internal_revenue_service number release date index number -------------- ------------------------------------------ ------------------------------ -------------------------------- --------------------------------------------------- ---- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc psi plr-133822-04 date december ------------- -------------- ------------------------ this responds to a letter dated date together with subsequent legend llc --------------------------------------------------- d1 state dear -------------------- correspondence submitted on behalf of llc requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election to treat llc as an association_taxable_as_a_corporation for federal tax purposes facts llc relied on its accountant to provide llc with tax_advice llc’s accountant inadvertently failed to inform llc of the advisability of making an election to be treated as an association_taxable_as_a_corporation effective d1 consequently llc did not file form_8832 entity classification election to be classified as an association_taxable_as_a_corporation for federal tax purposes law and analysis according to the information submitted llc was formed on d1 under state law plr-133822-04 sec_301_7701-3 provides guidance on the classification of a domestic eligible_entity for federal tax purposes generally a domestic eligible_entity will be a partnership if it has two or more members unless it elects otherwise a domestic eligible_entity with one owner will generally be disregarded as an entity separate from its owner unless it elects otherwise sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under ' b by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides that an election made under ' c i will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term aregulatory election as an election whose deadline is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interest of the government conclusion based on the information submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result llc is granted an extension of time of sixty days following the date of this letter to file form_8832 and elect to be classified as an association_taxable_as_a_corporation for federal tax purposes effective d1 a copy of this letter should be attached to the form_8832 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 plr-133822-04 this ruling is directed only to the taxpayer requesting it sec_6110 of the internal_revenue_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 sincerely heather c maloy associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes original form_8832


department of the treasury internal_revenue_service washington d c u u tax_exempt_and_government_entities_division uics sep se te prat3 legend taxpayer a individual b individual c plan x company w date date date date date state f sum eo this is in response to the correspondence submitted by your authorized representative as supplemented by correspondence dated which you through your authorized representative request a series of letter rulings under sec_401 and sec_402 of the internal_revenue_code code the following facts and representations support your ruling_request in taxpayer a whose date of birth was date died on date a resident of state f without having attained age at his death taxpayer a was a participant in plan x a defined benefit pension_plan which your authorized representative page asserts was is qualified within the meaning of code sec_401 attached to your ruling_request was a favorable determination_letter relating to plan x dated date at his death the value of taxpayer a’s interest in plan x approximated sum section dollar_figure of plan x in relevant part defines beneficiary as the recipient designated by the participant to receive the plan benefits payable upon the participant’s death sec_1 a of plan x provides in relevant part that in the absence of a written beneficiary designation form the participant will be deemed to have designated the following beneficiaries in the following order b the participant’s issue per stirpes the documentation which accompanied your ruling_request includes a beneficiary designation signed by taxpayer a relating to-his interest in plan x in which he named individual b and individual c as equal beneficiaries of his interest in plan x individual b is taxpayer a’s son and individual c is taxpayer a’s daughter individual b’s date of birth was date and individual c’s date of birth was date thus individual c is older than individual b taxpayer a was not married at his date of death the provisions of plan x indicate in relevant part that distributions to the beneficiary of a plan participant may be made by the purchase of an annuity as long as payments under any purchased annuity are not made over a period extending beyond any period permissible under code sec_401 the trustee of plan x intends to purchase one individual nontransferable variable_annuity contract that your authorized representative asserts will satisfy the requirements of sec_401 of the internal_revenue_code with all or a part of the portion of the benefits standing to taxpayer a’s credit under plan x that are payable to individual c her including pro_rata investment gains losses if any said purchase will occur no later than date the annuity_contract will be issued with the trustee of plan x listed as the owner and individual c listed as the annuitant thereof as a result the annuity_contract will be originally owned by the trustee of plan x said annuity_contract will subsequently be distributed by the plan x trustee to individual c said annuity_contract will provide for installment distributions over a period certain that will not exceed the life expectancy of individual c beginning not later than the end of calendar_year your authorized representative has asserted on your behalf that the term nontransferable variable_annuity contract means a contract issued by an insurance_company that promises to make distributions based upon the investment performance of page the underlying segregated_asset accounts in which the annuity funds are invested the segregated_asset accounts are generally mutual funds that are controlled by the insurance_company issuing the annuity_contract and that are valued at their net asset value on a daily basis the calculation of the code sec_401 minimum_required_distribution with respect to a calendar_year from such a contract will be determined with reference to the net asset value of the various segregated_asset accounts in which the annuity funds are invested as of december of the previous calendar_year an owner ofa variable_annuity contract has unlimited discretion to transfer annuity funds between and among the various segregated_asset accounts the annuity_contract will provide that if the annuitant were to die prior to receiving all of the distributions due under the contract installment distributions may continue to be made to the individual or entity properly named to receive subsequent annuity distributions however said individual or entity will receive annuity distributions over a period certain not extending beyond the remaining unexpired unrecalculated life expectancy of individual c the variable_annuity contract referenced above will contain an endorsement that will provide that once the annuity_contract has been distributed from plan x to the beneficiary no portion of the owner’s interest in the contract may be transferred or assigned furthermore the annuity_contract will provide that it may not be sold discounted or pledged as collateral for a loan or be security for the performance of an obligation based on the above facts and representations you through your authorized representative request the following letter rulings that the purchase by the trustee of the trust associated with plan x of one individual nontransferable variable_annuity contract issued with the trustee as owner and with individual c as annuitant with all or a portion of the of taxpayer a’s interest in plan x payable to individual c will not result in a taxable_distribution to individual c that the distribution of the individual nontransferable variable_annuity contract referenced in the first letter_ruling request from the trustee of plan x to individual c shall not result in a taxable_distribution to individual c that individual c may be treated as the designated_beneficiary as that term is used for purposes of code sec_401 of her interest in taxpayer a’s benefit under plan x page that with respect to calendar years beginning with calendar_year code sec_401 required distributions with respect to individual c’ sec_50 percent interest in taxpayer a’s interest under plan x may be made by means of distributions from the individual nontransferable variable_annuity referenced above to individual c over the non recalculated life expectancy of individual c commencing no later than date with respect to calendar_year individual c’s life expectancy i sec_55 years based on the single life table found in sec_1_401_a_9_-1 of the final income_tax regulations question and answer-1 and that the service’s responses to the third and fourth ruling requests above are contingent upon plan x’s trustee purchasing the annuity_contract referenced herein no later than date with respect to your ruling requests sec_401 of the internal_revenue_code provides certain requirements applicable to qualified_retirement_plans code sec_402 provides the rules governing the taxation of distributions received from the tax-qualified trust associated with a plan qualified within the meaning of code sec_401 a code sec_402 provides in general that amounts distributed from the trust associated with a code sec_401 qualified_plan which trust is exempt from tax pursuant to code sec_501 shall be taxed to the distributee in the taxable_year of the distributee in which distributed in accordance with the rules of code sec_72 sec_1_402_a_-1 of the income_tax regulations provides in relevant part that if the trust associated with a code sec_401 qualified_plan distributes a transferable annuity_contract to an employee the entire cash_surrender_value of the annuity_contract is includible in the gross_income of the employee unless the contract is made non- transferable within days of distribution code sec_401 provides in relevant part that for purposes of code sec_402 the term annuity does not include any contract or certificate issued after date which is transferable if any person other than the trustee of a_trust described in code sec_401 which is exempt from tax under code sec_501 is the owner of such contract or certificate code sec_401 in general sets down the rules governing minimum required distributions from retirement plans qualified within the meaning of code sec_401 code sec_401 provides in short that distributions to a qualified_plan participant must begin no later than april of the calendar_year following the later of- the calendar_year in which the employee attains age or ii the calendar_year in page which the employee retires subclause ii of clause i does not apply to a 5-percent_owner as that term is defined in code sec_416 code sec_401 provides that with respect to an