t c memo united_states tax_court patti ann ollestad petitioner v commissioner of internal revenue respondent docket no filed date patti ann ollestad pro_se dan orzechowski for respondent memorandum opinion nameroff special_trial_judge this case was heard pursuant to the provisions of sec_7443a and rule sec_180 sec_181 and sec_182 respondent determined the following deficiencies and additions to tax in petitioner's and all section references are to the internal_revenue_code in effect for the years at issue all rule references are to the tax_court rules_of_practice and procedure federal income taxes tax_year deficiency dollar_figure big_number additions to sec_6651 sec_6653 sec_6654 dollar_figure dollar_figure dollar_figure in addition respondent determined that petitioner was liable for an addition_to_tax under sec_6653 in the amount of percent of the interest payable with respect to the portion of the underpayment attributable to negligence for each of the years in issue in the notice_of_deficiency respondent determined that petitioner and her former spouse dan thompson mr thompson did not file federal_income_tax returns for taxable years and in addition respondent determined that petitioner was married and domiciled in a community_property_state and computed her income_tax_liability in accordance with community_property_laws respondent determined that petitioner's community share of gross_receipts from national cartage co was dollar_figure in dollar_figure in dollar_figure in and dollar_figure in further respondent determined that petitioner earned interest_income of dollar_figure in and dollar_figure in respondent allowed the following business_expenses year gross_receipts x expense percent expense community deprec deduction share total dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number the depreciation is based on a tractor placed_in_service in with a cost of dollar_figure zero salvage_value 10-year useful_life and the straight-line method in addition respondent allowed excess_itemized_deductions as follows year gross_receipts x deduction percent total deduction - bracket deduction share excess community zero dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number dollar_figure big_number big_number dollar_figure big_number respondent also allowed petitioner two exemptions for each of the years at issue after concessions the issue remaining for decision is whether petitioner is entitled to relief from the deficiencies as an innocent spouse for the years in issue at the time of the filing of this petition petitioner resided in moreno valley california the stipulation of facts supplemental stipulation of facts and attached exhibits are incorporated herein by this reference petitioner did not complete the ninth grade petitioner married mr thompson in month before she turned years old prior to and during her marriage petitioner was not employed petitioner and mr thompson had two children danny who was born in and tricia who was born in petitioner's responsibilities were to care for the children and do the grocery shopping respondent conceded all additions to tax under sec_2 a a and and a in addition respondent allowed additional business deductions for in the amount of dollar_figure for in the amount of dollar_figure for in the amount of dollar_figure and for in the amount of dollar_figure the result of these concessions by respondent is that the deficiencies decreased to dollar_figure for dollar_figure for dollar_figure for and dollar_figure for during the years at issue mr thompson worked for dan thompson trucking trucking a partnership he had formed with his father harry thompson trucking employed several truck drivers however trucking did not employ a bookkeeper or a secretary mr thompson maintained the books_and_records for trucking trucking's business office was not located in the marital home and mr thompson did not conduct business in the marital home petitioner did not work or perform services for trucking and did not help generate income for the business petitioner and mr thompson had one checking account this account was used for business and personal purposes petitioner was allowed to write checks or make deposits only with mr thompson's permission petitioner wrote checks for groceries or clothes for the children petitioner never purchased and was not given jewelry or furs on occasion mr thompson asked petitioner to write checks between the amounts of dollar_figure and dollar_figure for cash petitioner gave the money from these checks to mr thompson who used the money to pay truck drivers for fuel and for various personal expenses sometimes mr thompson requested that petitioner make deposits to the checking account petitioner did not know the source of the funds she deposited in view of the manner in which both parties presented this case we must assume that national cartage co is either a former name of trucking or perhaps a d b a thus we will regard respondent's determination in the notice_of_deficiency as relating to trucking mr thompson also wrote checks on and made deposits to this account petitioner did not see the monthly checking account statement and did not balance the checkbook at the beginning of their marriage petitioner drove an year-old cadillac which petitioner and mr thompson had purchased from their neighbors mr thompson later gave the cadillac to his son from a previous marriage sometime between and mr thompson purchased a cadillac el dorado which was titled in both petitioner's and mr thompson's names it is unclear whether the el dorado was new or used petitioner used the car for transportation for herself and the children mr thompson sometimes drove a truck and parked it at the marital home however he also drove the el dorado petitioner and mr thompson separated in july of pursuant to a court order mr thompson and petitioner were ordered to share the residence at first they lived during alternate weeks in the house however they were subsequently ordered by the court to live in separate areas of the house at the same time sometime in october or date petitioner permanently left the marital home to live with her mother tricia continued to reside in the marital home with mr thompson it is unclear whether danny resided with mr thompson petitioner's divorce from mr thompson became final on date pursuant to the division of property order dated date the superior court of the state of california for the county of los angeles the divorce court ordered the marital home to be sold for dollar_figure a portion of the proceeds was used to pay various community obligations petitioner received dollar_figure as an equalizing payment to offset the receipt of a truck by mr thompson and she received an additional dollar_figure from the sale proceeds of the marital home the divorce court also ordered the sale of various trucking equipment and division of the sale proceeds among mr thompson petitioner and mr thompson's parents the divorce court noted that certain property was the separate_property of mr thompson other_property was the separate_property of petitioner and certain property was sold the court retained jurisdiction over a trailer located in grass valley california the record contains no information regarding the value or disposition of this trailer petitioner and mr thompson were to divide the furniture and camping equipment however mr thompson resided in the marital home so petitioner never received any of the furniture petitioner did receive photo albums of the children petitioner and mr thompson were awarded joint custody of the children sold petitioner testified that this equipment was never for the years at issue neither petitioner nor mr thompson filed an income_tax return discussion petitioner seeks relief as an innocent spouse from the revised deficiencies determined by respondent because petitioner and mr thompson were nonfilers during the years at issue petitioner is not entitled to relief as an innocent spouse under the provisions of sec_6013 rather we must examine the provisions of sec_66 to determine whether petitioner qualifies for relief as an innocent spouse the purpose of sec_66 is to provide relief from unreported community_income which pursuant to the provisions of sec_879 is more appropriately attributable to the other spouse lucia v commissioner tcmemo_1991_77 affd without published opinion 962_f2d_14 9th cir if a husband and wife file a joint_return sec_5 d provides that each spouse becomes jointly and severally liable for the tax due a spouse however may be relieved of such liability if he or she proves entitlement to innocent spouse protection under sec_6013 sec_6013 provides relief if a joint tax_return has been filed for the year at issue there is a substantial_understatement of tax attributable to grossly_erroneous_items of the other spouse on the return the innocent spouse establishes that in signing the return he or she did not know or have reason to know of the substantial_understatement and under all the facts and circumstances it would be inequitable to hold the innocent spouse liable for the deficiency in tax resulting from the substantial_understatement to qualify for relief under sec_66 petitioner must satisfy the following provisions she must not have filed a joint_return with mr thompson for any of the years at issue she must not have included in her gross_income for any of the years in issue an item of community_income properly includable therein which in accordance with the rules contained in sec_879 would be treated as the income of mr thompson she must establish that she did not know and had no reason to know of the item of community_income and taking into account all facts and circumstances it is inequitable to include such item of community_income in her gross_income under sec_66 all four of the above requirements must be met before relief can be granted 860_f2d_1235 5th cir affg tcmemo_1987_391 the first requirement is satisfied since petitioner did not file a return during the years at issue in addition the first portion of the second requirement is satisfied since petitioner did not include items of community_property in her gross_income which were properly includable therein with respect to the second portion of sec_66 sec_879 attributes earned_income to the spouse who performed the services and trade_or_business income in accordance with sec_1402 the income earned from trucking constitutes income derived from a trade_or_business therefore we look to sec_1402 which provides as follows if- b any portion of a partner's_distributive_share of the ordinary_income or loss from a trade_or_business carried on by a partnership is community_income or loss under community_property_laws applicable to such share all of such distributive_share shall be included in computing the net_earnings from self- employment of such partner and no part of such share shall be taken into account in computing the net_earnings from self- employment of the spouse of such partner we find that the income from trucking is properly attributable to mr thompson petitioner had nothing to do with the management or control of trucking other than making a few deposits or cashing some checks under the