department of the treasury internal_revenue_service washington d c contact person identification_number tleoml telephone number employer_identification_number uniform issue list datengy legend l m n o p r dollar_figure t ue vv a b c d e f q dear sir or madam we have considered your ruling_request relating to the effect a proposed restructuring will have on your organization under sec_501 of the internal_revenue_code and whether certain activities will result in unrelated_business_income under sec_512 facts l was incorporated on b as a non-membership nonprofit corporation under the laws of the state of a pursuant to a group ruling issued on covering all members of the m lis considered exempt from federal income_taxation under sec_501 of the code as an organization described in sec_501 and as a public charity under sec_509 by virtue of being described as a hospital in sec_170 l operates three licensed hospitals as unincorporated divisions n was incorporated on d as a nonprofit membership corporation under the laws of the state of a the members of n consist of certain religious institutes of the pursuant to a group ruling issued on e with respect to agencies and instrumentalities and all educational charitable and religious institutions operated supervised or controlled by or in connection with the o in the united_states its territories and possessions appearing in p n is considered exempt from federal income_taxation under sec_501 of the code as an organization described in sec_501 and as a public charity described in sec_509 r formerly known as s which was formerly known as t was incorporated on f as a nonprofit membership corporation under the laws of the state of a the sole member of r is n pursuant to a group ruling issued on e with respect to agencies and instrumentalities and all educational charitable and religious institutions operated supervised or controlled by or in connection with the o in the united_states its territories and possessions appearing in p ris considered exempt from federal income_taxation under sec_501 of the code as an organization described in sec_501 and as a public charity under sec_509 by virtue of being described as a hospital in sec_170 r operates eight licensed hospitals as unincorporated divisions u was incorporated as a nonprofit membership corporation under the laws of the state of aong u was recognized as exempt from federal income_taxation under sec_501 of the code as an organization described in sec_501 and as a public charity as described in sec_509 the members of u are l and n u's bylaws provide that its board_of trustees consists of persons l appoints five trustees n appoints five trustees and u's president and n’s president and chief_executive_officer also serves as a voting member of the board u’s bylaws provide that if an executive committee is established it will consist of six persons u's chair of the board_of trustees u’s president and chief_executive_officer two members of the board selected by l and two members of the board selected by n l n r and u are collectively referred to as the parties a majority of the voting members of the boards of trustees of each of the parties and of each the parties’ executive committees is comprised of independent community members a majority of the individuals comprising a quorum of each of the parties’ boards of trustees and each of the parties’ executive committees are independent community members each of the parties has adopted a substantial conflicts of interest policy ce d in date l_and_r entered into an affiliation and management agreement the original agreement which provided for the formation of u to operate and manage the operations of the health care facilities of l_and_r this arrangement permitted l_and_r and their respective health care facilities to retain their distinct religious identities while working together to satisfy common goals in n replaced r as a party to the original agreement the parties concluded that the arrangement established by the original agreement needed to be restructured if the parties were to continue to jointly pursue their common goal of promoting the health of the communities they serve to accomplish this restructuring the parties executed an amended and restated affiliation agreement dated date the amended agreement under the amended agreement n has a percent interest in uand l_ has a percent interest under the amended agreement l and n have ceded to u significant financial managerial and operational authority over their affairs including exclusive authority over capital and operating budgets strategic plans managed care contracting the ability to allocate or reallocate services among the health care facilities l and n manage and the ability to monitor and audit compliance with directives the amended agreement provides that u will serve as the exclusive operator and manager of the business and healthcare activities of l_and_r and will have the general authority to operate and manage the health care facilities l and n manage subject only to the terms and conditions of the amended agreement and the powers reserved to l and n under the u bylaws the u bylaws provide that the authority over the business and healthcare activities of l_and_r has been granted to the board_of trustees of u and inciudes certain significant actions described therein the u bylaws provide that action on certain significant matters described therein must be initiated and approved by the board_of trustees of u but also must be approved by both of u’s members n and l the local boards of the health care facilities l and n manage are comprised of individuals elected by u pursuant to the u bylaws and therefore are subject_to u's control under a management and option agreement dated date between land v m o agreement’ v a sec_501 organization has paid l dollar_figure million for a a five- year option to become l’s sole member and b l’s delegation to v of l’s authority to approve certain u matters described in u's bylaws as of the date of this ruling v not has exercised this option under the m o agreement a representative of v serves as the principal liaison and duly-authorized representative of v and has various responsibilities described in this document in addition this representative is required to deliver to the l board_of trustees a quarterly report regarding the financial condition and operations of u and the health care facilities managed by nand l operating_expenses in return for these services l pays u a management fee of dollar_figure percent of l's under the amended agreement l and n are required to make annual contributions to u equal to each member's interest in u multiplied by the lesser_of percent of certain cash_flow or dollar_figure million of rulings requested following the restructuring described above u continues to qualify as exempt from federal income_taxation under sec_501 of the code as an organization described in sec_501 following the restructuring described above u continues to be a public charity under sec_509 of the code u's provision of management services loans capital contributions and or transfer of assets personnel or resources to any of the other parties does not result in unrelated_business_income to u under sec_512 of the code applicable law sec_501 of the code provides an exemption from federal_income_tax for organizations described in sec_501 including organizations that are organized and operated exclusively for charitable educational or scientific purposes sec_1_501_c_3_-1 of the income_tax regulations provides that the term charitable is used in sec_501 of the code in its generally accepted legal sense revrul_69_545 1969_2_cb_117 recognizes that the promotion of health is a charitable purpose within the meaning of sec_501 c of the code revrul_78_41 1978_1_cb_148 concludes that a_trust created by an exempt hospital for the sole purpose of accumulating and holding funds to be used to satisfy malpractice claims against the hospital is operated exclusively for charitable purposes and is exempt under sec_501 of the code sec_511 of the cade imposes a tax on the unrelated_business_income of organizations described in sec_501 sec_512 of the code defines unrelated_business_taxable_income as the gross_income derived by an organization from any unrelated_trade_or_business regularly carried on by it less the allowable deductions which are directly connected with the carrying on of the trade_or_business with certain modifications sec_513 of the code defines unrelated_trade_or_business as any trade_or_business the conduct of which is not substantially related aside from the need of the organization for funds or the use it makes of the profits derived to the exercise of the organization's exempt purposes or functions sec_1_513-1 of the regulations provides in part that a trade_or_business is related to exempt purposes only where the conduct of the business activities has a causal relationship to the achievement of exempt purposes and it is substantially related for purposes of sec_513 of the code only if the causal relationship is a substantial one thus for the conduct of trade_or_business from which a particular amount of gross_income is derived to be o2 substantially related to purposes for which exemption is granted the production or distribution of goods or the performance of the services from which the gross_income is derived must contribute importantly to the accomplishment of exempt purposes providing management and consultants’ services to other unrelated exempt_organizations for a fee sufficient to produce a small profit does not further an exclusively exempt_purpose see 70_tc_352 an organization providing laundry services on a centralized basis to exempt hospitals does not qualify for exemption under sec_501 c see 450_us_1 revrul_77_72 1977_1_cb_157 provides that indebtedness owed to a labor_union by its wholly-owned tax-exempt subsidiary is not acquisition_indebtedness within the meaning of sec_514 of the code since the parent and subsidiary relationship shows the indebtedness to be merely a matter of accounting tn geisinger health plan v united_states f 3rd 3rd cir geisinger the court recognized that an organization may qualify for exemption based on the integral_part_doctrine which arises from an exception to the feeder_organization rule set forth in sec_1_502-1 of the regulations which states that if a subsidiary_organization of a tax-exempt_organization would itself be exempt on the ground that its activities are an integral part of the exempt_activities of the parent organization its exemption will not be lost because as a matter of accounting between the two organizations the subsidiary derives a profit from its dealings with the parent organization the court also noted that an entity seeking exemption as an integral part of another cannot primarily be engaged in activity which would generate more than insubstantial unrelated_business_income if engaged in by the other entity in this regard the court followed the reasoning of sec_1_502-1 of the regulations which contains an example of a subsidiary_organization that is not exempt from tax because it is operated for the primary purpose of carrying_on_a_trade_or_business which would be an unrelated_trade_or_business that is unrelated to exempt_activities if regularly carried on by the parent organization the