employee plan participant who dies prior to his required_beginning_date as that term is defined in code sec_401 distributions of that employee’s entire_interest under a plan must be made within years of the employee’s death code sec_401 provides an exception to the 5-year rule above with respect to distributions made to or for the benefit of a designated_beneficiary as long as said distributions begin not later than year after the death of the employee and as long as said distributions are made over the life of the beneficiary or over a period not extending beyond the life expectancy of such beneficiary final and temporary income_tax regulations under sec_401 and sec_408 were published in the federal_register pincite federal_register date final regulations also see 2002_19_irb_852 date the preamble to the final regulations provides in relevant part that the regulations apply for purposes of determining required minimum distributions for calendar years beginning on or after date in addition the final regulations have been modified in part see 2004_26_irb_1082 date the modification to the final regulations may also be relied upon with respect to required distributions for the and subsequent calendar years sec_1_401_a_9_-3 of the final regulations question and answer-3 provides in relevant part that in order to satisfy the exception in code sec_401 to the 5-year rule_of code sec_401 with respect to a non- spouse beneficiary distributions must begin no later than the end of the calendar_year immediately following the calendar_year of the employee’s death sec_1_401_a_9_-4 of the final regulations q a-4 a provides that an individual must be a beneficiary as of the date of death of a plan participant in order to be treated as a designated_beneficiary furthermore in general a plan participant’s designated_beneficiary will be determined based on the beneficiaries designated as of the date of death who remain beneficiaries as of september of the calendar_year following the calendar_year of the employee’s death sec_1_401_a_9_-4 of the final regulations q a-4 c provides in general that for purposes of this a-4 an individual who is a beneficiary as of a plan participant’s death but who dies prior to september of the calendar_year following the calendar_year page of the plan participant’s death is still to be treated as the designated_beneficiary for purposes of computing minimum required distributions after the employee’s plan participant’s death the preamble to the final regulations provides in relevant part that the final regulations clarify that if a designated_beneficiary dies during the period between the employee’s date of death and september of the year following the year of the employee’s death the individual continues to be treated as the designated_beneficiary for purposes of determining the distribution period rather than the successor beneficiary sec_1_401_a_9_-5 of the final regulations q a-5 b provides in general that if an employee dies prior to his required_beginning_date having designated a beneficiary in order to satisfy the requirements of code sec_401 the applicable distribution period for distribution calendar years after the distribution calendar_year containing the employee’s date of death is the remaining life expectancy of the employee’s designated_beneficiary determined in accordance with either paragraph c or paragraph c of this a-s sec_1_401_a_9_-5 of the final regulations q a-5 c provides in general that with respect to a non-spouse beneficiary the applicable distribution period measured by the beneficiary’s remaining life expectancy is determined using the beneficiary’s age as of the beneficiary’s birthday in the calendar_year immediately following the calendar_year of the employee’s death applicable distribution period is reduced by one for each calendar_year that has elapsed after the calendar_year immediately following the calendar_year of death in subsequent calendar years the sec_1_401_a_9_-4 of the final regulations q a-3 provides that only individuals may be designated beneficiaries for purposes of sec_401 a person who is not an individual such as the employee's estate may not be a designated_beneficiary sec_1_401_a_9_-8 of the final regulations qs as-2 and provide the rules that apply if the benefit attributable to a deceased qualified_plan participant is divided into separate_accounts for purposes of code sec_401 sec_1_401_a_9_-8 of the final regulations q a-2 a provides that if an employee’s benefit in a defined_contribution_plan is divided into separate_accounts and the beneficiaries with respect to one separate_account differ from the beneficiaries with respect to the other separate_accounts of the employee under the plan for years subsequent to the calendar_year containing the date as of which the separate_accounts were established or date of death if later such separate_account under the plan is not aggregated with the other separate_accounts under the plan in order to determine whether page the distributions from such separate_account under the plan satisfy sec_401 however the applicable distribution period for each such separate_account is determined disregarding the other beneficiaries only if the separate_account is established on a date no later than the last day of the year following the calendar_year of the employee’s death sec_1_401_a_9_-8 of the final regulations q a-3 defines separate_accounts for purposes of code sec_401 as separate portions of an employee’s benefit reflecting the separate interests of the employee’s beneficiaries under the plan as of the date of the employee’s death for which separate_accounting is maintained the separate_accounting must allocate all post-death investments gains and losses contributions and forfeitures for the period prior to the establishment of the separate_accounts on a pro_rata basis in a reasonable and consistent manner among the separate_accounts sec_1_401_a_9_-8 of the final regulations q a-2 b provides that the rules of paragraph a and of this a-2 also apply to benefits under a defined_benefit_plan where the benefits under the plan are separated into separate identifiable components which are separately distributed sec_1_401_a_9_-9 of the final regulations q a-1 sets forth the single life table used to compute the life expectancy of an individual revised proposed income_tax regulations were published in the internal_revenue_bulletin pincite_11_irb_865 date revised proposed_regulations the preamble to the revised proposed_regulations provides in relevant - part that the revised proposed_regulations were proposed to be effective for distributions for calendar years beginning on or after date sec_1_401_a_9_-6 of the revised proposed_regulations q a-1 c provides in relevant part that distributions under a variable_annuity will not be found to - be increasing and thus potentially in violation of the required_distribution rules because the amount of the payments varies with the investment performance of the underlying assets sec_1_401_a_9_-6t of the temporary income_tax regulations published pincite federal_register date temporary regulations provided rules governing required minimum distributions for defined benefit plans and annuity_contracts said temporary regulations have been finalized effective date for purposes of determining required minimum distributions for calendar years beginning on or after date see lr b date page the preamble to the final and temporary regulations provides in relevant part that the temporary regulations do not permit annuity payments that vary with the value of the underlying assets of the plan to be provided by a defined_benefit_plan with a sec_401 qualified_trust however the temporary regulations do not preclude such payments being made under an annuity_contract purchased from an insurance_contract with an employee’s benefit under a plan thus annuity_contracts that comply with the language of q a-1 c of the revised proposed_regulations above purchased from an insurance_company will satisfy the requirements of code sec_401 as long as the contract also meets the requirements of sec_1_401_a_9_-6 of the temporary regulations sec_1_401_a_9_-6 of the final income_tax regulations q a-1 a provides in relevant part that in order to satisfy sec_401 except as provided in this section distributions under a defined_benefit_plan must be paid in the form of periodic annuity payments for the employee’s life or the joint lives of the employee and beneficiary or over a period certain that does not exceed the maximum length of the period certain determined in accordance with a-3 of this section q a-1 a further provides that except as otherwise provided in this section such as permitted increases described in a-14 of this section all payments life joint lives or period certain also must be nonincreasing sec_1_401_a_9_-6 of the final regulations q a-4 provides in general that distributions may be made from an annuity_contract which is purchased with an employee’s benefit by the plan from an insurance_company and which makes payments that satisfy the provisions of this section -6 which provides the rules governing required annuity distributions from defined benefit plans q a-4 further provides that if the payments actually made under the annuity_contract do not meet the requirements of sec_401 the plan fails to satisfy sec_401 q a-4 refers to a-14 for the rules governing permitted increases under annuity_contracts sec_1_401_a_9_-6 of the final income_tax regulations q a-13 provides that an annuity_payment may be changed in accordance with the provisions set forth in paragraph b of this a-13 or in association with an annuity_payment increase described in a-14 of this section sec_1_401_a_9_-6 of the final income_tax regulations a-13 b in conjunction with a-13 c provides rules that determine when changing annuity_payment periods and modifying amounts of annuity payments will not result in violations of the required_distribution rules of code sec_401 sec_1_401_a_9_-6 of the final income_tax regulations q a-14 a provides that except as otherwise provided in this section all annuity payments whether page vot5u28 paid over an employee’s life joint lives or a period certain must be nonincreasing or increase only in accordance with one or more of the following with an annual percentage increase that does not exceed the annual percentage increase in a cost-of-living index that as defined in paragraph b of this a-14 for a 12-month_period ending in the year during which the increase occurs or in a prior year with a percentage increase that occurs at specified times and does not exceed the cumulative total of annual percentage increases in an eligible cost-of- living index as defined in paragraph b of this a-14 since the annuity_starting_date or if later the date of the most recent percentage increase to the extent of the reduction in the amount of the employee’s payments to provide for a survivor’s benefit but only if there is no longer a survivor benefit because the beneficiary whose life was being used to determine the period described in sec_401 a ii over which payments were being made either dies or is no longer the employee’s