t c memo united_states tax_court winthrop b and sally l orgera petitioners v commissioner of internal revenue respondent docket no filed date william d hartsock for petitioners sherri s wilder for respondent memorandum findings_of_fact and opinion gerber judge respondent determined a dollar_figure deficiency in petitioners' income_tax respondent also determined a dollar_figure penalty under sec_6662 the deficiency include sec_1 william d hartsock entered his appearance after trial for involvement in posttrial briefing section references are to the internal_revenue_code in continued a 10-percent tax for premature_distribution from a qualified_plan after concessions by the parties the issues remaining for our consideration are whether petitioners successfully rolled over a plan distribution of dollar_figure or whether it was taxable if the distribution was taxable whether it was subject_to the 10-percent additional tax for premature_distribution under sec_72 whether the distribution is a lump-sum_distribution that meets the requirements for income_averaging under sec_402 and whether petitioners are liable for a dollar_figure accuracy-related_penalty for negligence or disregard of rules and regulations for failing to report the pension distribution and other income findings_of_fact petitioners resided in san juan capistrano california at the time their petition was filed as of date each of petitioners was less than years of age winthrop orgera petitioner was employed as a pilot by western air lines inc western prior to date petitioner participated in western's pilots' variable pension_plan plan of which sumitomo bank was the trustee petitioner made voluntary contributions to the fund and on date he received a dollar_figure cash distribution from the plan the plan's assets were distributed continued effect for the tax_year under consideration rule references are to this court's rules_of_practice and procedure because delta airlines had bought out western and did not wish to continue western's pilots' plan petitioner met with thomas supinski of the western federal credit_union credit_union regarding the rollover of his plan distribution mr supinski and the credit_union were attempting to assist western's employees to roll over their distributions into individual_retirement_accounts ira the credit_union had been connected with western petitioner's former employer mr supinski recommended the use of the first national bank of onaga kansas kansas bank to open an ira as of date petitioner had completed an ira application and a rollover certification with the kansas bank petitioner also executed a trading authorization that appointed thomas supinski as the ira account representative of account no which was applied for at the kansas bank in addition to the cash distribution petitioner expected that he would receive a distribution_in_kind of illiquid assets and that the kansas bank would be trustee for the assets that might be received by the ira account the illiquid assets represented about or percent of the total amount to be distributed from the plan to western pilots including petitioner it was mr supinski's understanding that petitioner's kansas bank ira was exclusively for the illiquid assets petitioner did not understand that the kansas bank ira did not cover the cash portion of the plan distribution mr supinski tried to persuade petitioner to invest the dollar_figure cash distribution in certain financial products and to include them in the ira petitioner advised mr supinski that he was going to handle the cash distribution himself and set up his own ira on date petitioner deposited dollar_figure in money market account no at the credit_union and he retained the dollar_figure difference between the distribution and the deposit on date petitioners withdrew dollar_figure from account no and deposited it into a qualified ira with charles schwab co inc prior to the date transaction petitioners had withdrawn a total of dollar_figure from account no of the dollar_figure dollar_figure was redeposited into petitioners' regular share account with the credit_union account no in addition dollar_figure of the dollar_figure was withdrawn on date and used by petitioners in connection with the building of their home petitioners did not report any portion of the plan distribution or credit_union withdrawals as income on their federal_income_tax return petitioners for also failed to report dollar_figure of income from prudential insurance co and dollar_figure of interest_income from great american bank by a letter dated date the kansas bank acknowledged receiving petitioner's documents with which to open an ira but advised that liquidating_trust certificates had not been received from western and accordingly it became the bank's understanding that the ira accounts were not to have been opened by a letter dated date the kansas bank advised petitioner of the return of a dollar_figure custodial fee which had been paid_by the credit_union with respect to petitioner's ira account the fee was returned because the ira had not been funded and the ira accounts had been closed opinion sec_402 provides the general_rule that amounts distributed by a qualified_plan are taxable in the year of distribution in accordance with the provisions of sec_72 sec_402 provides that taxation of a current_distribution may be deferred if it is rolled over into an eligible_retirement_plan within days of the distribution petitioners bear the burden of proving that respondent's determination is in error rule a 290_us_111 accordingly petitioners must show that the cash distribution in question was rolled over into an eligible_retirement_plan within days petitioner concedes that the dollar_figure of the plan distribution that was not deposited and the dollar_figure that wa sec_3 sec_402 as used in this opinion refers to the section in effect for distributions made prior to date the unemployment_compensation amendments of publaw_102_318 106_stat_290 restructured and reconfigured sec_402 for years after the calendar_year withdrawn during are taxable in that year with respect to the balance petitioner argues that his credit_union deposit was sufficient to meet the requirements of sec_402 it was petitioner's understanding that an ira account had been opened with the kansas bank and that he was covered for purposes of the rollover petitioner also believed that the credit_union and mr supinski were connected with petitioner's former employer western and that they were trying to assist in the rollover process although mr supinski attempted to make it clear to petitioner that his ira with the kansas bank was only for illiquid assets distributed in_kind petitioner believed that somehow the credit_union the kansas bank and his ira were connected during the trial petitioner demonstrated an unfamiliarity with the role of the kansas bank the nature or mechanics of an ira account and mr supinski's role in the entire process petitioner believed that maintaining the plan distributions in his western credit_union accounts was part of his ira mr supinski was attempting to profit from selling investments to be included in petitioner's ira petitioner did not make a distinction between depositing the distribution in the credit_union and the investments recommended by mr supinski for placement in the ira petitioner applied for an ira which was opened in his name albeit in a kansas bank petitioner followed mr supinski's instructions as to opening the ira at the kansas bank but that account was never funded after petitioner learned his approach was inadequate he put the remaining funds into a valid ira even though a part of the plan distribution was ultimately placed into a valid ira petitioners failed to roll over any part of the dollar_figure cash distribution within days in a manner that would meet the requirements for deferral under sec_402 petitioner contends that the holding in 93_tc_114 is applicable here that case involved a distribution of a profit-sharing_plan followed by the taxpayer's establishment of an ira due to a bookkeeping error by the ira trustee certain of the trustee's records indicated that part of the distribution had not been transferred to the ira account within the required days in wood we held that the trustee's bookkeeping error did not preclude the taxpayer's rollover treatment because in substance the taxpayer had met the statutory requirements here petitioner had established an ira yet due to petitioner's lack of understanding he failed to make a timely transfer of the distribution to an ira that met the statutory requirements hence the distribution made in is taxable as determined by respondent respondent also determined that petitioners were liable for the 10-percent additional tax for early distribution under sec_72 that section provides for an additional tax for any amount received from a qualified_plan unless it is made after the employee becomes years old made to a beneficiary after the employee's death attributable to the employee's being disabled part of a series of substantially equal payments made no less than annually for the life of designated persons made to an employee who is separated from service after attaining age a dividend paid with respect to a stock described in sec_404 made to an employee for medical_expenses in accordance with sec_72 or a payment in connection with a qualified_domestic_relations_order in accordance with sec_72 because petitioner wa sec_54 years of age as of and none of the other exceptions set forth in the provisions of sec_72 is satisfied petitioners are liable for an additional 10-percent tax on the early distribution under sec_402 a lump-sum_distribution made after the employee attained the age of was in certain circumstances eligible for income-averaging treatment petitioner was just years old at the time of the distribution which renders him ineligible for income_averaging under the express terms of sec_402 see 101_tc_70 moreover as explained infra the distribution was not a lump sum because less than the full balance of the account was distributed during the year moreover the record reflects that petitioner received cash amounts representing about percent of his plan interest and that about percent of his plan account was tied up in illiquid assets that were supposedly to be placed in the kansas bank ira for reasons that are not explained in our record as of the illiquid assets had not been trusteed or placed in petitioner's ira account and the dollar_figure custodial fee was returned to petitioner these illiquid assets were not distributed during consequently the distribution of cash to petitioner in that year did not represent the full balance standing to his account in the plan and failed to qualify as a lump-sum_distribution petitioner also argues that congress did not intend that taxpayers be subject_to the full impact of the tax in these situations it is true that petitioner's