example states that if a subsidiary_organization is operated primarily for the purpose of furnishing electric power to consumers other than its parent organization and the parent's tax- exempt subsidiary organizations it is not exempt because such business would be an unrelated_trade_or_business if regularly carried on by the parent organization similarly if the organization is owned by several unrelated exempt_organizations and is operated for the purpose of furnishing electric power to each of them it is not exempt since such business would be an unrelated_trade_or_business if regularly carried on by any one of the tax-exempt organizations accordingly the court in geisinger determined that application of the integral_part_doctrine requires at a minimum that an organization be in a parent and subsidiary relationship and that it not be carrying_on_a_trade_or_business which would be an unrelated_trade_or_business that is unrelated to exempt purposes if regularly carried on by the parent exemption under sec_501 c of the code is not generally available where an organization is established to provide corporate services to unrelated exempt_organizations rationale of other than through the application of sec_501 of the code for cooperative_hospital_service_organizations see bsw group inc supra and hcsc-laundry supra furthermore exemption under the integral_part_doctrine requires a parent and subsidiary relationship and the absence of unrelated_trade_or_business see geisinger supra and revrul_78_41 supra however if the exempt_organizations who participate in a joint operating_agreement are in a parent and subsidiary relationship then corporate services provided between them necessary to their being able to accomplish their exempt purposes are treated as other than an unrelated_trade_or_business and the financial arrangements between them are viewed as merely a matter of accounting see revrul_77_72 supra at issue then is whether the joint operating_agreement has established a parent and subsidiary relationship between the participating organizations if it has the corporate services and payments provided between the participating organizations are not treated as unrelated_trade_or_business income because these activities are essential to the accomplishment of their exempt purposes the activities could be conducted by a participating entity for itself without giving rise to unrelated_trade_or_business income and they occur in the context of a close relationship between the participating organizations based on all the facts and circumstances we conclude that under the amended agreement and the m o agreement l and n are effectively under the common_control of u as a result these organizations are within a relationship analogous to that of a parent and subsidiary aithough all of the facts and circumstances are relevant to this conclusion it is significant that under the amended agreement l and n have ceded authority to u significant financial managerial and operational authority over their affairs including exclusive authority over capital and operating budgets strategic plans managed care contracting the ability to allocate or reallocate services among the health care facilities land n manage and the ability to monitor and audit compliance with directives contributions to organizations exempt from federal_income_tax under sec_501 of the code or the performance of services by related sec_501 organizations do not fall within the definition of unrelated_business_income under sec_512 nor create taxable gain_or_loss to the transferor or transferee l's n’s and r's entering into the amended agreement and m o agreement with u will not adversely affect their status as organizations described in sec_501 c because they will continue to be organized and operated exclusively for the promotion of health within the meaning of revrul_69_545 supra the provision of management services loans capital contributions and the transfer of assets personnel or resources between these organizations pursuant to the amended agreement and the m o agreement will not adversely affect their tax- exempt status under sec_501 because these activities will facilitate their charitable purposes of promoting health for the benefit of the community within the meaning of revrul_69_545 in addition l_ and r will each continue to qualify as a hospital under sec_170 of the code and as a public charity under sec_509 and u will continue to qualify as a supporting_organization under sec_509 q7e ruling sec_1 following the restructuring described above u continues to qualify as exempt from federal income_taxation under sec_501 a of the cade as an organization described in sec_501 c following the restructuring described above u continues to qualify as a public charity under sec_509 of the code u's provision of management services loans capital contributions and or transfer of assets personnel or resources to any of the other parties does not result in unrelated_business_income to u under sec_512 of the code these rulings are based on the understanding that there will be no material changes in the facts upon which they are based these rulings do not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described these rulings are directed only to the organization that requested them and may not be used or cited by others as precedent we are informing your exempt_organizations area manager of this action please keep a copy of this letter in your permanent records if you have any questions about these rulings please contact the person whose name and telephone number are shown in the heading of this letter in accordance with the power_of_attorney currently on file with the internal_revenue_service we are sending a copy of this letter to your authorized representative sincerely signed marvin prisdlander marvin friedlander manager exempt_organizations technical group of 7s


t c memo united_states tax_court glenn l wittstadt jr and lynne m wittstadt petitioners v commissioner of internal revenue respondent docket no filed date robert g cassilly for petitioners alan r peregoy for respondent memorandum opinion dawson judge this case was assigned to special_trial_judge robert n armen jr pursuant to the provisions of sec_7443a of the internal_revenue_code_of_1986 as amended and rule sec_180 sec_181 and sec_183 the court agrees with and adopts the opinion of the special_trial_judge which is set forth below opinion of the special_trial_judge armen special_trial_judge this case is before the court on petitioners' motion for costs as amended filed pursuant to sec_7430 and rule petitioners seek to recover approximately dollar_figure incurred in resisting respondent's deficiency determinations for the taxable_year after concessions by respondent the issues for decision are as follows whether respondent's position in the proceedings was substantially justified and if not unless otherwise indicated all section references are to the internal_revenue_code in effect for the taxable_year in issue however all references to sec_7430 are to such section in effect at the time that the petition was filed unless otherwise indicated all rule references are to the tax_court rules_of_practice and procedure also pending before the court is petitioners' motion for entry of decision however at the hearing on that motion the parties agreed that there is an overpayment in petitioners' federal_income_tax for in the amount of dollar_figure which amount as well as interest thereon has been refunded to petitioners accordingly we need not address petitioners' motion for entry of decision in this memorandum opinion respondent concedes petitioners exhausted their administrative remedies see sec_7430 petitioners did not unreasonably protract the court_proceeding see sec_7430 petitioners substantially prevailed in the court_proceeding see sec_7430 and petitioners satisfy the applicable net_worth requirement see sec_7430 whether the attorney's_fees and other costs that petitioners seek to recover are reasonable in amount we consider these issues in the context of a case wherein decision was originally entered essentially in respondent's favor pursuant to a memorandum opinion of this court but such decision was subsequently reversed on appeal neither party requested an evidentiary hearing and the court concludes that such a hearing is not necessary for the proper disposition of petitioners' motion rule a we therefore decide the matter before us based on the record that has been developed to date i background glenn l wittstadt jr petitioner and lynne m wittstadt resided in edgewood maryland at the time that their petition was filed with the court a the notice_of_deficiency by notice_of_deficiency dated date respondent determined a deficiency in petitioners' federal_income_tax for the taxable_year as well as deficiencies in petitioners' federal excise_taxes under sec_4973 and sec_4980a in the total amount of dollar_figure the linchpin for the deficiencies was respondent's determination that a distribution the so-called respondent concedes that all but dollar_figure of the costs incurred by petitioners constitute reasonable_litigation_costs within the meaning of sec_7430 transfer refund that was received by petitioner from the maryland state teachers' retirement_system the retirement_system did not qualify for tax-free_rollover treatment under sec_402 in turn this determination was premised on respondent's ultimate determination that the transfer refund was not made on account of petitioner's separation from the service of the baltimore county public schools ie petitioner's retirement as a teacher but rather was made on account of petitioner's election to transfer from the retirement_system to the maryland state teachers' pension system the pension system b the parties' pleadings on date petitioners filed a timely petition the petition in which they contested the deficiencies determined by respondent in the petition which they filed pro_se petitioners alleged in part as follows the issue in this case was whether my transfer refund distribution met the irs requirements for a tax free roll-over or not the date final appeal decision letter from the local irs appeals_division states that the transfer refund did not qualify for tax-free_rollover treatment because the distribution was not received because of separation from the job retirement as required but because i signed an election form to transfer participation from the old retirement fund to the new retirement fund following the date separation petitioner's final day of employment the state had only one single required course of action namely to make the distribution to me on or after date as requested and contracted for on the effective documents and that was subsequently carried out the fact that the amount and nature of the distribution was the result of a choice had nothing to do with when it had to be paid and was ie after retirement as requested and contracted for thus satisfying the roll- over requirement on date respondent filed an answer the answer to the petition in the answer respondent admitted the first two of the above-quoted paragraphs in the petition and denied the third c petitioners' motion for summary_judgment on date petitioners again acting pro_se filed a motion for summary_judgment in their motion petitioners argued that the