specific direction of mr thompson petitioner was not involved in the operations of trucking accordingly the second part of sec_66 is satisfied with respect to the income derived from trucking the issue of whether petitioner knew or should have known of the unreported income is essentially factual we are convinced that petitioner had no actual knowledge of the unreported income however petitioner must also prove that a reasonably prudent person with her knowledge of surrounding circumstances would not and should not have known of the understatement keeping in mind her level of intelligence education and experience 509_f2d_162 5th cir 72_tc_1164 we conclude that a reasonably prudent person in petitioner's position would not have had reason to know of the unreported community_income from trucking during the years at issue in arriving at this conclusion we emphasize that petitioner did not complete the ninth grade and was not sophisticated with respect to financial or tax matters prior to and during her marriage petitioner did not hold a job apparently she had no experience with paychecks or income taxes and never filed an income_tax return moreover there is no indication of lavish_or_extravagant expenditures that might have given petitioner reason to know of the unreported income rather petitioner lived a modest lifestyle trucking was a partnership between mr thompson and his father petitioner was unfamiliar with the financial condition and business operations of trucking taxation of income from a partnership is far more complicated than the taxation of an employee's wages a partner's income is based upon his or her distributive_share of a partnership's tax items sec_702 without going into an elaborate explanation of partnership accounting we merely note that a partner might have take-home money without having taxable_income from the partnership eg a draw consequently petitioner did not have reason to know of any unreported community_income this is not the case where petitioner knew that mr thompson had earnings from trucking but did not know the exact amount of those earnings cf horner v commissioner tcmemo_1994_447 spouse knew her husband worked full time and earned substantial income mcgee v commissioner tcmemo_1991_510 affd 979_f2d_66 5th cir spouse knew her husband earned_income from his dental practice which was primary means of support and that his records were not kept in order thatcher v commissioner tcmemo_1988_537 spouse knew her husband's dental practice earned money and that the dental equipment was community_property which generated income baldwin v commissioner tcmemo_1986_342 spouse previously filed joint returns with her husband which disclosed income she knew her husband earned a salary from teaching at a university and she knew that his salary remained the same throughout the years in issue accordingly the third requirement is satisfied finally taking into account all of the facts and circumstances we conclude that it would be inequitable to include the unreported community_income from trucking in petitioner's gross_income there is no evidence that she benefited significantly from this income petitioner did not live extravagantly and was given money by mr thompson only for groceries and clothing for the children she took nothing away from the marriage beyond photo albums a car and water skis and dollar_figure from the sale of the marital home based on the foregoing we conclude that petitioner is relieved of tax_liability under sec_66 decision will be entered for petitioner


internal_revenue_service department of the treasury index no po box ben franklin station washington dc person to contact telephone number rater repiv to date cc dom p st plr-111788-98 oct legend this is in reply to your letter dated date in which you requested a ruling concerning the qualification of certain interest payments as an expense of administration that is deductible under sec_2053 of the internal_revenue_code decedent a resident of mississippi died testate in survived by four children and several grandchildren at the time of his death decedent owned over percent of the outstanding_stock in m corporation a closely_held_corporation the value of the m corporation stock owned by decedent at his death comprised no less than percent of the value of his gross_estate in addition to the stock owned outright decedent was also vested with additional shares of m corporation stock in that company's employee stock_option ownership plan publicly traded on the nasdaq exchange m corporation stock is under the terms of decedent's will after establishing a_trust for the benefit of his grandchildren funded to the extent of decedent's available generation-skipping_transfer_tax_exemption his residuary_estate passed in equal shares to his children decedent's executors mississippi uniform trustees' powers law through article seventh of decedent's will confers upon all powers enumerated in the section of the mississippi trusts_and_estates laws provides that unless the will otherwise provides and subject_to subsection connection with the settlement of a decedent's_estate including - charged against the principal of the estate not applicable here all expenses_incurred in interest and penalties concerning taxes miss code ann shall be section of the mississippi uniform trustees’ powers law provides that the trustee has all powers conferred upon him by the provisions of this article unless limited in the trust instrument any part of this article by reference any instrument which is not a_trust may incorporate section provides that from time of creation of the trust until final distribution of the assets of the trust a trustee has the power to perform without court authorization every act which a prudent man would perform for the purposes of the trust including but not limited to the powers specified in subsection remedies set forth in section mississippi code of of this section and those powers rights and in the exercise of his powers including the powers granted by this article a trustee has a duty to act with due regard to his obligations as a fiduciary x to borrow money to be paid from trust assets or otherwise miss code ann and the executors propose to borrow sufficient funds to pay the the executors will petition the federal and state estate_taxes appropriate local court for approval to borrow the necessary funds from a commercial bank the loan will provide for annual payment of both interest and principal over a specified term of years that does not exceed seven years at a fixed rate of interest the note will also provide that principal and interest may not be prepaid in the event of a default the note will provide that the entire_interest that would have been paid under the full term of the note will be accelerated and the total interest will be due and payable at the time of default the estate requests a ruling that a deduction may be claimed on a federal estate_tax_return for the total amount of interest o s that will be paid over the term of the installment loan as an administration expense under sec_2053 sec_2001 imposes a tax on the transfer of the taxable a citizen or resident of the estate of every decedent who is united_states sec_2051 provides that for purposes of the tax imposed by sec_2001 the value of the taxable_estate is determined in part by deducting from the value of the gross_estate the deductions provided for under sec_2053 sec_2053 allows a deduction from the value of the gross_estate for such amounts of administration_expenses as are allowable by the laws of the jurisdiction under which the estate is being administered sec_2053 provides that for decedents dying after date no deduction shall be allowed for any interest payable under sec_6601 on any unpaid portion of the federal estate_tax for the period during which an extension of time for payment of the tax is in effect under sec_6166 sec_20_2053-1 of the estate_tax regulations provides in part that for purposes of sec_2053 the term allowable by the laws of the jurisdiction means allowable by the law governing the administration of decedents' estates sec_20_2053-3 provides that amounts deductible from a decedent's gross_estate as administration_expenses are limited to such expenses as are actually and necessarily incurred in the administration of the decedent's_estate that is collection of assets payment of debts and distribution_of_property to persons entitled to it the expenses contemplated are only expenses that attend the settlement of the estate and the transfer of the property of the estate to the individual beneficiaries or to a trustee expenditures not essential to the proper settlement of the estate but incurred for the individual benefit of the heirs legatees or devisees may not be taken as deductions in the this regulation imposes a separate federal requirement that expenses must be actually and necessarily incurred in order to be deductible and in addition must satisfy the statutory requirement that the expense be allowable under local law 125_f3d_339 6th cir sec_20_2053-1 provides that an item may be entered on a return for deduction though its exact amount is not then known provided it is ascertainable with reasonable certainty see ae and will be paid no deduction may be taken upon the basis of a vague or uncertain estimate if the amount of the liability was not ascertainable at the time of final audit of the return by the district_director and as a consequence it was not allowed as a deduction in the audit and subsequently the amount of the liability is ascertained relief may be sought by a petition to the tax_court or a claim_for_refund as provided by sec_6213 and sec_6511 respectively in revrul_84_75 1984_1_cb_193 in order to avoid a therefore interest incurred on the loan is deductible forced sale of estate assets the executor borrowed funds to pay the estate_tax the revenue_ruling concludes that because the loan was obtained to avoid a forced sale of estate assets the loan was reasonably and necessarily incurred in administering the estate as an expense of administration under sec_2053 however because the estate's obligation to make payments on the loan could be accelerated because for example the estate might prepay the loan or the estate might default the amount of interest the estate might pay in the future is uncertain within the meaning of sec_20_2053-1 concludes that the interest is deductible by the estate only after it accrues and any estimated amount of interest to accrue in the future is not deductible 1980_2_cb_278 holding that interest incurred when payment of tax is deferred under sec_6166 prior to the enactment of sec_2053 is deductible only as the interest accrues since the tax_liability could be prepaid at any time see also revrul_80_250 accordingly the ruling years percent per year payable in one single payment of both in estate of graegin v commissioner tcmemo_1988_477 the executors of the decedent's_estate borrowed funds from the decedent's closely-held corporation to pay the estate's federal estate_tax liability the loan which had been approved by the appropriate local court was evidenced by a note bearing interest at interest and principal at the end of prohibited