distribution was made due to circumstances beyond his control the statute however requires that the distribution of a taxpayer's entire account during the year be made in specific circumstances which did not occur here in addition congress provided a method for deferral yet petitioner failed to comply with the statutory requirements to obtain such deferral accordingly petitioners are not entitled to sec_402 relief in the form of a tax-free_rollover or income_averaging for the year of the distribution finally we consider whether petitioners are liable for an accuracy-related_penalty for negligence under sec_6662 and b sec_6662 provides for a 20-percent penalty for the portion of the underpayment_of_tax attributable to one of the categories listed in sec_6662 sec_6662 provides that negligence or disregard of rules or regulations is a reason for imposition of the 20-percent addition negligence includes a lack of due care or a failure to do what a reasonable and ordinarily prudent person would do under the circumstances 85_tc_934 petitioners bear the burden of proving that respondent's determination of negligence is erroneous rule a 58_tc_757 petitioner at least with respect to was erroneously under the impression that his credit_union accounts were covered under the ira account that he opened during the confusion of the takeover by delta airlines and the closing of the pilots' pension_plan that had operated while petitioner worked for western petitioner executed ira papers and for the most part deposited his funds in the credit_union that was affiliated with the organization and the individual mr supinski who assisted petitioner in the opening of petitioner's ira account taking into consideration petitioner's lack of specialized knowledge about ira's and tax law involving pension plans and considering the circumstances in this case it was reasonable for petitioner to believe that he had rolled over his pension distribution into an ira mr supinski had attempted to direct petitioner to financial products on which mr supinski would have earned commissions petitioner believed that he could individually place his funds in an investment of his choice because he had already opened an ira account while this did not win the day as to petitioners' tax_liability argument we hold that petitioners are not liable for the negligence addition for the portion of the funds that remained deposited in petitioner's credit_union accounts as of the end of with respect to the dollar_figure initially withheld from deposit the dollar_figure withdrawn by petitioners to build a home and the unreported income in the amounts of dollar_figure and dollar_figure petitioners did not provide any explanation that would mitigate respondent's determination of negligence under sec_6662 accordingly we hold that petitioners are liable for the percent penalty as to that part of the underpayment which is attributable to the dollar_figure dollar_figure dollar_figure and dollar_figure omitted amounts to reflect the foregoing decision will be entered under rule


t c summary opinion united_states tax_court robert w and lila l blewett petitioners v commissioner of internal revenue respondent docket no 6277-o0s filed date glen g utzman for petitioners julie l payne for respondent wolfe 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 ’ the decision to be entered is not reviewable by any other court and this opinion ‘unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure - - should not be cited as authority some of the facts have been stipulated and are so found the stipulation of facts and the accompanying exhibits are incorporated herein by this reference petitioners resided in grangeville idaho at the time the petition was filed respondent determined a deficiency of dollar_figure in petitioners’ federal_income_tax after concessions ’ the issue for decision is whether petitioners’ losses during constitute nondeductible passive losses under sec_469 background in robert blewett petitioner and his brother don blewett organized highland enterprises inc highland acc corporation petitioner and his brother each owned percent of the outstanding_stock of highland during throughout the year in issue highland was engaged in two separate businesses a general heavy construction business and a real_estate sales business highland’s general heavy construction business included building logging and fire roads for the u s forest service and private logging companies building roads for governmental entities constructing homes and commercial buildings and developing residential and commercial land subdivisions including the building of streets curbs petitioners concede that they improperly failed to report interest_income of dollar_figure and income of dollar_figure from a jewelry sales business on their federal_income_tax return sidewalks and the installation of utilities the activities of highland’s real_estate sales operation which did business during as highland realty included selling residential and unimproved_real_estate during both petitioner and his brother worked full- time for highland petitioner provided services to both highland’s general heavy construction business and its real_property sales activity for the former he managed the corporate office secured construction projects acquired land for property development ordered construction materials_and_supplies and assured their timely arrival at construction sites and reviewed construction progress at construction sites for the latter petitioner provided services as a real_estate broker petitioner is licensed as a real_estate broker in the state of idaho prior to highland suffered a series of setbacks that put it in a dire financial situation the setbacks included a cost overrun in excess of dollar_figure million on a road job with the u s forest service a lengthy lawsuit involving the company’s purchase of faulty equipment and deliberate interference with highland’s work by an environmental group barth first that blocked its roads and destroyed hydraulic hoses and three major pieces of equipment because of highland’s poor financial condition the company q4e- was unable to lease or purchase equipment on credit financial institutions simply would not make any loan of any type to highland highland’s continued existence depended on its obtaining equipment faced with this predicament petitioner and his brother separately purchased the necessary equipment in their individual names and separately leased it to highland there is no dispute that petitioner and his brother were engaged in an equipment_leasing activity amounting to a trade_or_business during the year in issue and the record clearly supports that characterization respondent has not raised any questions as to whether the leasing activity was for profit and we treat that matter as conceded by respondent petitioner and his brother each owned percent of the equipment that he leased to highland none of the equipment was jointly owned they leased the equipment exclusively to highland it was never used in another trade_or_business petitioners had no written rental agreement with highland during highland did not pay petitioners any rent during highland paid rent of dollar_figure and dollar_figure to petitioners and don blewett respectively during highland paid rent of dollar_figure to don blewett and no rent to petitioners at trial petitioner testified that because of highland’s poor financial condition its rental payments to the blewetts were irregular in his words you pluck all the feathers off of that - - bird and it’s not going to lay any more eggs accordingly payments were made only when either petitioner or don blewett needed the money to make payments to creditors for leased eguipment petitioners claimed a net_loss of dollar_figure from their equipment_leasing activity on schedule c profit or loss from business sole_proprietorship of their federal_income_tax return in the notice_of_deficiency respondent disallowed the entire loss on the ground that the leasing activity was subject_to the passive loss limitations of sec_469 discussion sec_469 limits the deductibility of losses from certain passive activities generally a passive_activity includes the conduct_of_a_trade_or_business in which the taxpayer does not materially participate rental_activity is generally treated as a passive_activity without regard to whether the taxpayer materially participates sec_469 rental_activity is defined as any activity where payments are principally for_the_use_of tangible_property sec_469 j ‘the loss was attributable primarily to deductions of dollar_figure and dollar_figure for depreciation and sec_179 expenses respectively a statutory exception that was added in provides that certain real_estate operators need not treat their interests in rental real_estate as passsive activities sec_469 that exception is inapplicable here because the subject of this controversy is personal_property both parties agree that petitioners’ equipment_leasing activity falls within the definition of a rental_activity in sec_469 and that the income from that activity is passive in nature unless petitioner qualifies under one of the six exceptions listed in the regulations see tarakci v commissioner tcmemo_2000_358 sec_1_469-1t a through f temporary income_tax regs fed reg date petitioner specifically relies upon the so-called incidental exception which we previously discussed in the recent and analogous case of tarakci v commissioner supra and also the so-called grouping exception sec_1_469-4 income_tax regs we agree with petitioner that the incidental exception and the reasoning of the tarakci opinion are applicable here so we discuss the rules of the grouping exception only insofar as they relate to the provisions of the incidental exception petitioners’ position is that their leasing activity is not a rental_activity because it qualifies as an exception to the definition of a rental_activity under sec_1_469-1t d temporary income_tax regs fed reg date which together with paragraph e vi provides that -temporary regulations are entitled to the same weight as final regulations with respect to the years to which they apply 89_tc_765 sec_1_469-1t temporary income_tax regs fed reg continued - j- an activity involving the use of tangible_property is not a rental_activity if the rental of such property is treated as incidental to a nonrental activity of the taxpayer sec_1_469-1t vi c temporary income_tax regs fed reg date provides c property used in a trade_or_business the rental of property during a taxable_year shall be treated as incidental to a trade_or_business activity within the meaning of paragraph e of this section if and only if-- the taxpayer owns an interest in such trade_or_business activity during the taxable_year the property was predominantly_used in such trade_or_business activity during the taxable_year or during at least two of the five taxable years