t c summary opinion united_states tax_court robert l hand and tina a meilleur petitioners v commissioner of internal revenue respondent docket no 13039-10s filed date john j weiler and christian n weiler for petitioners emile l hebert iii for respondent armen special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any unless otherwise indicated all subsequent section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure other court and this opinion shall not be treated as precedent for any other case respondent determined a deficiency in petitioners’ federal_income_tax of dollar_figure and an accuracy-related_penalty of dollar_figure after concessions by the parties the issues for decision are whether petitioners are entitled to a business_expense deduction under sec_162 for expenses paid for flight lessons we hold that they are not and whether petitioners are liable for the accuracy-related_penalty under sec_6662 we hold that they are background some of the facts have been stipulated and they are so found we incorporate by reference the parties’ stipulation of facts and accompanying exhibits petitioners resided in the state of louisiana when the petition was filed all references to petitioner in the singular are to petitioner robert l hand petitioner is licensed as a financial adviser by the national association of securities dealers he has worked in the financial industry for approximately years and received a master of business administration m b a degree in in addition petitioner is an associate commercial real_estate all dollar amounts are rounded to the nearest dollar broker commercial realtor licensed by the state of louisiana real_estate commission petitioner tina a meilleur is a certified_public_accountant c p a and attends continuing education classes necessary to maintain her license she was also a highly compensated director of a supply chain unit at entergy corp in as a commercial realtor petitioner identifies large properties to list for sale and crafts detailed marketing brochures for prospective buyers sometime shortly after date petitioner began chartering airplanes to find and evaluate properties from the air petitioner continued this practice throughout and during each flight a licensed pilot flew the airplane while petitioner took aerial photographs of properties to include in the marketing brochures that he presented to prospective buyers in late petitioner began taking flight lessons so that he could obtain a private pilot’s license and pilot his own plane in december of petitioner purchased a cessna 172s aircraft petitioners filed a joint federal_income_tax return for and deducted the cost of the flight lessons as a business_expense on their schedule c profit or loss from business petitioner is unable to provide any receipts or entergy corp is a utility company that inter alia delivers electricity to utility customers in louisiana invoices from the original vendors for his flight lesson expenses and petitioners have conceded that they are not entitled to deduct over dollar_figure of other disallowed business_expenses a burden_of_proof discussion generally the commissioner’s determinations are presumed correct and the taxpayer bears the burden of proving that those determinations are erroneous rule a 290_us_111 deductions in particular are a matter of legislative grace and are narrowly construed rule a 503_us_79 292_us_435 consequently the taxpayer bears the burden of proving that he or she is entitled to any deduction claimed 319_us_590 b flight lessons under sec_262 no deduction is allowed for personal living or family_expenses sec_1_262-1 income_tax regs provides that a taxpayer’s expenditures_for obtaining or pursuant to sec_7491 the burden_of_proof as to factual matters may shift to the commissioner under certain circumstances petitioners have neither alleged that sec_7491 applies nor established their compliance with its requirements accordingly petitioners bear the burden_of_proof see rule a furthering education are not deductible unless they qualify as business_expenses under both sec_162 and sec_1_162-5 income_tax regs raines v commissioner tcmemo_1983_125 this court has held that expenditures_for flight training constitute education expenses subject_to sec_1_162-5 income_tax regs lee v commissioner tcmemo_1981_26 affd 723_f2d_1424 9th cir sec_1_162-5 income_tax regs provides that expenditures made by an individual for education may be deductible as business_expenses if the education maintains or improves skills required by the individual’s trade_or_business whether education maintains or improves skills required by a taxpayer’s trade_or_business is a question of fact 77_tc_1124 citing 51_tc_243 affd without published opinion 9th cir date the burden_of_proof is on petitioners to show that there was a direct and proximate relationship between the flight lessons petitioner received and the skills required to be a commercial realtor see id pincite citing 69_tc_877 and 46_tc_321 on the record before us we are unable to conclude that petitioners have satisfied their burden_of_proof petitioners contend that the cost of the flight lessons at issue is an education expense directly related to petitioner’s business as a commercial realtor we are not convinced however that the flight lessons petitioner received maintained or improved the skills required to be a commercial realtor sec_1_162-5 income_tax regs petitioner is skilled at finding properties and creating marketing brochures for prospective buyers a disconnect exists however between these skills and the flight lessons taken by petitioner admittedly evaluating properties from the air and placing aerial photographs in marketing brochures may be helpful to petitioner’s business however in and petitioner was able to evaluate properties and acquire aerial photographs without piloting a plane petitioner presented no evidence to explain why flying lessons were now required in order for him to view properties or obtain aerial photographs although the correlation need not be precise petitioner has failed to persuade us that a direct or proximate relationship exists between the flight lessons he received and the skills required to be a commercial realtor boser v commissioner supra pincite petitioners not only failed to carry their burden_of_proof with respect to the requirements under sec_1_162-5 income_tax regs they also failed to prove that the flight lesson expenses were ordinary and necessary as required by sec_5 petitioners do not contend that the flight lessons are related to petitioner’s business as a financial adviser a see boser v commissioner supra pincite raines v commissioner supra whether an expenditure is ordinary and necessary is a question of fact 320_us_467 in general an expense is ordinary if it is considered normal usual or customary in the context of the particular trade_or_business out of which it arose 308_us_488 and an expense is necessary if it is appropriate and helpful to the operation of the taxpayer’s trade_or_business 383_us_687 83_tc_356 affd 777_f2d_662 11th cir petitioners provided no evidence to suggest that it was normal usual or customary for commercial realtors to take flight lessons consequently petitioners are not entitled to deduct the flight lesson expenses under sec_162 c sec_6662 accuracy-related_penalty sec_6662 and b imposes a penalty equal to percent of the amount of any underpayment attributable to negligence or disregard of rules or regulations the term negligence includes any failure to make a reasonable attempt to because we hold that petitioner’s expenditures_for flight lessons were not ordinary and did not maintain or improve his skills as a commercial realtor we need not decide whether those lessons qualify him for a new trade_or_business thus making the expenditures nondeductible under sec_1_162-5 income_tax regs comply with tax laws and disregard includes any careless reckless or intentional disregard of rules or regulations sec_6662 negligence also includes any failure to keep adequate books_and_records or to substantiate items properly 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 the taxpayer acted in good_faith with respect to the underpayment sec_1_6664-4 income_tax regs the determination of whether the taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account the pertinent facts and circumstances sec_1_6664-4 income_tax regs with respect to a taxpayer’s liability for any penalty sec_7491 places on the commissioner the burden of production thereby requiring the commissioner to come forward with sufficient evidence indicating that it is appropriate to impose the penalty 116_tc_438 once the commissioner meets his burden of production the taxpayer must come forward with persuasive evidence that the commissioner’s determination is incorrect see id pincite see also rule a welch v helvering u s pincite respondent has proven and has therefore discharged his burden of production under sec_7491 that petitioners failed to keep adequate_records and properly substantiate the flight lesson expenses and the amounts of disallowed business_expenses petitioners ultimately conceded see sec_1 b income_tax regs petitioners have not met their burden of persuasion with respect to reasonable_cause and good_faith circumstances that may indicate reasonable_cause and good_faith include an honest misunderstanding of fact or law that is reasonable in light of the experience knowledge and education of the taxpayers sec_1_6664-4 income_tax regs see higbee v commissioner supra pincite citing remy v commissioner t c memo petitioners are sophisticated taxpayers petitioner tina a meilleur is a highly compensated department head of entergy corp and a c p a who attends continuing education classes to maintain her c p a license petitioner is a commercial realtor and a licensed financial adviser who has worked in the financial industry for over years and holds an m b a degree petitioner testified that he did not know he needed to retain receipts or invoices for his business_expenses however we are skeptical of this testimony see 87_tc_74 and we are unable to conclude given petitioners’ experience knowledge and education that this alleged lack of knowledge is indicative of reasonable_cause and good_faith petitioner alleges on brief that his tax preparer advised him he did not need to retain receipts and invoices to substantiate his expenses statements in briefs however do not constitute evidence rule c see tokarski v commissioner supra pincite the record itself contains insufficient evidence for us to conclude that petitioner ever received such advice and petitioner never even called his preparer as a witness see 6_tc_1158 affd 162_f2d_513 10th cir assuming arguendo that petitioner received such advice petitioner’s reliance on the advice of a professional tax advisor does not necessarily demonstrate reasonable_cause and good_faith sec_1_6664-4 income_tax regs thus on the record before us we are unable to conclude that petitioners acted with reasonable_cause and in good_faith within the meaning of sec_6664 accordingly petitioners are liable for the accuracy-related_penalty under sec_6662 on that part of the underpayment attributable to their deductions for flight lessons and the business_expenses they conceded conclusion we have considered all of the arguments made by petitioners and to the extent that we have not specifically addressed them we conclude they are unpersuasive to reflect the foregoing as well as the parties’ concessions decision will be entered under rule