the prepayment of principal or interest the term of the note was calculated to coincide with the surviving spouse's life expectancy because at that spouse's death the funds from her trust along with the dividends_paid over the term of the note would be available to satisfy the obligation decedent's_estate deducted the full amount of the single interest payment due on maturity of the note in years as an expense of administration under sec_2053 the court concluded that the loan was reasonably and necessarily incurred in the administration of the estate in view of the terms of the loan interest and principal due at the year term with prepayment of principal and interest prohibited the entire amount of the interest on the note was deductible as an administration expense further the court concluded that the note the the court also concluded that the note was a genuine indebtedness and that in view of the terms of the note the amount of the interest to be paid was ascertainable with reasonable certainty and would be paid under of the mississippi code annotated interest_expense concerning taxes incurred in the administration of the estate can be a proper estate administration expense accordingly in view of the terms of the loan we conclude that a deduction may be claimed on the form_706 for the entire amount of the post-death interest_expense to be incurred by the estate provided the expense is necessarily incurred in the administration of the estate within the meaning of sec_20_2053-3 and is allowable under local law whether the interest_expense will be necessarily incurred in the administration of the estate is a factual determination and we are specifically not ruling on this issue this ruling is conditioned on the estate obtaining approval for the proposed transaction from the appropriate local court as represented except as we have specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions of the code or under any other provisions of the code this ruling is directed only to the taxpayer who requested sec_6110 of the code provides that it may not be it used or cited as precedent sincerely assistant chief_counsel passthroughs and special industries george masnj assistant té6 the branch chief branch enclosure copy for sec_6110 purposes


t c memo united_states tax_court daniel g callahan et al petitioners v commissioner of internal revenue respondent docket nos filed date daniel g and mary e callahan pro_se james m klein and mark j miller for respondent memorandum findings_of_fact and opinion gale judge respondent determined the following deficiencies in and additions to petitioners’ federal_income_tax cases of the following petitioner are consolidated herewith mary e callahan docket nos and daniel g callahan year deficiency additions to tax sec_6651 sec_6654 dollar_figure big_number big_number dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure mary e callahan year deficiency additions to tax sec_6651 sec_6654 dollar_figure big_number big_number big_number dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure unless otherwise indicated all section references are to the internal_revenue_code_of_1986 as in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure these cases were consolidated for trial briefing and opinion at trial respondent moved to amend the pleadings to conform to the proof to the effect that petitioner mary e callahan mrs callahan was required to report one-half of petitioner daniel g callahan’s mr callahan income of dollar_figure for we must decide the following issues whether petitioners had unreported income in and as respondent determined whether petitioners must split their income in each year at issue on account of wisconsin’s marital property laws whether petitioners are liable for additions to tax under sec_6651 for those years whether petitioners are liable for additions to tax under sec_6654 for those years and whether petitioners are liable for penalties under sec_6673 findings_of_fact some of the facts have been stipulated and are incorporated by this reference at the time the petitions were filed petitioners resided in wisconsin mr callahan and mrs callahan were married in and have resided together in the same household in wisconsin since that time through the years in issue petitioners do not have a marital property agreement and have not opted out of the marital property laws of wisconsin mrs callahan provided medical services at a medical group in racine wisconsin for her services as a nurse practitioner she received payments of dollar_figure dollar_figure dollar_figure and dollar_figure in and respectively she received dividend income of dollar_figure dollar_figure dollar_figure and dollar_figure in and respectively as well as interest_income of dollar_figure in and dollar_figure in mr callahan received payment of dollar_figure from idea consulting in as well as interest_income of dollar_figure and dollar_figure in and respectively he also received dollar_figure as compensation_for his services from j tyson associates in petitioners did not file form sec_1040 u s individual_income_tax_return for any of the taxable years and the last time petitioners filed federal_income_tax returns before the years at issue was in petitioners made no estimated_tax payments for any of the years at issue opinion respondent determined that petitioners had unreported income in the aforementioned amounts for and as well as additions to tax under sec_6651 for failing to file returns and under sec_6654 for failing to make estimated_tax payments for each of those years respondent determined deficiencies for each petitioner based on the full amount of his or her income earned in each year as well as half of the income earned by each petitioner’s spouse in that year respondent also determined that mrs callahan had unreported income in as well as additions to tax under sec_6651 and sec_6654 respondent also asserted in a motion to amend the pleadings that she had marital income equal to one-half of mr callahan’s compensation_for services in that year respondent acknowledges that the notices of deficiency at issue create a whipsaw for each petitioner he concedes that in the event the court finds that wisconsin marital property law gives each petitioner a present undivided one-half interest in the income of his or her spouse earned during the years in issue each petitioner is not taxable on the half of his or her income in which his or her spouse holds the aforementioned interest instead the income is attributable to the spouse who holds the present undivided_interest in it respondent’s motion to amend pleadings at trial respondent moved to amend the pleadings to conform them to the evidence adduced concerning mr callahan’s income in and to increase mrs callahan’s deficiency for on account of her marital share of mr callahan’s income in that year whether a motion seeking an amendment of the pleadings should be granted is within the discretion of the court 304_f2d_136 9th cir leave to amend the pleadings to conform to the proof shall be given freely when justice so requires and where the nonmoving party has objected to the evidence giving rise to the motion to amend the nonmoving party has failed to satisfy the court that the admission of the evidence would prejudice such party rule b respondent seeks to amend the pleadings to assert that mrs callahan had marital income to the extent of one-half of mr callahan’s dollar_figure in compensation_for services from j tyson associates in petitioners did not object to the admission of the evidence concerning mr callahan’ sec_2002 income indeed they stipulated that he received it moreover petitioners were mr callahan’ sec_2002 taxable_year is not at issue in this case directed to address the issue of respondent’s motion to amend the pleadings on brief but failed to do so petitioners have identified no prejudice and we fail to see any mrs callahan’ sec_2002 taxable_year has at all times been at issue in this proceeding and she was on notice by virtue of the notice_of_deficiency issued to her for and as well as respondent’s pretrial memorandum that respondent intended to allocate marital income to her on account of wisconsin marital property law we conclude that amendment of the pleadings should be allowed as sought by respondent wisconsin marital property law under wisconsin law all income earned during marriage by spouses domiciled in wisconsin is presumed to be marital property wis stat ann sec west marital property includes spousal wages dividends interest and economic benefits attributed to a spouse wis stat ann sec park bank-west v mueller n w 2d wis ct app each spouse has a present while under rule a respondent bears the burden_of_proof with respect to mrs callahan’s increased deficiency resulting from his amendment of the pleadings that burden is of no consequence because petitioners have stipulated the income giving rise to the deficiency in enacting the marital property statute the wisconsin legislature intended that marital property be a form of community_property see wis stat ann sec west the commissioner treats it as such for federal_income_tax purposes revrul_87_13 1987_1_cb_20 undivided one-half interest in the other spouse’s income earned during the marriage wis stat ann sec - see gerczak v estate of gerczak n w 2d wis ct app park bank-west v mueller supra spouses may reclassify marital property as individual property by inter alia a marital property agreement wis stat ann sec petitioners were married during the years at issue and maintained a residence in wisconsin we are therefore satisfied that they were domiciled in wisconsin they have not maintained otherwise see wisconsin v corey j g n w 2d wis petitioners have not attempted to reclassify their marital property as individual property accordingly they each hold an undivided one-half interest in all items of income at issue in this case when a husband and wife who are domiciled in a community_property_state file separate returns or no returns any marital property income must be split between them 403_us_190 282_us_122 282_us_101 72_tc_340 because all items of income at issue in this case are marital property and petitioners when a separate_return has been filed married taxpayers forfeit their right to file a joint_return for the relevant year upon the issuance of a notice_of_deficiency to and the filing of a petition in this court by either spouse sec_6013 did not file returns for the years at issue all of these items of income must be equally split between them unreported income petitioners have admitted the receipt of each item_of_income respondent determined their arguments that this income was not taxable are frivolous tax-protester arguments that we need not refute with somber reasoning and copious citation of precedent to do so might suggest that these arguments have some colorable merit 737_f2d_1417 5th cir after splitting each item_of_income at issue equally between petitioners and attributing half of mr callahan’ sec_2002 income to mrs callahan we conclude that petitioners had unreported income in the following amounts mr callahan year mrs callahan year compensation_for services dividends interest marital income -0- dollar_figure -0- dollar_figure -0- dollar_figure big_number big_number compensation_for services dividends interest marital income dollar_figure big_number big_number big_number dollar_figure dollar_figure -0- big_number additions to tax under sec_7491 respondent has the burden of production with respect to petitioners’ liability for the additions to tax under sec_6651 and sec_6654 respondent must accordingly offer sufficient evidence to indicate that it is appropriate to impose each addition see 116_tc_438 once this burden is met petitioners bear the burden of proving error in the determination including evidence of exculpatory factors id pincite a sec_6651 additions sec_6651 provides for an addition_to_tax for a taxpayer’s failure_to_file a required return on or before the due_date including extensions respondent determined that mrs callahan is liable for sec_6651 additions for and and determined that mr callahan is liable for sec_6651 additions for and petitioners have admitted receiving income during each of these years in amounts sufficient to obligate them to file federal_income_tax returns see sec_6012 petitioners admitted that they did not file returns for any of their years in issue therefore respondent has met his burden of production under sec_7491 petitioners have offered no evidence of reasonable_cause for their failure_to_file accordingly we sustain respondent’s determination that petitioners are liable for additions to tax under sec_6651 for each of their years in issue b sec_6654 additions respondent determined that mrs callahan is liable for additions to tax pursuant to sec_6654 for failure to pay estimated_tax for and and determined that mr callahan is liable for additions pursuant to sec_6654 for and an individual taxpayer generally has an obligation to pay estimated_tax for a particular year only if he or she has a required_annual_payment for that year sec_6654 a required_annual_payment is equal to the lesser_of percent of the tax shown on the individual’s return for that year or if no return is filed percent of his or her tax for such year or if the individual filed a return for the immediately preceding year percent of the tax shown on that return sec_6654 respondent’s burden of production under sec_7491 for the sec_6654 addition_to_tax requires him to produce evidence that petitioners had required annual payments for the years in issue see 127_tc_200 as our deficiency determinations establish petitioners had tax due for each of their years in issue since petitioners admitted they had not filed returns since they did not file for any year that immediately preceded any of the years at issue nor did they pay any estimated_tax for their years at issue we accordingly conclude that respondent has met his burden of production regarding the sec_6654 additions with sufficient evidence to indicate that petitioners had required annual payments for each of their years at issue we do not find that petitioners are entitled to any of the statutorily provided exceptions to the sec_6654 addition_to_tax or that respondent’s determinations were incorrect accordingly we sustain the additions under sec_6654 for each of petitioners’ years at issue sec_6673 penalty respondent has moved for a penalty under sec_6673 whenever it appears to the court that proceedings have been instituted or maintained primarily for delay or the taxpayer’s position in such proceedings is frivolous or groundless the court may require the taxpayer to pay a penalty not in excess of dollar_figure sec_6673 petitioners presented no substantive evidence in support of their positions instead they advanced numerous frivolous tax- protester arguments such as claiming that labor is property that gives rise to an even exchange when it is traded for money and that income is not defined in the internal_revenue_code petitioners were warned at trial that their arguments were frivolous and could subject them to penalties under sec_6673 petitioners were directed to address in their brief the question of whether a sec_6673 penalty should be imposed on them they failed to do so instead persisting in advancing frivolous tax-protester arguments petitioners’ conduct in this case has wasted the time and resources of this court their disregard of the court’s warning indicates that stronger deterrents are appropriate consequently the court will exercise its discretion to impose a penalty of dollar_figure upon each petitioner pursuant to sec_6673 to reflect the foregoing appropriate orders and decisions will be entered under rule


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi br 1-plr-126035-02 date may legend x d1 state dear this letter responds to your representative’s letter dated date submitted on behalf of x requesting a time extension under sec_301_9100-3 of the procedure and administration regulations for x to elect to be treated as an association_taxable_as_a_corporation for federal tax purposes and relief under sec_1362 of the internal_revenue_code facts according to the information submitted x was formed on d1 under state law x intended to elect to be treated as an association_taxable_as_a_corporation and to then elect to be treated as an s_corporation with both elections effective d1 however form_8832 entity classification election and the election to be treated as an s_corporation were not timely filed law and analysis 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 an eligible_entity with a single owner can elect to be classified either as an entity disregarded as separate from its owner or as an association sec_301_7701-3 provides that an eligible_entity with a single owner will be disregarded as an entity separate from its owner unless it elects otherwise plr-126035-02 sec_301_7701-3 allows an eligible_entity to elect to change its classification by filing form_8832 entity classification election with the service_center designated on that form sec_301_7701-3 provides that all such elections become effective on the date specified by the entity on form_8832 or on the date filed if no effective date is specified the specified effective date must not be earlier than days prior to the filing_date of form_8832 nor later than twelve months after the filing_date sec_301_9100-1 gives the commissioner discretion to grant reasonable extensions of time to make regulatory elections under the rules of sec_301_9100-2 and sec_301_9100-3 under sec_301_9100-1 a regulatory election includes an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-3 sets forth the standards which the commissioner uses to determine whether to grant a discretionary extension of time these standards indicate that the commissioner should grant relief when the taxpayer provides evidence proving to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of government sec_1362 provides that a small_business_corporation can elect to be treated as an s_corporation sec_1362 provides when an s election becomes effective if an s election is made within the first two and one-half months of a corporation’s taxable_year then that corporation will be treated as an s_corporation for the year in which the election was made if an election is made after the first two and one-half months of a corporation’s taxable_year then the corporation will generally not be treated as an s_corporation until the following taxable_year sec_1362 provides that if no election is made pursuant to sec_1362 or if the election is made after the date prescribed for making such an election and the secretary determines reasonable_cause existed for the failure to timely make the election then the secretary can treat such an election as timely made for that taxable_year and effective as of the first day of that taxable_year conclusion based solely on the information submitted and the representations made we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 as a result x is granted an extension of time for making the election to be treated as an association_taxable_as_a_corporation for federal tax purposes effective d1 until days plr-126035-02 following the date of this letter x should make the election by filing form_8832 with the philadelphia service_center a copy of this letter should be attached to that form in addition based solely on the facts submitted and representations made and provided that x otherwise qualifies as a subchapter_s_corporation we conclude that x will be recognized as an s_corporation effective d1 an original form_2553 along with a copy of this letter must be forwarded to the relevant service_center within days from the date of this letter 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 the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative s paul f kugler sincerely paul f kugler associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi plr-116717-00 date date legend x a b d1 dear this letter responds to a letter dated date written on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code that x's s_corporation status will be effective as of the taxable_year beginning d1 facts according to the information submitted x was incorporated on d1 and it was decided that x would be an s_corporation a and b shareholders of x relied on an attorney and an accountant to file x's form_2553 election by a small_business_corporation with an effective date of d1 due to a miscommunication between the attorney and the accountant x's form_2553 was not timely filed x requests a ruling that it will be recognized as an s_corporation effective for the taxable_year beginning d1 under sec_1362 law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides when an s election will be effective if an s election is made within the first two and one half months of a corporation's taxable_year then that corporation will be treated as an s_corporation beginning the year in which the election is made if an s election is made after the first two and one half months of a corporation's taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made plr-116717-00 sec_1362 provides that if an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making the election or no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make the election then the secretary may treat the election as timely made for such taxable_year conclusions based solely on the facts submitted and representations made we conclude that x has established reasonable_cause for not making a timely election and is eligible for relief under sec_1362 accordingly if x makes an election to be an s_corporation by filing with the appropriate service_center a completed form_2553 containing an effective date of d1 for the election within days following the date of this letter then such election will be treated as timely made a copy of this letter should be attached to the form_2553 filed with the service_center a copy is enclosed for that purpose except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed concerning whether x is an s_corporation for federal tax purposes 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_ruling it is subject_to verification on examination this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent under a power_of_attorney on file with this office we are