beneficiary pursuant to a qualified_domestic_relations_order within the meaning of sec_414 to pay increased benefits that result from a plan amendment to allow a beneficiary to convert the survivor portion of a joint_and_survivor_annuity into a single sum distribution upon the employee’s death or to the extent increases are permitted in accordance with paragraph c or d of this a-14 sec_1_401_a_9_-6 of the final income_tax regulations q a-14 c provides with respect to annuity payments made from contracts purchased from insurance_companies that in the case of annuity payments paid from such annuity_contract if the total future expected payments determined in accordance with paragraph e of a-14 exceed the total value being annuitized within the meaning of paragraph e of a-14 the payments under the annuity will not fail to satisfy the nonincreasing payment of a-1 a of this section merely because the payments are increased in accordance with one or more of the following- by a constant percentage applied not less frequently than annually to provide a final payment upon the death of the employee that does not exceed the excess of the total value being annuitized within the meaning of page paragraph e of a-14 over the total of payments before the death of the employee as a result of dividend payments or other_payments that result from actuarial gains within the meaning of paragraph e of a-14 but only if the actuarial gain is measured no less frequently than annually and the resulting dividend or other_payments are either paid no later than the year following the year for which the actuarial experience is measured or paid in the same form as the payment of the annuity over the remaining period of the annuity beginning no later than the year following the year for which the actuarial experience is measured and an acceleration of payments under the annuity within the meaning of paragraph e of a-14 sec_1_401_a_9_-6 of the final regulations q a-14 e provides that actuarial gain means the difference between an amount determined using the actuarial assumptions ie investment return mortality expense and other similar assumptions used to calculate the initial payments before adjustment for any increases and the amount determined under the actual experience with respect to those factors the preamble to sec_1_401_a_9_-6 of the final regulations provides in the final regulations retain the rules in the temporary regulations relevant part that allowing an annuity purchased from an insurance_company with an employee’s account balance under a defined_contribution_plan to provide for variable and increasing payments and clarify that these rules apply to an annuity_contract purchased from an insurance_company by a qualified_trust for a defined_benefit_plan for an annuity_contract purchased from an insurance_company these final regulations retain the rule that the total expected future payments disregarding any payment increases as of the annuity_starting_date must exceed the premium being annuitized with respect to your ruling requests taxpayer a a participant in plan x died on date the facts surrounding this ruling_request indicate that a portion or all of the amount standing to taxpayer a’s benefit under plan x payable to individual c her one of two equal beneficiaries of taxpayer a will be distributed by means of a purchase of a nontransferable variable_annuity contract as described above which contract will provide for payments to the appropriate beneficiary or beneficiaries said purchase will occur no later than date with further reference to your ruling requests the nontransferable variable_annuity contract will provide for installment payments made over a period certain not page exceeding the life expectancy of individual c individual c who was taxpayer a’s daughter will be the beneficiary and annuitant of the annuity_contract to be purchased as noted previously pursuant to taxpayer a’s beneficiary designation and consistent with relevant provisions of plan x individual c is a beneficiary of taxpayer a’s interest in plan x no later than date an annuity_contract will be purchased by the trustee of plan x to benefit individual c one of taxpayer a’s beneficiaries and the named annuitant of the annuity_contract individual b will not be an annuitant of the contract or a named beneficiary thereof thus no later than date individual b will have no right to receive any portion of the of taxpayer a’s plan x benefit designated to be paid to individual c initially we note that based on the facts and representations provided above the nontransferable variable_annuity contract described herein will comply with the requirements of code sec_401 and sec_1_401_a_9_-6 of the final regulations thus consistent with sec_1_401_a_9_-8 of the final regulations qs as-2 and individual c may be treated as the designated_beneficiary of the of taxpayer a’s benefit payable to her in accordance with taxpayer a’s beneficiary designation without regard to individual b furthermore installment payments under the annuity_contract referenced herein may be paid over individual c’s non-recalculated life expectancy beginning no later than date thus with respect to your ruling requests we have reached the following conclusions that the purchase by the trustee of the trust associated with plan x of one individual nontransferable variable_annuity contract issued with the trustee as owner and with individual c as annuitant with all or a portion of the of taxpayer a’s interest in plan x payable to individual c will not result in a taxable_distribution to individual c that the distribution of the individual nontransferable variable_annuity contract referenced in the first letter_ruling request from the trustee of plan x to individual c will not result in a taxable_distribution to individual c that individual c may be treated as the designated_beneficiary as that term is used for purposes of code sec_401 of her interest in taxpayer a’s benefit under plan x page that with respect to calendar years beginning with calendar_year code sec_401 required distributions with respect to individual c’ sec_50 percent interest in taxpayer a’s interest under plan x may be made by means of distributions from the individual nontransferable variable_annuity referenced above to individual c over the non recalculated life expectancy of individual c commencing no later than date with respect to calendar_year individual c’s life expectancy i sec_55 years based on the single life table found in sec_1_401_a_9_-1 of the final income_tax regulations question and answer-1 and _ that the service’s responses to the third and fourth ruling requests above are contingent upon plan x’s trustee purchasing the annuity_contract referenced herein no later than date this ruling letter assumes that plan x is as represented qualified within the meaning of code sec_401 and will remain so qualified at all times relevant thereto additionally it assumes the correctness of all facts and representations contained therein this letter is directed only to the taxpayer that requested it and is based solely on the represéntations made with respect thereto sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with the service a copy of this letter_ruling is being sent to your authorized representative page any questions regarding squire fax this letter a should be addressed t iii hone-not a toll-free number or sincerely yours frances v sloan manager employee_plans technical group enclosures ‘deleted copy of ruling letter notice of intention to disclose


t c summary opinion united_states tax_court helen hubbard petitioner v commissioner of internal revenue respondent docket no 10128-01s filed date helen hubbard pro_se anita a gill for respondent dean special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure - - the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax for the issues for decision are whether petitioner is entitled to deductions for dependency_exemptions whether petitioner is entitled to head_of_household filing_status ’ and whether petitioner is entitled to an earned_income_credit some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by reference at the time the petition was filed petitioner resided in east cleveland ohio in petitioner lived alone at her home in east cleveland petitioner’s grandmother rebecca willis lived ina nursing home from until she died in date while ms willis lived in the nursing home she received social_security_benefits petitioner’s daughter vidah a saeed lived with her five children petitioner's grandchildren in her own home and paid her own bills ms saeed received social_security_benefits and child-support payments from her children’s father petitioner claimed dependency_exemption deductions for her grandmother daughter and two of her grandchildren akilah and ' our resolution of the issue of petitioner's filing_status will determine the correct computation of her standard_deduction for the year at issue zakihhah saeed respondent issued a notice_of_deficiency determining that petitioner was not entitled to deductions for dependency_exemptions head_of_household filing_status and earned_income_credit because she failed to provide substantiation for her claims the first issue we address is whether petitioner is entitled to deductions for dependency_exemptions deductions are strictly a matter of legislative grace and taxpayers must satisfy the specific requirements for any deduction claimed see 503_us_79 292_us_435 taxpayers are required to maintain records sufficient to substantiate their claimed deductions see sec_6001 sec_1_6001-1 income_tax regs taxpayers generally bear the burden of proving that the commissioner’s determination is incorrect rule a 290_us_111 under sec_7491 a however the burden_of_proof shifts to the commissioner if among other reguirements the taxpayer introduces credible_evidence with respect to any factual issue relevant to ascertaining his tax_liability we find that the burden_of_proof does not shift to respondent because petitioner has failed to comply with the requirements of sec_7491 a q4e- sec_151 allows a taxpayer to claim an exemption deduction for each qualifying dependent as defined in sec_152 as relevant here sec_152 defines a dependent to mean a taxpayer's daughter grandchildren or grandparent who received or is treated under sec_152 as having received over half of his or her support from the taxpayer to qualify for a dependency_exemption deduction a taxpayer must establish the total support cost expended on behalf of a claimed dependent from all sources for the year and demonstrate that she provided over half of this amount see 73_tc_963 56_tc_512 sec_1_152-1 income_tax regs petitioner argues that her grandmother and daughter meet the relationship gross_income and support tests provided in the internal_revenue_code and in the rules as set forth in cat no 12086y and chapter_3 of personal exemptions and dependents her position is that her relatives do not need to live with her to qualify for the deduction petitioner testified that her grandmother’s only outside source_of_income was social_security specifically petitioner argues that her grandmother qualifies as a dependent because she lived with petitioner under the temporary absence explanation provided in chapter_3 page we need not evaluate the merits of petitioner’s argument because she failed to show the total - - support cost expended for her grandmother in and failed to establish that she provided over half of that amount petitioner also claims that she gave her daughter money while her daughter was ill petitioner however concedes that her daughter received social_security_benefits and child-support payments petitioner failed to substantiate the total amount expended on behalf of her daughter for support during and that she provided over half of that amount respondent argues that petitioner failed to substantiate her claims with records receipts or any other evidence of expenditures petitioner has offered no evidence of the total support furnished for her grandmother or daughter and has provided no evidence of her own contributions of support the court cannot conclude that petitioner provided more than one-half of either of their support the court thus holds that petitioner is not entitled to the dependency_exemption deductions for her grandmother and daughter sec_152 support_test in case of divorced parents etc provides a special rule for children of separated parents sec_152 provides that if the child receives over half of his support from his parents and he is in the custody of one or both of his parents for more than half of the year then the child is treated as receiving over half of his support from the custodial_parent because ms saeed and her children’s father - - lived apart at all times during the last months of the calendar_year and she had custody of the children she is the custodial_parent sec_152 petitioner has not shown that her grandchildren did not receive over half of their support from their parents in the present case because ms saeed is the custodial_parent she is treated as providing over half the support of her children for purposes of sec_152 accordingly petitioner is not entitled to deductions for dependency_exemptions for her grandchildren for sec_152 sec_1 imposes a special tax_rate on individuals filing as heads of households head_of_household is defined to include an unmarried individual whose household is maintained as the principal_place_of_abode for specific family members if petitioner provided over half the cost of maintaining as her home a household that for more than one-half of the year was the principal_place_of_abode for her daughter or a grandchild or for any other person who qualifies as her dependent under sec_151 she meets the head_of_household definition in sec_2 a petitioner has not demonstrated that she maintained such a household because petitioner is not entitled to a deduction for her grandmother under sec_151 her grandmother does not serve to qualify her for head_of_household filing_status see sec_2 a sec_1_2-2 income_tax regs in addition we find that petitioner did not provide over half the cost of maintaining a principal_place_of_abode for more than one-half of for her daughter or grandchildren see sec_2 a sec_1_2-2 c and d income_tax regs the court thus holds that petitioner is not entitled to head_of_household filing_status sec_32 allows an eligible_individual an earned_income_credit against the individual’s income_tax_liability sec_32 and b limits the credit allowed based on whether the eligible_individual has no qualifying children one qualifying_child or two or more qualifying children to be eligible to claim an earned_income_credit with respect to a qualifying_child a taxpayer must establish the child bears the relationship to the taxpayer prescribed by sec_32 b the child meets the age requirements of sec_32 c and the child shares the same principal_place_of_abode as the taxpayer for more than one-half of the taxable_year as prescribed by sec_32 a because petitioner has not established that any of her grandchildren shared her principal_place_of_abode for more than one-half of the year at issue she has no qualifying children for purposes of the earned_income_credit - - petitioner also is not eligible for the earned_income_credit as an individual with no qualifying children under sec_32 a because her adjusted_gross_income in was in excess of the complete phaseout amount prescribed by sec_32 the earned_income_credit is completely phased out for individuals with no qualifying children and adjusted_gross_income in excess of dollar_figure for see sec_32 and b see also revproc_98_61 1998_2_cb_814 petitioner had adjusted_gross_income of dollar_figure in the court holds therefore that petitioner is not entitled to an earned_income_credit reviewed and adopted as the report of the small_tax_case division to reflect the foregoing decision will be entered for respondent


tcmemo_2009_176 united_states tax_court rob and shirley tyson petitioners v commissioner of internal revenue respondent rs tyson and associates inc petitioner v commissioner of internal revenue respondent docket nos filed date kathryn e barnhill for petitioners catherine s tyson for respondent memorandum findings_of_fact and opinion vasquez judge in these consolidated cases respondent determined the following deficiencies in and penalties on petitioners’ federal income taxes rob and shirley tyson docket no deficiency dollar_figure penalty sec_6662 dollar_figure rs tyson associates inc docket no deficiency dollar_figure penalty sec_6662 dollar_figure pursuant to a joint motion these cases have been consolidated for trial briefing and opinion the following issues remain for decision regarding whether rs tyson associates inc rs tyson is entitled to deductions claimed for alleged business_expenses whether rob and shirley tyson mr and mrs tyson are entitled to deductions claimed for alleged expenses on schedule e supplemental income and loss whether mr and mrs tyson received constructive dividends from rs tyson and whether petitioners are liable for accuracy-related_penalties pursuant to sec_6662 mr and mrs tyson deducted on schedule e supplemental income and loss interest of dollar_figure and depreciation of dollar_figure for in their brief they did not file a reply brief they failed to address the disallowance of those deductions accordingly we conclude that they have abandoned these issues see 92_tc_661 all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts the supplemental stipulation of facts and the attached exhibits are incorporated herein by this reference at the time they filed the petitions mr and mrs tyson resided in oklahoma and rs tyson had its principal_place_of_business in oklahoma i rs tyson during rs tyson a c_corporation had two business activities tyson painting and a shaklee distributorship mr and mrs tyson each owned percent of the outstanding shares of rs tyson mrs tyson sold shaklee products on behalf of rs tyson mr and mrs tyson were not employees of rs tyson mr and mrs tyson reported dollar_figure of wages and salaries from southern hills baptist church on their return they reported no other wages or salaries on that return rs tyson did not report see chaney v commissioner tcmemo_2009_55 shaklee distributors sell nutritional and cleaning products from shaklee corp respondent concedes that mrs tyson conducted an active trade_or_business as a distributor of shaklee products it is unclear from the record whether mr and mrs tyson were independent contractors of rs tyson or worked for rs tyson in some other capacity any compensation to officers or salaries or wages to any employees for rs tyson deducted the following expenses on its form_1120 u s_corporation income_tax return expense rent of mr and mrs tyson’s home lease of equipment employee benefit program laundry travel meals and entertainment automobile amount dollar_figure big_number big_number big_number big_number big_number big_number respondent disallowed these deductions a rent of mr and mrs tyson’s home and equipment_leasing expense on schedule e mr and mrs tyson reported dollar_figure of rents received from rs tyson they reported that the dollar_figure consisted of dollar_figure for_the_use_of mr and mrs tyson’s home for shaklee business purposes and dollar_figure for the lease of office and painting equipment rs tyson deducted as a business_expense alleged rent of dollar_figure paid to mr and mrs tyson to lease mr and mrs tyson’s office equipment and painting equipment the record is silent as to what specific equipment was leased rs tyson deducted as a business_expense alleged rent of dollar_figure paid to mr and mrs tyson to lease space in mr and mrs tyson’s home rs tyson allegedly rented space in mr and mrs tyson’s home for dollar_figure per month mr and mrs tyson arrived at this rental amount after estimating the number of hours per month rs tyson would need to rent meeting space hours per month and after taking into account the hourly rates of local establishments that rented meeting space rooms by the hour the local marriott hotel and other places that rented meeting space rooms were called and mr and mrs tyson learned that the rates these establishments received for rental of meeting space rooms were between dollar_figure and dollar_figure per hour mr and mrs tyson decided that rs tyson should rent meeting space in their home at a cost of dollar_figure per hour petitioners claimed that mr and mrs tyson’s living room was the meeting room the dining room was where training and makeovers took place the kitchen was where mrs tyson made shaklee shakes and the bathroom by the office also was used for makeovers the dining room was where mr and mrs tyson ate dinner in a notice_of_deficiency issued to rs tyson respondent disallowed the total deductions of dollar_figure in a notice_of_deficiency issued to mr and mrs tyson respondent determined that the schedule e listed did not exist during the tax_year ended date decreased rents received by dollar_figure and increased constructive dividends received by dollar_figure b employee benefit program rs tyson deducted dollar_figure as employee benefit program expenses mr and mrs tyson each signed a document entitled corporate resolution establishing self-insured medical payment plan which established the employee benefit program of rs tyson the plan provided that rs tyson would pay or reimburse directly or indirectly certain medical and dental expenses of its employees the employee benefit program was intended to qualify as one under which payments to employees are excludable from their gross_income under sec_105 under the employee benefit program the medical and dental expenses to be paid or reimbursed would be those for which the employee was not compensated by insurance or otherwise and which would be treated as medical_expenses under sec_213 the amount that would be paid or reimbursed was limited to dollar_figure per person per calendar_year the employee benefit program covered reimbursements for medical or medical-related insurance medical or medical-related services life_insurance disability insurance dental or dental-related services and chiropractic or chiropractic-related services during rs tyson paid the following amounts dollar_figure for term life_insurance for mr tyson dollar_figure for term life_insurance for mrs tyson and dollar_figure to christian care medi-share for affordable biblical healthcare for mr and mrs tyson during rs tyson made reimbursements as follows dollar_figure to mr tyson for medical_expenses and dollar_figure to mrs tyson for medical_expenses c laundry expenses rs tyson deducted dollar_figure as laundry expenses rs tyson deducted the cost of laundering the uniforms that mr tyson used for painting to substantiate this expense petitioners submitted receipts and payments for the purchase of mr tyson’s painting uniforms including the purchase of shirts boots and socks and one check for dollar_figure that contained alter paint pants in the memo section of the check d travel_expenses rs tyson deducted dollar_figure as travel_expenses rs tyson deducted the cost of a trip by mr and mrs tyson to disneyland and a personal trip for mr and mrs tyson to branson missouri mr and mrs tyson took their son daughter-in-law and grandson with them on the trip to disneyland e meals and entertainment_expenses rs tyson deducted dollar_figure as meals and entertainment_expenses rs tyson deducted the cost of meals to celebrate mr and mrs tyson’s daughter’s graduation and mrs tyson’s birthday additionally rs tyson deducted the cost of numerous meals that mr and mrs tyson had with their family rs tyson also deducted the cost of a small number of meals with shaklee business clients to substantiate the meals and entertainment expense deductions petitioners submitted photocopies of receipts from restaurants the receipts contained notations identifying the persons who consumed the meals and indicating that the purpose of the meals regarded shaklee business such as discussing various shaklee products shaklee business plans and strategy shaklee business volume or the layout of shaklee advertisements f automobile expenses rs tyson deducted dollar_figure as automobile expenses to substantiate this expense rs tyson submitted a spreadsheet listing car charge and insurance a document from shaklee entitled bonus statement that listed car program activity rs tyson’s bank statements photocopies of toll receipts a spreadsheet for gas repairs insurance and lease etc gas receipts many of which are illegible and copies of insurance payment schedules rs tyson kept track of only the personal_use mileage of the automobiles ii mr and mrs tyson for mr and mrs tyson deducted the following expenses on their schedule e expense amount legal and professional fees dollar_figure insurance repair sec_982 taxes utilities big_number respondent disallowed these deductions a legal and professional fees mr and mrs tyson deducted legal and professional fees of dollar_figure for the record does not contain any information about this deduction b insurance repairs taxes and utility expenses mr and mrs tyson deducted insurance expenses of dollar_figure repair expenses of dollar_figure taxes of dollar_figure and utility expenses of dollar_figure these expenses arose from the alleged rental arrangement for their home the record does not contain any further information about these deductions c constructive dividends automobile purchase in date rs tyson paid dollar_figure to reliable toyota the dollar_figure was a deposit on a vehicle purchased for mr and mrs tyson mr and mrs tyson got a loan for the balance of the cost of the vehicle opinion the commissioner’s determinations are generally presumed correct and the taxpayer bears the burden of proving the determinations erroneous rule a the taxpayer bears the burden of proving that he is entitled to the deduction claimed and this includes the burden of substantiation id 65_tc_87 affd per curiam 540_f2d_821 5th cir a taxpayer must substantiate amounts claimed as deductions by maintaining the records necessary to establish he or she is entitled to the deductions sec_6001 sec_162 provides a deduction for certain business_expenses in order to qualify for the deduction under sec_162 an item must be ‘paid or incurred during the taxable_year ’ be for ‘carrying on any trade_or_business ’ be an ‘expense ’ be a ‘necessary’ expense and be an ‘ordinary’ expense 403_us_345 see also 383_us_687 the term necessary imposes only the minimal requirement that the expense be ‘appropriate and helpful’ for ‘the development of the taxpayer’s business quoting 290_us_111 308_us_488 to qualify as ordinary the expense must relate to a transaction of common or frequent occurrence in the type of the business involved whether an expense is ordinary is determined by time place and circumstance welch v petitioners have not established that they satisfied the requirements of sec_7491 accordingly the burden_of_proof does not shift to respondent helvering supra pincite respondent has not challenged the existence of a trade_or_business if a taxpayer establishes that he or she paid_or_incurred a deductible business_expense but does not establish the amount of the expense we may approximate the amount of the allowable deduction bearing heavily against the taxpayer whose inexactitude is of his or her own making 39_f2d_540 2d cir however for the cohan_rule to apply there must be sufficient evidence in the record to provide a basis for the estimate 85_tc_731 certain expenses may not be estimated because of the strict substantiation requirements of sec_274 see sec_280f 50_tc_823 affd per curiam 412_f2d_201 2d cir rent of mr and mrs tyson’s home rs tyson deducted rental expenses for_the_use_of mr and mrs tyson’s home of dollar_figure for rs tyson claims that during it rented most of mr and mrs tyson’s home for shaklee business purposes supposedly mr and mrs tyson’s living room was the meeting room the dining room was where training and makeovers took place the kitchen was where mrs tyson made shaklee shakes and the bathroom by the office also in other words respondent concedes that both tyson painting and the shaklee distributorship were legitimate businesses carried on by rs tyson was used for makeovers the dining room was where mr and mrs tyson ate dinner a close relationship between a lessor and lessee requires a careful examination of the circumstances surrounding the arrangement to determine whether the payments are in fact for the rental of the property 84_tc_1 affd 791_f2d_781 9th cir there is a lack of proof of a bona_fide rental see chaney v commissioner tcmemo_2009_55 the amount claimed as rent was a guesstimate--both as to the cost and as to the amount of time rs tyson used the property the purported rental agreement has little reality beyond tax planning see id the purported rental was not at arm’s length and we disregard it for lack of economic_substance accordingly we sustain respondent’s determination on this issue employee benefit program rs tyson deducted employee benefit program expenses of dollar_figure for mr and mrs tyson each signed up for the employee benefit program offered by rs tyson the deductibility of employee_benefit_plan expenses generally requires proof in the first instance of an additionally mr and mrs tyson made personal_use of the alleged rented space furthermore we note that respondent reduced mr and mrs tyson’s rental income to zero in the notice_of_deficiency employer-employee relationship francis v commissioner tcmemo_2007_33 mr and mrs tyson reported dollar_figure of wages and salaries from southern hills baptist church on their return they reported no other wages or salaries on that return rs tyson did not report any compensation to officers or salaries or wages to any employees no evidence of an employment agreement was presented mr and mrs tyson were not employees of rs tyson see haeder v commissioner tcmemo_2001_7 accordingly we sustain respondent’s determination disallowing the employee_benefit_plan expense deduction laundry expenses rs tyson deducted laundry expenses of dollar_figure for this allegedly consisted of the cost of laundering the uniforms mr tyson painted in the evidence petitioners presented consisted of receipts and payments for the purchase of mr tyson’s painting uniforms including the purchase of shirts boots and socks petitioners also submitted one for dollar_figure with alter paint pants in the memo section of the check rs tyson must prove that the laundry expenses claimed for the year in issue were ordinary and necessary expenses sec_162 see deputy v du pont supra pincite deductibility under sec_162 is dependent upon the taxpayer’s establishing that an expense is normal usual or customary in the taxpayer’s trade_or_business see also sec_1_162-1 income_tax regs expenditures must be directly connected with or pertaining to the taxpayer’s trade_or_business in order to satisfy that burden in this instance rs tyson must establish that mr tyson was a bona_fide employee of rs tyson for the year in issue see haeder v commissioner supra see also 115_tc_43 neonatology contributed money to the neonatology plan for the benefit of mr mall mr mall was neither an employee of neonatology nor an individual who was eligible to participate in neonatology’s plan we conclude that these contributions served no business_purpose of neonatology and hence that they were not ordinary and necessary expenses paid to carry on neonatology’s business affd 299_f2d_221 3d cir love box co v commissioner tcmemo_1985_13 ‘before expenses will be considered ordinary and necessary under sec_162 it must be established that they bear a proximate and direct relationship to the taxpayer’s trade_or_business ’ quoting 51_tc_213 affd 418_f2d_91 7th cir affd 842_f2d_1213 10th cir mr tyson was not an employee of rs tyson accordingly these were not proper expenses of rs tyson and we sustain respondent’s determination disallowing the laundry expenses travel_expenses rs tyson deducted travel_expenses of dollar_figure for a deduction is allowed for ordinary and necessary traveling expenses while away from home in the pursuit of a trade_or_business sec_162 if a taxpayer travels to a destination at which he engages in both business and personal activities the traveling expenses to and from the destination are deductible only if the trip is related primarily to the taxpayer’s trade_or_business sec_1_162-2 income_tax regs if the trip is primarily personal the traveling expenses to and from the destination are not deductible id see also sec_262 in addition to satisfying the criteria for deductibility under sec_162 certain categories of expenses also must satisfy the strict substantiation requirements of sec_274 in order for a deduction to be allowed the expenses to which sec_274 applies include among other things travel_expenses including meals_and_lodging while away from home sec_274 we may not use the cohan doctrine to estimate expenses covered by sec_274 see sanford v commissioner t c pincite sec_1_274-5t temporary income_tax regs fed reg date to substantiate a deduction attributable to travel a taxpayer must maintain adequate_records or present corroborative evidence to show the following the amount of the expense the time and place of the travel the business_purpose of the expense and the business relationship to the taxpayer sec_274 flush language to meet the ‘adequate records’ requirements of sec_274 a taxpayer shall maintain an account book diary log statement of expense trip sheets or similar record and documentary_evidence sec_1_274-5t temporary income_tax regs fed reg date rs tyson deducted the cost of a family trip for mr and mrs tyson to disneyland and a personal trip for mr and mrs tyson to branson missouri as travel_expenses for traveling expenses to be deductible they must be in pursuit of the trade_or_business secs a income_tax regs sec_1_274-5t and c ii b temporary income_tax regs fed reg date provides that the taxpayer must record the business reason for the travel or the nature of the business benefit derived or expected to be derived on account of the travel unless the business_purpose is evident from the surrounding facts and circumstances rs tyson has not established how the cost of a family trip for mr and mrs tyson to disneyland and a personal trip for mr and mrs tyson to branson missouri were ordinary or necessary to its businesses furthermore rs tyson has failed to substantiate the claimed travel_expenses in accordance with sec_162 and sec_274 accordingly we sustain respondent’s determination on this issue meals and entertainment_expenses rs tyson deducted meals and entertainment_expenses of dollar_figure for sec_162 permits the deduction of food and beverage expenses if they are ordinary necessary and reasonable expenses_incurred by the taxpayer in its business no deduction is allowed with respect to personal living or family_expenses sec_262 in addition to satisfying the criteria for deductibility under sec_162 this category of expenses also must satisfy the strict substantiation requirements of sec_274 in order for a deduction to be allowed this includes establishing the business_purpose of the expenditure or use and the business relationship to the taxpayer of the persons entertained see sec_1_274-5t and b temporary income_tax regs fed reg date sec_274 further restricts the deduction of business food and beverage expenses an expenditure must be directly related to the conduct of the taxpayer’s trade_or_business or associated with the active_conduct of the taxpayer’s trade_or_business sec_274 an expenditure is considered associated with the active_conduct of the taxpayer’s trade_or_business if the taxpayer establishes that he had a clear business_purpose in making the expenditure such as to obtain new business or to encourage the continuation of an existing business relationship sec_1_274-2 income_tax regs in order to establish a substantial_and_bona_fide_business_discussion it must be shown that the taxpayer actively engaged in a business meeting negotiation discussion or other bona_fide business transaction other than entertainment for the purpose of obtaining income or other specific trade_or_business benefit sec_1_274-2 income_tax regs additionally it must be established that this business meeting negotiation discussion or transaction was substantial in relation to the entertainment id rs tyson deducted numerous meals mr and mrs tyson had with their family for example rs tyson deducted meals for mr and mrs tyson’s daughter’s graduation and mrs tyson’s birthday celebration rs tyson has not established how these expenditures were ordinary or necessary to its businesses additionally some of the receipts are redundant and many of the receipts are illegible other than mrs tyson’s notes and or re-creation of the amounts spent furthermore rs tyson has failed to substantiate the claimed meals and entertainment_expenses in accordance with sec_162 and sec_274 see sec_1_274-5t and v temporary income_tax regs fed reg date requiring proof of the name title or other designation of the persons entertained sufficient to establish the business relationship to the taxpayer after eliminating the aforementioned nondeductible food and beverage expenses claimed by rs tyson a few legible receipts remain these are date amount client s dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure total dollar_figure claude and janet west charles amos kathy huffman jeanette carter dan cramer sandy brown charles amos charles amos karen anderson jeanette and charles amos each of the listed persons was a shaklee business client of rs tyson during each of these meals shaklee business matters and discussions were held mrs tyson and the other person s present discussed various shaklee products shaklee business plans and strategy shaklee business volume and or the layout of shaklee advertisements accordingly we conclude that the costs of buying meals for these specific clients were ordinary and necessary business_expenses further we conclude that these meals were associated with the active_conduct of rs tyson’s shaklee business and that the meals directly preceded or followed substantial and bona_fide business discussions the meals purchased were associated with the active_conduct of rs tyson’s shaklee business because there was a clear business_purpose in purchasing the meals for the clients rs tyson had an existing business relationship with these individuals and meals were used to discuss the sale of shaklee products to customers and to encourage and increase the distribution of shaklee products further at each meal substantial and bona_fide business discussions occurred at the top of each receipt mrs tyson listed what sort of business_discussion and transactions occurred at the meal accordingly we allow rs tyson a deduction of dollar_figure for meals and entertainment_expenses sec_274 the amount of the deduction for allowable food and beverages expenses shall not exceed percent of the amount of such expense automobile expenses rs tyson deducted automobile expenses of dollar_figure for in addition to satisfying the criteria for deductibility under sec_162 this category of expenses also must satisfy the strict substantiation requirements of sec_274 in order for a deduction to be allowed sec_274 sec_280f and ii automobiles are listed_property to substantiate a deduction attributable to listed_property a taxpayer must maintain adequate_records or present corroborative evidence to total meals and entertainment_expenses of dollar_figure divided by equals dollar_figure show the following the amount of the expense the time and place of use of the listed_property and the business_purpose of the use sec_1_274-5t temporary income_tax regs fed reg date rs tyson neither kept a diary log trip sheet or similar record regarding the business use of the listed_property nor established the time and place of the business use of the listed_property ie rs tyson did not submit a business mileage log to establish the amount of business miles driven see id sec_1_274-5t temporary income_tax regs fed reg date mrs tyson explained most of the time that we’re in the car we’re doing business because every time we go -- i shouldn’t say every time we go and drop our grandchild off at mother’s day out or go to church we’re usually handing out our catalog we’re always prospecting so when we’re out and about we’re in business rs tyson failed to establish the time and place of business use of the listed_property and the business_purpose of the use of the listed_property rs tyson has failed to substantiate the claimed automobile expenses in accordance with sec_162 and sec_274 accordingly we sustain respondent’s determination on this issue equipment_leasing expenses rs tyson deducted dollar_figure for amounts paid to mr and mrs tyson to allegedly lease mr and mrs tyson’s office equipment and painting equipment for sec_162 allows a deduction as an ordinary and necessary business_expense for rentals or other_payments required to be made as a condition to the continued use or possession for purposes of the trade_or_business of property to which the taxpayer has not taken or is not taking title or in which he has no equity sec_162 to substantiate this expense rs tyson introduced bank statements the court reviewed the bank statements and found no checks or other evidence indicating that this amount was paid to lease equipment rs tyson has failed to substantiate a deduction for the claimed lease of equipment expenses accordingly we sustain respondent’s determination on this issue legal and professional fees a taxpayer may deduct under sec_162 legal fees paid in obtaining legal advice with respect to the taxpayer’s trade_or_business 67_tc_694 mr and mrs tyson deducted legal and professional fees of dollar_figure for to substantiate this expense they introduced bank statements the court reviewed the bank statements and found no checks or other information related to legal and professional fees mr and mrs tyson have failed to substantiate this amount accordingly we sustain respondent’s determination on this issue insurance repairs taxes and utility expenses these expenses insurance expenses of dollar_figure repair expenses of dollar_figure taxes of dollar_figure and utility expenses of dollar_figure are related to the alleged rental of mr and mrs tyson’s residence to rs tyson as we previously determined there is a lack of proof of a bona_fide rental see supra p the purported rental agreement has little reality beyond tax planning the purported rental was not at arm’s length and we disregard it for a lack of economic substancedollar_figure accordingly we sustain respondent’s disallowance of a deduction for the insurance repairs taxes and utility expenses constructive dividends respondent determined mr and mrs tyson received dollar_figure in constructive dividends from rs tyson this amount consisted of alleged rent expenses of dollar_figure lease expenses of dollar_figure image12 expenses of dollar_figure employee_benefit_plan expenses of dollar_figure and an automobile downpayment expense of dollar_figure generally where a shareholder diverts corporate funds to his own use those funds constitute constructive dividends to him additionally mr and mrs tyson made personal_use of the alleged rented space the taxes related to mr and mrs tyson’s residence may be deductible as expenses on schedule a itemized_deductions mrs tyson testified that the image expense was for the cost of purchasing and laundering mr tyson’s uniforms and are ordinary_income to the extent of the corporation’s earnings_and_profits see sec_301 sec_316 89_tc_1280 where a corporation provides an economic benefit to a shareholder with no expectation of reimbursement the benefit is a ‘constructive dividend’ and is taxable_income 560_f3d_1133 9th cir citation omitted affg tcmemo_2004_272 and tcmemo_2006_55 mr and mrs tyson each owned percent of rs tyson when individuals are in substantial control of a corporation special scrutiny of their transactions with the corporation may be necessary 52_tc_255 affd 422_f2d_198 5th cir 29_tc_1193 affd 271_f2d_267 5th cir see 513_f2d_800 5th cir transactions_between_related_taxpayers or between a close corporation and its principals must be subject_to close scrutiny citing 314_us_513 rs tyson paid dollar_figure to reliable toyota in date this money was a deposit on a vehicle purchased for mr and mrs tyson mrs tyson admitted that all the money is in rs tyson she testified that she has a tendency to write checks out of that account for personal items the evidence