department of the treasury internal_revenue_service washington d c aug tax_exempt_and_government_entities_division uniform issue list s fe hekkekemehekkekeerkrk hrkkererakkkerheeiakee kekkekeekeerrekeerrrkekkk hakekekekkkkekkrehekkueekek attn kxkkrkkekerekhekeekee legend state a university b statute cc plan x plan y dear rekkkkkkkkkk kererkekeeee aik kia heir eerie rr hkkrkkriekkrikharieerererereriark kekrekekekkkerekerkeerekekeer kwhekeeeerereekekekereerker hrekkekrekaeakeekkerkeekerener kearekhkeekkeakhereererkerheree krekkekrekehkekakkererheekrreree ehekkkkkeakekekekaeerer eereee rerekereee kerr ree erie khkkkkrerreeeekenerakeeeurkiare kraekekerekkerererereuhakeekrerekeke herrera eere re eeereerereere reece this is in response to a letter dated as supplemented by correspondence dated in which you request rulings under sec_414 of the internal_revenue_code the code you submitted the following facts and representations in connection with this request plan x is a retirement_plan which provides benefits for group d employees of university b a public university of state a and their beneficiaries plan x effective date is a new defined_contribution_plan intended to be qualified under code -2- sec_401 and is a governmental_plan under sec_414 noted in sec_3_2 of plan x the group d employees who participate in plan y will be eligible to participate in plan x plan y is a non-elective defined contribution b plan maintained by university b that originally provided for employer contributions of of the first dollar_figure of compensation and of compensation above dollar_figure as of date the employer_contribution under plan y was reduced to of the participant’s_compensation with the exceptions under plan x participants will be required to make a contribution of of compensation to plan x only participant contributions will be made to plan x university b through resolution by its board_of trustees adopted at its meeting on date has taken formal action providing that contributions required of participants in plan x although designated as employee contributions will be paid_by university b in lieu of employee contributions and treated as employer contributions beginning date the initial effective date of plan x group d employees of university b will be required to participate in plan x participants do not have the option of choosing to receive the contributed amounts directly and may not make a cash or deferred election with respect to such amounts it is expected that participants in plan x will be entitled to receive a distribution of their account balance under the plan upon the occurrence of certain events including death disability and termination of employment university b is governed by its board_of trustees which has authority under statute c of state a to establish compensation and retirement programs for faculty and staff based on the above facts and representations you request the following rulings that for federal_income_tax purposes mandatory_contributions made by participants into plan x and picked up by university b will not be currently included in the gross_income of the participants on whose behalf the pick-up is made and mandatory_contributions made by participants into plan x and picked up by university b will not constitute wages subject_to federal_income_tax withholding sec_414 of the code provides that contributions otherwise designated as employee contributions shall be treated as employer contributions if such contributions are made to a plan determined to be qualified under sec_401 of the code established by a state government or a political_subdivision thereof or any agency_or_instrumentality of any one of the foregoing and are picked up by the employing unit revrul_2006_43 2006_35_irb_329 amplifying and modifying revrul_81_35 1981_1_cb_255 and revrul_81_36 1981_1_cb_255 and revrul_87_10 1987_1_cb_136 describes the actions required for a state or political_subdivision thereof or an agency_or_instrumentality of any of the foregoing to pick-up employee contributions to 92v01143032 a plan qualified under sec_401 of the code so that the contributions are treated as employer contributions pursuant to sec_414 of the code specifically revrul_2006_43 provides that a contribution to a qualified_plan established by an eligible_employer ie a governmental employer will be treated as picked-up by the employing unit under sec_414 of the code if two conditions are satisfied first the employing unit must specify that the contributions although designated as employee contributions are being paid_by the employer for this purpose the employing unit must take formal action to provide that the contributions on behalf of a specific class of employees of the employing unit although designated as employee contributions will be paid_by the employing unit in lieu of employee contributions a person duly authorized to take such action with respect to the employing unit must take such action the action must apply only prospectively and be evidenced by a contemporaneous written document eg minutes of a meeting a resolution or an ordinance second the pick-up arrangement must not permit a participating employee from and after the date of the effective date of the pick-up to have a cash or deferred election right within the meaning of sec_1_401_k_-1 of the income_tax regulations with respect to designated employee contributions thus for example no participating employee may be given the right to opt_out of the pick- up arrangement described in sec_414 of the code or to receive the contributed amounts directly instead of having them paid_by the employing unit to the plan revrul_2006_43 applies even if the employer picks up contributions through either a reduction in salary or an offset against future salary increases the federal_income_tax treatment to be afforded contributions which are picked up by the employer within the meaning of sec_414 of the code is specified in revrul_77_462 1977_2_cb_358 in that revenue_ruling the employer school district agreed to assume and pay the amounts employees were required by state law to contribute to a state pension_plan revrul_77_462 concluded that the school district's picked-up contributions to the plan are excluded from the employees’ gross_income until such time as they are distributed to the employees the revenue_ruling held further that under the provisions of sec_3401 of the code the school district's contributions to the plan are excluded from wages for purposes of the collection of income_tax at source on wages therefore no withholding is required from the employees’ salaries with respect to such picked-up contributions the issue of whether contributions have been picked up by an employer within the meaning of sec_414 of the code is addressed in revrul_81_35 1981_1_cb_255 and revrul_81_36 c b these revenue rulings established that the following two criteria must be met the employer must specify that the contributions although designated as employee contributions are being paid_by the employer in lieu of contributions by the employee and the employee must not be given the option of choosing to receive the contributed amounts directly instead of having them paid_by the employer to the pension_plan furthermore it is immaterial for purposes of the applicability of sec_414 whether an employer picks up contributions through a reduction in salary an offset against future salary increases or a combination of both in order to comply with revrul_81_35 and revrul_81_36 with respect to particular contributions revrul_87_10 1987_1_cb_136 provides the required specification of designated employee contributions must be completed before the period to which such contributions relate contributions being paid_by the employer are actually employee contributions paid_by the employee and recharacterized at a later date the retroactive specification of designated employee contributions as paid_by the employing unit ie the retroactive pick up of designated employee contributions by a governmental employer is not permitted under sec_414 of the code thus employees may not exclude from current gross_income designated employee contributions to a qualified_plan that relate to compensation earned for services rendered prior to the date of the last governmental action necessary to effect the pick up if not the designated employee in this case plan x satisfies the criteria set forth in revrul_2006_43 revrul_81_35 and revrul_81_36 by specifically providing that university b shall pick up the mandatory_contributions of group d employees to plan x that such contributions although designated as employee contributions shall be paid picked up by university b in lieu of contributions by group d employees and that group d employees will not be given the option of choosing to receive the contributed amounts directly instead of having them paid_by university b to plan x with respect to ruling requests one and two we conclude that the mandatory_contributions made by the group d employees to plan x and picked up by university b shall be treated as employer contributions and will not be included in the current gross_income of the group d employees for federal_income_tax purposes in the year in which contributions are made to plan x these amounts will be includible in the gross_income of the group d employees or their beneficiaries only in the taxable_year in which they are distributed to the extent they represent contributions made by university b because we have determined that the picked-up amounts are to be treated as employer contributions they are excepted from wages as defined in sec_3401 of the code for federal_income_tax withholding purposes in addition no part of the amounts picked up by university b will constitute wages for federal_income_tax withholding purposes in the taxable_year in which they are contributed to plan x this ruling applies only if the effective date for the commencement of the pick-up is not earlier than the later of the date the board resolution is signed and adopted by university b or the date the pick-up is put into effect no opinion is expressed as to the federal tax consequences of the transaction described above under any other provisions of the code the above rulings are based on the assumption that plan x is qualified under code sec_401 and its related trust exempt from tax under sec_501 at all relevant times no opinion is expressed as to whether the amounts picked up by university b are subject_to tax under the federal_insurance_contributions_act no opinion is expressed as to whether the amounts in question are paid pursuant to a salary reduction agreement within the meaning of code sec_3121 this ruling is directed only to the specific taxpayer that requested it code sec_6110 provides that it may not be used or cited by others as precedent pursuant to a power_of_attorney on file with this office a copy of this ruling has been sent to your authorized representative should you have any questions or concerns regarding this letter please contact waeeeeee 1d no at - _ please address all correspondence to kekkrkekkkekk sincerely yours cuber warkins carlton a watkins manager employee_plans technical group


office_of_chief_counsel internal_revenue_service memorandum number release date cc tege eb ec ---------------- postn-124892-07 uilc 409a date date to scott e sharek executive compensation technical advisor pre-filing and technical guidance large and mid-size business from william c schmidt senior counsel executive compensation employee_benefits tax exempt government entities subject application of sec_409a to the exercise of certain backdated stock_options in this replies to your request for assistance on the application of sec_409a to certain exercises of backdated stock_options in application of the guidance under sec_409a depends largely on the particular facts and circumstances of the compensation arrangement and the particular actions taken under the compensation arrangement accordingly the advice provided in this memorandum should not be applied beyond the facts discussed facts employee a and employee b are employees of a corporation employer z on date employer z which has only one class of common_stock outstanding granted employee a and employee b compensatory nonstatutory stock_options to purchase common_stock of employer z under the terms of the stock_options the options were not exerciseable until date and would be forfeited if the employee did not continue in employment through date on date the fair_market_value of the underlying stock was dollar_figure per share the exercise price of the stock_options was dollar_figure per share under the terms of the stock_options the options would terminate on the postn-124892-07 earlier of date or the 90th day following the employee’s termination of employment employee a terminated employment on date employee b has not terminated employment on date employee a and employee b each exercised his or her stock_option neither employee a nor employee b was a key_employee of employer z as defined in sec_416 at any time the stock_options have never been modified or extended issue were the stock_options subject_to sec_409a and did the stock_option exercises result in a violation of section sec_409a response the stock_options were nonqualified_deferred_compensation_plans subject_to sec_409a employee a’s stock_option exercise in did not violate the requirements of sec_409a employee b’s stock_option exercise in violated the requirements of sec_409a for a discussion of the amount required to be included in income in see notice_2006_100 2006_51_irb_1109 discussion applicable guidance sec_409a applies to amounts deferred under a nonqualified_deferred_compensation_plan the final regulations under sec_409a are applicable for taxable years beginning after date for taxable years beginning before date the applicable guidance under sec_409a including transition guidance is notice_2005_1 2005_1_cb_274 the preamble to the proposed_regulations under sec_409a 2005_2_cb_786 fr and notice_2006_79 2006_43_irb_763 for taxable years beginning before date the guidance provides that the taxpayer must comply with the requirements of notice_2005_1 as well as any other applicable guidance as of its effective date with respect to issues not addressed by notice_2005_1 taxpayers may rely upon a reasonable good_faith interpretation of the statute for this purpose compliance with the proposed_regulations or final regulations constitutes compliance with a reasonable good_faith interpretation of the statute where a provision of the regulations is inconsistent with notice_2005_1 the taxpayer may comply with the provisions of the regulations or notice_2005_1 see notice_2005_1 q a-19 preamble to the proposed_regulations under sec_409a xi b notice_2006_79 sec_3 and preamble to the final regulations under sec_409a applicability date coverage under sec_409a a stock_option is subject_to sec_409a if the option constitutes a nonqualified_deferred_compensation_plan for purposes of sec_409a whether a stock_option is a deferred postn-124892-07 compensation plan requires analysis of whether the option provides for the deferral of compensation including whether the option provides for only a short-term deferral of compensation and whether the option is excluded from coverage under sec_409a under the effective date provisions a definition of nonqualified_deferred_compensation_plan - in general notice_2005_1 q a-4 a states that a plan provides for the deferral of compensation only if under the terms of the plan and the relevant facts and circumstances the service provider has a legally binding right during a taxable_year to compensation that has not been actually or constructively received and included in gross_income and that pursuant to the terms of the plan is payable to or on behalf of the service provider in a later year the proposed_regulations adopt a substantially_similar standard see prop sec_1_409a-1 the final regulations exclude the condition that the amount not be actually or constructively received to avoid confusion with respect to the rules on deferral elections and accelerations of payments see preamble to the final regulations under sec_409a iii a sec_1_409a-1 because the stock_options granted by employer z provide a legally binding right to a payment in a future year the arrangement provides for the deferral of compensation absent an applicable_exclusion notice_2005_1 q a-4 d ii provides that an option to purchase stock of the service_recipient other than an incentive_stock_option described in sec_422 or an option granted under an employee_stock_purchase_plan described in sec_423 does not provide for a deferral of compensation if the amount required to purchase stock under the option the exercise price may never be less than the fair_market_value of the underlying stock on the date the option is granted the receipt transfer or exercise of the option is subject_to taxation under sec_83 and the option does not include any feature for the deferral of compensation other than the deferral of recognition of income until the later of exercise or disposition of the option under sec_1_83-7 the regulations adopt a substantially_similar standard see prop sec_1_409a-1 sec_1_409a-1 because the exercise prices of the stock_options were less than the fair_market_value of the underlying stock on the date the options were granted this exception is not available b definition of nonqualified_deferred_compensation_plan - short-term deferrals notice_2005_1 q a-4 c provides that until additional guidance is issued a deferral of compensation does not occur if absent an election to otherwise defer the payment to a later period at all times the terms of the plan require payment by and an amount is actually or constructively received by the service provider by the later of i the date that i sec_2½ months from the end of the service provider’s first taxable_year in which the amount is no longer subject_to a substantial_risk_of_forfeiture or ii the date that i sec_2½ months from the end of the service recipient’s first taxable_year in which the amount is no longer subject_to a substantial_risk_of_forfeiture because the stock_options otherwise postn-124892-07 defer the payments to a later period and do not require that the payment be made by the end of the applicable_period the options do not qualify for this exclusion taxpayers may also rely upon the proposed or final regulations the proposed_regulations altered this exclusion from coverage under sec_409a generally eliminating the requirement that a plan require that the payment be made by the end of the applicable_period specifically proposed sec_1_409a-1 provides that a deferral of compensation does not occur if absent an election by the service provider including an election under proposed sec_1_409a-2 to otherwise defer the payment of the compensation to a later period an amount is actually or constructively received by the service provider by the later of the 15th day of the third month following the service provider’s first taxable_year in which the amount is no longer subject_to a substantial_risk_of_forfeiture or the 15th day of the third month following the end of the service recipient’s first taxable_year in which the amount is no longer subject_to a substantial_risk_of_forfeiture proposed sec_1_409a-2 also requires that the arrangement not otherwise defer the payment to a later period the preamble to the proposed_regulations explained that where an arrangement does not otherwise defer compensation an amount will qualify as a short-term deferral if the amount is paid out by the appropriate deadline preamble to the proposed_regulations under sec_409a ii b for example an arrangement that defers a payment until years after the lapsing of a condition that constituted a substantial_risk_of_forfeiture constitutes a deferral of compensation even if the amount is actually paid on the date the substantial_risk_of_forfeiture lapses under this standard a stock_option with a term permitting exercise beyond the applicable short-term deferral_period would not constitute a short-term deferral regardless of whether the option was actually exercised during such period because the arrangement would otherwise defer the payment to a later period once an arrangement provides for deferred_compensation the arrangement cannot be treated as a short-term deferral see also preamble to the proposed_regulations under sec_409a ii b the short-term deferral rules does not provide a method to avoid application of sec_409a if the legally binding right creates a right to deferred_compensation from the outset for rules applicable in taxable years beginning after date see sec_1_409a-1 and sec_1_409a-1 example c application of transition guidance the preamble to the proposed_regulations provides that to comply with the requirements of sec_409a a plan must be amended on or before date either to conform to the provisions of sec_409a with respect to amounts subject_to sec_409a or to provide a compensation arrangement that does not provide for a deferral of compensation_for purposes of sec_409a preamble to the proposed_regulations under sec_409a xi b some taxpayers have argued that the exercise of a stock_option should be treated as a de_facto amendment of the option to no longer provide for a deferral of compensation if such exercise occurs during the period ending ½ months after the end of the taxable postn-124892-07 year in which the option became vested if this argument were accepted a payment under a nonqualified_deferred_compensation_plan under a payment provision that did not meet the requirements of sec_409a would also be treated as amending the plan to pay under a different permissible provision for example a payment under a plan term permitting a payment at the participant’s election subject_to a penalty a haircut provision that happened to coincide with the participant’s separation_from_service arguably could be a payment upon a separation_from_service even if the plan did not otherwise provide for a payment upon a separation_from_service the transitional guidance does not permit these types of de_facto amendments for payments that occurred during because the purported de_facto amendment would be a change in a payment election the taxpayers could have amended the stock_options in to be compliant with sec_409a by requiring that the option be exercised in see notice_2005_1 q a-19 c however the transition_rules do not allow a taxpayer to amend a plan during to provide for a payment in in this regard the preamble to the proposed_regulations provides that with respect to amounts subject_to sec_409a and amounts that would be treated as a short-term deferral such an amendment and election will not be treated as a change in the form and timing of a payment under sec_409a or an acceleration of a payment under sec_409a provided that the amendment and election applies only to amounts that would not otherwise be payable in and does not cause an amount to be paid in that would not otherwise be payable in such year see preamble to the proposed_regulations under sec_409a xi c because the amount payable under the stock_option was not otherwise payable in the option could not be amended in to require that the payment be made in see notice_2006_79 dollar_figure for this purpose a stock right will not be treated as payable in a year solely because the stock right is exercisable during that year if the stock right is also reasonably expected to be exercisable in a subsequent year accordingly the transition_rules did not permit the taxpayers to amend the stock_options at issue here in to qualify such options as arrangements providing only short-term deferrals so as to exclude the options from the definition of a nonqualified_deferred_compensation_plan the preamble to the final regulations provides that with respect to payments before date a taxpayer is not required to amend the plan retroactively to reflect the changes and elections made during the transition_period however the taxpayer must be able to demonstrate that any such changes and elections were made in compliance with the applicable transition guidance because the election to exercise the stock_option in was made in and not in the taxpayer would not be able to demonstrate that the changes and elections were made in compliance with the applicable transition guidance d application of sec_409a - effective date notice_2005_1 q a-16 a provides generally that sec_409a is effective with respect to i amounts deferred in taxable years beginning after date and ii amounts postn-124892-07 deferred in taxable years beginning before date if the plan under which the deferral is made is materially modified after date sec_409a is effective with respect to earnings on amounts deferred only to the extent that sec_409a is effective with respect to the amounts deferred notice_2005_1 q a-16 b provides that for purposes of determining whether sec_409a is effective with respect to an amount the amount is considered deferred before date if i the service provider has a legally binding right to be paid the amount and ii the right to the amount is earned and vested for this purpose a right to an amount is earned and vested only if the amount is not subject_to either a substantial_risk_of_forfeiture as defined in sec_1_83-3 or a requirement to perform further services the proposed and final regulations incorporate substantially the same standards see prop sec_1_409a-6 sec_1_409a-6 because the employees’ rights under the stock_options were not earned and vested before date the stock_options are not excluded from coverage under sec_409a due to application of the effective date provisions compliance with the requirements of sec_409a notice_2005_1 generally did not address the application of the requirements under sec_409a accordingly for periods on or before date the nonqualified_deferred_compensation_plan comprised of the stock_option generally will not be treated as violating sec_409a if the plan is operated through date in reasonable good_faith compliance with the provisions of sec_409a and any other generally applicable guidance published with an effective date before date and to the extent not inconsistent therewith the plan’s terms in the case of a stock_option this means that the option generally must be operated in reasonable good_faith compliance with sec_409a which requires that compensation deferred under a nonqualified_deferred_compensation_plan may only be payable upon certain events including i a separation_from_service ii disability iii death iv a specified time or fixed schedule v a change in control event or vi an unforeseeable_emergency the ability to exercise a stock_option at any time during the option term where the term extends over multiple years does not meet the requirements of sec_409a during the taxable_year neither employee a nor employee b exercised his or her respective stock_option thus during the plan was operated in reasonable good_faith compliance with sec_409a because neither employee made use in operation of the noncompliant provision of the plan that is the right to exercise the option at any time in both employee a and employee b exercised their option when employee a terminated employment in the term of employee a’s stock_option became limited and would expire days later employee a exercised the stock_option within those days under a reasonable good_faith interpretation of sec_409a employee a exercised the stock_option under the option terms permitting exercise upon a separation_from_service which complies with the requirements of sec_409a postn-124892-07 accordingly employee a’s stock_option exercise did not violate the requirements of sec_409a employee b did not terminate employment in so the term of employee b’s stock_option was not so limited employee b exercised employee b’s stock_option under the option terms permitting exercise at any time after vesting and during the year term of the option this constitutes the use in operation of a plan term that is not consistent with a reasonable good_faith interpretation of the statute or with the transition guidance and accordingly violates the requirements of sec_409a


id office uilc cca-310122-09 -------------- number release date from ------------------- sent tue am to -------------------- cc --------------------------------------------------------------------------------------------------------------------------- ------------------------- subject re question re sol extension for sec_1446 withholding ------------------------------------------------------------------------ the liability of the partnership for withholding taxes on income allocated to foreign partners is a partnership_item determined in the tefra proceeding and is binding on the partnership as a partner in itself under sec_6231 the form 872-p is signed by the agent for all partners typically the tmp instead of having the agent sign for all partners we can get the partner itself to sign - in this case the liable partner would be the partnership itself you have not identified whether this is the taxpayer who signed the form 872-i if it is and the form identified the withholding issue then we are fine


department of the treasury_department of the treasury int ernal revenue service int ernal revenue service washington d c washington d c o f f i c e o f o f f i c e o f c h i e f c o u n s e l c h i e f c o u n s e l date number release date cc pa apjp br2 tl-n-659-01 uilc internal_revenue_service national_office chief_counsel_advice memorandum for associate area_counsel lmsb attn from curtis g wilson assistant chief_counsel administrative provisions and judicial practice cc pa apjp subject change_of accounting_period and statute_of_limitations this chief_counsel_advice responds to your memorandum dated date chief_counsel_advice is not binding on examination or appeals and is not a final case determination in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent the issue presented concerns the expiration of the period for assessing tax for certain subsidiaries of the taxpayer the subsidiaries changed their annual_accounting_period from a calendar_year to a fiscal_year effective date your office and the national_office have determined that the change was unauthorized the only issue remaining is the expiration of the period for assessing tax assuming the service requires use of the calendar_year or alternatively accepts the unauthorized fiscal_year filings legend taxpayer parent subsidiaries issues tl-n-659-01 if the service requires the use of the calendar_year as the taxable_year has the period of limitations expired for calendar years and if the service accepts the use of the years ended date date and date has the period of limitations for assessing tax for those years expired conclusion sec_1 if the service requires use of the calendar_year the period of limitations for the year ended date has expired and no tax for calendar_year may be assessed for the year ended date the three-year assessment_period expired on date and the six-year period if there was a substantial_understatement of gross_income will expire on date finally the period of limitations has not expired for the year ended date if the service allows use of the fiscal_year then the periods of limitation for the years ended date and date have not expired as these periods have been extended by the consent of the parties however the period of limitations for the year ended date has expired facts the taxpayer has several wholly-owned subsidiaries that elected to be taxed under sec_936 of the code sec_936 provides substantial tax_credits for companies receiving income from the active_conduct_of_a_trade_or_business in puerto rico prior to the subsidiaries and the parent all used the calendar_year as the taxable_year in the subsidiaries filed applications to change their annual_accounting_period the applications form requested a change to a taxable_year ended september effective date the applications were filed in order to avoid the impact of an amendment to sec_936 reducing the available tax_credit for tax years beginning after date the intent in filing the applications was to obtain the benefit of the larger credit for nine months longer than if the subsidiaries had remained on the calendar_year the applications for a change in the accounting_period were approved by the service pursuant to revproc_92_13 1992_1_cb_665 however revproc_94_12 1994_1_cb_565 modified revproc_92_13 so that sec_936 corporations could no longer change their annual_accounting_period under revproc_92_13 if the application was filed on or after date you have determined that the applications were subject_to revproc_94_12 and that the service has the right to tl-n-659-01 revoke its prior approval of the change to a fiscal_year however the service is not required to revoke its approval thus the service may disapprove of the change and require filing on the calendar_year basis or it may accept the fiscal_year returns the subsidiaries filed tax returns for the nine-month year commencing on date and ending on date and for the three subsequent twelve- month years ending on date date and date the parent taxpayer filed returns for its years ended date date and date the service is currently examining the parent and the subsidiaries for all of the above periods for the years ended date date and date extensions of the period of limitation on assessment form sec_872 were executed and the period remains open for assessment for each year of each subsidiary however for the subsidiaries’ years ended date no extensions were requested or executed analysis sec_6501 states the general_rule that the service must assess tax due within three years of the date of filing of the return if a federal_income_tax return is filed prior to its due_date the period of limitations begins to run from the due_date sec_6501 sec_6501 provides that if the taxpayer makes an omission of more than percent from gross_income the service may assess tax within six years of the date of filing of the original return sec_6501 provides that the service and the taxpayer may enter into a written_agreement form_872 consent to extend the time to assess tax extending the period of limitations for assessment provided that the agreement is executed before the end of the period of limitations specified by sec_6501 or the period as previously extended pursuant to sec_6501 a return can start the running of the sec_6501 three-year period even if it is defective or incomplete in certain respects however tax returns that lack the data necessary for the computation and assessment of deficiencies generally should not be regarded as triggering the period of assessment 506_us_523 the courts have held that the period of limitations may begin to run if the taxpayer mistakenly files returns for improper periods 12_bta_750 affd 33_f2d_653 9th cir the rationale is that the improperly filed returns will if pieced together provide the tl-n-659-01 commissioner with sufficient information to determine the tax_liability for the period for which the return should have been filed see also 22_tc_552 nonacq 1955_2_cb_10 86_tc_157 ndollar_figure the tax_court has explained this rationale as follows the rationale followed in atlas oil paso robles and mabel elevator is that when the commissioner is given information by a taxpayer in properly executed form ie on duly executed tax forms covering all of a taxable_period in issue the period of limitations applicable to the period in issue begins to run even though the taxpayer may have filed returns for improper periods in other words if a tax_return filed by a taxpayer for an incorrect period when considered with other returns filed by the same taxpayer provides the commissioner with the information necessary to determine the true tax_liability of the taxpayer for the taxable_period in dispute the period of limitations for the period in dispute begins to run even though the return is not for the period required by the code 22_tc_552 estate of simpson v commissioner tcmemo_1994_207 thus if a taxpayer is required to file returns on the basis of the calendar_year but improperly files returns on the basis of a fiscal_year the fiscal_year returns may be pieced together to provide sufficient information necessary to determine the tax_liability for the calendar_year as explained previously the subsidiaries did not obtain valid approval of the change to a fiscal_year as a result the service may require use of the calendar_year option or may accept the returns filed on the basis of the unauthorized fiscal_year option calendar_year analysis option under the first option requiring use of the calendar_year our analysis is as follows for and calendar_year the first nine months of were reported on the return for the nine-month year ended date the period of limitations for those nine months was extended by form_872 the last three months of calendar_year were reported on the return for the year ended date a form_872 based on a fiscal_year will by its plain language extend the period of limitations only for the fiscal_year generally although a form_872 is not a contract contract principles apply to its interpretation 80_tc_1035 90_tc_684 we do not think the subsidiaries can be said tl-n-659-01 to have assented to an extension for the calendar_year as this period is not specified by the form_872 therefore none of calendar_year is open because consents are not outstanding for the entire year you raise the issue whether adjustments may be made for the first nine months of calendar_year because this period is covered by the form_872 this issue implicitly arose in atlas oil refining corp supra in that case the taxpayer filed tax returns on the basis of fiscal years ending november in a prior decision the tax_court held that deficiencies had been improperly determined on the fiscal_year basis as the taxpayer kept its books using the calendar_year subsequently the commissioner sent notices of deficiency for calendar years and the consents with respect to fiscal years and had expired prior to the mailing of the deficiency notices the only unexpired consent outstanding at the time of the mailing related to fiscal_year that consent left one month december of calendar_year open at the time the notices of deficiency were mailed the tax_court held that the statute_of_limitations barred the assessment of deficiencies for and implicit in the holding was the concept that calendar_year was indivisible because the period of limitations was not open as to all of it could not be viewed as open with respect to the one month date covered by the unexpired consent thus the court did not view the notice_of_deficiency as timely with respect to this month similarly in this case there is an outstanding consent covering the first nine months of no tax may be assessed for because the consent covers only a portion of calendar_year income for the first nine months of was reported on the return for the year ended date income for the last three months of this calendar_year was reported on the return filed for the year ended date the two fiscal_year returns may be pieced together to determine the true tax_liability of the taxpayer for the taxable_period in dispute upon filing of the return for the year ended date that return was due on date and was timely filed the period of limitations for this calendar_year thus began to run on date three years thereafter was date six years thereafter will be date the general three-year period of limitations has therefore expired for as there is no outstanding consent covering all twelve months in however if a substantial_understatement of gross_income as defined in sec_6501 is determined then a notice_of_deficiency for this calendar_year may be mailed as late as date calendar_year income for the first nine months of was reported on the return filed for the year ended date income for the last three months was reported on tl-n-659-01 the return for the year ended date the two fiscal_year returns may be pieced together to determine the tax_liability for calendar_year there are unexpired consents for the years ended date and date therefore the period for assessing tax has not expired for the year ended date fiscal_year analysis 0ption under the second option the service will permit the use of the fiscal_year ended september for the returns already filed the period for assessing tax was extended by form sec_872 for the years ended date and date these taxable years remain open for the year ended date the three-year period expired on date and the six-year period expired on date therefore the service would not be able to collect taxes for the fiscal_year ended date this writing may contain privileged information any unauthorized disclosure of this writing may have an adverse effect on privileges such as the attorney client privilege if disclosure becomes necessary please contact this office for our views if you have any further questions please contact lisa neuder at curtis g wilson by michael l gompertz assistant to the branch chief branch


significant index no department of the treasury internal_revenue_service washington d c yat tax_exempt_and_government_entities_division in re dear dec se tecra-t a this letter constitutes notice that with respect to the above-named defined benefit pension pla year ended waiver of the minimum_funding_standard for the plan this waiver for the plan_year ended accordance with sec_412 of the internal_revenue_code and sec_303 of the employee_retirement_income_security_act_of_1974 erisa the waived amount is the contribution which would otherwise be required to reduce the balance in the funding_standard_account to zero as of the end of the plan_year for which this waiver has been granted ae been granted in the company has a fiscal_year ending on the last day in february the company has experienced a decline in sales volume and a rise in costs the company is taking extreme cost cutting measures as well as exploring for new markets as of ae value of the assets of the plan was equal to i of the plan's current_liability your attention is called to sec_412 of the code and sec_304 of erisa which describe the consequences that would result in the event the plan is amended to increase benefits change the rate in the accrual_of_benefits or to change the rate of vesting while any portion of the waived_funding_deficiency remains unamortized please note that any amendment to other retirement plans maintained by the company or to the company’s profit sharing plan to increase the liabilities of those plans would be considered an amendment for purposes of sec_412 of the code and sec_304 of erisa this ruling is directed only to the taxpayer that requested it sec_6110 of the code provides that it may not be used or cited by others as precedent when filing form_5500 for the plan_year ended po letter should be entered on schedule b actuarial information a copy of this letter is being sent to the manager employee_plans classification in the date of this if you have any questions on this ruling letter please contact sincerely ppd ah norman greenberg manager actuarial group


internal_revenue_service index no number release date cc dom p si plr-113302-98 date company trust state m n p q r s t u v w x a b c plr-113302-98 d e f g h this responds to your letter on company’s behalf dated date as well as subsequent correspondence requesting a ruling under sec_1362 of the internal_revenue_code that the termination of company's s_corporation_election was inadvertent company represents the following facts company was incorporated in state on a it elected under sec_1362 to be an s_corporation effective b at the time of the election company's shareholders were family members m n p q r s and t on c d and e m and n transferred shares in company to r as trustee for the benefit of their minor grandchildren u v w and x the attorney retained by m and n to draft the trust agreement was unaware of the effect of holding_company stock in trust would have on company's s election he knew nothing about s_corporations including qualified subchapter_s trusts qssts a single trust was created with a separate share for each grandchild r as trustee opened a bank account for each grandchild under which he and they have withdrawal rights all cash distributions from company with respect to the stock in trust have been made directly to these accounts the only withdrawals have been to pay the income taxes due on company earnings and account interest the accountant for the family and for company was unaware of the existence of the trust viewing the gifts of stock as direct transfers he prepared gift_tax returns claiming the annual exclusion under sec_2503 no trust income_tax returns were prepared company forms k-1 showed distributions and allocations of corporate tax items directly to the grandchildren separate_income tax returns were prepared for the grandchildren reporting the distributions and corporate income allocable to them as shareholders no qsst elections were filed on f p referred to the trust in a phone conversation with the accountant the accountant immediately asked for a copy of the trust agreement and contacted the attorney for n's estate the current authorized representative was retained on g to assist in resolving the problem each grandchild-beneficiary made a qsst election on h sec_1361 provides that for purposes of the code the term s_corporation means with respect to any_tax year a small_business_corporation for which an election under sec_1362 is in effect for the year sec_1361 provides that for purposes of subchapter_s plr-113302-98 the term small_business_corporation means a domestic_corporation that is not an ineligible_corporation and that does not among other things have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 provides that for purposes of sec_1361 a_trust all of which is treated under as owned by an individual who is a citizen or resident_of_the_united_states may be a shareholder sec_1361 provides that in the case of a qualified_subchapter_s_trust with respect to which a beneficiary makes an election under sec_1361 a the trust shall be treated as a_trust described in sec_1361 and b for purposes of sec_678 the beneficiary of the trust shall be treated as the owner of that portion of the trust that consists of stock in an s_corporation with respect to which the election under sec_1361 is made sec_1361 provides that for purposes of sec_1361 the term qualified_subchapter_s_trust means a_trust a the terms of which require that i during the life of the current income_beneficiary there shall be only one income_beneficiary of the trust ii any corpus distributed during the life of the current income_beneficiary may be distributed only to that beneficiary iii the income_interest of the current income_beneficiary in the trust shall terminate on the earlier of the beneficiary's death or the termination of the trust and iv upon the termination of the trust during the life of the current income_beneficiary the trust shall distribute all of its assets to that beneficiary and b all of the income within the meaning of sec_643 of which is distributed or required to be distributed currently to one individual who is a citizen or resident_of_the_united_states sec_1362 provides that an election under sec_1362 shall be terminated whenever at any time on or after the first day of the first tax_year for which the corporation is an s_corporation the corporation ceases to be a small_business_corporation sec_1362 provides that any termination under sec_1362 shall be effective on and after the date of cessation sec_1362 provides that if b an election under sec_1362 by any corporation was terminated under sec_1362 or the secretary determines that the circumstances resulting in termination were inadvertent a no later than a reasonable period of time after discovery of the circumstances resulting in termination steps were taken so that the corporation is a small_business_corporation and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make the adjustments consistent with the treatment of the corporation as an s_corporation as might be required by the secretary regarding this period then notwithstanding the circumstances resulting in termination the corporation shall be treated as an s_corporation during the period specified by the secretary sec_1_1362-4 of the income_tax regulations provides that for purposes of sec_1_1362-4 the determination of whether a termination was inadvertent is made by the commissioner the corporation has the burden of establishing that under the relevant facts and circumstances the commissioner should determine that the termination was inadvertent the plr-113302-98 fact that the terminating event was not reasonably within the control of the corporation and was not part of a plan to terminate the election or the fact that the event took place without the knowledge of the corporation notwithstanding its due diligence to safeguard itself against such an event tends to establish that the termination was inadvertent according to the legislative_history of sec_1362 f -- if the internal_revenue_service determines that a corporation's subchapter_s_election is inadvertently terminated the service can waive the effect of the terminating event for any period if the corporation timely corrects the event and if the corporation and the shareholders agree to be treated as if the election had been in effect for such period the committee intends that the internal_revenue_service be reasonable in granting waivers so that corporations whose subchapter_s eligibility requirements have been inadvertently violated do not suffer the tax consequences of a termination if no tax_avoidance would result from the continued subchapter_s treatment in granting a waiver it is hoped that taxpayers and the government will work out agreements that protect the revenues without undue_hardship to taxpayers for example if a corporation in good_faith determined that it had no earnings_and_profits but it is later determined on audit that its election terminated by reason of violating the passive_income test for three consecutive years because the corporation in fact did have accumulated earnings if the shareholders were to agree to treat the earnings as distributed and include the dividends in income it may be appropriate to waive the terminating events so that the election is treated as never terminated it is expected that the waiver may be made retroactive for all years or retroactive for the period in which the corporation again became eligible for subchapter_s treatment depending on the facts s rep no 97th cong 2d sess 1982_2_cb_718 company represents that none of the family member-shareholders understood the significance of the trust treating it simply as a technical means of holding title for minor children company and all of its shareholders have reported income and paid tax consistent with company being an s_corporation there was no intent to terminate company's s_corporation_election or to take advantage of the income_tax laws improperly as soon as the existence of the trust was made known to a knowledgeable professional immediate action was taken to cure the defect including the amendment of gift and estate_tax returns after applying the applicable law and regulations to the facts and representations of this ruling_request we conclude that the termination of company's s_corporation_election due to an ineligible shareholder was inadvertent within the meaning of sec_1362 consequently we rule that company will be treated as continuing to be an s_corporation from c to the present unless company's s election otherwise is terminated under sec_1362 except for the specific ruling above no opinion is expressed or implied concerning the federal income gift or estate_tax consequences of plr-113302-98 the facts of this case under any other provision of the code specifically no opinion is expressed regarding the validity of company’s election under sec_1362 to be an s_corporation the qualification of the trust under sec_1361 as a qsst or the availability of the gift_tax annual exclusion for the transfers of company stock in trust to the grandchildren in accordance with the power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative this ruling is directed only to the taxpayer who requested it according to sec_6110 this ruling may not be used or cited as precedent sincerely jeff erickson assistant to the chief branch office of assistant chief_counsel passthroughs and special industries enclosure copy for sec_6110 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 it a plr-121070-98 date date company trustee insurer plan date date date x dear this is in response to a request for rulings dated date and subsequent correspondence submitted on behalf of the company by its authorized representatives rulings are requested regarding the income_tax consequences relating to the exercise of participation options as more fully described below the internal_revenue_service addressed the first requested ruling in a ruling dated date plr-113381- plr the second requested ruling is addressed herein the company is primarily engaged in the business of certain manufacturing activities it is the common parent of an affiliated_group_of_corporations that files a consolidated federal_income_tax return on a calendar_year basis using an accrual_method of accounting effective date the company established an unfunded nonqualified_deferred_compensation_plan the plan to provide benefits to certain company executives the participants effective date the company entered into a_trust agreement with the plr-121070-98 trustee an unrelated financial_institution which generally provided for the payment of benefits to the participants or their beneficiaries as required under the plan the company subsequently determined to modify the plan and provide the participants with a choice between i a cash payment or ii a direct and guaranteed right to fixed benefit payments under two group annuity_contracts the contracts purchased from the insurer it is represented that the insurer determined the purchase_price for the contracts dollar_figurex solely by applying its actuarial and pricing assumptions to the benefits and interests each participant would have in the contracts and that the participation options did not effect the purchase_price of the contracts the company remitted the dollar_figurex purchase_price to the insurer on date each participant electing to receive benefits under the contracts received a certificate of beneficial_ownership in the contracts that specifies and fixes the benefits that each participant is entitled to receive obligates the insurer to pay the benefits to the participant and creates for the participant a direct and enforceable contractual right against the insurer for payment of the benefits a participant’s rights under the contracts are not forfeitable under any circumstances and are fully guaranteed by the insurer in a ruling dated date plr-75389-96 plr the service determined that as a result of the modification of the plan a the purchase_price for the benefits under the contracts allocable to each participant is includible in the participant’s income in the year the contracts were purchased and b the purchase_price was deductible by the company in that year under sec_404 of the internal_revenue_code the assets supporting the contracts are placed by the insurer in one or more segregated_asset accounts the investment performance of those segregated_asset accounts does not effect the amount or timing of benefit payments due participants under the contracts the contracts are unallocated ie all assets are available to satisfy all liabilities under the contracts and no assets are earmarked to provide benefits to a particular participant