sending a copy of this letter to your authorized representatives sincerely yours robert g honigman acting assistant to the chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc corp -plr date date legend company district selling shareholders date date date date state c xxx ppp project b ddd percent purchaser purchaser purchaser ccc plr hhh dollar_figurefff dollar_figureggg dollar_figureiii case j dear this letter responds to the date request for rulings submitted by your representative on behalf of company and the selling shareholders listed on the attached schedule a with respect to the transfer of certain water rights you have requested a ruling that for federal_income_tax purposes company's participation in the procedures by which the transfer of the water is accomplished in conjunction with the sales by the selling shareholders of their rights to the water will not constitute a sale_or_other_disposition of property by company nor a distribution_of_property by the company to the selling shareholders with respect to their stock additionally you have requested rulings on whether the water rights will constitute capital assets in the hands of the selling shareholders and whether certain_sales of these water rights will constitute sales or exchanges of capital assets the information submitted in the request and in a later submission is summarized below facts company was organized on date as a ditch and reservoir company and is subject_to state c's statutory requirements for mutual ditch companies company uses the cash_method_of_accounting and its fiscal_year ends on date approximately xxx of the company's shareholders are selling shareholders the other shareholders are not transferring any of their water rights and are not involved in the transactions described herein state c mutual ditch companies generally were created when a group of farmers banded together and formed the cooperative company for the express purpose of storing and conducting water for irrigation purposes company's primary function has been to deliver to and store the water of its shareholders the company's assets are limited to those necessary to deliver and store the water these assets include weirs canals dams water control devices and a storage reservoir the shareholders used the bylaws and shares to quantify each of their beneficial use rights in the water transported by the company the company owns no land on which to make use of the water it transports and stores although water is derived from two sources only the water from project b the project b water as described below is the subject of this ruling_request plr on date district a quasi-governmental corporation subject_to state c's statutory requirements for such entities entered into an agreement the repayment contract with the united_states bureau of reclamation the bureau for the development of project b project b emanates from the reclamation act of as amended the repayment contract grants district the right to allocate the project b water the district does so through allotment contracts that require the water users to pay their proportionate share of the district's costs to operate and maintain project b and to repay the federal government for its construction costs the operating reimbursements costs on date district entered into an allotment contract with company which provided that company would be entitled to receive an allocation of water for the beneficial use of its shareholders the project b water was then allocated pro_rata among the shareholders based on their shares in addition to paying on a pro_rata basis company's annual operating_expenses based on their respective allocation of project b water each shareholder pays his proportionate share of the operating reimbursements costs under the allotment contract conditions in state c are such that water is in great demand as such the selling shareholders intend to relinquish their beneficial_ownership of ddd percent of the project b water through three sales agreements the master sales agreements with purchaser purchaser and purchaser the master sales agreements with purchaser and purchaser provide they will acquire an aggregate of ccc units of project b water at dollar_figurefff per unit and dollar_figureggg per unit respectively the master sales agreement with purchaser provides for an allocation of hhh units of project b water at dollar_figureiii per unit in order to satisfy certain transfer requirements of the district the master sales agreement with purchaser includes an option for purchaser to take all or some of the units through a twenty-five year interruptible supply contract the interruptible supply contract under the interruptible supply contract the price for the units is the same as in the master sales agreement and it includes an option to purchase the units for a nominal fee by its terms the interruptible supply contract will remove beneficial_ownership of the units from the selling shareholders you have indicated that purchaser has elected to take all the units pursuant to the interruptible supply contract the selling shareholders will be paid in full for all units upon the closing of all three transactions including the transaction subject_to the interruptible supply contract to facilitate the negotiation of the master sales agreements and the interruptible supply contract the selling shareholders created ppp to act as their agent the only members of ppp are the selling shareholders the selling shareholders are not selling their shares in company but their shares will bear a legend to reflect that they are no longer entitled to their full allocation of the project b water plr you have indicated that company is not materially participating in the transactions described above company as a party to the allotment contract however will agree to the amendment of the allotment contract to reflect the reduced allotment of project b water the master sales agreements and the interruptible supply contract are conditioned on our rulings herein however the selling shareholders due to the crisis situation in state c have already transferred some of the project b water to the purchasers the emergency sales the consideration received by the selling shareholders from these emergency sales is being held in escrow pending our rulings herein according to the courts of state c mutual ditch companies are unique entities which are formed not under state c' s general corporation statutes but under special legislation reserved for ditch and reservoir companies in analyzing the relationship between the shareholders and mutual ditch companies in regards to water rights the supreme court of state c in case j has stated that a mutual ditch company is merely engaged in the business of transporting and storing the water for its shareholders benefit and the law of state c uniformly holds that the actual ownership of the water rights is in the shareholder the supreme court's analysis noted that a longstanding tenet of state c law is that ownership of a water right can be acquired only by the actual beneficial use of the water mere diversion is not sufficient to meet the requirements of state c's constitution finally the supreme court noted that it is well established that the water rights owned by the shareholders are property rights accordingly based on this supreme court's decision and other decisions by this court it is clear that under state c law company is not the beneficial_owner of any of the water it transports for the benefit of its shareholders including the project b water representations company has represented that it is not a party to the master sales agreements or the interruptible supply contract and shall not receive any proceeds or other consideration arising or resulting from the transactions described herein based on the information and representations submitted we rule as follows the selling shareholders for federal_income_tax purposes are the beneficial owners of the project b water rights and the sale of such rights including the short-term emergency sales described above will not be deemed to be a sale_or_other_disposition of property by the company or a distribution_of_property by the company to the selling shareholders with respect to their stock accordingly the company will not realize gain_or_loss as a result of the selling shareholders' transactions sec_1001 sec_301 sec_311 plr the beneficial rights in the project b water constitutes a capital_asset in the hands of the selling shareholders sec_1221 the transfer of the beneficial rights in the project b water under the master sales agreements and the interruptible supply contract constitute sales of capital assets by the selling shareholders sec_1222 caveat no opinion is expressed about the tax treatment of the transactions under other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the transactions that are not specifically covered by the above ruling for example no opinion is expressed about whether the short-term emergency sales constitute sales or exchanges of capital assets nor are we opining on the selling shareholders' bases in these water rights the rulings contained in this letter are based upon information and a representation submitted by the company 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 rulings it is subject_to verification on examination procedural statements this ruling is directed only to the taxpayers requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your taxpayer_representative sincerely steven hankin senior technical reviewer branch office of associate chief_counsel corporate