transfer refund was made on account of petitioner's retirement and not on account of petitioner's election to transfer from the retirement_system to the pension system the penultimate sentence of petitioners' motion stated as follows but for his retirement mr wittstadt would not have elected to receive the lump-sum payment and no such distribution would have been made petitioners also alleged that petitioner's election to transfer from the retirement_system to the pension system was invalid under maryland state law on date a hearing was conducted in washington d c on petitioners' motion for summary_judgment at that time the parties indicated that they were attempting to obtain facts and documents from the maryland state retirement agency respondent's counsel stated in part as follows i have had conversations with the assistant attorney_general of the state of maryland concerning what their testimony and official records would be they indicate to me merely that there is disputed facts to the extent that their records do not coincide with allegations of fact that mr wittstadt has made and therefore i think ultimately if mr wittstadt would waive his disclosure privilege with the state of maryland the state would be able to provide an affidavit that would show that material facts are in dispute in this case the court agreed to continue petitioners' motion for summary_judgment for further hearing in agreeing to do so the court stated in part as follows what the court would expect is that to the extent possible the parties would stipulate or agree to facts not reasonably in dispute and indicate so you can highlight to the court what facts are left in dispute and whether or not to support -- respondent seems to be saying that he believes that summary_judgment is not appropriate here because there may be a dispute on facts but it would be certainly helpful to have a record in which the court can decide that by stipulation on date a further hearing was conducted in washington d c on petitioners' motion for summary_judgment however contrary to the court's directive expressed at the prior hearing no executed stipulations were filed by the parties in this regard respondent's counsel acknowledged that information had been obtained from the maryland state retirement agency respondent's counsel stated that he had prepared stipulations of we note that at no time did respondent ever file any cross-motion for summary_judgment as will be discussed infra in the text above respondent thought that there were factual issues in dispute agreed and unagreed facts but that petitioners had declined to execute such stipulations petitioner confirmed this representation indicating that he thought such stipulations were irrelevant to his motion respondent's counsel then identified what he considered to be two disputed factual matters first the effective date of petitioner's election to transfer from the retirement_system to the pension system and second the reason why the transfer refund was paid to petitioner regarding the first disputed factual matter respondent took the position that the effective date of petitioner's election to transfer from the retirement_system to the pension system was date a date that preceded the effective date of petitioner's retirement in contrast petitioner took the position that the effective date of his election was date a date that followed the final day of petitioner's employment the second disputed matter involved causation ie what caused the state of maryland to make the transfer refund to petitioner in this regard respondent took the position that the maryland made the transfer refund because of petitioner's election to transfer from the retirement_system to the pension system in contrast petitioner took the position that maryland made the transfer refund because of petitioner's retirement as previously indicated petitioner took the position that the effective date of his election to transfer from the retirement_system to the pension system came after the final day of his employment petitioner's position in respect of this issue was consequential for two reasons first because it facilitated petitioners' principal argument that the transfer refund was made because of petitioner's retirement and second because it facilitated petitioners' ancillary argument that the transfer refund was not made because of petitioner's election to transfer from the retirement_system to the pension system because such election was invalid under maryland state law at the conclusion of the hearing the court denied petitioners' motion the court took this action essentially for two reasons first and principally because the record was so incomplete so as to preclude a rational disposition of the case and second because factual issues appeared to be in dispute near the end of the hearing the following colloquy took place between the court and petitioner the court mr wittstadt at this point i am not clear what your position is with respect to the stipulation of facts but when this case was continued last time and as i understand it from respondent's counsel that there are some documents the court does not now have those documents without those documents i couldn't come close--let the court finish--couldn't come close to ruling in your favor on this motion a motion for summary_judgment requires that there be no genuine material issue of fact in dispute so i don't have any facts or certainly anywhere near sufficient facts to rule in your favor even if you do stipulate respondent's counsel seems to be saying that there are a couple of areas of factual matters that are in dispute what would you like to do with this case petitioner in other words we can't do it by motion the court it sure doesn't look like it i think you understand why that there are matters here in dispute and respondent is saying there are matters in dispute you don't seem to be disagreeing with that that there are some matters which require some testimony if that is the case it's clear that the court cannot rule in your favor on the summary_judgment motion you can't get a dispositive answer which is what you want so the next step is trial d entry of appearance by petitioners' counsel on date petitioners' counsel entered his appearance in this case on the following day petitioners by counsel commenced formal discovery against respondent by serving a request for production of documents e the hylton case on date the court filed its memorandum opinion in hylton v commissioner tcmemo_1995_27 that case which was decided after a trial at which a representative of the maryland state retirement agency testified and exhibits were offered into evidence presented facts strikingly similar to those involved in the present case thus in hylton the the parties stipulated exhibits the remaining exhibits were offered during the course of the trial most of which were received into evidence taxpayer a maryland public school teacher elected to transfer from the retirement_system to the pension system effective date and received thereafter a transfer refund in date the taxpayer applied for retirement and retired in fact effective date hylton concluded as follows petitioners have shown that petitioner's election to transfer to the pension system due to which election he received the transfer refund was related to his retirement planning in other words they have demonstrated that the decision to retire was a link in the chain of causalities leading to the receipt of the transfer refund citation omitted however we view petitioner's separation_from_service as no more than a mere link in the chain of causalities leading to the receipt of the transfer refund citation omitted accordingly we hold that petitioner did not receive the transfer refund on account of his retirement rather he received the transfer refund because of his election to transfer from the retirement_system to the pension system an election that under maryland law lacked the requisite connection to petitioner's separation_from_service in reaching the foregoing conclusion we relied heavily on 54_tc_1766 affd 461_f2d_496 7th cir where we considered the meaning of the phrase on account of in an earlier version of the operative statute and construed it narrowly id pincite hylton was never appealed and the decision in that case became final on date see sec_7481 sec_7483 cf fed r app p a f the notice of trial on date the court calendared the present case for trial at a special session of the court scheduled to commence on date in baltimore maryland g progeny of the hylton case on date the court filed brown v commissioner tcmemo_1995_93 that case which was decided on the basis of a fully-stipulated record presented facts virtually indistinguishable from those in the present case thus in brown the taxpayer a maryland public school teacher elected to transfer from the retirement_system to the pension system effective date the taxpayer also applied to retire effective date thereafter the taxpayer received a transfer refund applying the same analysis as in hylton v commissioner supra we held in brown that the taxpayer did not receive the transfer refund on account of his retirement but rather on account of his election to transfer from the retirement_system to the pension system brown v commissioner tcmemo_1995_93 was ultimately reversed without published opinion per curiam 97_f3d_1446 4th cir on the basis of 86_f3d_378 4th cir vacating and remanding tcmemo_1995_148 see infra on date the court filed its memorandum opinion in dorsey v commissioner tcmemo_1995_97 once again we relied heavily on hylton v commissioner supra in holding that the taxpayer's transfer refund was not received on account of the taxpayer's retirement but rather on account of the taxpayer's election to transfer from the retirement_system to the pension system on date the court filed adler v commissioner tcmemo_1995_148 revd 86_f3d_378 4th cir that case which was decided after a trial at which a representative of the maryland state retirement agency testified presented facts virtually indistinguishable from those in the present case thus in adler the taxpayer a maryland state employee elected to transfer from the retirement_system to the pension system effective date the taxpayer also applied to retire effective date thereafter the taxpayer received a transfer refund applying the same analysis as in hylton v commissioner supra we held in adler that the taxpayer did not receive the transfer refund on account of his retirement but rather on account of his election to transfer from the retirement_system to the pension system the taxpayer's appeal in dorsey was ultimately dismissed dorsey v commissioner 91_f3d_129 4th cir h the trial on date the present case was called for trial in baltimore maryland at that time the court filed the parties' stipulation of facts which included some exhibits the court also filed the parties' trial memoranda petitioners' trial memorandum estimated trial time pincite hours and stated that petitioners expected to call witnesses including a representative of the maryland state retirement agency as it turned out the trial of this case lasted less than hours and the only witness who was called to testify was petitioner who was examined and cross-examined a principal thrust if not the principal thrust of petitioners' presentation