filed a memorandum of law explaining that the irs has procedures in place that are specifically set forth in the internal_revenue_manual to ensure that whipsaw assessments are only collected once internal_revenue_manual pt date provides that related case s should be controlled by a single revenue_officer to monitor payments and prevent over-collection of the liability if more than one revenue_officer is assigned to the cases because of the localities of the taxpayers the revenue officers are to closely coordinate their collection efforts to ensure that the liability is collected only once id therefore the irs has safeguards in place to ensure that a whipsaw assessment against both petitioner and mr putnam will not ultimately result in collecting tax from two separate individual taxpayers on the same income 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 order and decision will be entered appendix a respondent’s request for admission sec_1 petitioner did not file a federal_income_tax return for the following years a taxable_year b taxable_year c taxable_year d taxable_year e taxable_year f taxable_year g taxable_year petitioner did not make any payments to respondent for taxes due for the following years a taxable_year b taxable_year c taxable_year d taxable_year e taxable_year f taxable_year in petitioner married mr denis putnam mr putnam petitioner and mr putnam last filed a joint federal_income_tax return for the taxable_year ended date on date mr putnam caused to be filed with the state of delaware secretary of state division of corporations a certificate of incorporation for a closely_held_corporation called western enterprises inc company on date mr putnam opened a small_business checking account under the name of the company at sandy spring national bank of maryland company checking account the company checking account bank account number ends in the four digits of on date petitioner and mr putnam obtained signature_authority over the company checking account petitioner is listed as the assistant treasurer on the signature card for the company checking account since through the end of the company checking account’s signature card was not updated during the years and petitioner and mr putnam paid for personal expenses out of the company checking account the company has never filed a federal_income_tax return on date the company entered into a contract with apex systems inc as an independent_contractor during and mr putnam and or the company received payments from various entities via check the checks referred to in paragraph above were made out to either mr putnam or the company during and petitioner and mr putnam maintained the following bank accounts a company checking account b bank account ending in at suntrust bank held in the name of denis ethel putnam joint account during mr putnam also maintained a bank account ending in at m t bank mr putnam’s account petitioner and mr putnam made regular deposits of the checks referred to in paragraph above into one or more of the company checking account the joint account and mr putnam’s account during petitioner and mr putnam made bank_deposits in the following amounts a dollar_figure into the company checking account b dollar_figure into the joint account c dollar_figure into mr putnam’s account during petitioner and mr putnam made bank_deposits in the following amounts a dollar_figure into the company checking account b dollar_figure into the joint account during petitioner and mr putnam made bank_deposits in the following amounts a dollar_figure into the company checking account b dollar_figure into the joint account during petitioner and mr putnam made bank_deposits in the following amounts a dollar_figure into the company checking account b dollar_figure into the joint account during petitioner and mr putnam made bank_deposits in the following amounts a dollar_figure into the company checking account b dollar_figure into the joint account during petitioner and mr putnam made bank_deposits in the following amounts a dollar_figure into the company checking account b dollar_figure into the joint account petitioner did not receive any gifts inheritances legacies or devises in the following years a taxable_year b taxable_year c taxable_year d taxable_year e taxable_year f taxable_year appendix b respondent’s answer paragraphs further answering the petition and to assert the failure to pay addition_to_tax for taxable years and under sec_6651 in the amounts of dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure respectively respondent alleges the following a petitioner did not file a return for taxable years or b on date respondent prepared substitute for returns sfr on behalf of petitioner c petitioner did not make any payments to respondent for taxes due for taxable years or further answering the petition and to assert the failure to make estimated payments addition_to_tax for taxable years and under sec_6654 in the amounts of dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure respectively respondent alleges the following a petitioner did not file a return for taxable years or b petitioner did not make any payments to respondent for taxes due for taxable years or further answering the petition and in support of the determination