the contracts as issued were nonparticipating_contracts ie only the insurer was at risk or stood to benefit if the payment of benefits to the participants differed from the actuarial and pricing assumptions the insurer used to establish the purchase_price of the contracts both of the contracts contain a participation option which the company timely exercised through the trustee after the participation options were exercised the company participates in the investment mortality retirement and disability performance of the contracts thus if the assets in the segregated_asset accounts available for payment of benefits under the contracts fall below a specified minimum threshold then the company will be required to make a participation payment plr-121070-98 to the insurer to restore the assets to the required level conversely if those assets exceed the stated minimum threshold the company may in accordance with the terms of the contracts require the insurer to make a participation payment to the company of the excess_amount it is represented that after the participation options were exercised there is no sharing of profits from investment_assets between the company and the insurer and that all of those profits inure solely to the company it is further represented that the participation arrangement resulting from the exercise of the options is wholly independent of the insurer’s obligations to the participants and in no way effects the rights and interests of the participants under the contracts whether or not the options are in effect the participants have nonforfeitable fully guaranteed rights to the same benefit payments due from the insurer after the participation options were exercised the company was required to notify the insurer of the asset mix that it selected for investment of the assets supporting the contracts the contracts provide for a choice of two asset mixes and allow the company and the insurer to negotiate additional mixes the company may change the asset mix at any time which would result in a corresponding change to the specified minimum threshold and may require a participation payment to or from the company it is represented however that the company may not direct or control any specific investment_asset purchased by the insurer the company also may discontinue the participation arrangement at any time which also may require a participation payment to or from the company in response to the first requested ruling the service previously determined that neither the exercise of the participation options under the contracts nor participation payments from the company to the insurer nor participation payments from the insurer to the company will result in the current inclusion of any amount in income by the participants or their beneficiaries under the plan the second requested ruling is that the company must recognize in gross_income any participation payments received from the insurer and may deduct from gross_income any participation payments to the insurer the exercise of the participation options raises a threshold issue as to whether the resulting participation arrangement between the company and the insurer constitutes a separate_entity for federal_income_tax purposes the creation of a separate_entity would effect the proper tax treatment of payments between the two parties sec_7701 of the code provides that the term partnership includes a syndicate group pool joint_venture or other unincorporated organization through or by means of which any business financial operation or venture is carried on and which is not a corporation trust or estate sec_301_7701-1 of the procedure and administration regulations provides that the internal_revenue_code prescribes the plr-121070-98 classification of various organizations for federal_income_tax purposes whether an organization is an entity separate from its owners for federal tax purposes is a matter of federal tax law and does not depend on whether the organization is recognized as an entity under local law sec_301_7701-1 provides that a joint_venture or other contractual arrangement may create a separate_entity for federal tax purposes if the participants carry on a trade business financial operation or venture and divide the profits therefrom for example a separate_entity exists for federal tax purposes if co-owners of an apartment building lease space and in addition provide services to the occupants either directly or through an agent nevertheless a joint undertaking merely to share expenses does not create a separate_entity for federal tax purposes for example if two or more persons jointly construct a ditch merely to drain water from their properties they have not created a separate_entity for federal tax purposes similarly mere co- ownership of property that is maintained kept in repair and rented or leased does not constitute a separate_entity for federal tax purposes for example if an individual owner or tenants in common of farm property lease it to a farmer for a cash rental or a share of the crops they do not necessarily create a separate_entity for federal tax purposes sec_301_7701-1 provides that the classification of organizations that are recognized as separate entities is determined under sec_301_7701-2 sec_301_7701-3 and sec_301_7701-4 unless a provision of the code provides for special treatment of that organization case law principles concerning whether a partnership exists provide some guidance on whether a separate_entity is created for federal tax purposes under the case law whether a partnership exists is determined by considering whether in view of the parties’ actions the parties in good_faith and acting with a business_purpose intended to join together in the present conduct of the enterprise 337_us_733 1949_2_cb_5 a list of factors to be considered none of which is conclusive is set forth in 42_tc_1067 the agreement of the parties and their conduct in executing its terms the contributions if any which each party had made to the venture the parties’ control_over income and capital and the right of each to make withdrawals whether each party was a principal and co-proprietor sharing a mutual proprietary interest in the net profits and having an obligation to share losses or whether one party was the agent or employee of the other receiving for his services contingent_compensation in the form of a percentage of income whether business was conducted in the joint names of the parties whether the parties filed federal partnership returns plr-121070-98 or otherwise represented to respondent or to persons with whom they dealt that they were joint venturers whether separate books of account were maintained for the venture and whether the parties exercised mutual control_over and assumed mutual responsibilities for the enterprise the determination of whether parties intended to join together in a partnership is a question of fact to be determined from testimony disclosed by their agreement considered as a whole and by their conduct in execution of its provisions 327_us_280 the best evidence of the intent of parties is any written document signed by the parties that defines their relationship the documents submitted with this ruling_request make no reference to a partnership between the company and the insurer and neither party represents to the service or third parties that there is a partnership arrangement although the company may select the general asset mix of the assets supporting the contracts it will not direct or control any specific asset purchased by the insurer finally the company and the insurer do not share in the profits and losses associated with the contracts after the participating options were exercised accordingly the conversion of the contracts from nonparticipating to participating status by virtue of the company exercising its participation options does not result in the formation of a separate_entity for federal tax purposes sec_162 allows a deduction for all the ordinary and necessary expenses paid_or_incurred during a taxable_year in carrying on any trade_or_business under sec_263 no deduction is allowed for any amount_paid our for new buildings or for permanent improvements or betterments made to increase the value of any property or estate under sec_451 the amount of any item_of_gross_income shall be included in the gross_income for the taxable_year in which received by the taxpayer unless under the method_of_accounting used in computing taxable_income the amount is to be properly accounted for as of a different period pursuant to sec_1_451-1 income is includible in gross_income under an accrual_method of accounting when all the events have occurred that fix the right to the income and the amount thereof can be determined with reasonable accuracy under sec_461 the amount of any deduction or credit allowed by this subtitle shall be taken for the taxable_year which is the proper taxable_year under the method_of_accounting used in computing taxable_income pursuant to sec_461 and sec_1 a a liability is incurred under an accrual_method of accounting and generally is taken into account for federal_income_tax purposes in the taxable_year in which all the events have occurred that establish the fact of the liability the amount of the liability plr-121070-98 can be determined with reasonable accuracy and economic_performance has occurred with respect to the liability the supreme court in 403_us_345 addressed whether payment of required premiums to a secondary reserve fund established by the federal savings and loan insurance corporation to cover losses if other accounts proved insufficient were deductible business_expenses or nondeductible capital expenditures the court relied on several factors in concluding that the premiums were capital expenditures including the fact that under certain circumstances the premiums were refundable to the savings and loan association in revrul_83_66 1983_1_cb_43 the taxpayer obtained medical malpractice insurance that contained a retrospective rate credit refund provision under which the taxpayer could receive a refund of a portion of the premiums_paid if the insurer’s loss experience over a five year period was not as great as projected the ruling concludes that there was sufficient risk shifting to constitute insurance and thus the premiums are deductible as ordinary and necessary business_expenses under sec_162 unless they are required to be capitalized under sec_263 the ruling then distinguishes lincoln savings and loan association supra stating that t he mere expectancy that a refund may be forthcoming in a future tax_year because malpractice claims actually incurred for a policy year are less than originally expected does not create an asset in the hands of the taxpayer paying the premium similarly any participation payments the company may make in this case are not required to be capitalized under sec_263 the mere expectancy that the actual experience under the contracts will deviate favorably from the actuarial and pricing assumptions used in pricing the contracts and thus potentially result in a right to subsequent participation payments from the insurer does not create a separate and distinct asset in the hands of the company accordingly based on the facts and representations submitted with the ruling_request we conclude that the company must recognize in gross_income any participation payment from the insurer in the taxable_year in which the right to the payment becomes fixed and the amount thereof is reasonably ascertainable in addition the company may deduct from gross_income as an ordinary and necessary business_expense under sec_162 any participation payment made to the insurer in the taxable_year in which the payment is made no opinion is expressed as to the tax treatment of the exercise of the participation options under the provisions of any of the other sections of the code and regulations which may be applicable in addition no opinion was requested and none is expressed as to the applicability of sec_72 of the code to the contracts in the hands of the company plr-121070-98 in accordance with a power_of_attorney filed in connection with this ruling_request a copy of this ruling is being sent to your authorized representative a copy of this ruling should be attached to any federal_income_tax return to which it is relevant this ruling is directed only to the taxpayer that requested it sec_6110 of the code provides that it may not be used or cited as precedent sincerely acting assistant chief_counsel income_tax and accounting by douglas a fahey acting chief cc dom it a


tcmemo_2006_141 united_states tax_court aaron t and linda k ball petitioners v commissioner of internal revenue respondent docket no 17212-04l filed date aaron t and linda k ball pro sese wesley j wong for respondent memorandum opinion vasquez judge this case was commenced in response to a notice_of_determination concerning collection action s under section and or the issues for decision are whether respondent may proceed with collection of petitioners’ unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure income_tax_liability and whether petitioners are liable for a penalty pursuant to sec_6673 background some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference at the time the petition was filed petitioners resided in las vegas nevada in petitioner aaron ball was employed as a tile installer by carrara marble co of america his employer issued a form_w-2 wage and tax statement reporting wages of dollar_figure and federal_income_tax withheld of dollar_figure a copy of this form_w-2 was attached to petitioners’ tax_return in petitioner linda ball was employed as a registered nurse she was issued a form_w-2 from chc payroll agent inc sunrise mt view reporting wages of dollar_figure and federal_income_tax withheld of dollar_figure she was also issued a form_w-2 from chc payroll agent inc sunrise hsp m c reporting wages of dollar_figure and federal_income_tax withheld of dollar_figure copies of these forms were also attached to petitioners’ tax_return petitioners do not dispute that they received this income in yet they filed a form_1040 u s individual_income_tax_return listing zero as the amount of taxable_income tax due and total_tax petitioners requested a refund of dollar_figure which was the total amount of federal_income_tax withheld petitioners also attached a typewritten statement to the form_1040 reciting contentions and arguments that this court has found to be frivolous and or groundless respondent determined a deficiency and an accuracy-related_penalty in petitioners’ federal_income_tax and issued a notice_of_deficiency to petitioners on date petitioners received the notice_of_deficiency but did not file a petition for redetermination of a deficiency with this court for taxable_year respondent issued to each petitioner a letter final notice_of_intent_to_levy and notice of your right to a hearing on date for taxable_year petitioners sent respondent a letter dated date requesting a sec_6330 hearing throughout their correspondence with respondent petitioners continued to make contentions and arguments that this court has found to be frivolous and or groundless in letters dated july and date respondent’s settlement officer attempted to schedule an administrative hearing with petitioners respondent informed petitioners that a face-to-face hearing would not be available if the only items raised by petitioners are arguments or contentions that courts have determined to be frivolous and or groundless on date petitioners sent a letter to the settlement officer requesting a face-to-face conference in las vegas nevada in that letter petitioners continued to assert frivolous and or groundless arguments for why they are not liable for income taxes respondent did not allow petitioners a face- to-face meeting on date respondent issued petitioners a notice_of_determination concerning collection action s under sec_6320 and or in which the settlement officer sustained the proposed levy to collect petitioners’ unpaid tax_liability petitioners filed a petition for lien and levy action on date petitioners alleged that they were not provided with a hearing under sec_6330 at trial petitioners continued to make frivolous and or groundless arguments that they are not liable for federal_income_tax respondent sought sanctions under sec_6673 discussion i determination to proceed with collection sec_6331 provides that if any person liable to pay any_tax neglects or refuses to do so within days after notice_and_demand the secretary can collect such tax by levy upon property belonging to such person pursuant to sec_6331 the secretary is required to give the taxpayer notice of his intent to levy and within that notice must describe the administrative review available to the taxpayer before proceeding with the levy see also sec_6330 sec_6330 describes the administrative review process providing that a taxpayer can request an appeals hearing with regard to a levy notice at the appeals hearing the taxpayer may raise certain matters set forth in sec_6330 which provides sec_6330 matters considered at hearing --in the case of any hearing conducted under this section-- issues at hearing -- a in general --the person may raise at the hearing any relevant issue relating to the unpaid tax or the proposed levy including-- i appropriate spousal defenses ii challenges to the appropriateness of collection actions and iii offers of collection alternatives which may include the posting of a bond the substitution of other assets an installment_agreement or an offer-in- compromise b underlying liability --the person may also raise at the hearing challenges to the existence or amount of the underlying tax_liability for any_tax period if the person did not receive any statutory_notice_of_deficiency for such tax_liability or did not otherwise have an opportunity to dispute such tax_liability pursuant to sec_6330 within days of the issuance of the notice_of_determination the taxpayer may appeal that determination to this court if we have jurisdiction over the underlying tax_liability 115_tc_324 although sec_6330 does not prescribe the standard of review that the court is to apply in reviewing the commissioner’s administrative determinations we have stated that where the validity of the underlying tax_liability is properly at issue the court will review the matter de novo 114_tc_604 114_tc_176 where the validity of the underlying tax_liability is not properly at issue however the court will review the commissioner’s administrative determination for abuse_of_discretion sego v commissioner supra goza v commissioner supra petitioners received the notice_of_deficiency for the tax_year accordingly they cannot challenge their underlying liability see sec_6330 sego v commissioner supra pincite goza v commissioner supra pincite therefore we review respondent’s determination for an abuse_of_discretion see sego v commissioner supra pincite petitioners state in their petition that they were denied their right to a face-to-face hearing as provided in sec_6330 we have held that it would be unproductive and thus unnecessary to remand a case for a face-to-face hearing if petitioners merely want to advance frivolous arguments see 117_tc_183 stephens v commissioner tcmemo_2005_183 balice v commissioner tcmemo_2005_161 in numerous letters to respondent in their petition and at trial petitioners argued that they had no income and were not liable for income taxes petitioners also argued that they received no valid notice_of_deficiency because the notice that they received was not signed by the secretary_of_the_treasury these arguments are characteristic of tax-protester rhetoric that has been universally rejected by this and other courts michael v commissioner tcmemo_2003_26 knelman v commissioner tcmemo_2000_268 affd 33_fedappx_346 9th cir because petitioners insisted upon making only these frivolous arguments we decline to remand this case to respondent so that petitioners may have a face-to-face hearing petitioners made these arguments in filings and at trial even though the underlying tax_liability was not properly an issue in this case respondent offered petitioners a face-to-face hearing if petitioners raised any meaningful issue regarding the proposed continued petitioners have failed to raise a spousal defense make a valid challenge to the appropriateness of respondent’s intended collection action or offer alternative means of collection these issues are now deemed conceded see rule b accordingly we sustain respondent’s determination to proceed with collection ii sec_6673 penalty sec_6673 authorizes this court to require a taxpayer to pay to the united_states a penalty not to exceed dollar_figure if the taxpayer took frivolous positions in proceedings or instituted the proceedings primarily for delay in 115_tc_576 we issued an unequivocal warning to taxpayers concerning the imposition of a penalty pursuant to sec_6673 on those taxpayers who abuse the protections afforded by sec_6320 and sec_6330 by instituting or maintaining actions under those sections primarily for delay or by taking frivolous and or groundless positions in such actions a position maintained by the taxpayer is frivolous where it is contrary to established law and unsupported by a reasoned colorable argument for change in the law 791_f2d_68 7th cir see also 820_f2d_1464 9th cir sec_6673 continued levy petitioners however continued to make only frivolous and or groundless tax-protester arguments penalty upheld because taxpayer should have known claim was frivolous furthermore we have warned these petitioners of the possible consequences of advancing frivolous arguments in this court in a previous appearance before this court petitioners made similar frivolous tax-protester arguments they were warned that if they brought the arguments to this court again a penalty would be imposed in the petition and at trial petitioners raised frivolous arguments and contentions that we have previously rejected and which we conclude were interposed primarily for delay this has caused the court to waste limited resources accordingly we shall impose a penalty of dollar_figure pursuant to sec_6673 to reflect the foregoing an appropriate order and decision will be entered petitioners were previously before this court making the same frivolous arguments regarding their income_tax_liability ball v commissioner docket no 1066-04l