at trial and on brief was that the transfer refund was not made pursuant to maryland state law because the transfer refund would have been invalid if made pursuant to maryland state law but rather was made pursuant to an administrative policy of the maryland state retirement agency which administrative policy required petitioner to retire in order to receive the transfer refund thus on brief petitioners argued as follows petitioner's election to receive a transfer refund was an election made pursuant to the retirement policy legally established by the board and was not made pursuant to the statutory transfer option in md ann code art 73b sec_83 in order to elect the retirement option as established by the board's policy it was necessary for petitioner glenn l continued after the conclusion of trial the court directed the parties to file seriatim briefs see rule b petitioners' opening brief includes pages of proposed findings_of_fact see rule e respondent's answering brief include sec_5 pages of objections to petitioners' proposed findings_of_fact and pages of respondent's proposed findings_of_fact id petitioners' reply brief includes 4-½ pages of objections to respondent's proposed findings_of_fact id i the memorandum opinion in tcmemo_1995_492 filed date the court decided the present case in our memorandum opinion we rejected petitioners' argument that petitioner's transfer refund had not been received pursuant to maryland state law but rather pursuant to some administrative policy regardless we went on to hold that the transfer refund was received on account of petitioner's election to transfer from the retirement_system to the pension system and not on account of petitioner's retirement in so holding we relied heavily on hylton v commissioner tcmemo_1995_27 as well as a number of other transfer refund cases continued wittstadt to have retired because petitioner's retirement was a necessary condition_precedent to his participation in the policy distribution option the distribution by the board to petitioner was made on account of petitioner glenn l wittstadt's separation_from_service as those terms are used in sec_402 consequently the distribution to petitioner qualified for tax free treatment as provided for in sec_402 that we had previously decided specifically including adler v commissioner tcmemo_1995_148 revd 86_f3d_378 4th cir j appeal assessment and collection following a rule computation the decision in the present case was entered on date on date petitioners filed a notice of appeal petitioners did not however file a bond_to_stay_assessment_and_collection see sec_7485 accordingly on date respondent assessed the deficiencies in income and excise_taxes as redetermined in our decisiondollar_figure subsequently petitioners made two substantial payments in partial satisfaction of the foregoing assessment thereafter in response to a final notice dated date petitioners entered into an installment_payment agreement with respondent on date see sec_6159 petitioners ultimately made the following payments on the indicated dates date amount dollar_figure big_number e respondent also assessed interest see sec_6601 on date respondent filed a notice_of_federal_tax_lien in the county of petitioners' residence also by notice dated date respondent reminded petitioners that their next payment pursuant to the installment_payment agreement was due on date k the adler case on appeal on date the court_of_appeals for the fourth circuit decided 86_f3d_378 which vacated and remanded our decision in tcmemo_1995_148 in adler v commissioner the court_of_appeals agreed that the phrase on account of requires a causal connection between the employee's separation_from_service and the distribution from the qualified_plan f 3d pincite however the court_of_appeals construed the phrase on account of to mean incident to and concluded that the requisite degree of causality required by the operative statute had been satisfied in so holding the court_of_appeals stated as the purpose of the statute sec_402 is to protect and encourage retirement savings it is plain that a distribution to an employee that occurs incident to his retirement should be entitled to rollover treatment f 3d pincite on date the solicitor_general_of_the_united_states decided that a petition for a writ of certiorari would not be filed in respect of 86_f3d_378 cf u s c sec_2101 l reversal and subsequent developments on or about date and after some prodding by petitioners respondent filed a motion with the court_of_appeals asking that the tax court's decision entered on date be reversed on the basis of 86_f3d_378 4th cir shortly thereafter on date the court_of_appeals issued an order granting respondent's motion and reversing our decision no later than date respondent's counsel undertook action to suspend any further collection in respect of the date assessment against petitioners pending abatement of such assessment and the refund of amounts previously paid respondent's counsel specifically advised respondent's problem_resolution_officer for the delaware-maryland district that mr wittstadt no longer owes the deficiency for and directed the officer to take whatever steps are necessary to terminate the required_payment agreement nevertheless during the fall of petitioners incurred costs in trying to have collection terminated on date the record in this case was returned by the court_of_appeals and received by this court thereafter by order dated date the court vacated the decision entered date and directed the parties either to furnish an agreed form of decision suitable for entry of decision by the court or to move for such relief as they thought might be warranted under the circumstances then present petitioners then filed their motion for costs as well as their motion for entry of decisiondollar_figure ii discussion we apply sec_7430 as amended by the technical_and_miscellaneous_revenue_act_of_1988 tamra publaw_100_647 sec a 102_stat_3342 3743-dollar_figure a requirements for a judgment under sec_7430 under sec_7430 a judgment for litigation costs incurred in connection with a court_proceeding may only be awarded if a taxpayer is the prevailing_party has exhausted his or her administrative remedies within the irs and did not unreasonably protract the court_proceeding sec_7430 b a taxpayer must satisfy each of these three requirements in order to be entitled to a judgment under sec_7430 rule e respondent contends that petitioners' motion for costs was filed out of time and should be dismissed for that reason we reject respondent's contention and do not consider it further technical_and_miscellaneous_revenue_act_of_1988 tamra publaw_100_647 sec a 102_stat_3342 is generally applicable to proceedings commenced after date tamra sec d 102_stat_3746 congress amended sec_7430 most recently in the taxpayer bill of right sec_2 tbor2 publaw_104_168 secs 110_stat_1452 however the amendments made by tbor2 apply only in the case of proceedings commenced after date tbor2 sec_701 sec_702 sec_703 and sec_704 sec_110 stat inasmuch as the petition herein was filed on date the amendments made by tbor2 do not apply in the present case maggie management co v commissioner t c date respondent concedes that petitioners exhausted their administrative remedies within the irs respondent also concedes that petitioners did not unreasonably protract the court_proceeding accordingly we must decide whether petitioners qualify as the prevailing_party in the court_proceeding b prevailing_party in order to qualify as the prevailing_party a taxpayer must establish the position_of_the_united_states in the proceeding was not substantially justified the taxpayer has substantially prevailed with respect to the amount in controversy or the most significant issue or set of issues presented and the taxpayer satisfies the applicable net_worth requirement sec_7430 respondent concedes that petitioners substantially prevailed within the meaning of sec_7430 respondent also concedes that petitioners satisfy the applicable net_worth requirement however respondent contends that the position taken by respondent in the court_proceeding was substantially justified petitioners bear the burden of proving that respondent's position in the court_proceeding was not substantially justified rule e 94_tc_708 92_tc_192 affd 905_f2d_241 8th cir accordingly we must decide whether petitioners have carried their burden of proving that respondent's position in the court_proceeding was not substantially justified c respondent's position in the court_proceeding whether respondent's position was not substantially justified is a question of fact we resolve such issue by the application of a reasonableness standard see 487_us_552 construing similar language in the equal_access_to_justice_act eaja u s c sec see also maggie management co v commissioner t c date slip op pincite 92_tc_760 n 89_tc_79 affd 861_f2d_131 5th cir the position_of_the_united_states that must be examined against the reasonableness standard is the position taken by the commissioner in the answer to the petition and thereafter 930_f2d_759 9th cir sher v commissioner f 2d pincite maggie management co v commissioner supra slip op pincite see sec_7430 the fact that the commissioner eventually loses a case does not by itself establish that the commissioner's position was unreasonable 931_f2d_1044 5th cir 106_tc_76 100_tc_457 in the present case respondent's position in the court_proceeding was that petitioner's transfer refund did not qualify for tax-free_rollover treatment under sec_402 because the transfer refund was not made on account of petitioner's retirement as a teacher but rather on account of petitioner's election to transfer from the retirement_system to the pension system respondent consistently maintained this position throughout the court_proceeding until respondent conceded the case on date in the court_of_appeals d petitioners' contentions petitioners contend that respondent's position was unreasonable for at least three reasons first petitioners contend that respondent's position was contrary to congressional intent to preserve retirement_funds second petitioners contend that respondent should not have opposed petitioners' motion for summary_judgment but rather should have permitted the court to adjudicate the disputed issues in this case in a summary fashion if the court had done so then so the argument goes petitioners would have been spared the cost of trialdollar_figure third petitioners contend that respondent was unreasonable in pursuing collection of the assessed deficiencies at least after the court_of_appeals decided 86_f3d_378 4th cir petitioners acknowledge that if the court had rendered summary_judgment for respondent even though respondent never filed any cross-motion for summary_judgment petitioners would not have been spared the cost of appeal we consider each of petitioners' contentions in turn e congressional intent petitioners contend that respondent's position in the court_proceeding was not substantially justified because respondent's position is in conflict with stated congressional intent in this regard petitioners rely on the statement made by the court_of_appeals in reversing adler v commissioner tcmemo_1995_ that as the purpose of the statute sec_402 is to protect and encourage retirement savings it is plain