that petitioner’s failure_to_file her tax returns for the taxable years and is due to fraud respondent alleges a in petitioner married mr dennis putnam mr putnam return for the taxable_year ended date b petitioner and mr putnam last filed a joint federal_income_tax c on date mr putnam caused to be filed with the state of delaware secretary of state division of corporations through the company corporation a certificate of incorporation for a close corporation called western enterprises inc company d on date mr putnam opened a small_business checking account under the name of the company at sandy spring national bank of maryland company checking account e the company checking account bank account number ends in the four digits of f on date petitioner and mr putnam obtained signature_authority over the company checking account g mr putnam is listed as the treasurer on the signature card for the company checking account h petitioner is listed as the assistant treasurer on the signature card for the company checking account i since to date the company checking account’s signature card has not been updated j petitioner and mr putnam paid for personal expenses out of the company checking account k the company has never filed a federal_income_tax return l during mr putnam worked for america online aol as an employee m during mr putnam's title at aol was principle systems programmer n mr putnam ceased working for aol as of date o on date the company entered into a contract with apex systems inc as an independent_contractor p mr putnam signed the contract as a contract representative q mr putnam agreed to the position of c perl developer in the r in mr putnam represented himself as president of the contract company s during the years at issue mr putnam and or the company received payments from various entities via check t petitioner and mr putnam made regular deposits of the checks into the company checking account a bank account held jointly between petitioner and mr putnam or in only a bank account held only in mr putnam’s name u the deposited checks were made out to either mr putnam or the company v neither petitioner nor mr putnam maintained or submitted to respondent during respondent’s examination complete and adequate books and accounts of the income-producing activities for each of the taxable years and as required by the applicable provisions of the internal_revenue_code i r c and the regulations treas regs promulgated thereunder w respondent is unable to determine whether the income deposited into petitioner and mr putnam’s joint bank account and the company checking account belongs to petitioner or mr putnam or both and therefore has proposed to whipsaw the income to both to the extent that the income is not specifically attributable to either petitioner or mr putnam x respondent has determined petitioner’s correct adjusted gross income for the taxable years and on the basis of the bank_deposits method y during and petitioner and mr putnam maintained the following bank accounts bank name on accnt accnt no sand spring bank western enterprises inc m t bank provident dennis putnam suntrust bank dennis ethal putnam z during petitioner and mr putnam made deposits in the banks accounts in subparagraph y above in the following amounts accnt no deposits dollar_figure dollar_figure dollar_figure aa during petitioner and mr putman made dollar_figure of total deposits into all of their bank accounts bb during the taxable_year petitioner’s reduction in total deposits for amounts attributable to nontaxable sources was as follows nontaxable source transfers between accounts dollar_figure refinance dollar_figure misc refunds deposits dollar_figure mr putnam's net wages deposited dollar_figure reductions for nontaxable sources dollar_figure account was closed in date into petitioner and mr putnam’s bank accounts were as follows cc during the taxable_year petitioner’s net taxable deposits total bank_deposits dollar_figure less reductions for nontaxable sources dollar_figure net taxable deposits dollar_figure dd petitioner did not file a tax_return for ee the unreported adjusted_gross_income of petitioner for the taxable_year as summarized from the allegations contained in subparagraphs z through dd of this paragraph are as follows total bank_deposits dollar_figure less reductions for nontaxable items dollar_figure net taxable deposits dollar_figure less gross_receipts as reported dollar_figure unreported gross_receipts dollar_figure ff during petitioner and mr putnam made deposits in the banks accounts in subparagraph y above in the following amounts accnt no deposits dollar_figure dollar_figure gg during petitioner and mr putman made dollar_figure of total deposits into all of their bank accounts hh during the taxable_year petitioner’s reduction in total deposits for amounts attributable to nontaxable sources was as follows nontaxable source misc refunds deposits dollar_figure reductions for nontaxable sources dollar_figure ii during the taxable_year petitioner's net taxable deposits into petitioner and mr putnam’s bank accounts were as follows total bank_deposits dollar_figure less reductions for nontaxable sources dollar_figure net taxable deposits dollar_figure jj petitioner did not file a tax_return for