that immediately precede the taxable_year and the gross rental income from such property for the taxable_year is less than two percent of the lesser of-- the unadjusted_basis of such property and the fair_market_value of such property with respect to the application of the three tests of subdivision c we consider it significant that the parties have stipulated that during petitioner owned percent of continued date is effective for taxable years beginning after date sec_1_469-11 income_tax regs fed reg date --- - the outstanding_stock of highland the equipment in question was used exclusively in highland’s trade_or_business activity throughout the year and petitioners did not receive any gross rental income from highland for the equipment respondent contends that sec_1_469-1t vi c temporary income_tax regs fed reg date is inapplicable to the instant case because it requires that a taxpayer at least temporarily stop using property in his trade_or_business and start using the property in a rental_activity respondent argues that the exception is not available when the property is used in the rental_activity and the trade_or_business activity simultaneously respondent makes three arguments in support of this construction of the regulation respondent’s arguments are set forth below but we note that in our view here respondent advocates a strained interpretation of language prepared by respondent’s own employees see ferguson v commissioner tcmemo_1992_451 in interpreting the language in question we bear in mind that respondent’s personnel drafted that language and the resolution of doubts against the draftsman is appropriate in many circumstances see id and authorities cited therein first respondent argues that sec_1_469-1t vi c temporary income_tax regs fed reg date uses the past tense when referring to the use of the property in --- - the trade_or_business respondent contends that use of the verb was in paragraph of the relevant regulation means that for the purposes of the incidental exception the property cannot be used_in_the_trade_or_business activity and the rental_activity simultaneously we are not convinced by this argument sec_1_469-1t vi c temporary income_tax regs fed reg date provides that the rental of property during a taxable_year shall be treated as incidental to a trade_or_business activity if inter alia the property was predominantly_used in such trade_or_business activity during the taxable_year or during at least two of the five taxable years that immediately precede the taxable_year emphasis added the word was in the regulation refers not only to past years but also to the current taxable_year the terms of the regulation are consistent with the conclusion that the property can be used_in_the_trade_or_business activity at any time and still satisfy the requirements for the incidental exception to the definition of a rental_activity we conclude that the language of the regulation does not require that the taxpayer must cease using the property in a trade_or_business activity before it can be used in the rental_activity second respondent cites the preamble to t d the treasury_decision promulgating sec_1_469-1t vi c -- - temporary income_tax regs fed reg date the preamble states that the exception applies if an insubstantial amount of rental income is derived from property that was recently used in a trade_or_business activity of the taxpayer and is temporarily rented id we apply a regulation according to its plain or ordinary meaning unless such interpretation would lead to absurd results or another construction is supported by unequivocal evidence of administrative intent 101_tc_78 affd without published opinion 70_f3d_1282 10th cir respondent does not suggest that the application of the plain meaning of sec_1_469-1t vi c temporary income_tax regs fed reg date leads to absurd results thus we must determine whether the language from the preamble amounts to unequivocal evidence of administrative intent to limit the exception to only those situations where the property being rented is no longer being used_in_the_trade_or_business activity the preamble does refer to the use of the property in the trade_or_business activity in the past tense and it does refer to the use of the property in the rental_activity in the present tense however in our view rather than creating a separate requirement in addition to the requirements set forth in the text of the regulations the preamble merely recites one example of a situation that would satisfy sec_1_469-1t vi c temporary income_tax regs fed reg date the preamble’s general one-sentence introductory comment concerning the regulation in question does not amount to unequivocal evidence of administrative intent that use of the property in the trade_or_business activity must cease before the property is used in the rental_activity a contrary conclusion would import into the regulation a requirement that simply is not in the terminology of the regulation third respondent cites sec_1_469-1t viii example temporary income_tax regs fed reg date hereinafter referred to as example in example a taxpayer owns an interest in a farming activity which is a trade_or_business activity and owns farmland that is used in the farming activity in and in and the taxpayer does not use the land in the farming activity instead during those years he leases the land to other parties but continues his interest in the farming activity the taxpayer is permitted to treat the rental of his land as incidental to his farming activity in and based on the gross rental income received id example does illustrate respondent’s narrow interpretation of sec_1_469-1t vi c temporary income_tax regs fed reg date example is the - only example in the regulations that applies sec_1 1t e vi c temporary income_tax regs fed reg date in our view the applicability of the regulation is not limited to the precise circumstances of an example set forth in the regulation the example plainly is illustrative rather than limiting or exclusive moreover as stated above sec_1_469-1t vi c temporary income_tax regs fed reg date permits the property to be used_in_the_trade_or_business during either the current_year or of the years that precede the taxable_year example is an illustration of the property being used in of the preceding years subdivision ii of example provides for and the taxpayer owns an interest in a trade_or_business activity and the farmland which the taxpayer leases to the rancher was used in such activity for two out of the five immediately preceding_taxable_years here petitioners’ property was used_in_the_trade_or_business during the current_year the facts of example and the facts of the instant case relate to different clauses of sec_1 1t e vi c temporary income_tax regs fed reg date respondent also argues that sec_1_469-1t vi c temporary income_tax regs fed reg date does not apply to the facts here because the rental_activity and - the trade_or_business activity must be conducted by the same entity in effect respondent argues that the regulation does not apply because the equipment_leasing activity of petitioners’ sole_proprietorship was not incidental to any other trade_or_business activity of their sole_proprietorship we previously ruled on this issue in tarakci v commissioner tcmemo_2000_358 there the taxpayer formed a sole_proprietorship that purchased equipment and leased it to a general_partnership in which the taxpayer and another individual were equal partners in the notice_of_deficiency the commissioner disallowed the taxpayer’s entire loss from his sole_proprietorship on the ground that the loss was subject_to the passive_activity_loss limitations of sec_469 the taxpayer argued that sec_1_469-1t vi c temporary income_tax regs fed reg date applied and that for purposes of that section the trade_or_business activities of the partnership were trade_or_business activities of the sole_proprietorship the commissioner contended that sec_1_469-1t e vi c temporary income_tax regs fed reg date did not apply because the equipment_leasing activity of the sole_proprietorship was not incidental to any other activity of the sole_proprietorship we held that the trade_or_business activities of the taxpayer for the year in issue included the trade_or_business - activities of the partnership for purposes of sec_1 1t e vi c temporary income_tax regs fed reg date we noted that the the regulations require the taxpayer own ‘an interest in such trade_or_business activity’ not that the taxpayer be the sole owner of the trade_or_business tarakci v commissioner supra quoting sec_1 1t e vi c temporary income_tax regs fed reg date there the taxpayer was actively involved in the affairs of the partnership substantially contribut ing both time and effort to the success of it id here petitioner’s ownership of percent of highland’s stock as well as his substantial time commitment to highland satisfies the requirement that he have an interest in such trade_or_business respondent argues that the holding of tarakci conflicts with the language of sec_1_469-1t vi c temporary income_tax regs fed reg date and sec_1 1t e viii example temporary income_tax regs fed reg date we disagree with respondent’s analysis in our view the reasoning and the holding in the tarakci case are correct and properly applicable to the facts and circumstances here the trade_or_business activities of petitioners for include the trade_or_business activities of - - highland for purposes of sec_1_469-1t vi c temporary income_tax regs fed reg date we hold that petitioners are entitled to treat their leasing activity as incidental to highland’s trade_or_business activities under sec_1_469-1t vi c temporary income_tax regs fed reg date consequently petitioners’ leasing activity is not classified as a rental_activity sec_1_469-1t d temporary income_tax regs fed reg date the passive loss limitations of sec_469 still apply to petitioners unless they meet the material_participation standard sec_469 the regulations permit a taxpayer to group an activity conducted through a c_corporation subject_to sec_469 with another activity of the taxpayer for purposes of determining whether the taxpayer materially or significantly participates in the other activity sec_1_469-4 income_tax regs since petitioners conducted an activity through a c_corporation subject_to sec_469 petitioners are entitled to group their ‘the passive loss limitations of sec_469 apply only to individuals estates trusts closely held c corporations and personal_service_corporations sec_469 a closely_held_c_corporation for purposes of sec_469 is defined as any corporation in which more than percent in value of its outstanding_stock is owned directly or indirectly by or for not more than five individuals at any time during the last half of the taxable_year sec_469 a b a since all of the stock of highland a c_corporation was owned directly by two individuals during the year in issue highland is continued -- - activities for the purpose of determining material_participation since it is undisputed that petitioner materially participated in the trade_or_business activities of highland ’ petitioners automatically meet the material_participation standard with respect to their leasing activity for the foregoing reasons petitioners’ losses during do not constitute nondeductible passive losses under sec_469 reviewed and adopted as the report of the small_tax_case division decision will be entered under rule continued subject_to sec_469 ‘an individual is treated as materially participating in an activity for the taxable_year if the individual participates in the activity for more than hours during such year sec_1_469-5t temporary income_tax regs fed reg date the parties stipulated that during the year in issue petitioner worked or more hours per week for highland thus petitioner unquestionably satisfies the 500-hour requirement