that a distribution to an employee that occurs incident to his retirement should be entitled to rollover treatment adler v commissioner f 3d pincite petitioners' contention is tantamount to arguing that respondent's position was unreasonable because respondent lost the case however as previously stated the fact that the commissioner eventually loses a case does not by itself establish that the commissioner's position was unreasonable estate of perry v commissioner supra swanson v commissioner supra powers v commissioner supra further we recall that respondent did not lose the present case in this court rather respondent ultimately lost the case on appeal under these circumstances a taxpayer ordinarily has a heavy burden in contending that respondent's position was unreasonable the legislative_history of sec_7430 states that when a taxpayer loses in the trial_court and obtains a reversal of that decision in the appellate court the appellate court would not normally award attorney's_fees to the taxpayer since the trial_court by definition had found the government's position to be reasonable h rept see staff of joint comm on taxation general explanation of the revenue provisions of the tax equity and fiscal responsibility act of j comm print cong rec s-32078 auto-ordnance corp v united_states cl_ct see also h conf rept further respondent's position was consistent with the holding of this court as expressed in four cases with similar if not indistinguishable facts that had been decided prior to the trial of the present case thus in hylton v commissioner tcmemo_1995_27 brown v commissioner tcmemo_1995_93 dorsey v commissioner tcmemo_1995_97 and adler v commissioner tcmemo_1995_148 this court held that a transfer refund was received not on account of retirement but rather on account of the taxpayer's election to transfer from the retirement_system to the pension system indeed the decision in the first of the foregoing cases hylton v commissioner supra was final at the time of trial of the present case finally in view of the fact that a linchpin for our decision in hylton v commissioner supra was 54_tc_1766 affd 461_f2d_496 7th cir a case in which we construed narrowly the phrase on account of in an earlier version of the operative statute we think that respondent's position was reasonable both at the time that the notice_of_deficiency was issued in date and at the time that the answer was filed in date see 487_us_552 the commissioner's position must have a reasonable basis in law in view of the foregoing we reject petitioners' first contention f petitioners' motion for summary_judgment petitioners also contend that respondent was unreasonable in refus ing to submit the case for decision by way of summary_judgment we disagree petitioners' contention overlooks a number of matters first the court denied petitioners' motion for summary_judgment principally because of a record so incomplete that a rational disposition of the case was not possible because petitioners were the moving party petitioners bore responsibility for ensuring that the record provided a basis for their motion second the court also denied petitioners' motion for summary_judgment because genuine issues of material fact appeared to be in dispute here we recall that in an effort to more clearly determine this matter the court had directed the parties to stipulate facts and the court even continued the original hearing on petitioners' motion for that purpose respondent's counsel complied with this directive by preparing stipulations of agreed and unagreed facts however petitioners declined to execute either stipulation or to otherwise cooperate in the process further petitioners had raised matters that clearly implicated factual issues thus petitioners had questioned the effective date of petitioner's election to transfer from the retirement_system to the pension system petitioners had challenged the validity of that election and petitioners had raised the fundamental issue of causation ie the reason why the transfer refund had been paid indeed petitioners alleged that but for his retirement mr wittstadt would not have elected to receive the lump-sum payment and no such distribution would have been made third the court did not deny petitioners' motion with prejudice thus petitioners were free to cure the defects as identified by the court at the hearing on date and refile their motion however they chose not to do sodollar_figure fourth the initial transfer refund case hylton v commissioner tcmemo_1995_27 was decided after a trial at in addition submission of the case by the parties on a fully stipulated basis pursuant to rule provided an alternative to trial however the record is silent regarding any effort by petitioners to encourage respondent to submit the case on that basis we find this curious in view of petitioners' contention that there were no genuine issues of material fact in this case we note that brown v commissioner tcmemo_1995_93 revd without published opinion per curiam 97_f3d_1446 4th cir was decided by this court on a fully stipulated basis which a representative of the maryland state retirement agency testified and at which numerous exhibits were offered in evidence at trial moreover the transfer refund case that led to a published opinion by the court_of_appeals adler v commissioner tcmemo_1995_148 revd 86_f3d_378 4th cir was decided by this court after a trial fifth the decision in hylton v commissioner supra became final before the trial of the present case if petitioners regarded their case as presenting nothing other than a pure issue of law they could have agreed to entry of decision on the basis of hylton and then appealed instead petitioners went forward at trial on the theory that the transfer refund was not made pursuant to maryland state law but rather pursuant to an administrative policy that required petitioner to retire in order to receive the transfer refund petitioners' strategy was obviously to present a theory that might serve to distinguish their case from hylton brown dorsey and adler and thereby avoid the need to appeal however the fact that petitioners' strategy was unsuccessful does not mean that respondent's position was unreasonable finally we do not think that respondent was under any obligation to move for summary_judgment indeed respondent thought that there were genuine issues of material fact and the reasonableness of respondent's view as to the existence of disputed factual issues is demonstrated if by no other fact by petitioners' theory at trial regarding an alleged administrative policy that required petitioner to retire in order to receive the transfer refunddollar_figure accordingly we do not comprehend how decision in this case could have been entered pursuant to any motion for summary_judgment in view of the foregoing we reject petitioners' second contention g respondent's collection activity finally petitioners contend that respondent was unreasonable in pursuing collection of the assessed deficiencies at least after the court_of_appeals decided 86_f3d_378 4th cir we begin by recalling that petitioners did not file a bond_to_stay_assessment_and_collection when they filed their notice of appeal accordingly respondent was permitted by law to assess and collect the deficiencies in income and excise_taxes as the pages of objections in each party's post-trial brief to the other party's proposed findings_of_fact demonstrate the parties' perception that more than a pure issue of law was involved in this case we also note that the day after petitioners' counsel entered his appearance in this case petitioners commenced formal discovery against respondent again such action demonstrates petitioners' perception that more than a pure issue of law was involved in this case redetermined in our decision see sec_7485 and respondent was not unreasonable to have done so on date the court_of_appeals decided adler v commissioner supra petitioners contend that it was unreasonable for respondent to pursue further collection after that date in contrast we conclude that it was unreasonable for respondent to pursue further collection after october dollar_figure sec_7485 provides in relevant part as follows sec_7485 bond_to_stay_assessment_and_collection a upon notice of appeal --notwithstanding any provision of law imposing restrictions on the assessment and collection of deficiencies the review under sec_7483 shall not operate as a stay of assessment or collection of any portion of the amount of the deficiency determined by the tax_court unless a notice of appeal in respect of such portion is duly filed by the taxpayer and then only if the taxpayer-- on or before the time his notice of appeal is filed has filed with the tax_court a bond in a sum fixed by the tax_court not exceeding double the amount of the portion of the deficiency in respect of which the notice of appeal is filed and with surety approved by the tax_court conditioned upon the payment of the deficiency as finally determined together with any interest additional_amounts or additions to the tax provided for by law we need not decide whether it was unreasonable for respondent to pursue further collection between date and date because that issue appears to be moot in this regard we note that during such period petitioners did not incur any attorney's_fees and that the only cost in respect of which petitioners seek reimbursement appears to represent a dollar_figure payment for westlaw service related to petitioners' reply brief filed in the court_of_appeals before 86_f3d_378 4th cir was decided cf estate of perry v continued after the court_of_appeals decided adler v commissioner supra respondent had a 45-day period to petition the court_of_appeals for rehearing or rehearing en_banc see fed r app p c a and a 90-day period to petition the supreme court to file a petition for a writ of certiorari see u s c sec_2101 on date the solicitor general decided that a petition for a writ of certiorari would not be filed in adler v commissioner supra we think that by the end of date respondent should have concluded that the decision of the court_of_appeals in adler would control the disposition of the present case and respondent should have terminated collection against petitioners nevertheless on date respondent filed a notice_of_federal_tax_lien in the county of petitioners' residence moreover by notice dated date a date more than a month after the court_of_appeals had reversed our decision in the present case respondent reminded petitioners that their next payment pursuant to the installment_payment agreement was due on date during this period petitioners incurred costs in trying to persuade respondent to terminate collection that should have terminated earlier continued commissioner 931_f2d_1044 5th cir 766_f2d_1227 8th cir in view of the foregoing we hold that it was unreasonable for respondent to pursue further collection after date h amount of recoverable costs finally we turn to the matter concerning the amount of recoverable costs here we observe that respondent concedes that all but dollar_figure of the costs incurred by petitioners constitutes reasonable_litigation_costs within the meaning of sec_7430dollar_figure the disputed dollar_figure amount however does not pertain to any cost incurred after date accordingly we conclude that the costs incurred for the months of date through date as enumerated in petitioners' counsel's single invoice for those months are recoverable by petitionersdollar_figure iii conclusion based on the foregoing we hold that respondent's position in the court_proceeding was not unreasonable through date but that respondent acted unreasonably thereafter by not see supra note further we note that respondent neither cites nor relies upon either sec_301_7430-3 proced admin regs or sec_301_7430-3 proced admin regs accordingly no consideration is given to the possible effect of those provisions of the regulation cf lavallee v commissioner tcmemo_1997_183 at n ball v commissioner tcmemo_1995_520 see also gustafson v commissioner 97_tc_85 the total amount for services and expenses according to such invoice is dollar_figure terminating collection accordingly we shall award costs to petitioners in the amount of dollar_figure to reflect the foregoing as well as the agreed disposition of petitioners' motion for entry of decision an appropriate order and decision will be entered granting petitioners' motion for costs as amended to the extent indicated and granting petitioners' motion for entry of decision in the amount of the agreed overpayment see supra note