kk the unreported adjusted_gross_income of petitioner for the taxable_year as summarized from the allegations contained in subparagraphs ff through jj of this paragraph are as follows total bank_deposits dollar_figure less reductions for nontaxable items dollar_figure net taxable deposits dollar_figure less gross_receipts as reported dollar_figure unreported gross_receipts dollar_figure ll during petitioner and mr putnam made deposits in the banks accounts in subparagraph y above in the following amounts accnt no deposits dollar_figure dollar_figure total deposits into all of their bank accounts mm during petitioner and mr putman made dollar_figure of nn during the taxable_year petitioner’s reduction in total deposits for amounts attributable to nontaxable sources was as follows nontaxable source transfers between accounts dollar_figure misc refunds deposits dollar_figure reductions for nontaxable sources dollar_figure oo during the taxable_year petitioner’s net taxable deposits into petitioner and mr putnam’s bank accounts were as follows total bank_deposits dollar_figure less reductions for nontaxable sources dollar_figure net taxable deposits dollar_figure pp petitioner did not file a tax_return for qq the unreported adjusted_gross_income of petitioner for the taxable_year as summarized from the allegations contained in subparagraphs through pp of this paragraph are as follows total bank_deposits dollar_figure less reductions for nontaxable items dollar_figure net taxable deposits dollar_figure less gross_receipts as reported dollar_figure unreported gross_receipts dollar_figure rr during petitioner and mr putnam made deposits in the banks accounts in subparagraph y above in the following amounts accnt no deposits dollar_figure dollar_figure ss during petitioner and mr putman made dollar_figure of total deposits into all of their bank accounts tt during the taxable_year petitioner’s reduction in total deposits for amounts attributable to nontaxable sources was as follows nontaxable source transfers between accounts dollar_figure misc refunds deposits dollar_figure reductions for nontaxable sources dollar_figure uu during the taxable_year petitioners’ net taxable deposits into petitioner and mr putnam’s bank accounts were as follows total bank_deposits dollar_figure less reductions for nontaxable sources dollar_figure net taxable deposits dollar_figure vv petitioner did not file a tax_return for ww the unreported adjusted_gross_income for petitioner of the taxable_year as summarized from the allegations contained in subparagraphs rr through vv of this paragraph are as follows total bank_deposits dollar_figure less reductions for nontaxable items dollar_figure net taxable deposits big_number less gross_receipts as reported dollar_figure unreported gross_receipts dollar_figure xx during petitioner and mr putnam made deposits in the banks accounts in subparagraph y above in the following amounts accnt no deposits dollar_figure dollar_figure yy during petitioner and mr putman made dollar_figure of total deposits into all of their bank accounts zz during the taxable_year petitioner’s reduction in total deposits for amounts attributable to nontaxable sources was as follows nontaxable source transfers between accounts dollar_figure misc refunds deposits dollar_figure reductions for nontaxable sources dollar_figure aaa during the taxable_year petitioner’s net taxable deposits into petitioner and mr putnam’s bank accounts were as follows total bank_deposits dollar_figure less reductions for nontaxable sources dollar_figure net taxable deposits dollar_figure bbb petitioner did not file a tax_return for ccc the unreported adjusted_gross_income of petitioner for the taxable_year as summarized from the allegations contained in subparagraphs xx through bbb of this paragraph are as follows total bank_deposits dollar_figure less reductions for nontaxable items dollar_figure net taxable deposits dollar_figure less gross_receipts as reported dollar_figure unreported gross_receipts dollar_figure ddd during petitioner and mr putnam made deposits in the banks accounts in subparagraph y above in the following amounts accnt no deposits dollar_figure dollar_figure eee during petitioner and mr putman made dollar_figure of total deposits into all of their bank accounts fff during the taxable_year petitioner’s reduction in total deposits for amounts attributable to nontaxable sources was as follows nontaxable source transfers between accounts dollar_figure misc refunds deposits dollar_figure reductions for nontaxable sources dollar_figure ggg during the taxable_year petitioner’s net taxable deposits into petitioner and mr putnam's bank accounts were as follows total bank_deposits dollar_figure less reductions for nontaxable sources dollar_figure net taxable deposits dollar_figure hhh petitioner did not file a tax_return for iii the unreported adjusted_gross_income of petitioner of the taxable years as summarized from the allegations contained in subparagraphs ddd through hhh of this paragraph are as follows total bank_deposits dollar_figure less reductions for nontaxable items dollar_figure net taxable deposits dollar_figure less gross_receipts as reported dollar_figure unreported gross_receipts dollar_figure jjj petitioner