id office uilc cca_2011031108283850 ---------- number release date from ----------------------- sent friday date am to -------------- cc --------------------------------------------------------------- subject re hotline calls--2011 ovdi for purposes of determining ability to pay ownership is presumed to be in equal shares unless the taxpayer demonstrates otherwise see irm in the levy context the supreme court held in the national bank of commerce case that where under state law the taxpayer has the unrestricted right to withdraw funds from a jointly held account a levy attaches to the entire account the levy however is provisional and subject_to a later claim by a codepositor that the money in fact belongs to him or her


department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------- id no ------------- telephone number --------------------- refer reply to cc intl b04 plr-171098-03 date date internal_revenue_service number release date index number ------------------------------ ------------------------- ------------------------ --------------------- ---------------------------- in re ------------------------ --------------------- ---------------------------- ----------------------- legend legend taxpayer ------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------- -------------------------- entity a ------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------- ----------------------- accounting firm accounting firm accounting firm subsidiary one subsidiary two ----------------------------- -------------------------- ---------------- ------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------- ----------------------- ------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------- ----------------------- plr-171098-03 subsidiary three subsidiary four subsidiary five subsidiary six ------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------- ----------------------- ------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------- ----------------------- ------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------- ----------------------- ------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------- ----------------------- country a --------------------- date a -------------------------- date b -------------------------- date c -------------------------- date d -------------------------- date e -------------------------- date f ------------------- date g ----------------------- individual a ---------------------------------------------------------------------------------- individual b ---------------------------------------------------------- x ----------- y ----------- dear --------------- this replies to a letter dated date in which taxpayer requests an extension of time under sec_301_9100-3 to file the annual certifications required by sec_1_1503-2 for the tax years ending on date b and plr-171098-03 date c with respect to the dual consolidated losses of subsidiary five and subsidiary six incurred in the tax_year ended on date a the information submitted for consideration is substantially as set forth below the rulings contained in this letter are based upon information and representations submitted by taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request_for_ruling verification of the factual information representations and other data may be required as a part of the audit process taxpayer a domestic_corporation was the common parent of an affiliated_group_of_corporations that until date f filed a u s consolidated federal_income_tax return pursuant to sec_1502 of the internal_revenue_code the code taxpayer owns its subsidiaries in the following order taxpayer owns percent of subsidiary one subsidiary one owns percent of subsidiary two subsidiary two owns percent of subsidiary three subsidiary three owns percent of subsidiary four subsidiary four owns percent of subsidiary five and subsidiary six taxpayer and its subsidiaries are u s_corporations and are members of a consolidated_group entity a is a country a unlimited liability company which is treated as a partnership for u s federal_income_tax purposes subsidiary five owns x percent and subsidiary six owns y percent of entity a during the tax_year ended on date a entity a was a hybrid_entity_separate_unit as defined under sec_1_1503-2 subsidiary five and subsidiary six’s interests in entity a were treated as separate units as defined under sec_1_1503-2 taxpayer was not in compliance with the certification requirements under sec_1_1503-2 for the tax years ending on date b and date c taxpayer now requests relief to obtain an extension of time to make the corrections and certifications because the interests in entity a are hybrid_entity separate units as defined under sec_1_1503-2 taxpayer was required to file annual certifications with its income_tax return for each of the years following the applicable tax_year see sec_1_1503-2 therefore taxpayer seeks to cure the omitted certification statements for the tax years ending on date b and date c beginning in the tax_year ending on date d taxpayer engaged accounting firm to provide tax consulting and compliance services relating to the tax_year ending on date d previously taxpayer had engaged accounting firm sec_1 and to prepare its u s consolidated tax returns for the tax years ending from date a to date c accounting firm sec_1 and did not prepare the required annual certification under treas plr-171098-03 reg sec_1_1503-2 nor did it advise taxpayer of the requirement to make annual certifications for the tax years ending on date b and date c in the tax_year ending on date e as part of an overall review of taxpayer’s tax position and a review of previously filed income_tax returns accounting firm confirmed that taxpayer did not file the required certifications for tax years ending on date b and date c accounting firm recommended that taxpayer pursue relief to request an extension of time within which to file the necessary annual certifications for tax years ending on date b and date c taxpayer has submitted its ruling_request before the failure to make the elections was discovered by the service individual a is the plan_administrator of taxpayer individual b is a partner with accounting firm and is responsible for providing tax consulting services and tax compliance services relating to taxpayer’s tax_year ending on date d the affidavits of individuals a and b and the facts submitted set forth the reasons taxpayer is requesting relief to file the annual certifications individual a’s affidavit states that taxpayer relied on accounting firm sec_1 and at all times to identify and properly address issues relating to the filing of taxpayer’s federal_income_tax returns including filing appropriate annual certifications the omission of the sec_1_1503-2 certifications was first discovered on date g sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the standards set forth in sec_301_9100-3 to make a regulatory election under all subtitles of the code except subtitles e g h and i sec_301 -1 b defines a regulatory election as an election whose due_date is prescribed by a regulation a revenue_ruling revenue_procedure notice or announcement treas reg provides standards for extensions of time for making regulatory elections when the deadline for making the election is other than a due_date prescribed by statute sec_301_9100-3 provides that requests for relief subject_to this section will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government in the present situation sec_1_1503-2 fixes the time to file the annual certification therefore the commissioner has discretionary authority under plr-171098-03 sec_301_9100-1 to grant taxpayer an extension of time provided that taxpayer satisfies the standards set forth in treas reg a based on the facts and circumstances of this case we conclude that taxpayer satisfies sec_301_9100-3 accordingly pursuant to sec_301_9100-1 and sec_301_9100-3 taxpayer is granted as extension of time until days from the date of this ruling letter to file annual certifications under sec_1_1503-2 for tax years ending on date b and date c the granting of an extension of time is not a determination that taxpayer is otherwise eligible to file the sec_1_1503-2 annual certifications sec_301_9100-1 a copy of this ruling letter should be attached with the sec_1 g vi b certification this ruling is directed only to the taxpayer who requested it code sec_6110 provides that it may not be used or cited as precedent no ruling has been requested and none is expressed as to the application of any other section of the code or regulations to the facts presented the facts state that taxpayer attached elections under sec_1 g i to its timely filed u s consolidated_income_tax_return for the tax_year ended on date a however the dollar amount of the dual_consolidated_loss reported on the election statement was incorrect taxpayer has requested relief for an extension of time to correct its timely filed election under sec_1_1503-2 to report the correct amount of loss because the election with respect to taxpayer for the tax_year ended on date a was timely filed sec_301_9100-3 does not apply in this situation despite the fact that the amount of the loss reported on the election statement was incorrect however taxpayer may file an amended_return together with an election reporting the correct amount of the loss for taxpayer for the tax_year ended on date a plr-171098-03 pursuant to the power_of_attorney on file in this office a copy of this ruling letter is being furnished to taxpayer’s authorized representative sincerely joseph m calianno special counsel to the deputy associate chief_counsel international cc ----------------------------- enclosures copy for purposes