t c memo united_states tax_court alan l poe petitioner v commissioner of internal revenue respondent docket no 20950-03l filed date alan l poe pro_se michelle m lippert for respondent memorandum opinion chiechi judge this case is before the court on respon- dent’s motion for summary_judgment and to impose a penalty under section respondent’s motion we shall grant respon- dent’s motion background the record establishes and or the parties do not dispute the following petitioner resided in toledo ohio at the time he filed the petition in this case on date respondent received from petitioner a federal_income_tax tax_return for his taxable_year return in his return petitioner reported total income of dollar_figure total_tax of dollar_figure and claimed a refund of dollar_figure of tax withheld petitioner attached to his return form_w-2 wage and tax statement reporting wages tips and other compensation totaling dollar_figure petitioner also attached a document to his return petitioner’s attachment to his return that contained statements contentions arguments and requests that the court finds to be frivolous and or groundless 1all section references are to the internal_revenue_code in effect at all relevant times all rule references are to the tax_court rules_of_practice and procedure 2although the court ordered petitioner to file a response to respondent’s motion petitioner failed to do so 3petitioner’s attachment to his return is very similar to the documents that certain other taxpayers with cases in the court attached to their tax returns see eg flathers v commissioner tcmemo_2003_60 copeland v commissioner tcmemo_2003_46 smith v commissioner tcmemo_2003_45 on date respondent refunded or credited4 to petitioner the entire refund ie dollar_figure that he claimed in his return plus interest thereon on date respondent issued to petitioner a notice_of_deficiency notice with respect to his taxable_year in that notice respondent determined a deficiency in an addition under sec_6651 to and an accuracy-related_penalty under sec_6662 on petitioner’s tax for his taxable_year in the respective amounts of dollar_figure dollar_figure and dollar_figure petitioner did not file a petition in the court with respect to the notice relating to his taxable_year on date respondent assessed petitioner’s tax as well as an addition_to_tax under sec_6651 a penalty under sec_6662 and interest as provided by law for his taxable_year we shall refer to those unpaid assessed amounts as well as interest as provided by law accrued after date as petitioner’s unpaid liability for on date respondent issued to petitioner a notice of balance due with respect to petitioner’s unpaid liability for on date respondent issued to petitioner 4respondent credited dollar_figure of the refund claimed in peti- tioner’s return in payment of a frivolous_return penalty under sec_6702 that respondent imposed on petitioner with respect to his return another notice of balance due with respect to that unpaid liabil- ity on date respondent issued to petitioner a final notice_of_intent_to_levy and notice of your right to a hearing notice_of_intent_to_levy with respect to inter alia his taxable_year on or about date in response to the notice_of_intent_to_levy petitioner filed form request for a collection_due_process_hearing form and requested a hearing with respondent’s appeals_office appeals_office with respect to inter alia his taxable_year petitioner attached a document to his form petitioner’s attachment to form that contained statements contentions arguments and requests that the court finds to be frivolous and or groundless on date a settlement officer with respondent’s appeals_office held a hearing appeals_office hearing with petitioner with respect to the notice_of_intent_to_levy at the appeals_office hearing the settlement officer gave petitioner a copy of form_4340 certificate of assessments payments and other specified matters form with respect to petitioner’ sec_5petitioner’s attachment to form contained statements contentions arguments and requests that are similar to the statements contentions arguments and requests contained in the attachments to forms filed with the internal_revenue_service by certain other taxpayers with cases in the court see eg flathers v commissioner supra copeland v commissioner supra taxable_year at that hearing the settlement officer also gave petitioner a copy of 115_tc_576 and explained the warning of the court in that opinion with respect to sec_6673 on date the appeals_office issued to petitioner a notice_of_determination concerning collection action s under sec_6320 and or notice_of_determination that notice_of_determination stated in pertinent part summary of determination appeals determination is that compliance is upheld no relief is granted you were given an opportunity to prepare and file corrected returns and provide a com- pleted collection information statement you failed to file corrected returns you did not provide any finan- cial information on which consideration of alternatives could be based you raised only frivolous arguments and were given a copy of pierson v commissioner an attachment to that notice_of_determination stated in pertinent part summary and recommendation you requested a collection_due_process cdp hearing with appeals under the provisions of sec_6330 -the determination of appeals is that the proposed collection actions are appropriate and are upheld no relief is granted verification of legal and procedural requirements the statute_of_limitations has been suspended since the settlement officer had no involvement in your case prior to the assignment for the cdp hear- ing sec_6331 provides that if any person liable to pay any_tax neglects or refuses to pay the same within days after notice_and_demand it shall be lawful for the secretary to collect such tax and such further sum as shall be sufficient to cover the expenses of the levy by levy upon all property and rights to property ex- cept such property as is exempt under sec_6334 belonging to such person or on which there is a lien provided in this chapter for the payment of such tax sec_6330 cdp appeal procedures require that irs must in addition to notice_and_demand and sec_6331 provide the taxpayer with a written notification of his or her right to a cdp appeal of the proposed levy action this notice was sent to you on based on the best information available the require- ments of all laws regulations and procedures have been met during the assessment and collection phases of this dispute specific issues raised by the taxpayer in this case you dispute the underlying liabilities the settlement officer requested and reviewed the original documents submitted as form_1040 for the year in question along with a detailed transcript of the account the settlement officer also secured and reviewed certified transcripts forms of this account a copy of the transcript was provided to you at the hearing as evidence of the correctness of the assessment the files and transcript show notice_and_demand were properly made at the hearing you were given the opportunity to dis- cuss or submit alternatives to the collection actions such as an installment_agreement under sec_6159 or an offer_in_compromise under sec_7122 instead you chose to spend your time at the hearing bringing up frivolous issues you made the statement that this can not be frivo- lous this mere assertion is not supported by the facts or by law the courts have consistently ruled that arguments of this nature are considered frivolous you correctly point out that sec_61 defines income more precisely sec_61 defines gross_income sec_61 gross_income defined a general definition except as otherwise provided in this subtitle gross_income means all income from whatever source derived including but not limited to the following items compensation_for service including fees commissions fringe_benefits and similar items wages are considered to be compensation_for services the u s tax_court has recently ruled on documents and positions that are substantially identical to the ones you have put forward see christopher kiley v com- missioner t c memo no 6676-02l date a copy of this case was provided to you at the hearing in kiley v commissioner the u s tax_court ruled that the return filed with all -0-‘s and using substantially identical language in the attachments was clearly frivolous the court went further and assessed a substantial penalty under sec_6673 for taking the court’s time with arguments that have been long settled as a matter of law a copy of the court’s warning as provided for in pierson v commissioner was also given to you at the hearing and explained no spousal defenses were raised the only challenges you raised as to the appropriateness of the collection actions were couched in terms of arguments that have previously been identified as frivolous you offered no alternatives to the proposed enforced collection actions balancing efficient collection and intrusiveness the determination of appeals is that the proposed collection action balances the need for efficient collection_of_taxes with the intrusiveness of the action since the liabilities are due and owing and the notices of proposed enforced collection action were legally proper you were notified that the documents you filed were frivolous and chose to ignore the clear warning issued in writing before you decide whether to petition this notice_of_determination you should know that the tax_court is empowered to impose monetary sanctions up to dollar_figure for instituting or maintaining an action before it primarily for delay or for taking a position that is frivolous or groundless see the copy of pierson v commissioner that was provided at the hearing it is our view that the positions you have taken have no merit and are groundless petitioner filed a petition with the court with respect to the notice_of_determination relating to petitioner’s unpaid liability for the petition contains statements contentions arguments and requests that the court finds to be frivolous and or groundless discussion the court may grant summary_judgment where there is no genuine issue of material fact and a decision may be rendered as a matter of law rule b 98_tc_518 affd 17_f3d_965 7th cir we conclude that there are no genuine issues of material fact regarding the questions raised in respondent’s motion petitioner did not file a petition with the court with respect to the notice_of_deficiency that respondent issued to him relating to his taxable_year where as is the case here 6the frivolous and or groundless statements contentions arguments and requests in petitioner’s petition are similar to the frivolous and or groundless statements contentions arguments and requests in petitions filed by certain other taxpayers with cases in the court see eg copeland v commissioner tcmemo_2003_46 the validity of the underlying tax_liability is not properly placed at issue the court will review the determination of the commissioner of internal revenue for abuse_of_discretion 114_tc_604 114_tc_176 based upon our examination of the entire record before us we find that respondent did not abuse respondent’s discretion in determining to proceed with the collection action as determined in the notice_of_determination with respect to petitioner’s unpaid liability for in respondent’s motion respondent requests that the court require petitioner to pay a penalty to the united_states pursuant to sec_6673 sec_6673 authorizes the court to require a taxpayer to pay to the united_states a penalty in an amount not to exceed dollar_figure whenever it appears to the court inter alia that a proceeding before it was instituted or maintained primarily for delay sec_6673 or that the taxpayer’s position in such a proceeding is frivolous or groundless sec_6673 in pierson v commissioner t c pincite we issued an unequivocal warning to taxpayers concerning the imposition of a penalty under sec_6673 on those taxpayers who abuse the protections afforded by sec_6320 and sec_6330 by instituting or maintaining actions under those sections primarily for delay or by taking frivolous or groundless positions in such actions at the appeals_office hearing the settlement officer gave petitioner a copy of pierson and explained the warning of the court in that opinion with respect to sec_6673 nonetheless in the instant case petitioner advanced in the petition we believe primarily for delay frivolous and or groundless statements contentions arguments and requests thereby causing the court to waste its limited resources we shall impose a penalty on petitioner pursuant to sec_6673 in the amount of dollar_figure we have considered all of petitioner’s statements contentions arguments and requests that are not discussed herein and we find them to be without merit and or irrelevant on the record before us we shall grant respondent’s motion to reflect the foregoing an order granting respondent’s motion and an appropriate decision will be entered


office_of_chief_counsel internal_revenue_service memorandum number release date cc ita b06 nmmulleneaux postf-138399-09 uilc date date to associate area_counsel large mid-size business lmsb area heavy manufacturing transportation attn elizabeth r edberg from willie e armstrong jr senior technician reviewer branch income_tax accounting ita subject definition of dollar-value lifo inventory_items this chief_counsel_advice responds to your request for assistance in accordance with k this chief_counsel_advice should not be cited as precedent taxpayer region vineyard vineyard a b c d e legend -------------------------------------------- ---------------- ----------------------- ----------------------- -- -- -- -- -- postf-138399-09 f g h i grape grape grape grape --- --- -- ---------- ------------------------------------- -------------------------------- -------------------------- ------------------ reserve varietal ---------------------------------------------- estate varietal varietal varietal varietal varietal year year year year month month -------------------------------------------- ---------------------------------- ------------------------------ ----------------------- --------------- ------- ------- ------- ------- ------ --------- postf-138399-09 issue whether taxpayer properly defines items of inventory within its dollar-value last-in_first-out lifo_pool for purposes of computing the lifo price index of the pool in accordance with sec_472 of the internal_revenue_code and the income_tax regulations thereunder conclusion taxpayer properly defines items within its dollar-value lifo_pool for purposes of computing the lifo price index of the pool in accordance with sec_472 and the regulations thereunder facts taxpayer is a winery that produces several types of wine and owns and operates two vineyards in region vineyard and vineyard vineyard contains a blocks of land including b for reserve grape c for estate grape c for grape b for grape and b for grape vineyard contains d blocks of land including e for grape and c for grape in year taxpayer’s first vintage year it produced estate varietal in year taxpayer began producing varietal varietal and reserve varietal in year taxpayer began producing varietal and continued to produce that varietal off and on through year taxpayer uses grapes grown within the same grape-growing geographical region appellation for its wine production and generally uses only estate-grown grapes in some years however taxpayer may purchase a small amount of grape grape grape and grape grapes to augment the estate-grown grapes if and to the extent there is a shortfall in the yield from its vineyards due to weather insects diseases or other similar causes because the grape growing costs are expensed at the farming division level the grapes grown at taxpayer’s vineyards are taken into inventory at a zero basis taxpayer does not purchase wine for resale taxpayer generally designates about f percent of the best of its grape production for the reserve varietal program the vast majority of the grapes used in the program come from the reserve grape block although some blending may occur indeed for production years after year the bulk wine produced from grape grapes is used solely for blending into the varietal programs at the time of bottling although vineyard practices at the reserve grape block may vary slightly from the estate grape blocks timing of harvest trellis systems and canopy management may differ from a practical standpoint there is no difference in production methods or costs in the reserve varietal program compared to the estate varietal program in this postf-138399-09 regard the grapes are crushed fermented and barrel aged using the same methods and in the same location up to the point of final blending decisions at that point the best barrels are identified for the reserve varietal program and are subject_to further barrel and or bottle aging the balance of the varietal along with any remaining varietal from that vintage goes into the estate varietal program where they are subject_to the processes of blending bottling and bottle aging traditionally taxpayer bottles its varietal in month of the year after harvest and releases the wine for sale shortly thereafter the majority of that bottling will sell out within g months of bottling after a period of bulk aging taxpayer bottles its varietal in month of the year following harvest the wine is then bottle aged for a period of about h months before its release for sale once released for sale the majority of the bottled varietal is sold within g months after a period of aging the estate varietal is bottled in month of the i year after harvest with a bottle aging period of about g months the barrel and bottle aging periods are slightly longer for the reserve varietal program both varietal programs generally sell out within g months of their respective releases taxpayer defines items in its bulk wine by varietal varietal varietal varietal and varietal it further defines bulk wine by length of production ie time in months from the month the grapes are harvested stage of production additionally taxpayer defines bulk wine by quality once bulk wine is determined to be of sufficient quality to be bottled as a reserve high quality wine taxpayer treats such bulk wine as a separate item from the bulk wine of the same varietal and production_period in general taxpayer defines items of bottled wine in a similar manner as bulk wine it defines bottled wine by varietal length of time it has been aged and stored and the quality of the wine eg estate varietal reserve varietal taxpayer further defines items by the size of the bottle used if the same item is bottled in containers of different sizes for example some wines are further defined by 750ml and 5l bottles to value its bulk and bottled wine inventory taxpayer uses the dollar-value link chain lifo_method taxpayer determines current-year cost using the latest acquisitions method taxpayer maintains one natural_business_unit pool law sec_1_472-8 provides that any taxpayer may elect to determine the cost of its lifo_inventories using the dollar-value lifo_method provided such method is used consistently and clearly reflects income in order for taxpayer’s dollar-value_method to clearly reflect income taxpayer must properly define each inventory_item used to calculate its lifo_index inflation and to measure increments and decrements in its lifo_pool postf-138399-09 in order to determine whether taxpayer properly defined its lifo items and consequently its lifo_index it is helpful to first discuss the definition of the word items and goods in the context of sec_472 and the importance of a taxpayer properly defining an inventory_item within a pool for purposes of accurately measuring inflation and calculating the lifo_index for the pool a definition of the terms goods and items neither the code nor the regulations set forth a definition of the words goods and items sec_1_472-8 however seems to use the terms goods and items interchangeably when describing the dollar-value lifo_method for example sec_1 a provides that goods contained in the inventory are grouped into a pool or pools sec_1_472-8 states in part a pool shall consist of all items entering into the entire inventory investment for a natural_business_unit of a business_enterprise unless the taxpayer elects to use the multiple_pooling method provided in subparagraph of this paragraph sec_1_472-8 also refers to an item in the pool in legislative interpretation words are uniformly presumed unless the contrary appears to be used in their ordinary and usual sense and with the meaning commonly attributed to them 242_us_470 see 447_us_102 a similar presumption should be used with respect to words used in regulations thus the term goods should be used in its ordinary meaning the term goods is defined in merriam-webster’s collegiate dictionary pincite 9th ed as personal_property having intrinsic value wares commodities merchandise therefore using common usage goods or items can include a broad group of wares or commodities the tax_court has established a basic principle for the term item in the context of sec_472 the tax_court stated a narrow definition of an item within a pool will generally led to a more accurate measure of inflation ie price index and thereby lead to a clearer reflection of income 82_tc_726 thus whether referencing goods or an item the goods or item placed in the inventory_pool must provide an accurate measure of inflation further the cost of inventory_items plays a significant role in defining an item in amity leather the tax_court agreed with the taxpayer that billfolds manufactured in puerto rico should be treated for inventory purposes as different items from otherwise identical billfolds produced in the united_states the billfolds produced in puerto rico were substantially cheaper see 97_tc_120 goods may be placed in separate item categories because of their cost b importance of defining items properly postf-138399-09 proper item definition is the foundation on which an accurate reliable and suitable lifo_index must be built the lifo_index is generally defined as the ratio of the current cost of the goods in inventory to the base cost of those same goods see sec_1_472-8 since a lifo reserve measures cumulative inflation in the ending inventory it is imperative that the lifo_index accurately measure inflation in amity leather the tax_court recognized the importance of defining inventory_items properly because the change in the price of an item determines the price index and that index affects the computation of increments or decrements in the lifo inventory the definition and scope of an item are extremely important to the clear_reflection_of_income if factors other than inflation enter into the cost of inventory_items a reliable index cannot be computed for example if a taxpayer’s inventory experiences mix changes that result in the substitution of less expensive goods for more expensive goods the treatment of those goods as a single item increases taxable_income conversely if changes in mix of the inventory result in the substitution of more expensive goods for less expensive goods the treatment of those goods as a single item decreases taxable_income because the increase in inventory costs is eliminated from the lifo cost of the goods as if such cost increase represented inflation amity leather t c pincite this lengthy quotation emphasizes the importance of a taxpayer defining its items properly and explains that distortions can occur when the taxpayer does not properly define its items the tax_court again emphasized this conclusion in hamilton industries when it stated the proper grouping of goods into pools and items is central to the operation of the dollar-value_method 72_tc_447 in order to produce a clear_reflection_of_income the goods contained in a taxpayer’s pool and item categories must have similar characteristics as determined under the standards applicable to each amity leather products co v commissioner t c pincite a system which groups like goods together and separates dissimilar goods permits cost increases attributable to inflation to be isolated and accurately measured amity leather products co v commissioner t c pincite the more homogenous that each category can be made the better it will screen out cost increases caused by non-inflationary factors thus producing a clearer reflection of income than would be possible with categories containing heterogeneous agglomerations of goods hamilton industries t c pincite footnote omitted the taxpayer in hamilton had elected the lifo_method and tried to include inventory purchased in two acquisitions in the same inventory_pool as inventory manufactured after the acquisition the tax_court postf-138399-09 determined that the purchased inventory could be placed in the same pool as the later manufactured inventory but despite the taxpayer’s arguments could not be treated as the same item for lifo purposes because the values of the purchased inventory were too disparate from the costs of the manufactured inventory furthermore the taxpayer could identify the inventory in question and track it at the time of purchase id pincite a appropriate criteria for determining item definitions analysis if the inflation in taxpayer’s lifo inventory is to be correctly and consistently measured taxpayer must properly define each item of wine in its inventory and the change in cost of its various wines must be identified and measured at the item level the manner in which a winery should define items for lifo purposes so that this goal is met is factually dependent and the resulting item definitions may vary depending on the particular facts and circumstances of each winery recognizing that not all criteria may be applicable to a particular winery we believe that the factors noted below should be considered in defining an inventory_item for a winery with regard to bulk wine bottled wine and cased goods bulk wine item definition criteria a winery should consider the following criteria when dividing the bulk wines that it produces into lifo inventory_items type of wine eg varietal appellation or blend source of grapes eg purchased or grown process recipe or formula used or the program followed to make the wine length of time the wine has been in production or aging at the end of the tax_year from the time the grapes are harvested eg months months months and bottled wine and cased goods item definition criteria a winery should consider the following criteria when dividing bottled wines and cased goods into lifo inventory_items type of wine eg varietal appellation or blend source of grapes e g purchased or grown postf-138399-09 process recipe or formula used or the program followed to make the wine if the wine if aged in the bottle the length of time the bottled wine has been aging when bottled type and size of container if a significant cost difference exists between types or sizes of containers and length of time the wine has been stored after bottling aside from these criteria additional factors may be applicable to defining an item of wine the application of additional factors will depend on the facts and circumstances related to a particular winery as to type of wine each varietal appellation and blend should be defined as a separate item for this purpose a blend generally is a wine made from mixing together two or more wines or varietals the term appellation refers to a defined viticultural growing region whereby specific grape varietals are grown harvested and made into wine regarding source of grapes wines made with purchased grapes and wines made with estate-grown grapes should generally be treated as separate items due to their cost differences however where a taxpayer purchases grapes if and only to the extent there is a shortfall in the yield from its vineyard due to weather insects diseases or other similar causes the taxpayer need not under such circumstances separate wines into separate items on the basis that some of the grapes used to make wine otherwise made with estate grapes were purchased for purposes of defining an item of wine the terms process recipe formula and program mean a set of directions techniques or procedures regularly followed as well as a set of ingredients regularly used to produce a distinct product ie wine with specific taste quality or grade cost and price point for example if the taxpayer uses different quality grapes of the same varietal to produce a high quality wine and a medium quality wine the two wines should be treated as separate items on the other hand if the taxpayer uses the same quality grapes and some of the resulting wine has a higher quality than or will be marketed as a different wine from the remainder of the wine produced using these grapes the taxpayer will not treat this wine as two items based solely on the process recipe formula or program criteria as to length of time wine has been aging or in production wines with different ages or at different stages of production such as the current year’s production one-year bulk wine and two-year bulk wine etc should be separate items this is because treating wines that are at different stages of production as the same item would not create an accurate measure of inflation or result in a correct lifo_index for example two-year bulk wine would have more production and storage costs applied to it than the current year’s production or than one-year bulk wine therefore if two-year bulk wine and one-year bulk wine were treated as the same item for purposes of computing a lifo_index the lifo_index would be distorted as a result of the artificial inflation created by the two- year bulk wine’s additional costs postf-138399-09 b application of criteria to taxpayer bulk wine item definitions taxpayer properly applies the above criteria to bulk wine as follows taxpayer properly defines its bulk wine by varietal taxpayer does not need to distinguish its bulk wine by appellation because taxpayer only uses grapes grown within the same appellation taxpayer properly defines bulk wine by source of grapes taxpayer primarily uses estate-grown grapes taxpayer uses purchased grapes only if and to the extent there is a shortfall in the yield of grapes from its vineyard due to weather insects diseases or other similar causes therefore taxpayer does not need to distinguish wine on the basis of the use of purchased grapes versus estate-grown grapes taxpayer properly defines bulk wine by process recipe or formula used taxpayer also properly defines bulk wine by quality once taxpayer‘s varietal is determined to be of sufficient quality to be bottled as a reserve wine this higher- quality bulk wine becomes a separate item taxpayer properly defines its bulk wine by the stage of production or length of time the bulk wine has been aging or in production bottled wine and cased goods item definitions taxpayer properly applies the above criteria to bottled wine as follows taxpayer properly defines its bottled wine by varietal taxpayer does not need to distinguish its bottled wine by appellation because taxpayer only uses grapes grown within the same appellation taxpayer properly defines bottled wine by source of grapes taxpayer primarily uses estate-grown grapes taxpayer uses purchased grapes only if and to the extent there is a shortfall in the yield of grapes from its vineyard due to weather insects diseases or other similar causes therefore taxpayer does not need to distinguish wine on the basis of the use of purchased grapes versus and estate-grown grapes taxpayer properly defines bottled wine by process recipe or formula used taxpayer also properly defines bottled wine by quality once taxpayer’s varietal is determined to be of sufficient quality to be bottled as a reserve wine this higher- quality bulk wine becomes a separate item postf-138399-09 taxpayer properly defines bottled wine by length of time it has been aged and stored taxpayer properly defines bottled wine by the type and size of container used taxpayer treats as separate items wine bottled in ml containers and l containers based on the facts presented taxpayer does not consider goods that do not have similar characteristics as the same item rather taxpayer defines items of wine in a manner that allows for an accurate measure of inflation taxpayer appropriately subdivides bulk wine and bottled wine into inventory_items based on factors such as varietal quality length of time of aging and other criteria noted therefore taxpayer properly defines items within its dollar-value lifo_pool for purposes of computing the lifo price index of the pool in accordance with sec_472 and the regulations thereunder 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