established distributions from rs tyson to mr and mrs tyson or on behalf of mr and mrs tyson including the dollar_figure rs tyson paid as a downpayment on mr and mrs tyson’s car petitioners have failed to prove that any of the dollar_figure in question was not diverted from rs tyson for mr and mrs tyson’s own use accordingly respondent’s determination regarding the constructive dividends is sustaineddollar_figure accuracy-related_penalty for mr and mrs tyson sec_7491 provides that the commissioner will bear the burden of production with respect to the liability of any individual for additions to tax and penalties the commissioner’s burden of production under sec_7491 is to produce evidence that it is appropriate to impose the relevant penalty addition_to_tax or additional_amount 118_tc_358 see 116_tc_438 the commissioner however does not have the obligation to introduce evidence regarding reasonable_cause or substantial_authority higbee v commissioner supra pincite respondent determined that rs tyson and mr and mrs tyson are liable for the sec_6662 penalty for pursuant to sec_6662 and b and a taxpayer may be liable for we note that respondent did not argue that rs tyson did not deserve to be recognized as a separate taxpaying entity and petitioners do not argue that rs tyson’s earnings_and_profits were insufficient to cover the constructive dividends a penalty of percent on the portion of an underpayment_of_tax due to negligence or disregard of rules or regulations or a substantial_understatement_of_income_tax negligence includes any failure to make a reasonable attempt to comply with the provisions of this title and disregard includes any careless reckless or intentional disregard sec_6662 negligence includes any failure by the taxpayer to keep adequate books_and_records or to substantiate items properly sec_1_6662-3 income_tax regs respondent met his burden of production as to mr and mrs tyson14 as they failed to substantiate the expenses claimeddollar_figure see sec_6001 sec_1_6662-3 income_tax regs rs tyson overstated expenses by deducting personal expenses of mr and mrs tyson rs tyson also failed to substantiate expenses eg laundry expenses travel_expenses meals and entertainment_expenses and automobile expenses see sec_6001 sec_1_6662-3 income_tax regs sec_7491 imposes on the commissioner a burden of production respecting the liability of any individual emphasis added for a penalty addition_to_tax or additional_amount accordingly respondent has no burden of production with respect to rs tyson additionally as we have sustained all of respondent’s deficiency determinations against mr and mrs tyson there is a substantial_understatement_of_income_tax see sec_6662 and b a substantial_understatement exists if the understatement exceeds the greater of percent of the tax required to be shown on the return for a taxable_year or dollar_figure dollar_figure in the case of a corporation id the accuracy-related_penalty is not imposed with respect to any portion of the underpayment as to which the taxpayer acted with reasonable_cause and in good_faith sec_6664 the decision as to whether the taxpayer acted with reasonable_cause and in good_faith depends upon all the pertinent facts and circumstances sec_1_6664-4 income_tax regs mr and mrs tyson attempted to use rs tyson as a vehicle to turn their nondeductible personal expenses into deductible business_expenses petitioners’ tax_return_preparer was not called as a witness we infer that his testimony would not have been favorable to petitioners see 6_tc_1158 affd 162_f2d_513 10th cir petitioners have failed to prove that they acted with reasonable_cause and in good_faith see sec_6664 accordingly we sustain the sec_6662 penalty against rs tyson and mr and mrs tyson in reaching our holdings herein we have considered all arguments made by the parties and to the extent not mentioned above we find them to be irrelevant or without merit to reflect the foregoing decision will be entered for respondent in docket no decision will be entered under rule in docket no


t c summary opinion united_states tax_court cindee j conner petitioner v commissioner of internal revenue respondent docket no 10410-05s filed date cindee j conner pro_se thomas yang for respondent goldberg special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure respondent determined a deficiency in petitioner’s federal_income_tax for the taxable_year in the amount of dollar_figure the issues for decision are whether respondent is barred by the statute_of_limitations from assessing and collecting the deficiency this issue turns on the question of whether petitioner filed an income_tax return for whether petitioner failed to report wage income earned in in the amount of dollar_figure whether petitioner failed to report income from a long-term_capital_gain in the amount of dollar_figure arising from a deed in lieu of a foreclosure transaction whether petitioner is entitled to innocent spouse relief and whether petitioner is liable for additions to tax pursuant to sec_6651 and background the stipulation of facts and the attached exhibits are incorporated herein by reference at the time the petition was filed petitioner resided in mchenry illinois petitioner and james conner mr conner were married on date two children were born of the marriage the couple purchased a home in barrington illinois in date for at trial respondent conceded the addition_to_tax under sec_6651 therefore that addition is no longer an issue before us dollar_figure the deed on record for that property lists petitioner and mr conner as owners in joint_tenancy between and the couple experienced a series of unspecified financial setbacks in early they refinanced their home with a second mortgage in the amount of dollar_figure and a home equity loan in the amount of dollar_figure this refinancing was provided by corus bank of chicago illinois refinancing however could not resolve the economic quandary that the couple found themselves in and so faced with an impending bankruptcy they decided in to execute a deed in lieu of foreclosure to corus bank despite or perhaps because of these measures petitioner and mr conner separated in late after the deed in lieu of foreclosure was delivered corus bank filed forms 1099-c cancellation of debt reporting that james and cindee conner received income in the amounts of dollar_figure for the mortgage and dollar_figure for the home equity loan corus bank sent the forms 1099-c to mr conner at his last_known_address in barrington illinois on date corus bank sent petitioner a letter notifying her corus bank filed a cancellation of debt form 1099-c to the internal_revenue_service for the following primary - james conner n tamarack barrington il secondary - cindee conner n tamarack barrington il date cancelled amount number amount cancelled big_number account number debt description foreclosure petitioner and mr conner separated in early and a judgment of dissolution of marriage was subsequently entered by the circuit_court for mchenry county illinois on date on date respondent sent mr conner an individual notice_of_deficiency for his federal_income_tax respondent determined mr conner’s deficiency based on a failure to report income from a long-term_capital_gain arising from the execution of a deed in lieu of foreclosure transaction respondent determined mr conner’s correct_tax liability for by calculating the income incurred by the aforementioned transaction as follows form 1099-c - cancellation of debt dollar_figure form 1099-c - cancellation of debt dollar_figure dollar_figure total cancellation of debt amount_realized sec_1001 adjusted_basis in property total amount_realized dollar_figure big_number dollar_figure mr conner’s share mr conner filed a petition with this court at docket no dollar_figure after this court sustained respondent’s determination mr conner entered into a payment plan with respondent to pay his outstanding federal_income_tax liability he continues to make payments in accordance with this plan some of these figures have been rounded during the taxable_year in issue petitioner worked as a dance instructor at her sister’s dance studio and earned wage income in the amount of dollar_figure petitioner did not file a separate federal_income_tax return for reporting her wage income or her share of long-term_capital_gain on date respondent sent petitioner a notice_of_deficiency for the taxable_year in the notice respondent determined a deficiency in the amount of dollar_figure together with additions to tax pursuant to sec_6651 and sec_6654 in the amounts of dollar_figure and dollar_figure respectively discussion as a general_rule the determinations of the commissioner in a notice_of_deficiency are presumed correct and the taxpayer bears the burden of proving them to be in error rule a 290_us_111 as an exception to this rule sec_7491 places upon the commissioner the burden_of_proof with respect to any factual issue relating to liability for tax if the taxpayer maintained adequate_records satisfied the substantiation requirements cooperated with the commissioner and introduced during the court_proceeding credible_evidence with respect to the factual issue based on the following because petitioner has not satisfied the requirements of sec_7491 sec_7491 is inapplicable see 116_tc_438 respondent however has the burden of production with respect to the additions to tax sec_7491 higbee v commissioner supra pincite to satisfy respondent’s burden of production respondent must come forward with sufficient evidence indicating that it is appropriate to impose the addition_to_tax higbee v commissioner supra pincite statute_of_limitations failure_to_file return as a general_rule sec_6501 provides that the amount of any_tax imposed shall be assessed within years after the return was filed in the case of a failure_to_file a return the tax may be assessed or a proceeding in court for the collection of tax may be begun at any time sec_6501 in this case petitioner admits that she did not file a separate federal tax_return for that she did not sign a joint_return with her husband that year and that she did not confirm with her husband either that he was preparing a joint_return for that year or that a joint_return had been filed by him on her behalf petitioner failed to produce any evidence of a joint_return on which she was listed for the year in question based upon this evidence we are convinced that petitioner did not file a return for thus making the 3-year period of limitations on assessments inapplicable unreported wage income as previously stated respondent determined that petitioner did not file a federal_income_tax return for the taxable_year and did not report wage income of dollar_figure received during that year petitioner however contends that her husband purportedly filed a joint_return on their behalf in and that the wage income at issue was reported on that return therefore she argues she has no present liability for tax stemming from her unreported wage income received in sec_61 defines gross_income as all income from whatever source derived including compensation_for services unless otherwise provided moreover sec_6001 requires any person liable for tax imposed under title_26 to keep records render statements make returns and comply with the rules and regulations in this case petitioner admitted at trial that she did in fact receive wage income in in the amount of dollar_figure from her work as a dance instructor however she also testified that she kept no records of receiving these wages and filed no separate_return for that year petitioner nevertheless contests respondent’s determination of her liability on the grounds that she and mr conner had agreed to file a joint_return for to include this income and that irrespective of whether or not a joint_return was filed she could not have filed separately for that year as mr conner maliciously withheld petitioner’s form w- wage and tax statement for from her as to petitioner’s first argument that the income in question was already included on a joint_return purportedly filed on her behalf for mr conner credibly explained to this court that it was never the intention of either party to file a joint_return for and that he did not include petitioner’s wage income on his return with respect to petitioner’s second claim that she could not file for lack of the necessary information mr conner testified that he neither received nor maliciously withheld petitioner’s form_w-2 for her wages earned for we not only find mr conner’s testimony credible but we note that because petitioner’s employer in was her sister with whom she has a close relationship and for whom she still works as a dance instructor petitioner could presumably have asked for and received a duplicate copy of her w-2 accordingly and based on the foregoing reasons we sustain respondent’s determination that petitioner failed to file a federal_income_tax return for and that she did not report wage income received in in the amount of dollar_figure received in that year unreported long-term_capital_gain as previously stated respondent determined that petitioner received income from a long-term_capital_gain as a result of a transfer of property by deed in lieu of foreclosure petitioner does not contest that this transaction triggered gain to her and mr conner she does however contest her personal liability for tax due stemming from this transaction on the grounds that she had no idea that she was required to report this income as she did not receive any forms 1099-c listing the transaction and because all of the income at issue would have been included on the federal_income_tax return that mr conner filed on our behalf we have already concluded that petitioner failed to file a federal_income_tax return in mr conner filed his federal_income_tax return separately as previously discussed mr conner failed to include income from the transaction on his tax_return prompting respondent to issue a notice_of_deficiency for his share since petitioner and mr conner held the property to which the long-term_capital_gain is attributable as owners in joint_tenancy it follows that upon the transfer of property by deed petitioner would have received one-half of the amount of the transaction and accordingly that she would be liable for the tax due thereon petitioner’s request for innocent spouse relief petitioner submitted to this court a form_8857 request for innocent spouse relief as an attachment to her underlying petition in her supporting statement petitioner seeks relief from her liability for one-half of the long-term_capital_gain at issue on the grounds that because she assumed that mr conner had filed a joint_return in including the full amount of the long-term_capital_gain she should not be held liable for tax on one-half of the income on the long-term_capital_gain incurred in that year generally spouses filing joint federal_income_tax returns are jointly and severally liable for the taxes due thereon sec_6013 while sec_6015 provides three avenues for relief from that liability to a taxpayer the operative predicate before a request for such relief may be deemed appropriate is whether the requesting spouse filed a joint_return for the year in issue sec_6015 in this case we have already determined that petitioner and mr conner did not file a joint_return for taxable_year accordingly petitioner is barred from requesting innocent spouse relief additions to tax a sec_6651 respondent determined an addition_to_tax as a result of petitioner’s failure_to_file her federal_income_tax return for sec_6651 imposes an addition_to_tax for failure_to_file a return on the date prescribed for filing unless petitioner proves that such failure_to_file was due to reasonable_cause and not willful neglect sec_6651 higbee v commissioner t c pincite the addition_to_tax is equal to percent of the amount of the tax required to be shown on the return if the failure_to_file is not for more than month sec_6651 an additional percent is imposed for each month or fraction thereof in which the failure_to_file continues to a maximum of percent of the tax id the addition_to_tax is imposed on the net amount due sec_6651 the addition_to_tax is applicable unless a taxpayer establishes that the failure_to_file was due to reasonable_cause and not willful neglect sec_6651 if a taxpayer exercised ordinary care and prudence and was nonetheless unable to file the return within the date prescribed by law then reasonable_cause exists sec_301_6651-1 proced admin regs w illful neglect means a conscious intentional failure or reckless indifference 469_us_241 at trial petitioner testified that she assumed that mr conner would file their return jointly as he had always done so she also testified that this was their understanding and the reason why she did not file separately as previously discussed petitioner admitted that she had neither confirmed with her then husband that a joint_return was filed for the taxable_year nor witnessed or signed such a return finally petitioner testified that she would have been unable to file separately for because mr conner had withheld income_tax documents from her again as previously discussed we believe that petitioner was either in possession or could have easily acquired the necessary documents to file a separate_return for moreover we believe mr conner’s testimony that he neither kept the aforementioned documents from petitioner nor agreed to file a joint_return on their behalf for taxable_year petitioner’s failure_to_file a federal tax_return for was not due to reasonable_cause petitioner failed to exercise ordinary care in assuring that a joint_return was filed and willfully neglected to file a separate_return in the alternative petitioner’s federal_income_tax return was due on date petitioner never filed a return and failed to show that she exercised ordinary care and prudence in this case accordingly petitioner is liable for the addition_to_tax under sec_6651 respondent is sustained on this issue b sec_6654 respondent also determined that petitioner is liable for an addition_to_tax for the underpayment of estimated_tax pursuant to sec_6654 for taxable_year the commissioner’s initial burden with respect to this penalty is to come forward with evidence that it is appropriate to apply the penalty to a taxpayer this obligation however is conditioned upon the taxpayer’s assignment of error with respect to the commissioner’s penalty determination in this case petitioner had not assigned error with respect to the sec_6654 penalty in 118_tc_358 this court held that a taxpayer who fails to assign error to a penalty is deemed under rule b to have conceded the penalty notwithstanding that the commissioner failed to produce evidence that the imposition of the penalty is appropriate as petitioner did not assign error with respect to respondent’s application of the sec_6654 penalty we deem that issue conceded accordingly we conclude petitioner is liable for the addition_to_tax pursuant to sec_6654 for taxable_year to reflect the foregoing and respondent’s concession decision will be entered for respondent except as to the addition_to_tax pursuant to sec_6651


internal_revenue_service number release date index number ------------------------------------ ------------------------------------------------------ ------------------------- ------------------------- - department of the treasury washington dc person to contact ------------------- id no ------------- telephone number --------------------- refer reply to cc psi - plr-152550-03 date date ------------------ ------------------ ---------------------- ------------------------------------------------------ x ----------------------------------------- a ------------------------------------------- b ------------------------ ------------------------------------------- d1 state dear ----------------- a ruling under sec_1362 of the internal_revenue_code facts for x to be an s_corporation as of d1 however x’s form_2553 election be a small_business_corporation was not filed timely taxable_year beginning d1 law and analysis x requests a ruling that it will be recognized as an s_corporation effective for the x was incorporated under state law on d1 x’s shareholders a and b intended this letter responds to a letter dated date on behalf of x requesting sec_1362 provides that a small_business_corporation may elect to be an plr-152550-03 s_corporation sec_1362 provides that such election shall be effective for the current taxable_year if it is made during the preceding_taxable_year or before the 15th day of the third month of the current taxable_year sec_1362 provides that an election made after the 15th day of the third month of the current taxable_year shall be treated as having been made for the following taxable_year sec_1362 provides that if an election under sec_1362 is made for any taxable_year determined without regard to sec_1362 after the date prescribed by this subsection for making such election for such taxable_year or no such election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to make such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply conclusion established reasonable_cause for failing to make an s election in a timely manner thus we conclude that x 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 within days of this letter containing as an effective date d1 then such election shall be treated as timely made for x’s taxable_year beginning d1 a copy of this letter should be attached to the form_2553 filed with the service_center a copy is enclosed for that purpose the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion concerning whether x is otherwise eligible to be an s_corporation for federal_income_tax purposes letter is being sent to your representative the code provides that it may not be used or cited as precedent except as expressly provided herein we express or imply no opinion concerning this ruling is directed only to the taxpayer requesting it sec_6110 of in accordance with the power_of_attorney on file with this office a copy of this based on the facts submitted and representations made we conclude that x has sincerely christine e ellison chief branch office of associate chief_counsel passthroughs special industries plr-152550-03 enclosures a copy of this