office_of_chief_counsel internal_revenue_service memorandum cc ita files-123904-04 uilc date date to associate area_counsel small_business self-employed cc sb por from acting chief branch number release date office of associate chief_counsel income_tax and accounting cc ita subject oregon child_care_credit this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent we understand that your office is assisting a local irs office in preparing an information_letter to be issued under the provisions of section dollar_figure of revproc_2004_1 2004_1_irb_1 previously your office forwarded draft text for our review we reviewed that text and recommend some revisions the text in the section below reflects our revisions and we recommend that it be used for the body of the information_letter with appropriate modifications for example the local irs office will need to insert a closing paragraph with contact information text for letter this information_letter responds to your inquiry concerning whether contributions made under the oregon child care tax_credit program or rev stat 657a et seq qualify for a charitable_contribution_deduction under sec_170 of the internal_revenue_code section dollar_figure of revproc_2004_1 2004_1_irb_1 describes an information_letter as a statement issued by the internal_revenue_service that calls attention to a well-established interpretation or principle of tax law without applying it to a specific set of facts an information_letter is advisory only and has no binding effect on the internal_revenue_service files-123904-04 to summarize the following discussion a payment for which a benefit of receiving a state_income_tax credit may be expected raises serious concerns as to the deductibility of such a payment as a charitable_contribution on the contributor’s federal_income_tax return however if a charitable_contribution_deduction under sec_170 of the internal_revenue_code is not allowable for federal_income_tax purposes it is possible that an equivalent deduction may be allowable under sec_162 or sec_164 as a payment of state tax the service's national_office has been informed of this oregon credit because it is studying various issues concerning the federal tax treatment of state tax_credits and whether such issues should be addressed in official published guidance description of oregon credit the state of oregon provides for a credit against oregon personal and corporate_income_tax or corporate excise_tax for certain contributions made to the oregon child care division generally the law provides that a taxpayer may make a contribution to the child care division or a selected community agency and apply for a tax_credit certificate with the contribution section 657a of the oregon revised statutes provides that the child care division of the employment department in collaboration with an advisory committee established by the child care division shall establish a program to a allocate tax_credit certificates to taxpayers that make qualified contributions to the child care division and b distribute to child care providers moneys from qualified contributions and other contributions section 657a of the oregon revised statutes provides that a qualified_contribution means a contribution made by a taxpayer to the child care division of the employment department or a selected community agency for the purpose of promoting child care and for which the taxpayer will receive a tax_credit certificate under section 657a of the oregon revised statutes section 657a provides that a community agency means a nonprofit agency that a provides services related to child care children and families community development or similar services and b is eligible to receive contributions that qualify as deductions under sec_170 of the internal_revenue_code section 657a of the oregon revised statutes provides that the purposes of the program are to a encourage taxpayers to make contributions to the child care division by providing a financial return on qualified contributions and by soliciting other contributions b achieve specific and measurable goals for targeted communities and populations files-123904-04 c set standards for the child care industry concerning the cost of providing quality affordable child care d strengthen the viability and continuity of child care providers while making child care more affordable for low and moderate income families section 657a a of the oregon revised statutes provides that the child care division shall issue tax_credit certificates in the chronological order in which the contributions are received by the division the division shall issue tax_credit certificates to contributors until the total value of all certificates issued by the division for the calendar_year equals dollar_figure each certificate shall state the value of the contribution being certified as eligible for the tax_credit allowed under section of the oregon revised statutes except as provided in rules adopted under section 657a the certified value shall equal the amount of the contribution section 657a provides that the child care division may adopt rules that establish a fixed percentage that is less than percent by which the amount contributed by a taxpayer will be certified for a tax_credit by the division that section also states that t he purpose of the grant of rulemaking authority under this subsection is to permit the division to calibrate the amount of the tax_credit to interpretations of the deductibility of qualified contributions under sec_170 of the internal_revenue_code for federal tax purposes section 657a provides that a taxpayer that receives a notice of denial of a tax_credit certificate or that receives a tax_credit certificate issued for an amount that is less than the amount contributed may request a refund for the amount contributed within days of the denial or issuance of the certificate section of the oregon revised statutes provides a credit against personal income taxes or if the taxpayer is a corporation against corporate income and excise_taxes for certified contributions made to the child care division under section 657a the credit is not refundable section provides that the credit may not exceed the tax_liability of the taxpayer for the tax_year in which the credit is claimed section provides that if the amount claimed as a credit is allowed as a deduction for federal tax purposes the amount allowed as a credit shall be added to federal taxable_income for oregon tax purposes section provides that any credit otherwise allowable that is not used by the taxpayer in a particular tax_year may be carried forward and offset against the taxpayer’s tax_liability for the next succeeding tax_year up to a period of four years discussion sec_170 of the internal_revenue_code provides the general_rule that subject_to certain limitations there shall be allowed as a deduction any charitable_contribution charitable_contribution_deduction files-123904-04 as defined in sec_170 payment of which is made within a taxable_year see also sec_1_170a-1 of the federal_income_tax regulations generally to be deductible as a charitable_contribution under sec_170 a transfer to a charitable_organization or government unit must be a gift a gift_for this purpose is a transfer of money or property without receipt of adequate_consideration made with charitable intent a transfer is not made with charitable intent if the transferor expects a direct or indirect return benefit commensurate with the amount of the transfer if a taxpayer receives a benefit in return for a transfer to a charitable_organization the transfer may be deductible as a charitable_contribution but only to the extent the amount transferred exceeds the fair_market_value of the benefit received and only if the excess_amount was transferred with the intent of making a gift see 477_us_105 490_us_680 sec_1_170a-1 and a leading authority in this area observed that if the benefits received or expected to be received by a donor are substantial that is greater than those incidental_benefits that inure to the general_public from transfers for charitable purposes then the transferor has received or expects to receive a quid pro quo sufficient to remove the transfer from the realm of deductibility under sec_170 449_f2d_413 ct_cl the tax_benefit of a federal charitable_contribution_deduction is not regarded as a return benefit that negates charitable intent reducing or eliminating the deduction itself similarly the fact that states typically provide for a similar deduction in determining the taxable_income base for state tax purposes does not affect the federal deduction under sec_170 however that situation is arguably distinguishable from one in which as a result of a payment a taxpayer makes to a governmental or charitable body a state offsets the taxpayer's state tax_liability with a credit sec_164 of the internal_revenue_code provides generally for an itemized_deduction for the payment of certain taxes including state_income_tax see sec_164 similarly taxpayers engaged in a trade_or_business may deduct certain tax_payments as business_expenses under sec_162 as discussed above a charitable_contribution_deduction under sec_170 may not be allowable for a payment that qualifies for the oregon child care tax_credit if the credit is viewed as a quid pro quo benefit that eliminates the necessary charitable intent for federal tax purposes however if receipt of the credit from the state is viewed as a disqualifying benefit arguably the taxpayer's transfer of the credit to the state to satisfy the state tax_liability should be viewed as a payment of state tax for purposes of the federal deduction for tax_payments in sec_164 or sec_162 deduction for payment of state tax other considerations files-123904-04 in addition to these two questions other issues are raised by certain features of the oregon child_care_credit such as the fact that the contributions may be refundable under certain circumstances and the fact the credit may not be issued in the same year as the taxpayer's contribution after consideration i believe that the federal tax issues raised by the oregon child_care_credit are significant and should be considered by the service's national_office along with the other issues related to the federal tax treatment of state tax_credits currently under study this will allow full consideration of concerns that have been identified with respect to the tax treatment of these and other state tax_credits and help ensure uniform treatment of taxpayers please be aware that the decision to issue published guidance must be approved at higher levels pending resolution of these issues i cannot furnish definitive advice on the questions you raised however i have attempted to highlight the areas of concern which might affect the deductibility of payments to the child care division end of text for letter please call if you have any questions