internal_revenue_service number release date index number ----------------------- ------------------------------------------------- ----------------------- ---------------------------- in re ----------------------- ------------------------- -------------------------- ------------------------ department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc intl plr-156352-03 date june legend legend --------------------- ------------ ------------ ------------------------------------------ -------------------------- ------------------------------------ individual a foreign_country x foreign_country y entity one entity two entity three dear --------------- this replies to a letter dated date in which taxpayer requests an extension of time under sec_301_9100-3 to file the election and agreement described in sec_1_1503-2 and the annual certification described in sec_1 g vi in accordance with schedule a which is attached to and made a part of this ruling letter additional information was submitted in letters dated date date date and date the information submitted for consideration is substantially as set forth below the ruling contained in this letter is predicated upon facts and representations submitted by the 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 a ruling verification of the factual information representations and other data may be required as a part of the audit process do not deny the plr-156352-03 individual a is a senior vice-president of taxes for taxpayer in that capacity individual a is responsible for the preparation signing and filing of taxpayer’s consolidated federal_income_tax returns including the filing of appropriate elections forms and schedules the facts submitted and the affidavit of individual a show that taxpayer relied on individual a with respect to these tax matters and that individual a had concluded that taxpayer was not subject_to the reporting requirements of sec_1_1503-2 for the tax years at issue however as the result of a subsequent review of the matter individual a determined that his prior conclusions were incorrect taxpayer represents that the income_tax laws of foreign_country x do not deny the use of losses expenses or deductions of entity one to offset income of another person because the dual_resident_corporation or separate_unit is also subject_to income_taxation by another country on its worldwide income or on a residence basis taxpayer represents that the income_tax laws of foreign_country y use of losses expenses or deductions of entity two and entity three to offset income of another person because the dual_resident_corporation or separate_unit is also subject_to income_taxation by another country on its worldwide income or on a residence basis sec_301 -1 b provides that an election includes an application_for relief in respect of tax and defines a regulatory election as an election whose due_date is prescribed by a regulation a revenue_ruling revenue_procedure notice or announcement sec_301_9100-1 provides that the commissioner has discretion to grant a taxpayer a reasonable extension of time under the rules set forth in sec_301_9100-3 to make a regulatory election under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides that requests for relief subject_to this section will be granted when the taxpayer provides evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith within the meaning of sec_301_9100-3 subject_to the conditions set forth in sec_301_9100-3 and the grant of relief will not prejudice the interests of the government within the meaning of sec_301_9100-3 in the present situation the election and agreement described in sec_1_1503-2 and the annual certification described in sec_1_1503-2 are regulatory elections as defined in sec_301_9100-1 therefore the commissioner has discretionary authority under sec_301_9100-1 to grant taxpayer an extension of time provided that taxpayer satisfies the standards for relief as set forth in sec_301_9100-3 plr-156352-03 based on the facts and information submitted we conclude that taxpayer satisfies sec_301_9100-3 accordingly taxpayer is granted an extension of time of days from the date of this ruling letter to file the election and agreement described in sec_1 g i and the annual certification described in sec_1_1503-2 in accordance with schedule a the granting of an extension of time is not a determination that taxpayer is otherwise eligible to file the elections and agreements and the annual certifications sec_301 a for example a taxpayer that is subject_to mirror legislation enacted by a foreign_country may be ineligible to file the election agreement pursuant to sec_1_1503-2 a copy of this ruling letter should be associated with the elections and agreements and the annual certifications this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent no ruling has been requested and none is expressed as to the application of any other section of the code or regulations to the facts presented pursuant to a power_of_attorney on file in this office a copy of this ruling letter is being furnished to taxpayer sincerely associate chief_counsel international by allen goldstein reviewer enclosure copy for purposes schedule a schedule a plr-156352-03 fsub1 ---------------------------- fsub2 fsub2a fsub3 ------------------------------------------ fsub4 ------------------------------------------ fsub5 ------------------------------------- fsub6 --------------------------------------- a --------------------------------------------------------------------------------------------------- ------------------------------------- --------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ---------- ------------ ---------- -------- -------- ---------- -------- -------- -------- -------- -- -- ------ -- ------ -- --- --- -- -- ------ ------ ----- ----- ----- -- -- -- -- ------------ ---------- -- -- -- -- -- -- -- b ---------------------------------- plr-156352-03 cc ------------------------------------------------------------------------------------------------------------ ------------------------------ ------------------------------- ------------------------------------------- cc ----------------------------------------------------------------------------------------------------------- -------------------------------- ---------------------------------- --------------------------------- ----------------


internal_revenue_service index no number release date cc dom p si - plr-117042-98 date x a b d1 year year dear this responds to a letter dated date and subsequent correspondence written on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated on d1 of year a as x's president represents that a and b intended for x to be an s_corporation for federal tax purposes as of year x's first taxable_year a instructed x's attorney to prepare all necessary papers for s_corporation status for x for year however x’s attorney did not timely file a form_2553 election by a small_business_corporation for x for year x’s accountant subsequently in year filed a form_2553 containing an effective date of d1 of year sec_1362 of the code provides that if a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year based solely on the facts and representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation for x’s first taxable_year accordingly the election made by x to be an s_corporation by filing the form_2553 which contained an effective date for its year taxable_year will be treated as timely made for x’s year taxable_year x should send a copy of this letter to the service_center where x filed its form_2553 to be associated with that form_2553 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 of the code this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent sincerely yours h grace kim assistant to the chief branch office of the assistant chief_counsel passthroughs and special industries enclosure copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number --------------------------- ----------------------------------- ------------------------------ ------------------------------------ legend 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 b01 plr-139179-15 date date x ----------------------------------------- ----------------------------- d1 d2 -------------------------- --------------------- state --------- dear ------------ this responds to a letter dated date submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts according to the information submitted x was incorporated on d1 under the laws of state x intended to be treated as an s_corporation for federal tax purposes effective d2 but the proper election was not timely filed law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective sec_1362 provides that if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s plr-139179-15 corporation for the year in which the election is made if the election is made after the first two and one-half months of a corporation's taxable_year then the corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if no election is made pursuant to sec_1362 or if made the election is made after the date prescribed for making such an election and the secretary determines there was reasonable_cause for the failure to timely make the election then the secretary may treat such election as timely made for such taxable_year and effective as of the first day of that year x did not file a timely election to be treated as an s_corporation under sec_1362 effective d2 x has however established reasonable_cause for not making a timely election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and representations made and provided that x otherwise qualifies as a subchapter_s_corporation we conclude that x will be recognized as an s_corporation effective d2 if within days from the date of this letter x submits a properly completed form_2553 with a copy of this letter attached to the appropriate service_center 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 specifically no opinion is expressed or implied concerning whether x otherwise qualifies as an s_corporation for federal tax purposes this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-139179-15 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the taxpayer’s authorized representative sincerely laura c fields laura c fields senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes cc


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi br01-plr-138763-01 date date legend x state date this private ruling letter responds to your letter dated date submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts x was incorporated under state law in date the sole shareholder of x intended that x elect to be treated as an s_corporation effective on date however the election to be treated as an s_corporation was not timely filed law and analysis sec_1362 of the code provides that a small_business_corporation can elect to be treated as an s_corporation sec_1362 of the code provides guidance on when the s election becomes effective if an s election is made within the first two and one-half months of a corporation’s taxable_year then that corporation will be treated as an s_corporation for the year in which the election was made if the corporation makes an election after the plr-138763-01 first two and one-half months of a corporation’s taxable_year then the corporation will generally not be treated as an s_corporation until the following taxable_year sec_1362 of the code provides that if no election is made pursuant to sec_1362 or if the election is made after the date prescribed for making such an election and the secretary determined reasonable_cause existed for the failure to timely make the election then the secretary can treat such an election as being timely made for that taxable_year and effective as of the first day of that taxable_year x did not file a timely election to be treated as an s_corporation under sec_1362 x has however established reasonable_cause for not making a timely s election therefore x is entitled to relief under sec_1362 conclusion based solely on the facts submitted and representations made and provided that x otherwise qualifies as a subchapter_s_corporation we conclude that x will be recognized as an s_corporation effective date an original from along with a copy of this letter must be forwarded to the relevant service_center within days from the date of this letter 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 the copy of the power_of_attorney on file with this office a copy of this letter will be sent to the taxpayer_representative sincerely dianna miosi chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


department of the treasury internal_revenue_service washington d c u i l number info release date cc dom it a 3cfkane cor-109758-00 date this is in reference to your letter of date in which you inquired about the insolvency exclusion available under sec_108 of the internal_revenue_code and the requirement that tax_attributes be reduced pursuant to sec_108 a taxpayer who claims the insolvency exclusion is required to reduce attributes under sec_108 but only to the extent of those attributes if the income arising from the discharge_of_indebtedness exceeds the amount of the taxpayer’s attributes listed in sec_108 the excess_amount may still be eligible to be excluded from gross_income the exclusion applies up to the amount of the taxpayer’s insolvency not to the amount of the taxpayer’s attributes sec_108 states that insolvency means the excess of the liabilities over the fair_market_value of assets immediately before the discharge generally then a taxpayer who receives a form 1099-c reporting cancellation_of_indebtedness_income and who was insolvent at the time of the discharge may exclude the reported amount up to the amount of the taxpayer’s insolvency the taxpayer must then reduce attributes the fact that the taxpayer does not have enough attributes to absorb all of the excluded amount has no bearing on the amount the taxpayer may exclude cor-109758-00 thank you for your inquiry regarding this matter sincerely assistant chief_counsel income_tax accounting by____________________ christopher f kane assistant to the branch chief branch


office_of_chief_counsel internal_revenue_service memorandum number release date cc pa apjp b02 ------------ scaf-119239-04 uilc date date to associate area_counsel salt lake city small_business self-employed cc sb slc from blaise g dusenberry special counsel administrative provisions judicial practice procedure administration cc pa apjp subject farming income credit this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent this responds to your request for review of a draft service_center advice dated date you have described a situation in which certain taxpayers are amending their federal_income_tax returns to exclude proceeds received in settlement of a lawsuit where it appears plaintiff-taxpayers recovered on a claim of discrimination ---------------------------- --------------------------------------------------------------------------------------- for your convenience our discussion addresses the issues analyzed in your memorandum discussion of sec_104 in the section of your draft memorandum discussing sec_104 we recommend that you delete all language after you set forth the language of sec_104 and substitute instead the following scaf-119239-04 the requirement that damages must be received on account of personal physical injuries or physical sickness applies to amounts received after date see of the small_business job protection act of here all of the payments were made well after thus we believe that you should assert that the plaintiffs simply cannot demonstrate that they received their damages on account of or in other words in compensation_for personal physical injuries or physical sickness for questions related to this issue please contact -------------------------cc ita br4 at application of sec_6702 we agree with your conclusion that it is inappropriate to impose a sec_6702 frivolous_return penalty in these cases sec_6702 provides in relevant part that if an individual files what purports to be an income_tax return but that contains information that on its face indicates that the self-assessment is substantially incorrect and the conduct is due to a position that is frivolous the individual will pay a penalty of dollar_figure although often applied when frivolous positions are taken on original returns the frivolous_return penalty applies equally to amended returns 902_f2d_1462 9th cir 846_f2d_36 8th cir 804_f2d_868 5th cir per curiam 797_f2d_268 6th cir as your draft memorandum notes these claims for refund are substantially different from the types of positions that are generally thought of as frivolous - eg constitutional arguments against paying income_tax 575_fsupp_1459 d utah and arguments that wages are not taxable_income 208_fsupp2d_698 s d tex we agree that in the situation you describe the position that excluding proceeds received in settlement of a racial discrimination suit does not rise to the level of frivolous application of sec_6501 we agree with your conclusion that the irs may not rely on the unlimited statute_of_limitations in sec_6501 to make an assessment after the expiration of the normal three-year statute_of_limitations given the facts you presented however - specifically that the claim for excluding the settlement proceeds is made on an amended rather than original return - it is not necessary to reach this issue w hen congress provided for assessment at any time in the case of a false or fraudulent ‘return ’ it plainly included by this language a false or fraudulent original return 464_us_386 emphasis in original the supreme court emphasized this point by again stating that it is plain that ‘the return’ referred to in sec_6501 is the original not the amended_return id pincite scaf-119239-04 validity of the return and whether it is processible generally we believe that the advice provides an adequate response however we note that in the discussion regarding sec_6611 the advice states that a return is not processible until four criteria are met the advice inaccurately states that one of the statutory criteria item is that the taxpayer submits in good_faith sufficient required information whether on the return or on required attachments to permit the mathematical verification of the tax_liability shown on the return this statement is mostly a verbatim recitation of sec_6611 however the statute does not explicitly provide for a good_faith requirement the good_faith requirement is a condition that generally has been read into the code by the courts see eg the 70_f3d_1244 fed cir accordingly we recommend that the discussion regarding sec_6611 be revised by quoting the statutory language verbatim and removing the reference to the good_faith requirement nevertheless we agree with the conclusion that the irs should treat these returns as processible since the returns meet all of the statutory criteria under sec_6611 we also agree that the irs might be able to make an argument that the taxpayers did not submit the returns in good_faith relying on the cited cases but that the question of good_faith should be considered in the context of determining the validity of the return rather than whether the return is processible a draft revised discussion is attached to this memorandum for questions relating to this issue please contact ------------------------------------------------- -----------------------------------------------------------------cc pa apjp br1 recovery_of an erroneous refund and collection actions the facts in your draft memorandum describe the relevant original and amended_return entries they do not however indicate the terms of the settlement and consent decree regarding the taxability of the settlement benefit and the tax payment by the department of agriculture the consent decree 185_frd_82 pincite d d c provides that for those who select the dollar_figure payment and loan forgiveness the usda will also make a tax payment to the irs of of the cash payment and loan forgiveness thus it is clearly contemplated by the settlement and consent decree to the point of being a term of the settlement and consent decree that the cash payment and loan forgiveness are taxable_income to the individual receiving the benefit of the settlement we recommend adding to the facts a statement consistent with the foregoing we recommend deleting portions of the analysis that address the basis for the discrimination claim and that appear irrelevant to this aspect issue addressing erroneous refunds as currently drafted to some extent confuses three separate concepts the immediate action to prevent the payment of - or if scaf-119239-04 payment has already been made to recover without a formal determination of liability - - a refund induced by a false or fraudulent refund claim the determination of a liability whether by deficiency in an erroneous refund action or in another court action and the collection of such a determined liability the second of these determining a liability if immediate recovery proves unavailing is best dealt with as issue while issue addressing collection actions is the proper place to address recovery before a determination of liability as well as collection after a determination of liability a draft revised discussion of these issues is attached to this memorandum please contact -----------------------cc pa cbs br3 at for questions related to these issues referral of the return preparer for investigation the sec_6694 penalty generally does not apply if the position that results in an understatement_of_liability has at least a realistic possibility - ie a one-in-three - chance of success or the position that results in an understatement_of_liability is not frivolous and is disclosed sec_6694 the penalty under sec_6694 is dollar_figure for each return or claim_for_refund that does not meet either of these two requirements id there is a reasonable_cause exception for this penalty id the position that the settlement proceeds are excludible from gross_income may be an incorrect position but it is likely not a frivolous one disclosure in this context has the meaning given by sec_6662 which requires adequate_disclosure either in the return or claim_for_refund or in a statement attached to the return or claim_for_refund disclosure is adequate only if made either on a properly completed form_8275 disclosure statement or on a form 8275-r regulation disclosure statement if the position is contrary to a regulation disclosure made on the return or claim_for_refund without the form_8275 or 8275-r may also be adequate if it is in accordance with revproc_2002_66 2002_2_cb_724 the annual revenue_procedure referred to in the regulations sec_1_6662-4 the revenue_procedure states that the following amounts shown on a form_1040 may constitute adequate_disclosure for purposes of sec_6662 and sec_6694 certain itemized_deductions certain trade_or_business_expenses certain amounts reflected on a schedule m-1 reconciliation of income loss per books with income per return and certain other expenses the exclusion of income under sec_104 is not mentioned in revproc_2002_66 nor does it appear from the facts presented that taxpayers are claiming the exclusion of the settlement proceeds on their form sec_1040 therefore we do not believe that the disclosure provisions in revproc_2002_66 would apply in these cases there are no facts that indicate the position is disclosed on a form_8275 attached to the claim_for_refund therefore it may be appropriate to consider the imposition of penalties against preparers of these claims for refund scaf-119239-04 you have presented no facts indicating that the exclusion of settlement proceeds is something that has been promoted or marketed to taxpayers therefore we express no opinion on the applicability of promoter penalties in these cases please contact ----------------------cc pa apjp br2 if you have any questions attachments sec_6611 provides that for purposes of sec_6611 and e a the determination of whether a return qualifies as processible depends on the is the return valid and processible criteria set forth in sec_6611 regarding interest on overpayments sec_6611 generally provides that interest shall be allowed and paid upon any overpayment in respect of any internal revenue tax sec_6611 and e generally require that a return be filed before a taxpayer is eligible to receive interest on an overpayment return shall not be treated as filed until it is filed in processible form a processible form if a such return is filed on a permitted form and b such return contains i the taxpayer’s name address and identifying number and the required signature and ii sufficient required information whether on the return or on required attachments to permit the mathematical verification of tax_liability shown on the return requirements for processing however in addition to the statutory requirements recited above the courts have also generally required that the returns be filed by the taxpayer in good_faith for example in the 70_f3d_1244 fed cir the court_of_appeals_for_the_federal_circuit stated that sec_6611 provides that for purposes of sec_6611 a return is in the documents submitted for our review would meet all of the statutory mathematical verifiability requires sufficient information to permit irs to recalculate and corroborate the mathematics and data reported by the taxpayer thus under sec_6611 a taxpayer must submit in good_faith all the required forms with the required signatures and enough underlying data for the irs to verify the tax_liability shown on the return the information must be sufficient to enable irs to calculate the tax_liability without undue burden in this case the taxpayers have arguably not followed the instructions for the forms and they have improperly excluded from income the settlement proceeds obtained through discrimination litigation while the irs might have a valid argument that the taxpayers did not submit the returns in good_faith we recommend that the irs treat the returns in scaf-119239-04 question as processible however the irs may still raise the issue of good_faith in the context of determining the validity of the return validity of a return these four criteria are as follows in this context the courts have identified four key criteria for evaluating the there must be sufficient data to calculate tax_liability the document must purport to be a return there must be an honest and reasonable attempt to satisfy the requirements of the tax law and the taxpayer must execute the return under penalties of perjury 82_tc_766 aff’d per curiam 793_f2d_139 6th cir these four criteria are generally known as the beard formulation or the substantial compliance standard which is derived from a line of supreme court cases including 293_us_172 and 280_us_453 these cases hold that if a return meets the substantial compliance standard the return is a valid_return for purposes of the statute_of_limitations on assessment this determination is based on the facts and circumstances of each case accordingly no bright line test exists to determine whether a taxpayer has filed a valid_return the returns and treat the returns as valid unless the irs is able to obtain subjective evidence that clearly shows that the taxpayers filed the returns in bad faith the attachment of correspondence to the returns does not change this analysis given the facts of this case we believe it would be prudent for the irs to proce sec_1 what process should the irs follow to determine a liability eg deficiency or would the irs need to use the notice_of_deficiency procedures and if so how scaf-119239-04 issues relating to erroneous refunds and collection issues other including by a court to recover erroneous refunds should the irs treat the deletion of income found in the amended_return if the irs has made an erroneous refund whether by credit electronic funds transfer or mailed check what actions may the irs take to protect the revenues from immediate harm to recover a refund as misappropriated government property or to collect a determined liability conclusion sec_1 there are two methods for determining a liability under the facts presented one is to follow the deficiency procedures the other is to follow the erroneous refund_suit procedures of sec_7405 because of the greater efficiency which the notice_of_deficiency procedures provide we recommend that the irs use those procedures the general period of limitations is three years from the date the original return is filed to secure a determination of liability through erroneous refund litigation the erroneous refund_suit must normally be brought within two years of the refund but where the taxpayer induced the making of the erroneous refund by fraud or misrepresentation of material fact the government must bring an action under sec_7405 within the year period of sec_6532 erroneous refund the irs would need to treat the dollar_figure of settlement proceeds as an income adjustment in the notice_of_deficiency before a liability is determined and before the erroneous refund is received or before it becomes a final payment the irs can always subject_to applicable time limits a cause financial management services fms to stop issuance of an eft or check b cause the united_states postal service usps to prevent delivery and return a mailed check and c cause a stop payment of an eft or check the irs can also request voluntary repayment of an erroneous refund once the refund becomes a final payment the deficiency procedures or the erroneous refund_suit procedures may be used to determine liability however arrived at after a liability is determined the irs has administrative procedures for assessment and collection if the liability is a deficiency and the government has judgment collection procedures if the liability whether deficiency or erroneous refund is reduced to judgment in a case in which a misrepresentation of material fact occurred which warrants equitable protection of the revenues and in conjunction with action to determine a liability the government can we recommend the use of a notice_of_deficiency if the irs has issued an scaf-119239-04 bring a suit requiring the taxpayer to turn over funds or property and account for any funds not turned over discussion recovery_of an erroneous refund issuer of a payment can recover in the following ways without establishing any reason at all for recovery the irs as the authorizer or recovery before determination of a collectible liability one way is to cancel payment if the irs discovers that it erroneously issued a voucher to financial management services fms directing fms to issue a payment whether by eft or check the irs within a very short_period of time after issuing the payment voucher days for a check and three days for an eft measured from fms’s receipt of the voucher can cause by issuing a canceling voucher fms to stop issuance of the eft or check before it leaves the fms facility another way is to issue a stop payment order during the period before the another way is to request a mail stop if an erroneous refund is discovered after the refund check is put in the hands of the united_states postal service usps the irs can submit an expedited request by a mailgram or an express mail letter to any usps post office identifying the mail-piece and the treasury_department irs as the sender this procedure is provided in usps domestic mail manual issue plus postal bulletin changes through pb22047 d030 if the usps is able to locate the mail item in its hands before delivery the mail item will be returned to the irs erroneous refund is considered made as a final payment whether in regard to an eft or check the irs or fms can issue a stop payment on the eft or check the stop payment can be issued to a specific bank or to a small_group of banks at any time during the period before completion of the treasury first review the time at which a payment becomes final 235_f3d_11 1st cir recover the erroneous refund without a liability determination but with assertion of grounds for recovery by requesting voluntary repayment if the refund is in the hands of the taxpayer the irs can contact the taxpayer and ask for voluntary repayment of the erroneous refund and the filing of an amended_return the communication from the irs should explain the reason why the claim of the credit is not allowable if it is too late for any of these loss-prevention measures the irs may attempt to recovery through determination of a collectible liability if the irs has issued an erroneous refund the irs will have two options the regarding the statute_of_limitations normally the irs has three years from the if the deficiency procedures do not apply or if you have a special enforcement scaf-119239-04 irs can audit the taxpayer for the tax_year and issue a notice_of_deficiency alternatively the irs can ask the department of justice to initiate an erroneous refund action to recover the refund if the assessment statute remains open and no special enforcement situation exists the irs should engage the audit procedure followed by issuance of a notice_of_deficiency this will best use the resources of the irs and allow the irs to access its administrative tools to collect the amount assessed following default by the taxpayer or a determination by the tax_court before invoking judicial collection remedies reason to bring a suit or if the statute_of_limitations for issuing a statutory_notice_of_deficiency has expired the irs could also authorize an erroneous refund action pursuant to sec_7405 if the action is brought the irs would need to coordinate with the department of justice on the collection of any judgment obtained filing of a return in which to issue a notice_of_deficiency sec_6501 for erroneous refunds the irs could initiate an erroneous refund_suit pursuant to sec_7405 within the two-year period of sec_6532 this two-year period runs from the making of the erroneous refund for recovery_of erroneous refunds the making of which was induced by misrepresentation of material fact however the irs can rely on the year period of sec_6532 running from the making of the erroneous refund which is defined as the completion of the treasury department’s first review see 235_f3d_11 1st cir instant facts which warrant an equitable remedy and in conjunction with action to determine a liability such as filing of an erroneous refund action at the same time the government can request that a court order the taxpayer to turn over to the court or the irs funds or property and account for any funds not turned over this method was successfully used in united_states v crystal foster tnt 4th cir aff’g tnt e d va district_court ordered turn-over of proceeds of the erroneous refund turn-over of property into which the erroneous refund was translated and an accounting for proceeds not turned over separately the district_court found that the refund was erroneous finally in cases involving misrepresentation of material fact suggested by the scaf-119239-04 this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call if you have any further questions