during the taxable years and did not receive any gifts inheritances legacies or devises kkk petitioner and mr putnam’s failure to maintain complete and accurate records of their income-producing activities and their failure to produce complete and accurate records to respondent in connection with the examination of petitioner and mr putnam’s income_tax returns for the taxable years and was fraudulent with intent to evade tax lll petitioner and mr putnam fraudulently and with intent to evade tax refused to provide documents and answer respondent’s agent’s questions during the examination of their income_tax returns for the taxable years and mmm petitioner fraudulently and with intent to evade tax failed to file her income_tax returns for the taxable years and and understated the amounts of income as follows unreported inc dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure nnn petitioner fraudulently and with intent to evade tax failed to file her income_tax_liability on her and returns as follows total correct_tax liability dollar_figure dollar_figure dollar_figure less tax shown on return or as previously adjusted dollar_figure dollar_figure dollar_figure understatement_of_tax dollar_figure dollar_figure dollar_figure total correct_tax liability dollar_figure dollar_figure dollar_figure less tax shown on return or as previously adjusted dollar_figure dollar_figure dollar_figure understatement_of_tax dollar_figure dollar_figure dollar_figure ooo petitioner’s failure_to_file her tax returns for each of the taxable years and is due to fraud


internal_revenue_service number info release date index number --------------------------------------------------- ----------------------- --------------- --------------------------------- department of the treasury washington dc person to contact --------------------- id no ----------- telephone number --------------------- refer reply to cc psi b1 - genin-160628-04 date june taxpayer --------------------------------------------------- dear ---------------- this responds to your letters dated date and date in which it was requested that we recognize taxpayer’s election to be an s_corporation effective for the tax_year under revproc_97_48 a corporation which meets the definition of a small_business_corporation under sec_1362 of the internal_revenue_code may elect to be treated as an s_corporation in order for an s_corporation_election to be effective for the taxable_year in which it is made it must be made within the first two and one-half months of the corporation’s taxable_year sec_1362 if an s election is made after that time then the corporation will not be treated as an s_corporation until the taxable_year following the one in which the s election was filed sec_1362 an election made after the first two and one-half months of the taxable_year in which it is intended to be effective may be treated as effective if the secretary determines that there was reasonable_cause for the corporation’s failure to make a timely election sec_1362 unfortunately relief under revproc_97_48 is unavailable because the irs mailed a notice indicating that there was a problem with the s_corporation e lection within six months of the date on which the s_corporation timely filed its tax_return for the first year that it intended to be an s_corporation announcement copy enclosed provides guidance on seeking relief for late s_corporation elections generally to request relief for a late s_corporation_election you must request a private_letter_ruling from the national_office the procedures for requesting a private_letter_ruling are set out in revproc_2005_1 copy enclosed in addition revproc_2005_1 requires taxpayers to submit a user_fee along with their ruling_request the standard user_fee for a private_letter_ruling is dollar_figure however taxpayers with gross_income of less than dollar_figure million on their tax_return for the most recent 12-month taxable_year qualify for a reduced user_fee in the amount of dollar_figure if you qualify for the reduced fee you must include a statement certifying your gross_income for the last 12-month taxable_year otherwise the higher fee will apply if you decide to submit a formal request for a private_letter_ruling please review appendix b of revproc_2005_1 and be certain to include all required procedural statements also include the proper user_fee and any documents that substantiate your intent to be an s_corporation from inception please refer your request to our office by adding the following to the address attn cc pa t p o box ben franklin station washington dc direct to cc psi room please contact ----------------------at --------------------- not a toll-free call we hope that this information is helpful to you if you have additional questions sincerely s dianna k miosi dianna k miosi chief branch office of the associate chief_counsel passthroughs and special industries enclosures announcement revproc_2005_1


t c summary opinion united_states tax_court barton slavin and amy weinstock slavin petitioners v commissioner of internal revenue respondent docket no 7785-12s filed date barton slavin and amy weinstock slavin pro sese theresa g mcqueeney for respondent summary opinion gale judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case respondent determined the following deficiencies and accuracy-related_penalties under sec_6662 with respect to petitioners’ federal_income_tax for taxable years and years at issue year deficiency dollar_figure big_number big_number penalty sec_6662 dollar_figure big_number big_number after the parties’ concessions the issues for our consideration are whether petitioners are entitled to mortgage interest_expense deductions for unless otherwise indicated all section references are to the internal_revenue_code code in effect for the years at issue and all rule references are to the tax_court rules_of_practice and procedure all monetary amounts are rounded to the nearest dollar for petitioners have conceded that they had unreported taxable interest_income that they are not entitled to their claimed real_estate loss deduction in the amount that respondent has disallowed and that respondent’s adjustments to their claimed child tax_credits are computational for and petitioners have conceded that they are not entitled to their claimed real_estate loss deductions in the amounts that respondent has disallowed and that the other adjustments including the taxation of state and local_tax refunds are computational the parties have also agreed that for petitioners had a dollar_figure capital_gain taxable at the long-term_capital_gains_rate respondent has conceded that petitioners had reasonable_cause for their failure to report the capital_gain and that they are not liable for the portion of the sec_6662 penalty for attributable to the capital_gain adjustment taxable years and and whether petitioners are liable for accuracy- related penalties under sec_6662 for the years at issue background some of the facts have been stipulated and are so found the stipulated facts are incorporated herein by this reference petitioners resided in new york when the petition was filed petitioner husband is a litigation attorney who also has experience with real_estate transactions petitioner wife worked in sales helped with petitioners’ rental_activity and cared for their children during the years at issue during petitioners purchased from family friends sellers two semi- detached houses in rockville centre new york collectively property as a rental property in lieu of obtaining third-party financing on date petitioners executed a mortgage on the property and a promissory note for dollar_figure payable to the sellers under the terms of the promissory note petitioners were to make two interest-only payments per year representing an annual interest rate of until the maturity_date in at which date the note would be due in full the interest payments were due in may and december each as long as petitioners did not make principal payments the semiannual interest payments were to be dollar_figure year the may interest payments were to be applied to the unpaid interest for november and december of the previous year and to the unpaid interest for january through april of the current_year the december interest payments were to be applied to the unpaid interest for may through october of the current_year petitioners paid the sellers dollar_figure of interest in however the rental property was not as profitable as petitioners had hoped and they did not make any payments on the promissory note for or on date petitioners and one of the sellers executed a mortgage modification agreement capitalizing dollar_figure of unpaid interest for into the unpaid mortgage principal on date petitioners and one of the sellers executed a second mortgage modification agreement capitalizing dollar_figure of unpaid interest for into the unpaid mortgage principal neither of the mortgage modification agreements altered the annual interest rate after a series of conversations the dates of which are not clear from the record petitioners and one of the sellers entered into an interest rate modification the date mortgage modification agreement stated that the unpaid principal balance of the original promissory note was dollar_figure although petitioners did not make any interest payments for and although under the terms of the promissory note petitioners were to pay annually dollar_figure of interest spread over two payments the mortgage modification agreements addressed only dollar_figure of unpaid interest for each year agreement on date under the terms of this agreement the annual interest rate as set forth in the promissory note was reduced from to effective date the interest rate modification agreement did not address how the agreement to retroactively reduce the interest rate affected the two mortgage modification agreements or the mortgage principal during the years at issue petitioners were cash_basis taxpayers they timely filed joint form sec_1040 u s individual_income_tax_return for the years at issue petitioners attached to each form_1040 a schedule e supplemental income and loss on which they reported that they were real_estate professionals and claimed a rental real_estate loss deduction on each schedule e petitioners claimed inter alia a mortgage interest_expense_deduction of dollar_figure they did not submit into evidence documentation sufficient to substantiate their status as real_estate professionals or their entitlement to the rental real_estate loss deductions petitioners hired mayeer karkowsky a certified_public_accountant who is also an attorney admitted to the u s tax_court bar to prepare their form sec_1040 for the years at issue mr karkowsky appeared and testified at trial he discussed with petitioner husband before the filing of the form sec_1040 the mortgage interest_expense deductions for the years at issue but he did not have either mortgage modification agreement or the interest rate modification agreement when he was preparing the returns he advised petitioner husband that because of the capitalized_interest and the interest rate reduction petitioners’ mortgage had been substantially_modified under sec_1_1001-3 income_tax regs and therefore petitioners qualified for the mortgage interest_expense deductions respondent issued to petitioners a notice_of_deficiency dated date for the years at issue petitioners timely filed a petition for redetermination of the deficiencies i burden_of_proof discussion generally the commissioner’s determinations in a notice_of_deficiency are presumed correct and the taxpayer bears the burden of proving that those determinations are erroneous rule a 290_us_111 the taxpayer likewise bears the burden of proving his entitlement to deductions allowed by the code and of substantiating the amounts of expenses underlying claimed deductions sec_6001 503_us_79 sec_1_6001-1 income_tax regs under sec_7491 in certain circumstances the burden_of_proof may shift from the taxpayer to the commissioner petitioners have not claimed or shown that they meet the requirements of sec_7491 to shift the burden_of_proof to respondent as to any relevant factual issue ii mortgage interest_expense deductions petitioners did not make any payments toward the promissory note for or rather the two mortgage modification agreements each capitalized dollar_figure of unpaid interest into the mortgage principal petitioners claimed on their and schedules e mortgage interest_expense deductions for the amounts of the capitalized_interest respondent disallowed the claimed deductions sec_163 provides that there shall be allowed as a deduction all interest_paid or accrued within the taxable_year on indebtedness cash_basis taxpayers such as petitioners are allowed a deduction for interest_paid during the taxable_year in cash or its equivalent see 429_us_569 107_tc_35 aff’d 141_f3d_403 2d cir 80_tc_1174 when a lender capitalizes unpaid interest by adding the unpaid interest amount to the loan principal a cash_basis borrower is not entitled to a current interest_deduction for the interest that is added to the loan’s principal balance 70_tc_482 aff’d 652_f2d_598 6th cir petitioners did not pay mortgage interest for or in cash or its equivalent the mortgage modification agreements did not constitute interest payments but rather allowed petitioners to postpone the paying of interest as cash_basis taxpayers they are not entitled to deductions for the interest that was capitalized into the unpaid mortgage principal petitioners attempt to distinguish the above-cited caselaw by contending that the capitalization of the interest was a true discharge of the interest because there was a substantial modification of the promissory note under sec_1_1001-3 income_tax regs even if we were to accept petitioners’ theory that there was a substantial modification of the promissory note for which we do not that theory does not help them sec_1_1001-3 income_tax regs addresses when a modification of the terms of a debt_instrument results in recognition of gain_or_loss under sec_1001 it does not concern the deductibility of interest payments moreover 856_f2d_1169 8th cir aff’g 86_tc_655 which petitioners cite in support of their case is distinguishable that case concerned accrual basis taxpayers which petitioners are not and addressed whether capitalized_interest was properly includible in the taxpayers’ amount_realized upon foreclosure of the mortgaged property see smoker v commissioner tcmemo_2013_56 at explaining that allan does not support a cash_basis taxpayer’s claimed deduction for unpaid interest that was capitalized into the principal of the loan as cash_basis taxpayers petitioners were not entitled to deduct unpaid interest that was capitalized in the mortgage principal we sustain respondent’s disallowance of petitioners’ mortgage interest_expense deductions for iii sec_6662 accuracy-related_penalties respondent determined that petitioners are liable for accuracy-related_penalties pursuant to sec_6662for the years at issue the commissioner bears the burden of production regarding a taxpayer’s liability for any penalty sec_7491 see 116_tc_438 once the commissioner has met this burden the taxpayer must provide persuasive evidence that the commissioner’s determination was incorrect see rule a higbee v commissioner t c pincite sec_6662 and b imposes a penalty on any portion of an underpayment_of_tax required to be shown on a return attributable to negligence or disregard of rules or regulations the term negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws including any failure to maintain adequate books_and_records or to substantiate items properly and the term disregard includes any careless reckless or intentional disregard sec_6662 sec_1_6662-3 and income_tax regs negligence is strongly indicated where a taxpayer fails to make a reasonable attempt to ascertain the correctness of a deduction credit or exclusion on a return that would seem to a reasonable and prudent person to be too good to be true under the circumstances sec_1_6662-3 income_tax regs petitioners conceded inter alia that respondent’s adjustments with respect to their unreported interest_income for their rental real_estate loss deductions and their state and local_tax refunds were correct they also failed to maintain adequate_records showing their entitlement to the claimed rental real_estate loss deductions for the years at issue moreover petitioners especially given petitioner husband’s background and education level should have known that as cash_basis taxpayers they were not entitled to deduct unpaid interest respondent has met his burden of production with regard to the imposition of accuracy-related_penalties for the years at issue taxpayers may avoid liability for the sec_6662 penalty if they demonstrate that they had reasonable_cause for the underpayment and that they acted in good_faith with respect to the underpayment sec_6664 reasonable_cause and good_faith are determined on a case-by-case basis taking into account all pertinent facts and circumstances sec_1_6664-4 income_tax regs generally the most important factor is the extent of the taxpayer’s efforts to assess his proper tax_liability id circumstances that may indicate 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 id reliance on professional advice may constitute reasonable_cause and good_faith but it must be established that the reliance was reasonable 89_tc_849 aff’d on another issue 904_f2d_1011 5th cir aff’d 501_us_868 the taxpayer’s education sophistication and business experience will be relevant in determining whether the taxpayer’s reliance on tax_advice was reasonable and in good_faith sec_1_6664-4 income_tax regs petitioners argue that they acted in good_faith by relying on professional advice although petitioners demonstrated that their adviser was a competent professional with sufficient experience to justify reliance see 115_tc_43 aff’d 299_f3d_221 3d cir we are not convinced they had reasonable_cause and acted in good_faith first nothing in the record indicates that petitioners sought or relied on advice from mr karkowsky with respect to the adjustments that they have conceded see id second with respect to the mortgage interest_expense deductions petitioners have not proven that their reliance on mr karkowsky was reasonable although petitioner husband had discussed the mortgage interest_expense deductions with him mr karkowsky did not have the two mortgage modification agreements or the interest rate modification agreement when he prepared the returns see id stating that taxpayers must provide necessary and accurate information to their adviser moreover petitioners’ reliance on mr karkowsky’s theory of the deductibility of the interest was not reasonable even if petitioners did not understand that sec_1_1001-3 income_tax regs was not applicable to their situation petitioner husband understood that mr karkowsky’s advice was at least partially based on the interest rate reduction from to however on each of their form sec_1040 petitioners deducted mortgage interest_expenses of although the interest rate modification agreement was not executed until date we give petitioners the benefit of the doubt and assume without deciding that they and the sellers had orally agreed to the interest rate reduction before mr karkowsky prepared petitioners’ federal_income_tax return if there was no oral agreement before mr karkowsky prepared petitioners’ federal_income_tax return petitioners’ reliance on mr karkowsky’s advice for their mortgage interest_deduction would also be unreasonable dollar_figure this is the same amount of interest that petitioners had deducted for when the interest rate was especially given petitioner husband’s education level petitioners should have realized that an interest rate reduction would have translated into a smaller mortgage interest_expense_deduction for the year petitioners have failed to prove that they had reasonable_cause or that they acted in good_faith and they are liable for the sec_6662 penalties for and and for the penalty for in excess of the amount that respondent has conceded iv conclusion we have considered the parties’ remaining arguments and to the extent not discussed above conclude those arguments are irrelevant moot or without merit to reflect the parties’ concessions and the foregoing decision will be entered under rule


number release date id office uilc cca_2011042115354843 ---------------------------- from -------------- sent thursday date pm to ----------------------- cc subject re statute_of_limitations question out of curiosity why does the ao want to calculate the sol without regard to the if the sol expires on per agreement then the sol under the code is not relevant is it the additional days would not be tacked on as there is no stat_notice that can be petitioned the additional days provides a period for petitioning the tax_court as a result the number of days remaining on the sol would be tacked on to the day that the state notice is rescinded