tcmemo_1998_155 united_states tax_court cleo perfume inc petitioner v commissioner of internal revenue respondent docket no filed date david m garvin for petitioner james p dawson for respondent memorandum findings_of_fact and opinion jacobs judge respondent determined a dollar_figure deficiency in petitioner's federal_income_tax for tax_year ended date a dollar_figure sec_6651 addition_to_tax and a dollar_figure sec_6662 accuracy-related_penalty following concessions by petitioner the remaining issues for decision are whether petitioner had additional income of dollar_figure in its tax_year ended date whether petitioner is liable for the sec_6651 addition_to_tax and whether petitioner is liable for the sec_6662 accuracy-related_penalty 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 findings_of_fact some of the facts have been stipulated and are so found the stipulations of facts and the attached exhibits are incorporated herein by this reference cleo perfume inc cleo perfume inc petitioner or cpi a florida corporation is engaged in the business of distributing perfume on a wholesale basis its principal_place_of_business at the time the petition was filed was miami florida it employs the accrual_method of accounting and reports its income on the basis of a fiscal_year ending june petitioner conceded that it is entitled to neither a dollar_figure bad_debt deduction nor dollar_figure in other deductions petitioner also conceded that it is liable for a dollar_figure environmental_tax during the year in issue petitioner's stockholders were oscar campos sr president oscar campos jr mr campos sr 's son vice president for sales and elisa c martinelli mr campos sr 's wife treasurer petitioner acquires perfumes from numerous suppliers including aeroboutique s a asa of san juan puerto rico between date and date asa sent petitioner merchandise valued at dollar_figure after examining the delivered merchandise messrs campos jr and sr telephoned edgar balzac the owner of asa threatening to return the merchandise to asa because the goods were at the end of their useful shelf life and therefore unacceptable following further discussion messrs balzac campos jr and campos sr agreed that in lieu of returning the merchandise petitioner would keep the perfume on consignment and would pay asa only for the merchandise that it was able to sell by date cpi was only able to sell approximately dollar_figure of the merchandise received from asa this amount was properly included in income for the year inasmuch as the majority of the goods could not be sold a decision was made to attempt to sell the merchandise the following christmas season the consigned merchandise remained in boxes on the racks in petitioner's warehouse credit line with barnett bank and certified financial statements in petitioner obtained a dollar_figure million line of credit with barnett bank a security_interest in petitioner's accounts_receivable and inventory and a guaranty by mr campos sr were given as collateral for this line of credit mr campos sr 's guaranty was secured_by a first mortgage on his residence to maintain the line of credit petitioner was required to deliver to the bank certified financial statements barnett bank's credit department analyzed the certified financial statements prepared for petitioner on a quarterly basis barnett bank sent a group of its own auditors to conduct a review of petitioner's accounts_receivable accounts_payable and inventory in order to verify the correctness of the certified financial statements as well as petitioner's books_and_records from through there were no disparities among these various documents petitioner hired verdeja iriondo gravier vig certified public accountants to perform the audit and prepare the certified financial statements for barnett bank oscar rosales performed the initial audit for vig petitioner later hired mr rosales as its comptroller before mr rosales was hired petitioner never had a comptroller mr rosales worked for petitioner through incorrect entry mr rosales was not involved in the negotiations between petitioner and asa he neither was informed nor independently discovered that petitioner held the asa inventory on consignment after taking a physical inventory of the goods in petitioner's warehouse mr rosales mistakenly included the dollar_figure asa consignment merchandise in petitioner's date ending inventory on petitioner's audited financial statements and credited dollar_figure to trade accounts_payable reflecting his belief that petitioner had purchased the goods mr rosales did not consult with either mr campos jr or sr when making this entry correcting entry sometime in date mr rosales questioned why the trade account payable to asa recorded on the books remained unpaid mr campos sr informed mr rosales that there was no payable due asa mr rosales then stated that he would correct the books and remove the payable however instead of debiting accounts_payable and crediting beginning_inventory mr rosales debited accounts_payable and credited paid-in capital reflecting his belief that the shareholders had assumed the liability from the account payable to asa a physical inventory was taken at yearend date and the consigned merchandise less dollar_figure which had been sold remained on hand vig which prepared the financial statements for tax_year ended date inquired in date as to why the dollar_figure of trade accounts_payable had been eliminated from the books mr rosales represented that cpi's officers had assumed responsibility for the debt and that the amount was recorded as additional paid-in capital vig requested and received a letter2 signed by the letter states in connection with the audit of the financial statements of cleo perfumes inc for the years ended date and we have made available to you all information related to stockholder's equity during the company's stockholders assumed personally and subsequently capitalized as part of paid-in capital a note receivable from stockholder in the amount of dollar_figure a trade accounts_payable to an unaffiliated company in the amount of dollar_figure and a note payable to bank in the amount of dollar_figure the netting of these transactions increased paid-in capital by dollar_figure the undersigned stockholders of cleo perfumes inc hereby confirm to you that the afore-mentioned sic transactions were in due time properly and adequately approved by the board_of directors and also that mr oscar campos sr president of our continued petitioner's stockholders dated date confirming that the obligation had been assumed by petitioner's stockholders and that the comptroller had been authorized to write off the debt on date vig also sent a letter to asa requesting confirmation that petitioner was not indebted to asa on date asa confirmed that petitioner had an outstanding balance of zero as of date destruction of remaining asa merchandise sometime in martha balzac vice president of asa and mr balzac's wife visited petitioner's offices and informed mr campos sr that he could destroy the remaining unsold asa consignment merchandise accordingly in cpi destroyed all of the remaining approximately dollar_figure million of asa merchandise on its computer-generated date inventory listing petitioner identified the discarded merchandise by highlighting the merchandise in yellow new accounting firm continued corporation was duly authorized to take all actions required to implement the related resolutions the record is unclear as to why petitioner waited years to destroy the unsold asa merchandise petitioner hired smith ortiz gomez buzzi p a sogb to audit its tax years ended date and and prepare certified financial statements for those years sogb was not informed that the asa goods were on consignment federal_income_tax returns vig prepared petitioner's federal_income_tax return for tax_year ended date based on its certified financial statement for that year this return reported beginning_inventory of dollar_figure ending inventory of dollar_figure and purchases of dollar_figure on approximately date petitioner filed a form_7004 application_for automatic_extension of time to file corporation income_tax return requesting a 6-month extension on date respondent received petitioner's return for tax_year ended date vig also prepared petitioner's return for tax_year ended date based on its certified financial statement for that year this return reported beginning_inventory of dollar_figure ending inventory of dollar_figure and purchases of dollar_figure no discharge_of_indebtedness income related to the dollar_figure asa trade account payable was reported on this return petitioner's return for tax_year ended date was based on petitioner's certified financial statements for that year this return reported beginning_inventory of dollar_figure ending inventory of dollar_figure and purchases of dollar_figure on its return for tax_year ended date petitioner adjusted the beginning_inventory to correct the correcting journal entry mr rosales made by reducing by dollar_figure beginning_inventory and paid-in capital notice_of_deficiency in the notice_of_deficiency respondent determined that petitioner was liable for a dollar_figure deficiency on the theory that it was relieved of a dollar_figure liability during the tax_year ended date respondent also determined a sec_6651 addition_to_tax and a sec_6662 accuracy-related_penalty issue additional income opinion our first task is to determine whether petitioner had additional income of dollar_figure in its tax_year ended date in this regard respondent makes three alternative arguments a discharge_of_indebtedness income sec_61 provides the general_rule that gross_income includes income from the cancellation of indebtedness generally the amount of income includable is the difference between the face value of the debt and the amount_paid in satisfaction of the debt 23_f3d_1032 6th cir affg tcmemo_1992_673 the income is recognized in the year cancellation occurs 65_tc_511 respondent asserts that petitioner had a debtor relationship with asa beginning on the date the goods were delivered in until some point in when the debt was discharged continuing respondent contends that there was a discharge of dollar_figure of indebtedness which from a tax viewpoint resulted in discharge_of_indebtedness income to petitioner petitioner on the other hand maintains that it never purchased the asa perfume but only held the merchandise on consignment consequently petitioner asserts there was no debt to be forgiven we agree with petitioner's position that it held the merchandise from asa on consignment consequently we find that there was no debt owed to asa by petitioner thus no debt forgiveness occurred accordingly we dismiss respondent's first argument that petitioner had discharge_of_indebtedness income b tax_benefit_rule the tax_benefit_rule includes an amount in current income to the extent that the amount was properly deducted in a year we recognize that pursuant to the auditor's request petitioner's shareholders signed a letter acknowledging their assumption of a liability due asa nonetheless we accept mr campos sr 's testimony that the letter was signed knowing that there was no actual debt owing by petitioner to asa prior to the current_year the deduction resulted in a tax_benefit an event occurs in the current_year that is fundamentally inconsistent with the premises on which the deduction was originally based and a nonrecognition_provision of the internal_revenue_code does not prevent the inclusion in gross_income 460_us_370 see 110_f3d_769 11th cir revg per curiam 104_tc_696 101_tc_35 a current event is fundamentally inconsistent with the premises on which the deduction was originally based when that event would have prevented the deduction if the event had occurred in the year of the deduction hillsboro natl bank v commissioner supra frederick v commissioner supra respondent asserts that petitioner improperly derived a dollar_figure tax_benefit because that amount was treated on petitioner's books as a purchase and consequently petitioner's cost_of_goods_sold for the year ended date was overstated petitioner disagrees claiming that even though its purchases were overstated the asa merchandise was included in petitioner's ending inventory and thus there was a wash cost_of_goods_sold is generally determined as follows beginning_inventory purchases continued respondent claims that there is no evidence to prove the asa merchandise was included in petitioner's ending inventory for the tax_year ended date or we conclude that the asa merchandise was included in petitioner's ending inventory for the tax years ended date and and hence petitioner's cost_of_goods_sold for those years was not overstated thus petitioner received no tax_benefit as a result of mistakenly treating and reporting the asa consigned merchandise as a purchase in reaching our conclusion that the asa merchandise was included in petitioner's and ending inventory we find that mr rosales petitioner's comptroller recorded the transaction consistent with his understanding that the consigned goods were acquired by purchase and thus he included all unsold goods in inventory we find compelling that on petitioner's tax_return filed for the year ended date petitioner made an adjustment to its beginning_inventory when it realized the error in its reporting of the consigned goods rather than carry over the ending inventory balance for the year ended date petitioner reduced beginning_inventory for the year ended june continued - total goods available for sale ending inventory cost_of_goods_sold by dollar_figure--the exact amount of the erroneous adjustment mr rosales made in the year ended date c duty_of_consistency the duty_of_consistency also known as the doctrine_of quasi- estoppel prevents a party from benefiting in a subsequent year from an error that was made in a prior year see 75_tc_497 when the duty_of_consistency applies the taxpayer must recognize income even though the earlier deduction was improper id pincite the duty_of_consistency applies when the taxpayer made a representation or reported an item for federal_income_tax purposes in one year the commissioner acquiesced in or relied on that representation or report for that year and the taxpayer attempts to change that representation or report in a subsequent year after the period of limitations has expired with respect to the year of the representation or report and the change is detrimental to the commissioner 854_f2d_755 5th cir affg 87_tc_1087 when the duty_of_consistency applies the commissioner may proceed as if the representation or report on which the commissioner relied continues to be true although in fact it is not the taxpayer is estopped from taking a position to the contrary herrington v commissioner supra respondent contends that the duty_of_consistency is applicable herein petitioner disagrees we conclude that the duty_of_consistency is not applicable under the facts herein there was no erroneous deduction in a prior year which respondent acquiesced in or relied on to respondent's detriment as stated above petitioner's misreporting of the treatment of the consigned goods resulted in a wash when calculating the cost_of_goods_sold deduction such that petitioner did not receive any benefit and respondent did not suffer any detriment respondent has not suggested any other reason why the inflated inventory balances would cause respondent to fail to collect the correct amount of tax consequently we hold that the duty_of_consistency is inapplicable in sum we hold that petitioner did not have additional income of dollar_figure in its tax_year ended date issue sec_6651 addition_to_tax we next determine whether petitioner is liable for an addition_to_tax for failure to timely file its return sec_6651 imposes an addition_to_tax of percent of the amount of tax due per month for each month that a tax_return is not timely filed not to exceed percent an exception is made for reasonable_cause not due to willful neglect one of the requirements of the automatic_extension of time to file a tax_return is the proper estimation of the final tax_liability for the taxable_year sec_1_6081-4 income_tax regs the failure to estimate properly the final tax_liability on form_7004 can invalidate the automatic_extension and subject the taxpayer to an addition_to_tax pursuant to sec_6651 for failure to timely file the return 92_tc_899 respondent argues that petitioner failed to estimate properly its tax_liability on form_7004 when it filed for the automatic_extension and thus the extension is invalid we agree petitioner failed to report any_tax liability on its application putting aside petitioner's concessions petitioner reported a dollar_figure tax_liability on its tax_return for year ended date despite the fact that it estimated on its application moreover petitioner has failed to present any evidence on this issue other than to contend that it is not liable for the addition and has accordingly failed to satisfy its burden_of_proof clearly petitioner has failed to show that it estimated properly the final tax_liability on form_7004 see eg scott v commissioner tcmemo_1997_507 consequently we sustain respondent's determination issue sec_6662 accuracy-related_penalty the final issue is whether petitioner is liable for the sec_6662 accuracy-related_penalty sec_6662 imposes an accuracy-related_penalty equal to percent of any portion of an understatement attributable to a substantial_understatement a substantial_understatement means an understatement which exceeds the greater of percent of the tax required to be shown on the return or dollar_figure sec_6662 the understatement is reduced by that portion of the understatement for which the taxpayer had substantial_authority or for which the taxpayer adequately disclosed the relevant facts in the return sec_6662 additionally no penalty is imposed with respect to any portion of an understatement as to which the taxpayer acted with reasonable_cause and in good_faith sec_6664 sec_1_6664-4 income_tax regs provides that reliance on professional advice constitutes reasonable_cause and good_faith if under all the circumstances the reliance was reasonable and the taxpayer acted in good_faith the taxpayer however must disclose to the adviser all relevant facts regarding the proper tax treatment of an item in order to be able to invoke the professional reliance exception although petitioner retained the services of a tax_return_preparer it did not disclose the relevant facts to the preparer accordingly petitioner is liable for the sec_6662 accuracy- related penalty with regard to the items it conceded to reflect the foregoing and petitioner's concessions decision will be entered under rule


t c memo united_states tax_court stephen kowalchuk petitioner v commissioner of internal revenue respondent docket no filed date stephen kowalchuk pro_se louise r forbes for respondent memorandum opinion powell special_trial_judge respondent determined that petitioner is liable for additions to tax under sec_6653 and in the respective amounts of dollar_figure and dollar_figure for the taxable_year in addition respondent also determined that petitioner is liable for the addition_to_tax under sec_6653 in the amount of percent of the unless otherwise indicated 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 - - interest due on a dollar_figure deficiency for the issues are whether petitioner is liable for these additions to tax petitioner resided in boca raton florida at the time he filed the petition in this case the facts may be summarized as follows a background this case is part of the plastics recycling group of cases for a detailed discussion of the transactions involved in the plastics recycling group of cases see provizer v commissioner tcmemo_1992_177 affd without published opinion 996_f2d_1216 6th cir it is stipulated that the underlying transactions involving the sentinel recyclers in the present case are substantially identical to the transactions in provizer v commissioner supra the facts concerning the transactions as found in provizer v commissioner supra are as follows packaging industries group inc pi manufactured and sold six sentinel recyclers to ethynol cogeneration inc eci for dollar_figure each eci in turn resold the recyclers to f g equipment corp f g corp for dollar_figure each f g corp leased the recyclers to the clearwater group partnership which then licensed the recyclers to first massachusetts equipment corp fmec which sublicensed them back to pi pi allegedly sublicensed the recyclers to entities the end-users which would use them to recycle plastic scrap the sublicense agreements provided that the end-users would transfer to pi percent of the recycled scrap in exchange for payment from fmec based on the guality and amount of recycled scrap all of the foregoing transactions were executed simultaneously the sale of the recyclers from pi to eci was financed with nonrecourse notes approximately percent of the sales_price of the recyclers sold by eci to f g corp was paid in cash and the remainder was financed through notes the notes provided that percent of the amount thereof was recourse but that the recourse portion was due only after the nonrecourse portion had been paid in full all of the monthly payments required among the entities in the above transactions offset each other in provizer v commissioner supra we found that the market_value of a sentinel recycler in did not exceed dollar_figure and that the nuts and bolts or manufacturing cost was dollar_figure other recycling machines were commercially available during the years in issue in provizer v commissioner supra b petitioner’s introduction to plastics recycling petitioner is a civil engineer by training and during he was a self-employed real_estate broker a personal friend and business_associate ira sullivan mr sullivan gave petitioner a prospectus for sab recycling associates sab a limited_partnership formed to exploit steam chest molded expanded polystyrene recycling_equipment the ‘sentinel eps recyclers’ - sab purported to lease four recyclers manufactured by pi the prospectus stated that the projected tax benefits for a dollar_figure investor were investment and energy tax_credits in the amount of dollar_figure and tax deductions in the amount of dollar_figure in the year of the investment in reading the prospectus petitioner noticed that samuel z burstein’ had written a favorable analysis of the recyclers manufactured by pi petitioner had known mr burstein in college and considered him to have a fabulous reputation petitioner however did not contact mr burstein petitioner has no knowledge concerning the plastics industry and or plastics recycling petitioner never saw one of the recyclers and did not understand how the machinery worked he essentially relied on mr sullivan but as far as petitioner knew mr sullivan had no knowledge of how the process worked petitioner also relied on john masak mr masak but mr masak had no experience in plastics recycling in reading the prospectus petitioner noticed that pi had no experience in manufacturing and operating plastics recyclers when there was no financial return from the partnership petitioner never contacted the general_partner to find out why the investment did not generate the profits projected in the prospectus even in the transcript this name is spelled bernstein in the prospectus however the name is spelled burstein - - though he was a engineer by training petitioner did no research with respect to whether there were comparable recyclers and what were the value of the machines cc petitioner’s interest in sab and the tax returns in petitioner invested dollar_figure in overview associates overview a partnership which in turn had a 974705-percent interest in sab on its partnership return sab reported that each of the four recyclers had a basis of dollar_figure and that its bases for the purposes of the investment and business energy tax_credits were dollar_figure million in provizer v commissioner supra we found that of the dollar_figure million only percent was paid in cash overview the second tier-partnership reported its aliquot share of the tax_credits and deductions on his federal_income_tax return petitioner claimed an ordinary_loss of dollar_figure and reported a dollar_figure basis eligible for the investment_tax_credit upon which an investment_tax_credit of dollar_figure was claimed by petitioner sab was a so-called tefra partnership to which the provisions of sec_6221 through apply on date this court entered a decision in sab recycling associates v commissioner docket no based on the decision in that case respondent issued a notice_of_deficiency for so- called affected items to petitioner for the additions to tax -- - under sec_6653 for negligence and the valuation_overstatement addition_to_tax under sec_6659 discussion this case is one of many cases involving additions to tax resulting from the plastics recycling scheme see eg grelsamer v commissioner tcmemo_1996_399 affd without published opinion sub nom morgan v commissioner 138_f3d_957 lith cir except for a few cases that involved exceptional circumstances the court has upheld the imposition of the additions to tax see grelsamer v commissioner supra at n this case is similar to the many cases that have fallen on the other side of the line a sec_6653 a ----negligence in a notice_of_deficiency for respondent determined that petitioner is liable for the additions to tax for negligence under sec_6653 and petitioner has the burden of proving that respondent's determinations of these additions to tax are erroneous see rule a 39_f3d_402 2d cir affg tcmemo_1993_480 79_tc_846 sec_6653 imposes an addition_to_tax equal to percent of the underpayment if any part of an underpayment_of_tax is due to negligence or intentional disregard of rules or regulations sec_6653 imposes an addition_to_tax equal - to percent of the interest payable with respect to the portion of the underpayment attributable to the negligence or intentional disregard of rules or regulations negligence is defined as the failure to exercise the due care that a reasonable and prudent person would employ under the circumstances goldman v commissioner supra pincite 85_tc_934 in provizer v commissioner supra this court found that each sentinel recycler had a fair_market_value not in excess of dollar_figure and that the clearwater group transaction was a sham because it lacked economic_substance and a business_purpose in reaching the conclusion that the transaction lacked economic_substance and a business_purpose this court relied heavily upon the overvaluation of the sentinel recycler it is stipulated that the sab transactions are substantially_similar and petitioner therefore agrees that the same flaws existed with sab petitioner essentially contends that the additions to tax for negligence should not apply because he was not a sophisticated investor petitioner may not be a sophisticated investor but even if a taxpayer is an unsophisticated investor that taxpayer is not relieved of the requirement to use ordinary care and prudence the pertinent facts here are that petitioner --- - put dollar_figure into a scheme that promised for the first year dollar_figure in tax_credits and dollar_figure in ordinary deductions and reduced his income_tax_liability to zero as far as this record indicates petitioner made this investment without the slightest notion of how the recyclers in which he had indirectly invested worked furthermore as courts have frequently noted during this period there was extensive publicity concerning guestionable tax_shelters see eg 89_tc_849 affd 904_f2d_1011 5th cir affd 501_us_868 these facts require a reasonable and prudent person at least to seek advice from persons who have knowledge concerning the investment the only people with whom petitioner spoke concerning sab were messrs sullivan and masak and it is agreed that they had no such expertise petitioner therefore cannot deflect his own culpability onto other shoulders we also reject petitioner’s argument that the small amount of his investment militated against seeking further information because of the costs that would have been involved having claimed bogus tax deductions and credits he must bear responsibility for his actions the long and short of the matter petitioner’s income was such that he claimed only a credit in the amount of dollar_figure the unused portion of the credit however may have been carried back or forward see sec_46 ‘ petitioner did have a liability for self-employment taxes --- - is that petitioner did not use reasonable and prudent care in investing in and claiming the deductions and credits from this scheme respondent’s determinations as to the additions to tax under sec_6653 are sustained b section 6659--valuation overstatement under sec_6659 a graduated addition_to_tax is imposed when an individual has an underpayment_of_tax that equals or exceeds dollar_figure and is attributable to a valuation_overstatement sec_6659 d a valuation_overstatement exists if the fair_market_value or adjusted_basis of the property claimed on a return equals or exceed sec_150 percent of the amount determined to be the correct amount see sec_6659 if the claimed valuation exceed sec_250 percent of the correct value the addition is equal to percent of the underpayment see sec_6659 in the notice_of_deficiency respondent determined that petitioner is liable for the sec_6659 addition_to_tax on the portion of his underpayment attributable to valuation_overstatement petitioner has the burden of proving that respondent's determination of the sec_6659 addition_to_tax is erroneous see rule a luman v commissioner supra pincite- petitioner received tax benefits including investment and business energy tax_credits based on a purported value of -- - dollar_figure for each recycler petitioner concedes that the fair_market_value of a recycler in was not in excess of dollar_figure therefore if petitioner’s underpayment_of_tax is attributable to such valuation_overstatement petitioner is liable for the sec_6659 addition_to_tax at the rate of percent of the underpayment_of_tax attributable to the tax benefits claimed with respect to the partnership except for his petition petitioner makes no argument concerning the sec_6659 addition_to_tax it is clear that the underpayment_of_tax resulted directly from the grossly overstated value of the recycling machinery respondent’s determination with respect to the sec_6659 addition_to_tax is sustained decision will be entered for respondent


internal_revenue_service number release date index number ----------------------------- ---------------------------------- ------------------ ------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc psi b03 plr-129299-09 date date legend x ----------------------------------------------------------------------------------------------------- ----------------------- state ------------- date ----------------------- dear ----------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting a ruling under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations that x be granted an extension of time to file an election to be treated as an association_taxable_as_a_corporation under sec_301_7701-3 facts x was formed on date as a state limited_liability_company x intended to make an election to be an association_taxable_as_a_corporation for federal tax purposes effective date however x inadvertently failed to timely file form_8832 entity classification election law and analysis plr-129299-09 sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as an association and thus a corporation under sec_301_7701-2 or a partnership sec_301_7701-3 provides that except as provided in sec_301_7701-3 unless the entity elects otherwise a domestic eligible_entity is i a partnership if it has two or more members or ii disregarded as an entity separate from its owner if it has a single owner sec_301_7701-3 provides in part that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides that an election made under sec_301 c i will be effective on the date specified by the entity on form_8832 or on the date filed if no date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed if an election specifies an effective date more than days prior to the date on which the election is filed it will be effective days prior to the date it was filed sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion plr-129299-09 based solely on the facts submitted and the representations made we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 accordingly x is granted an extension of time of sixty days from the date of this letter to elect to be treated as an association_taxable_as_a_corporation for federal tax purposes effective date the election should be made by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for a ruling it is subject_to verification on examination sincerely s curt g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc