t c memo united_states tax_court james m nitschke and patricia s nitschke petitioners v commissioner of internal revenue respondent docket no filed date james m and patricia s nitschke pro sese marty j dama for respondent memorandum opinion dinan special_trial_judge respondent determined a deficiency in petitioners’ federal_income_tax in the amount of dollar_figure for the taxable_year unless otherwise indicated section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure - - the issue for decision is whether petitioners are entitled to deduct certain business_expenses in excess of those allowed by respondent some of the facts have been stipulated and are so found the stipulations of fact and the attached exhibits are incorporated herein by this reference petitioners resided in fort worth texas on the date the petition was filed in this case petitioners received wage and business income from several sources during petitioner wife ms nitschke worked as a legal secretary for the law office of haynes and boone l l p earning wages in the amount of dollar_figure she also earned wages from shannon gracey ratliff and miller dtd in the amount of dollar_figure petitioner husband mr nitschke worked for duro-test corporation earning taxable wages in the amount of dollar_figure in addition petitioners conducted three business activities for which they filed schedules c with their joint federal_income_tax return the first was petitioners’ melaleuca sales and marketing business with a claimed loss of dollar_figure the second was mr nitschke’s business as a musician with a claimed loss of dollar_figure the third was ms nitschke’s business as a freelance legal secretary with a reported profit of dollar_figure in the statutory_notice_of_deficiency mailed date respondent made the following adjustments to the respective deductions claimed by petitioners claimed adjustment allowed melaleuca business office expenses dollar_figure dollar_figure so supplie sec_885 big_number meals entertainment big_number big_number travel_expenses big_number big_number big_number other expenses big_number big_number big_number musician business advertising car truck expenses big_number big_number itemized_deductions miscellaneous big_number big_number the notice_of_deficiency stated that the various business_expenses were disallowed because it had not been established that each amount was for an ordinary and necessary business_expense or was expended for the purpose designated sec_162 allows a deduction for the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business personal_living_and_family_expenses however generally are not allowed as deductions see sec_262 a taxpayer is required to maintain records sufficient to establish the amount of his income and deductions see sec_6001 sec_1_6001-1 e income_tax regs in the event that a taxpayer establishes that a deductible expense has been paid but is unable to substantiate the precise amount we generally may estimate the amount of the deductible expense bearing ‘this adjustment was computational and is not disputed by petitioners q4e- heavily against the taxpayer whose inexactitude in substantiating the amounts of the expenses is of his own making see 39_f2d_540 2d cir we may estimate deductible expenses only where the taxpayer presents evidence sufficient to provide some basis upon which estimates may be made see 85_tc_731 sec_274 supersedes this general_rule allowing estimates however and provides that--unless the taxpayer substantiates certain elements---no deduction shall be allowed with respect to traveling expenses under sec_162 including meals_and_lodging while away from home any item with respect to an activity of a type considered to be entertainment amusement or recreation or the use of any listed_property as defined in sec_280f to include passenger automobiles computers and peripheral equipment and cellular telephones for an expense described in any of the above categories the taxpayer must substantiate by adequate_records or sufficient evidence to corroborate the taxpayer’s own testimony the amount of the expenditure or use based on the appropriate measure the time and place of the expenditure or use the business_purpose of the expenditure or use and in the case of entertainment the business relationship to the taxpayer of each person entertained see sec_274 sec - - 274-5t b temporary income_tax regs fed reg date petitioners argue that sec_162 and sec_274 should not be applied in this case because respondent did not raise these issues during the audit of their return petitioners further assert that the substantiation issue was not raised by respondent until presented at trial subject_to exceptions inapplicable to this case this court does not look behind the statutory_notice_of_deficiency a trial before this court is a proceeding de novo and our determination as to a taxpayer's tax_liability is based upon the merits of the case see 62_tc_324 furthermore the notice_of_deficiency in this case specifically stated that the various business_expenses were disallowed because it had not been established that each amount was for an ordinary and necessary business_expense or was expended for the purpose designated this statement raises issues under both sec_162 a ---whether the expenses were ordinary and necessary--and sec_274 d --whether the expenses were properly substantiated ie whether petitioners established that the amounts were expended for the purpose designated petitioners also argue that the burden_of_proof in this case should be shifted to respondent because petitioners presented credible_evidence with respect to factual issues although -- - petitioners cite no authority with regard to this argument we assume they are referring to the recently enacted sec_7491 however sec_7491 only applies to court proceedings arising in connection with examinations commencing after date see internal_revenue_service restructuring and reform act of publaw_105_206 sec c 112_stat_727 there is nothing in the record which establishes that the examination in this case commenced after date we therefore find that sec_7491 does not operate to shift the burden_of_proof in this case accordingly the burden_of_proof is upon petitioner to show respondent’s determinations to be in error see rule a 290_us_111 the first deductions at issue in this case relate to the office expenses claimed in connection with petitioners’ melaleuca business at trial petitioners presented receipts and copies of checks totaling dollar_figure for office expenses petitioners claimed dollar_figure in office expenses on their return the receipts were for a computer printer and a cellular phone because these are listed_property see sec_280f iv v these expenses are subject_to the provisions of sec_274 in order to substantiate the amount of expenses for listed_property a taxpayer must establish the amount of business use and the amount of total use for such property see sec_1_274-5t b temporary income_tax regs fed reg date - petitioners have failed to do this and we therefore find that they have not adequately substantiated these expenses and are not entitled to these deductions the copies of checks in the total amount of dollar_figure were for the purchase of an armoire used to store melaleuca supplies and products the copies of these checks which were entered into evidence are not clear but nothing appears on them which indicates they were presented for payment we nevertheless accept petitioners’ testimony with regard to this expense and therefore hold that they are entitled to an additional deduction in the amount of dollar_figure the next deductions at issue relate to the melaleuca meals and entertainment_expenses petitioners presented copied pages of receipts and checks which contained sporadic notations for the most part providing only partial details such as mela mtg or a person’s name this substantiation does not meet the requirements of sec_274 furthermore we find the receipts are not credible_evidence for example one receipt was copied twice and the copies each had separate notations stating meetings had occurred with two different persons the notations were nearly all made not on the receipt itself but on the copy of the receipt ms nitschke indicated in her testimony concerning other receipts presented as evidence that the notations were probably made at the end of the year even accepting this testimony and not concluding that petitioners --- - made the notations in anticipation of trial we find it unlikely that petitioners could have accurately remembered the business_purpose and persons with whom they dined for these numerous expenses----which included items such as fast food meals---for up to a year beyond the date of the expense petitioners also presented a summary of these meal and entertainment_expenses listing amount business_purpose time location and business contact the amount of expenses contained in the summary dollar_figure does not match the amount of expenses claimed on the return dollar_figure we do not accept this summary as substantiation for the same reasons we do not accept the underlying receipts as substantiation we therefore uphold respondent’s determinations with respect to these deductions the next deductions at issue relate to the melaleuca travel_expenses petitioners presented receipts with a cover sheet stating that travel_expenses for totaled dollar_figure petitioners claimed dollar_figure of travel_expenses on their return we find that this substantiation presented by petitioners also does not meet the strict substantiation requirements of sec_274 because the amount time place and business_purpose of the expenses were not established we therefore uphold respondent’s determinations with respect to these deductions the next deductions at issue relate to the melaleuca other expenses petitioners presented copied pages of receipts --- - and other documents with a cover sheet stating that these expenses totaled dollar_figure petitioners claimed dollar_figure of expenses on their return the amounts claimed on their return and the amounts petitioners asserted were substantiated at trial are as follow claimed argued on return at trial postage dollar_figure dollar_figure copies faxes training meeting convention fees convention merchandise business report sec_90 parking tolls food for home meeting sec_662 bus charter to meeting tapes magazines books big_number big_number sales aides big_number big_number giveaways big_number big_number big_number we may estimate the amount of a deductible expense but there must be sufficient evidence in the record to permit the court to conclude that a deductible expense was incurred for the stated purpose and at least in the amount estimated see 245_f2d_559 5th cir citing cohan v commissioner supra many of the expenses in this category appear likely to have been personal in nature and petitioners were unable to provide details regarding many of them thus petitioners have presented this court with a number of receipts but have failed to give the court any reasonable method to determine which receipts were business personal ora -- - combination of both and which of the business_expenses were ordinary necessary and otherwise properly deductible under sec_162 furthermore a portion of the receipts in this category are not credible_evidence for example one receipt for food was marked as having been incurred for a meeting that occurred a day earlier while another receipt for snack food was marked as having been incurred for a meeting months later petitioner testified that these notations were made at the end of the year well after the expenses were incurred because the evidence presented by petitioners is not fully credible and because petitioners have failed to provide a sufficient basis to enable us to conclude that they are entitled to a deduction in excess of the dollar_figure deduction allowed by respondent in the notice_of_deficiency we uphold respondent’s determinations with respect to these deductions the final deductions at issue in this case relate to the car and truck expenses_incurred in connection with mr nitschke’s musician business petitioners presented evidence purporting to reflect big_number miles and using dollar_figure per mile dollar_figure in expenses petitioners claimed dollar_figure in car and truck expenses on their return because passenger automobiles and any other_property used as a means of transportation are listed_property see sec_280f d these expenses are subject_to the provisions of sec_274 petitioners presented a purported mileage log and summary to substantiate the mileage we find that this evidence is not credible mr nitschke testified that he kept a daily log in his vehicle and that he would then on a daily basis report the amount of mileage he incurred to his wife who would record this information in another log the log presented as evidence we do not believe that petitioners would use this method of recording mileage on a daily basis furthermore the mileage reflected in the log are often round numbers and mr nitschke testified that he thought the mileage amounts were conservative numbers both of these facts suggest that petitioners’ purported log was in fact based upon estimates and was not created in the alleged manner because petitioners have not presented credible substantiation for the mileage expense we uphold respondent’s determinations with respect to these deductions to reflect the foregoing decision will be entered under rule


internal_revenue_service index nos number release date cc dom it a plr-114505-99 attention date in re dear this is in reference to a form_1128 application to adopt change or retain a tax_year submitted on behalf of the above- named taxpayer requesting permission to change its accounting_period for federal_income_tax purposes from a taxable_year ending to a taxable_year ending the taxpayer has requested that the form_1128 be considered timely filed under the authority contained in sec_301_9100-3 of the procedure and administration regulations the taxpayer's form_1128 requesting a change in accounting_period to a tax_year ending was due on or before the information furnished indicates that the application_for the change in accounting_period was filed late because of an error or misunderstanding however the form was filed within days of the due_date sec_1_442-1 of the income_tax regulations provides that in order to secure the commissioner's consent to a change in accounting_period the taxpayer must file an application on form_1128 with the commissioner on or before the 15th day of the second calendar month following the close of the short_period sec_301_9100-3 provides that requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 automatic extensions such as the instant case must be made under the rules of sec_301_9100-3 requests for relief subject_to 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 the granting of relief will not prejudice the interests of the government based on the facts and information submitted and the representations made it is held that the taxpayer has acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government accordingly the requirements of the regulations for the granting of relief have been satisfied in this case and taxpayer’s late filed form_1128 requesting permission to change to a tax_year ending effective for the short_period of is considered timely filed pursuant to appendix a of revproc_99_1 1999_1_irb_6 an additional user_fee is required in order to process the form_1128 the user_fee will be requested in a separate correspondence we will begin processing the taxpayer’s application after the user_fee is received the ruling contained in this letter is based upon facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for a ruling verification of the factual information representations and other data may be required as part of an examination process this ruling addresses the granting of sec_301_9100-3 relief only no opinion is expressed regarding the tax treatment of the instant transaction under the provisions of any other sections of the code or regulations that may be applicable thereto or regarding the tax treatment of any conditions existing at the time of or effects resulting from the instant transaction specifically no opinion is expressed as to whether the taxpayer is permitted under the code and applicable regulations to change to the tax_year requested in the subject form_1128 in accordance with the provisions of a power_of_attorney currently on file we are sending the original of this letter_ruling to the taxpayer's designated officer a copy of our ruling letter is being sent to the taxpayer and to the taxpayer’s second designated recipient this ruling is directed only to the taxpayer that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent sincerely yours assistant chief_counsel income_tax and accounting s richard l carlisle acting deputy assistant chief_counsel enclosures copy of this letter copy for sec_6110 purposes


office_of_chief_counsel internal_revenue_service memorandum number release date cc psi b02 --------------- postf-109960-08 third party communication none date of communication not applicable uilc date date to associate area_counsel small_business self-employed attn from branch chief passthroughs special industries cc psi b02 subject -------------------------------------------------------- this chief_counsel_advice responds to your request for assistance dated date this advice may not be used or cited as precedent legend x -------------------------------------------------------------------------------------------- -------------------------------- y ------------------------ z ----------------------------------- a ----------------------- a -------------- b -------------- c ------------- d ----------- postf-109960-08 e -------- date1 ------------------ date2 ---------------------- date3 ---------------------- date4 --------------------------- date5 --------------------------- date6 ---------------------- date7 ------------------------- date8 ------------------------- year1 ------- year2 ------- year3 ------- year4 ------- year5 ------- year6 ------- airplane ---------------------------------- bank -------------------------------------------------- business --------------------- state -------------------- issue sec_1 whether y’s election to be treated as an association_taxable_as_a_corporation caused x to recognize dollar_figure million of gain under sec_357 postf-109960-08 whether income or gain from the airplane leasing activity of x would be properly characterized as passive_investment_income for purposes of sec_1362 conclusion sec_1 based on the facts presented through the application of the step_transaction_doctrine the economic_substance_doctrine and sec_269 it appears that y’s election to be treated as an association_taxable_as_a_corporation should not be respected and did not cause x to recognize dollar_figure million of gain under sec_357 based on the facts as presented it appears that substantial costs may have been incurred by x in the airplane leasing activity and therefore the income received by x from the airplane leasing activity may be properly treated as income that is not passive_investment_income for purposes of sec_1362 facts as we understand them the facts are as follows x was formed on date1 as a c_corporation and elected to be treated as an s_corporation effective date2 and conducted business a is the sole shareholder of x x currently has accumulated_earnings_and_profits and a possesses substantial carryover net operating losses generated by the business activities of x in year1 x purchased and placed_in_service the airplane the purchase_price of the airplane was dollar_figureb the airplane was operated exclusively for a’s business and personal needs the airplane was fully depreciated by the close of x’s taxable_year in year2 in year2 x formed y a limited_liability_company under the laws of state and x chose to treat y as a disregarded_entity for federal tax purposes after the formation of y x contributed the airplane to y it is not known what the value of the airplane was for any of the years at issue in year3 x’s business was sold to an unrelated company z the submission indicates that a does not hold any ownership percentage or management responsibility in z after this sale a retained his ownership of x and y along with y’s sole asset the airplane after the sale of the business x’s business activity of record became management and investing in addition with the sale of the business x ceased to have any employees however a had an agreement with z whereby one former employee of x would continue to perform certain personal assistant duties for a in addition to her duties at z after the sale of the business to z x entered into an agreement with z whereby z would handle the scheduling and day-to-day operations of leasing the airplane owned by x through y z would schedule all aircraft maintenance and incur any other expenses necessary for the operation of the airplane the expenses_incurred by z in the airplane leasing activity were paid_by z and then billed to x each month in an itemized expense report the payment by x to z for these expenses would be postf-109960-08 overseen by a’s personal assistant employed by z z would issue invoices to rental customers under the name of x for the airplane usage fees rental customers would remit payment for the airplane usage fees directly to x and the receipt of these payments would be overseen by a’s personal assistant employed by z z would also provide pilots and other services to rental customers and then issue invoices for pilot services and fuel surcharges directly to these customers for payment the rental customers would remit payments for these invoices to z the airplane leasing operations continued to be handled by z on behalf of x in this manner through year6 in addition to operating the airplane leasing activity on a day-to-day basis with respect to rental customers z would also use the airplane for its own business purposes no invoices were issued for this usage however x would be credited by z for the rental value of these flights as part of the agreement between x and z x was also permitted to schedule and operate the airplane for a’s business and personal needs no invoices were issued by z to x for this usage the expenses_incurred for these operations were paid_by z and then billed to x as part of the monthly expense report on date3 a executed a promissory note on behalf of y in exchange for a loan in the amount of dollar_figurec from bank also on date3 a executed an unconditional guaranty to bank as president of x to guarantee the repayment of the dollar_figurec loan borrowed by y the loan proceeds of dollar_figurec were wire transferred by bank to a newly opened bank account of y on date3 on date3 a check drawn on this bank account was made payable to x for dollar_figurec and this check was deposited by x into x’s money market bank account several days later x has stated that the funds were borrowed for general corporate purposes and in anticipation of investment opportunities it does not appear from the facts as presented that any portion of the loan proceeds were devoted by x for use in the airplane leasing activity based on the facts as submitted it is not known whether the fair_market_value of the airplane on date3 would have been sufficient to provide for full repayment of this loan on date7 a on behalf of y executed a form_8832 entity classification election to change the entity classification of y from a disregarded_entity to an entity electing to be classified as an association_taxable_as_a_corporation the effective date of this election was date4 on date8 a on behalf of x executed a form_8869 qualified_subchapter_s_subsidiary election to treat y as a qualified_subchapter_s_subsidiary of x the effective date of this election was date6 y filed a form_1120 for the period starting date4 and ending date5 a two-week period in year6 for the two week period covered by the form_1120 y may be referred to as the c_corporation this tax_return included a statement under sec_1 b that listed the property transferred as an airplane with an adjusted_basis of dollar_figured and postf-109960-08 cash in the amount of dollar_figuree the combined values being significantly less than the dollar_figurec borrowed by y from bank there was no mention of any assumption_of_liabilities by y x’s tax_return for the taxable_year ending in year6 reported gain of dollar_figurea taxed as ordinary_income based on y’s election to be taxed as a c_corporation for a two-week period in year6 x argues that this gain was derived from the fact that x was deemed to have transferred both liabilities and assets to y and that the liabilities exceeded the adjusted tax basis of the assets deemed transferred to y x also argues that this gain permitted y to increase the adjusted_basis of the airplane by approximately that amount x further argues that the taxable gain recognized by x was derived in connection with its airplane leasing activity that this gain was not passive_investment_income to x and that the recognition of this gain prevented the termination of x’s subchapter_s_election after year6 under sec_1362 for excess passive_investment_income x otherwise admits that it had passive_investment_income within the meaning of sec_1362 that exceeded percent of its gross_receipts in year4 and year5 and also admits that its subchapter_s_election would have terminated after the end of year6 under sec_1362 but for the gain purportedly recognized by x in year6 as a result of the election by y to be taxed as a c_corporation law and analysis issue under reg sec_301_7701-3 x’s form_8832 election is treated as if x transferred all of the assets and liabilities of disregarded_entity y to a new corporation y in exchange for its stock the taxpayer claims that this transaction is tax free under sec_351 of the internal_revenue_code x’s subsequent form_8869 election is treated as if y liquidated into x under reg sec_1_1361-4 sec_301_7701-3 provides that the tax treatment of a change in the classification of an entity for tax purposes by election is determined under all relevant provisions of the code and general principles of tax law including the step_transaction_doctrine sec_351 under sec_351 no gain_or_loss is recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately_after_the_exchange such person or persons are in control of the corporation the basic purpose of sec_351 is to permit deferment of gains or losses where there has been a mere readjustment of the form of ownership rather than a termination of the taxpayer's interest in the transferred property see 316_us_527 discussing the purpose of sec_112 the predecessor to sec_351 as stated by the court in 109_f2d_479 1st cir postf-109960-08 it is the purpose of sec_112 to save the taxpayer from an immediate recognition of a gain or to intermit the claim of a loss in certain transactions where gain_or_loss may have accrued in a constitutional sense but where in a popular and economic sense there has been a mere change in the form of ownership and the taxpayer has not really ‘cashed in‘ on the theoretical gain or closed out a losing venture under sec_358 a transferor’s basis in the transferee corporation’s stock received in the sec_351 exchange is equal to the transferor’s basis in the contributed assets decreased by the amount of any boot or money received and increased by any gain recognized by the transferor on the exchange the amount of the assumption of any liability is treated as money received by the transferor for purposes of determining its basis in the transferee’s stock accordingly basis is decreased by the amount of the assumed liability under sec_358 and sec_358 treating the assumption of a liability as money received resulting in a reduction in basis produces problems in transactions in which the sum of the transferor’s liabilities assumed by the transferee exceeds the adjusted_basis of the assets transferred thus sec_357 was enacted to provide that the excess of the amount of liabilities assumed over the total of the adjusted_basis of the property transferred is considered gain from a sale_or_exchange of an asset see 68_tc_223 62_tc_11 the intent of sec_357 is to tax gain in a circumstance where the transferee corporation has relieved the transferor of an obligation the transferor has essentially cashed out to the extent that the liability assumed by the corporation exceeds the adjusted_basis of the assets transferred in the instant case however the deemed assumption of the liability under the election did not result in a cashing out or any actual debt relief the taxpayer was still liable as the unconditional guarantor on the note held the cash in its money market account for purposes unrelated to the transferee corporation's airplane leasing activity and any relief was illusionary the step_transaction_doctrine but alternatively the sec_351 transaction need not be respected at all sec_1_1361-4 of the regulations states that general principles of law including step_transaction_doctrine apply to form_8869 elections the step_transaction_doctrine is a in the instant case x’s basis in the c_corporation stock is the basis of the airplane dollar_figured cash and property that was transferred minus the amount of money received by taxpayer assumption of liability or dollar_figurec plus amount of recognized gain on the exchange dollar_figurea x’s basis in the c_corporation stock is zero under sec_362 the c corporation’s basis in the airplane is the same as in the hands of x dollar_figured plus the amount of gain recognized by x in the exchange dollar_figurea sec_362 states that the basis of any property shall not be increased by sec_362 above the fair_market_value of the property postf-109960-08 variant of the substance_over_form_doctrine the doctrine holds that where a taxpayer has embarked on a series of transactions that are in substance a single unitary or indivisible transaction the courts will disregard the intermediary steps and give credence only to the completed transaction 399_f2d_652 5th cir the case of 88_tc_1415 established what is commonly referred to as the step_transaction_doctrine and three formulations for how to test the applicability of the doctrine the binding_commitment_test - under the binding_commitment_test one or more steps of an overall transaction are disregarded if at the time the first step is entered into there is a binding commitment to undertake the later step the interdependence test - the interdependence test asks whether the steps that make up the transaction are so interdependent the legal relations created by one transaction would be fruitless without a completion of the series the end result test - the end result test applies to a situation in which a series of separate steps are in substance just prearranged parts of a single transaction intended from the outset to reach the ultimate result it appears that the end result test applies to the facts presented this test relies on the parties’ intent at the time of the transactions which can be derived from the actions surrounding the transactions penrod pincite the end result test applies when separate transactions were really component parts of a single transaction intended from the outset to be taken for the purpose of reaching the ultimate result the 422_f3d_1339 fed cir citing 418_f2d_511 ct_cl 927_f2d_1517 10th cir 90_tc_171 aff’d without published opinion 886_f2d_1318 7th cir y was an entity that was disregarded for federal income taxes purposes under sec_301_7701-3 prior to date4 after the form_8869 election effective on date6 y as a qualified_subchapter_s_subsidiary was ignored for virtually all federal income purposes under sec_1_1361-4 the existence of the c_corporation for a mere two weeks can be collapsed and ignored for federal_income_tax purposes under the end result test economic_substance the economic_substance_doctrine is a judicial doctrine developed through years of case law and applies to align the tax consequences of a transaction with its substance rather than its form the doctrine has been applied in a variety of forms and is closely related to the step transaction substance over form and business_purpose doctrines its test has been articulated in a variety of ways the doctrine’s genesis is generally credited to the supreme court in 293_us_538 postf-109960-08 although earlier cases stated similar ideas see eg 257_us_156 while a taxpayer can legitimately structure a transaction to minimize tax_liability under the code the transaction must nevertheless have factual and economic_substance in order to be the thing which the statute intended gregory u s pincite as the seventh circuit observed in 765_f2d_643 7th cir the freedom to arrange one's affairs to minimize taxes does not include the right to engage in financial fantasies with the expectation that the internal_revenue_service and the courts will play along the commissioner and the courts are empowered and in fact duty-bound to look beyond the contrived forms of transactions to their economic_substance and to apply the tax laws accordingly in 752_f2d_89 4th cir the appellate court agreed with the tax court's determination that the supreme court in 435_us_561 mandated a two-pronged inquiry to determine whether a transaction is for tax purposes a sham to treat a transaction as a sham the court must find that the taxpayer was motivated by no business purposes other than obtaining tax benefits in entering the transaction and that the transaction has no economic_substance because no reasonable possibility of a profit exists see also 74_tc_305 aff'd per curiam 671_f2d_316 9th cir in the instant case the formation of the c_corporation and its quick liquidation had no economic purpose at all in fact x tried to form the c_corporation solely for a tax-motivated not an economic purpose x tried to generate a taxable gain solely for the purpose of maintaining its subchapter_s status based on these facts an application of the economic_substance_doctrine would yield the conclusion that x's formation of the c_corporation for two weeks has no economic_substance was undertaken purely for tax-motivated purposes and can be disregarded sec_269 sec_269 provides that if any person or persons acquire or acquired directly or indirectly control of a corporation and the principal purpose for which such acquisition was made is evasion or avoidance of federal_income_tax by securing the benefit of a deduction credit or other allowance which such person or corporation would not otherwise enjoy then the secretary may disallow such deduction credit or other allowance the statute sets forth three major elements that must be satisfied in order for sec_269 to apply to a tax_benefit postf-109960-08 a person or persons must directly or indirectly acquire the ownership of stock possessing at least percent of the total combined voting power of all classes of stock entitled to vote or at least percent of the total value of shares of all classes of stock of a corporation and the principal purpose for which such acquisition was made is evasion or avoidance of federal_income_tax by securing the benefit of a deduction credit or other allowance which such person or corporation would not otherwise enjoy in the instant case it is clear that the first two elements are satisfied sec_1_269-1 defines a person for purposes of sec_269 and the regulations to include a corporation such as x and x organized and wholly owned y the c_corporation the creation of the c_corporation was an acquisition of control for purposes of the statute see eg 489_f2d_957 2d cir cert_denied 419_us_829 satisfaction of the third element however requires closer examination sec_1_269-3 elaborates upon when sec_269 can apply in relevant part sec_1_269-3 provides as follows in either instance ie under sec_269 or the principal purpose for which the acquisition was made must have been the evasion or avoidance of federal_income_tax by securing the benefit of a deduction credit or other allowance which such person or persons or corporation would not otherwise enjoy if this requirement is satisfied it is immaterial by what method or by what conjunction of events the benefit was sought the third element requires that the acquisition must have had as its principal purpose the evasion or avoidance of federal_income_tax this is a question of fact to be determined by considering all the facts and circumstances of the entire transaction with the burden_of_proof on the taxpayer 334_f2d_269 2d cir see also sec_1_269-3 in the instant case the short time that the c_corporation existed is evidence that the sole purpose of the election was to maintain x’s subchapter_s status and to enjoy the tax benefits that status permits issue except as provided in sec_1362 sec_1362 provides that a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1362 provides that an election under sec_1362 shall be terminated whenever the corporation has accumulated_earnings_and_profits at the postf-109960-08 close of each of three consecutive taxable years and has gross_receipts for each of such taxable years more than percent of which are passive_investment_income except as otherwise provided in sec_1362 sec_1362 provides that the term passive_investment_income means gross_receipts derived from royalties rents dividends interest annuities and sales or exchanges of stock_or_securities sec_1_1362-2 of the income_tax regulations provides that rents means amounts received for_the_use_of or the right to use property whether real or personal of the corporation sec_1_1362-2 provides that rents does not include rents derived in the active trade_or_business of renting property rents received by a corporation are derived in the active trade_or_business of renting property only if based on all the facts and circumstances the corporation provides significant services or incurs substantial costs in the rental business generally significant services are not rendered and substantial costs are not incurred in connection with net leases whether significant services are performed or substantial costs are incurred in the rental business is determined based upon all the facts and circumstances including but not limited to the number of persons employed to provide the services and the types and amounts of costs and expenses_incurred other than depreciation based on the facts as presented it appears that significant services may have been performed and substantial costs may have been incurred by x in the airplane leasing activity even though most of the services provided in connection with the airplane leasing were provided by or through z x was billed separately by z for the expenses related to these services the fees for_the_use_of the airplane were paid directly to x by customers accordingly based on the facts as presented it appears that the possibility existed that x’s expenses related to the airplane leasing activity could exceed the rental income from the airplane leasing activity under certain conditions therefore it appears that the arrangement between x and z would not have been equivalent to a net_lease and x likely should be considered as having incurred the expenses in connection with the airplane leasing activities if upon examination of all of the facts and circumstances surrounding the relationship between x and z it is determined that significant services were performed and substantial costs were incurred by x in the airplane leasing activity the rental income x received from the airplane leasing activity for the years at issue is properly treated as income that is not passive_investment_income under sec_1362 therefore to the extent that x is properly treated as deriving gain from its airplane leasing activity this gain is likely properly treated as income that is not passive_investment_income postf-109960-08 case development hazards and other considerations --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- 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necessary please contact this office for our views please call if you have any further questions by _____________________________ j thomas hines branch chief branch passthroughs special industries


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom corp plr-114096-99 date date legend purchaser target sellers date a date b date c date d plr-114096-99 purchaser’s company official sellers’ company official outside tax professionals authorized representatives dear this responds to your authorized representatives’ letter dated date requesting an extension of time under sec_301_9100-1 through of the procedure and administration regulations to file an election purchaser and sellers are requesting an extension to file a sec_338 election under sec_338 and sec_338 of the internal_revenue_code and sec_1_338_h_10_-1 of the income_tax regulations the election with respect to purchaser's acquisition of the target stock on date a the material information is summarized below plr-114096-99 target was an s_corporation within the meaning of sec_1361 and was wholly owned by sellers ie individuals purchaser is a subchapter_c_corporation on date a purchaser sellers and target entered into a stock acquisition agreement pursuant to which purchaser would acquire all of the seller’s target stock also on date a pursuant to the stock acquisition agreement purchaser acquired all of the sellers’ target stock solely for cash in a fully taxable transaction it is represented that purchaser was not related to sellers within the meaning of sec_338 and purchaser's acquisition of target stock qualified as a qualified_stock_purchase qsp as defined in sec_338 purchaser and sellers intended to file the election the election was due on date b which is after date a however for various reasons a valid election was not filed on date c which is after date b purchaser’s company official sellers’ company official outside tax professionals and authorized representatives discovered that the election had not been filed subsequently this request was submitted under sec_301_9100-1 for an extension of time to file the election on date d purchaser timely filed its return as if the election had been made sellers also timely filed their returns as if the election had been made the period of limitations on assessments under sec_6501 has not expired for purchaser’s sellers’ or target’s taxable_year s in which the acquisition occurred the taxable_year s in which the election should have been filed or any taxable_year s that would have been affected by the election had it been timely filed further the service has not discovered that the election has not been filed and none of the taxpayers or related entities or individuals have taken any reporting position that is not consistent with making the election sec_338 permits certain stock purchases to be treated as asset acquisitions if the purchasing_corporation makes or is treated as having made a sec_338 election under sec_338 and the acquisition is a qsp sec_1 c provides that a sec_338 election is an election to apply sec_338 to target sec_338 specifies the requirements for making a sec_338 election sec_1_338_h_10_-1 provides that if a sec_338 election is made for t a sec_338 election is deemed made for t sec_338 defines a qsp as any transaction or series of transactions in which stock meeting the requirements of sec_1504 of one corporation is acquired by another corporation by purchase during the 12-month_acquisition_period sec_338 provides that the term purchase means any acquisition of stock but only if i the basis of the stock in the hands of the purchasing_corporation is not determined i in whole or in part by reference to the adjusted_basis of such stock in the hands of the person from whom acquired or ii under sec_1014 relating to property_acquired_from_a_decedent ii the stock is not acquired in an exchange to which sec_351 sec_354 sec_355 or sec_356 applies and is not acquired in any other transaction described in regulations in which the transferor does not recognize the entire amount of plr-114096-99 the gain_or_loss realized on the transaction and iii the stock is not acquired from a person the ownership of whose stock would under sec_318 other than paragraph thereof be attributed to the person acquiring such stock sec_338 permits the purchasing and selling corporations to jointly elect to treat the target_corporation as deemed to sell all of its assets and distribute the proceeds in complete_liquidation the sale of stock included in the qsp is generally ignored a sec_338 election may be made for target only if it is a member of a selling_consolidated_group a member of a selling affiliated_group filing separate returns or an s_corporation sec_1_338_h_10_-1 gain_or_loss on the deemed sale is included in the consolidated_return of the selling group unless the target_corporation is a member of a selling affiliated_group filing separate returns or an s_corporation sec_1_338_h_10_-1 provides that a sec_338 election may be made for the target_corporation if the purchasing_corporation makes a qsp of the target_corporation stock sec_1_338_h_10_-1 and provide that if a sec_338 election is made for the target_corporation it is irrevocable and a sec_338 election is deemed made for the target_corporation more specifically target is treated as if while a member of the selling group or owned by the selling affiliate or s_corporation shareholders it distributed all of its assets in complete_liquidation if target is an s_corporation immediately before the acquisition_date nothing in the sec_338 provisions prevents a holder of target stock from taking deemed sale gain into account under sec_1366 and sec_1367 see sec_331 or sec_332 for gain_or_loss recognized by the old target shareholders as a result of the deemed liquidation sec_1_338_h_10_-1 no gain_or_loss is recognized on the sale_or_exchange by the selling_consolidated_group or the selling affiliate or an s_corporation shareholder of target stock included in the qsp if target is an s_corporation immediately before target’s acquisition_date the sale_or_exchange of old target does not result in a termination of the sec_1362 election for the s_corporation sec_1_338_h_10_-1 sec_1_338_h_10_-1 provides that a sec_338 election is jointly made by a purchaser and the selling_consolidated_group or the selling affiliate or the s_corporation shareholders on form_8023 in accordance with the instructions to the form the regulations further provide that the election must be made not later than the 15th day of the ninth month beginning after the month in which the acquisition_date occurs the instructions to form_8023 provide that a sec_338 election must be made jointly by the purchasing_corporation or the common parent of the consolidated_group of which the purchasing_corporation is a member or the selling affiliate or s_corporation shareholders and the selling corporation or the common parent of the consolidated_group of which the selling corporation is a member or the selling affiliate or s_corporation shareholders the instructions provide that the form must be signed by each person authorized to act on behalf of each corporation and if made for an s_corporation it must be signed by each s_corporation shareholder who sells target stock in the qsp the instructions further provide that the signatures dates and titles if plr-114096-99 applicable of those persons must be provided in a signature attachment and they provide specific details as to the preparation of the signature attachment and its attachment to form_8023 sec_1_1502-77 provides that the common parent for all purposes other than for several purposes not relevant here shall be the sole agent for each subsidiary in the group duly authorized to act in its own name in all matters relating to the tax_liability of the consolidated_return_year see also form_8023 and the instructions thereto under sec_301_9100-1 the commissioner has discretion to 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 internal_revenue_code except subtitles e g h and i provided the taxpayer demonstrates to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation revenue_ruling revenue_procedure notice or announcement sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections 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 interests of the government sec_301 a in this case the regulations fix the time for filing the election ie sec_1 h - d therefore the commissioner has discretionary authority under sec_301_9100-1 to grant an extension of time for purchaser and sellers to file the election provided purchaser and sellers show they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by purchaser sellers purchaser’s company official seller’s company official outside tax professionals and authorized representatives explain the circumstances that resulted in the failure to timely file a valid election the information establishes that the service has not discovered that the election has not been filed and that none of the taxpayers or related entities or individuals have filed a return or otherwise taken a reporting position that is not consistent with making the election the information also establishes that the taxpayers relied on tax professionals for the election and that the plr-114096-99 government will not be prejudiced if relief is granted see sec_301_9100-3 and sec_301_9100-3 and v based on the facts and information submitted including the representations made we conclude that purchaser and sellers have shown they acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly an extension of time is granted under sec_301 -1 until days from the date_of_issuance of this letter for purchaser and sellers to file the election with respect to the acquisition of target as described above the above extension of time is conditioned on i purchaser and each and every one of the sellers signing the election ii purchaser and each and every one of the sellers treating the acquisition sale of the target stock as a sec_338 transaction and iii the taxpayers’ ie purchaser’s and sellers’ tax_liability if any being not lower in the aggregate for all years to which the election apply than it would have been if the election had been timely made taking into account the time_value_of_money no opinion is expressed as to the taxpayers’ tax_liability for the years involved a determination thereof will be made by the district director’s office upon audit of the federal_income_tax returns involved further no opinion is expressed as to the federal_income_tax effect if any if it is determined that the taxpayers’ liability is lower sec_301_9100-3 purchaser and sellers must file the election in accordance with sec_1 h - d that is a new election on form_8023 must be executed on or after the date of this letter which grants an extension and filed in accordance with the instructions to the form a copy of this letter should be attached to the election form purchaser and sellers must file their returns to report the transaction as a sec_338 transaction for the year in with the transaction was consummated and attach to the return a copy of this letter and a copy of the election we express no opinion as to whether the acquisition sale of target’s stock qualifies as a qsp under sec_338 as to whether the acquisition sale of target’s stock qualifies for sec_338 treatment or if sec_338 is applicable as to the amount and character of gain_or_loss if any recognized by target and thus by sellers on target’s deemed asset sale in addition we express no opinion as to the tax consequences of filing the election late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or resulting from filing the election late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-1 we relied on certain statements and representations made by the taxpayers however the district_director s should verify all essential facts in addition notwithstanding that an extension is granted under sec_301_9100-1 to plr-114096-99 file the election penalties and interest that would otherwise be applicable if any continue to apply this letter is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to the powers of attorney on file in this office copies of this letter are being sent to designated authorized representatives for delivery to purchaser and seller sincerely yours assistant chief_counsel corporate richard todd counsel to the assistant chief_counsel corporate by


t c summary opinion united_states tax_court timothy p szulczewski petitioner v commissioner of internal revenue respondent docket no 20264-06s filed date timothy p szulczewski pro_se laura l buckley 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 and all rule references are to the tax_court rules_of_practice and procedure the issue for decision is whether respondent abused his discretion in sustaining the filing of a notice_of_federal_tax_lien for collection of petitioner’s unpaid tax_liability background some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference petitioner resided at birch hill drive in california when he filed his petition petitioner worked and as of the date of trial continued to work as a union dockworker for roadway express inc roadway loading and unloading ships at the port of long beach and driving trucks to several of the corporation’s facilities petitioner’s job required him to travel periodically away from home he married and had two children one born in and the other in in petitioner blew out his shoulder on the job and was unable to work for the next years he began receiving social_security disability benefits of approximately dollar_figure per month and continued to receive the social_security_benefit at least through the physical and financial strains took their toll on date petitioner and his wife divorced she left the children in petitioner’s primary physical custody and moved to rhode island petitioner also underwent a chapter bankruptcy petitioner owned a house on birch hill drive until date when the bankruptcy trustee sold petitioner’s house to petitioner’s brother who allowed petitioner to continue to reside there as a tenant petitioner returned to work at roadway in earning gross wages of dollar_figure meanwhile his union representative researched petitioner’s out-of-work circumstances and determined that petitioner was entitled to union disability benefits of approximately dollar_figure per month from the date of injury in as a result petitioner received from prudential insurance co of america prudential the carrier for the union’s disability and pension fund a distribution of dollar_figure in compensating him for the past years of unpaid disability benefits petitioner continued to receive the monthly benefit from prudential at least through the court received in evidence a copy of petitioner’s self- prepared tax_return on the return petitioner listed birch hill drive as his address and dated his signature date petitioner filed as a head_of_household claiming his two children as dependents petitioner reported adjusted_gross_income of dollar_figure consisting of wages of dollar_figure interest_income of dollar_figure taxable social_security_benefits of dollar_figure and dollar_figure of disability benefits the latter amount representing year of disability benefits petitioner claimed total itemized_deductions of dollar_figure comprising dollar_figure in state and local real_estate and personal_property_taxes dollar_figure in mortgage interest and dollar_figure in charitable_contributions petitioner also claimed dependency_exemption deductions for his two children a child_tax_credit of dollar_figure and a dependent_care_credit of dollar_figure with respect to the attached form_2441 child and dependent care expenses petitioner listed rachel ortega at a flintlock road address as the provider of the child care the return shows no income_tax due and an overpayment of dollar_figure resulting from withholding for according to a form_4340 certificate of assessments payments and other specified matters certificate of assessments for received into evidence the internal_revenue_service irs timely received an automatic_extension request from petitioner to file hi sec_2002 federal_income_tax return but has no record of receiving petitioner’ sec_2002 federal_income_tax return because the irs had no record that petitioner filed a federal_income_tax return on date the irs prepared a substitute for return sfr for the sfr shows adjusted_gross_income for of dollar_figure consisting of wages of dollar_figure interest of dollar_figure taxable social_security disability benefits of dollar_figure and the distribution from prudential of dollar_figure the irs allowed a single exemption and a standard_deduction resulting in a tax due of dollar_figure and showing dollar_figure in federal_income_tax withholdings according to petitioner in or about date he moved about miles away from birch hill drive to live with his girlfriend on flintlock road at the time of his move petitioner did not notify the irs of his change_of address however petitioner stated that he notified the u s postal service postal service or ps of his address change about a month earlier petitioner had received a letter dated date addressed to him at birch hill drive from the irs service_center in holtsville new york requesting that he provide hi sec_2002 federal_income_tax return to holtsville with the top portion of the letter attached the court received into evidence a copy of a completed ps form_3800 certified mail receipt and a completed ps form_3811 domestic return receipt the identifying 20-digit certified mail numbers on the two postal service forms are identical confirming that petitioner sent an envelope to the irs service_center in fresno california on date and that the irs fresno service_center received the same envelope on date according to petitioner the envelope contained the copy of hi sec_2002 federal_income_tax return that holtsville had requested and that on or about the same date date he timely mailed his federal_income_tax return to fresno reporting his address as flintlock road respondent has no record of receiving petitioner’s federal_income_tax return and at trial petitioner did not offer a copy of his return into evidence the certificate of assessments has an entry that the irs issued a notice_of_deficiency for on date to petitioner because petitioner did not file a petition with this court seeking a redetermination of hi sec_2002 federal_income_tax deficiency on date the irs assessed the following amounts for dollar_figure in federal_income_tax dollar_figure in interest dollar_figure for failure_to_file a tax_return dollar_figure for failure_to_pay_tax and dollar_figure for failure to pay estimated_tax attempting to collect petitioner’s unpaid federal_income_tax liability for the irs sent a notice_of_intent_to_levy dated date by certified mail to petitioner at the birch hill drive address the postal service could not complete the delivery and on or about date returned the unclaimed envelope to the irs on date the irs mailed a final notice_of_levy to petitioner at the birch hill drive address on date the irs received the first of three levy payments of dollar_figure from roadway the irs posted the second and third payments on march and date respectively the irs also attempted to levy on petitioner’s social_security disability benefits on or before date after the first irs levy petitioner called the irs telephone number that roadway’s payroll department had given him talked to an irs representative about the levy action and informed the irs representative that flintlock road not birch hill drive was his correct address nonetheless the irs prepared two separate notices of federal_tax_lien filing and your right to a hearing under sec_6320 both addressed to petitioner at his former birch hill drive address and both noting they were being sent by certified mail one notice was dated date and the other notice was dated date but otherwise both notices contained nearly identical information the certificate of assessments shows that the irs sent only one notice the one dated date to petitioner the notices state in relevant part that the irs had filed on date at the county recorder for los angeles county california a federal_tax_lien for dollar_figure which was the current unpaid balance of petitioner’s assessed tax_liability the residents living at birch hill drive forwarded the notice_of_federal_tax_lien filing to petitioner who in turn timely sent form request for a collection_due_process_hearing dated date to the irs explaining that he disagreed with the lien filing because his tax_return for was sent to and received by the irs on the form petitioner listed flintlock road as his address in response the irs appeals_office mailed three letters dated april may and date to petitioner at his flintlock road address which were apparently the first instances where the irs used petitioner’s flintlock road address in the letters respondent offered petitioner an opportunity for a conference by personal interview and noted that for appeals to consider collection alternatives petitioner had to submit his delinquent federal_income_tax returns and a completed form 433-a collection information statement for wage earners and self-employed individuals petitioner did not respond to the letters from appeals and he did not provide the information appeals requested in a notice_of_determination dated date addressed to petitioner at flintlock road sent by certified mail from the irs fresno california appeals team manager appeals sustained the filing of the notice_of_federal_tax_lien because appeals found that the irs had met all the legal and administrative requirements for the collection action the collection action properly balanced the need for the efficient collection_of_taxes with the legitimate concern that the collection action be no more intrusive than necessary and petitioner had not established grounds for a withdrawal of the lien petitioner received the notice_of_determination from his girlfriend who was still residing at the flintlock road address and who signed for the certified mail delivery petitioner listing birch hill drive as his address timely petitioned the court with respect to respondent’s notice_of_determination at trial petitioner did not call any witnesses respondent called maria vargas a paralegal in respondent’s office_of_chief_counsel in california respondent called no other witnesses and could not produce a copy of the notice_of_deficiency for or a ps form_3877 the court concluded the trial and closed the record discussion petitioner’s sole challenge in his petition to respondent’s notice_of_determination is that he never received a hearing in response to the lien filing where he could discuss his underlying federal_income_tax liability for petitioner argues that if he had a hearing he would show respondent that he did not have a balance due for and therefore respondent should cease all collection actions related to respondent counters that the court should sustain the notice_of_determination for because the irs appeals_office in fresno california offered petitioner multiple opportunities to meet with an appeals officer to discuss the circumstances surrounding the filing of a notice_of_federal_tax_lien for and to discuss collection alternatives petitioner never responded to the offers from the appeals_office petitioner failed to provide the missing tax returns and the financial information that the appeals_office had requested and the appeals officer did not find and petitioner did not provide any valid reason why respondent should withdraw the notice_of_federal_tax_lien respondent argues additionally that petitioner had two prior opportunities to challenge the underlying liability for in each instance petitioner failed to take advantage of the opportunity and therefore petitioner’s underlying liability for was not properly at issue when the appeals officer offered a collection hearing according to respondent petitioner’s first opportunity arose when the irs properly mailed the notice_of_deficiency dated date by certified mail to petitioner at his last known address--birch hill drive petitioner failed to petition the tax_court seeking a redetermination respondent contends the second opportunity occurred when the irs sent by certified mail to petitioner at his birch hill drive address the notice_of_intent_to_levy dated date seeking to collect petitioner’s unpaid federal_income_tax liability the postal service returned the levy notice unclaimed to the irs and petitioner failed to request a hearing with respondent’s appeals_office regardless of the parties’ contentions the threshold issue is whether respondent’s assessment of the federal_income_tax liability is valid respondent’s arguments presuppose that the secretary mailed a valid notice_of_deficiency and that petitioner failed to timely petition this court seeking a redetermination thereby permitting the irs to assess the deficiency petitioner did not file a petition with this court for redetermination within days of the purported mailing date of the notice_of_deficiency in fact petitioner emphasizes that he never received a notice_of_deficiency respondent may collect the unpaid federal_income_tax deficiency only if respondent properly assessed the income_tax deficiency generally except as otherwise provided the secretary may not assess a deficiency in tax unless the secretary has first mailed a notice_of_deficiency to the taxpayer sec_6213 butti v commissioner tcmemo_2008_82 none of the statutory exceptions set forth in sec_6213 applies here when the secretary determines that a deficiency in tax exists he is authorized to send a notice_of_deficiency to the taxpayer by certified or registered mail addressed to the taxpayer at the taxpayer’s last_known_address sec_6212 and b however where a taxpayer maintains that he did not receive a notice_of_deficiency and the commissioner is unable to produce a copy of the notice then the commissioner bears the burden of establishing both the existence of a notice_of_deficiency mailed to petitioners for the year as well as the date of its mailing 92_tc_729 affd without published opinion 935_f2d_1282 3d cir the commissioner must introduce evidence showing that the notice_of_deficiency was properly delivered to the postal service for mailing 94_tc_82 we examine respondent’s evidence noting that we decide the issue on the basis of the preponderance_of_the_evidence see 114_tc_604 casey v commissioner tcmemo_2009_131 respondent did not produce at trial a copy of the notice_of_deficiency or a ps form_3877 instead to meet his burden respondent relies on paragraph of the stipulation of facts the certificate of assessments and the testimony of ms vargas with respect to the stipulation of facts the parties stipulated that on date the irs mailed the notice_of_deficiency to petitioner by certified mail to petitioner’s last_known_address however in the very next sentence the parties stipulated further that petitioner claims he did not receive the statutory notice dated date we relieve petitioner of his stipulation regarding respondent’s mailing of the notice since the fundamental basis of petitioner’s argument is that he did not receive the notice_of_deficiency he would have no knowledge as to when how where or if respondent sent a notice see rule e 66_tc_312 we do not lightly disregard facts to which the parties have stipulated however where such facts are clearly contrary to facts disclosed by the record we refuse to be bound by the stipulation next we address the certificate of assessments which shows an entry without elaboration that the irs sent a notice_of_deficiency on date ordinarily a certified certificate of assessments is a self-authenticating document providing sufficient evidence that the commissioner mailed a notice_of_deficiency see 969_f2d_238 7th cir 119_tc_252 however in instances as here where the taxpayer challenges the existence of the notice_of_deficiency and the commissioner fails to produce a copy of the notice the commissioner must produce additional corroborating evidence typically the commissioner produces a ps form_3877 among other information ps form_3877 shows a taxpayer’s name and address included among the list of mail recipients for a particular day’s batch of mailed notices of deficiency the type of delivery method used eg certified mail and the signature of a postal service employee where the taxpayer does not dispute the existence of the notice_of_deficiency the commissioner’s production of a properly completed ps form_3877 is sufficient evidence by itself absent evidence to the contrary that the commissioner properly mailed the notice_of_deficiency to the taxpayer 724_f2d_808 9th cir coleman v commissioner supra pincite the secretary’s strict compliance with ps form_3877 mailing procedures raises a presumption of official regularity in favor of the commissioner united_states v zolla supra coleman v commissioner supra however as here where the taxpayer disputes the existence of the notice_of_deficiency ps form_3877 by itself is no longer sufficient to establish the presumption of regularity that the secretary mailed the notice_of_deficiency to the taxpayer butti v commissioner supra instead the commissioner must come forward with additional evidence such as testimonial habit evidence of mailing procedures coleman v commissioner supra pincite we note again that in this case respondent failed to produce a ps form_3877 1if this case were appealable which it is not because petitioner elected sec_7463 small_tax_case procedures the appeal would lie in the court_of_appeals for the ninth circuit with respect to testimonial evidence respondent called ms vargas a paralegal in respondent’s office_of_chief_counsel ms vargas testified that according to her review of an irs computer database entitled imf entity module three pages of which she printed out on the morning of trial and which the court received into evidence petitioner’s last_known_address was birch hill drive when respondent issued the notice_of_deficiency on date ms vargas explained that according to the module birch hill drive continued to be petitioner’s last_known_address until the final week of date when the irs changed petitioner’s last_known_address to flintlock road presumably in response to petitioner’s telephone instruction respondent failed to establish that ms vargas had any knowledge with respect to the preparation or mailing of notices of deficiency consequently respondent may not properly rely on the testimony of ms vargas to establish a presumption of regularity with respect to his mailing practices and accordingly her testimony is not helpful to respondent in meeting his burden of proving the existence of a notice_of_deficiency for or its proper mailing a 90-day letter clerk or mailroom official would have been more appropriate for establishing respondent’s customary preparation and mailing practices coleman v commissioner supra pincite testimony from a district statutory notice coordinator and a 90-day clerk was probative habit evidence 54_tc_1535 testimony by a chief mail room clerk was persuasive 119_tc_183 declarations by an irs service_center custodian of records and a postal service mail processing clerk were corroborating evidence when the existence of a notice_of_deficiency is at issue proper testimonial evidence of customary mailing practices is critical to defeat a taxpayer’s denial of receipt 92_tc_729 butti v commissioner tcmemo_2008_82 therefore weighing the totality of the evidence in the record we find that respondent has failed to meet his burden of proving that he properly mailed a notice_of_deficiency to petitioner at petitioner’s last_known_address using certified or registered mail consequently the assessment here is invalid and respondent is prohibited from conducting collection activity it follows that we are unable to sustain respondent’s determination to proceed with collection by the filing of a notice_of_federal_tax_lien because the assessment is invalid we need not address any other of the parties’ contentions to reflect our disposition of the issue decision will be entered for petitioner


internal_revenue_service number release date index number -------------------- -------------------- ----------------------------- --------------------------------- department of the treasury washington dc third party communication date of communication month dd yyyy person to contact ----------------------------- id no ------------- ----------------------------------------------------- telephone number --------------------- refer reply to cc psi b04 plr-161371-05 date date re ------------------------------------------------------------------------------ ---------------------------------------------------------------------------- legend decedent child child spouse ----------------- date date date trust -------------------------- ---------------------- ------------------- trust ----------------------------------------------------------------------------------- bank dear ------------------- -------------------- ------------------------- ------------------- ------------------- ----------------------------------------------------------------------------- ------------------------------------------------------------------------------- -------------------------------------------- ------------------------------------------------------------------------------ plr-161371-05 qualified doctor’s certification and other evidence that decedent was mentally incompetent at all times on and after date until his death this is in response to correspondence requesting an extension of time to file a the facts submitted and representations made are as follows decedent executed his will on date1 prior to date and died on date after date decedent was survived by child and child under the terms of decedent’s will the residuary_estate was to be divided into two equal shares one share was to be held in trust trust for the benefit of child during child 1’s life and the other share was to be held in trust trust for the benefit of child during child 2’s life on the death of the respective child the trust established for that child is to terminate and the corpus distributed to the child’s living issue by right of representation bank child and child 2’s spouse spouse were appointed as decedent’s co- personal_representatives decedent’s form_706 united_states estate and generation- skipping tax_return was filed timely on date bank and child are the co-trustees of trust and bank and spouse are the co-trustees of trust you have requested an extension of time under sec_301_9100-3 of the procedure and administration regulations to file the physician’s certification required under sec_26_2601-1 of the generation-skipping_transfer_tax regulations sec_2601 of the internal_revenue_code imposes a tax on every generation- skipping transfer under b c of the tax_reform_act_of_1986 and b i of the generation-skipping_transfer_tax regulations if an individual was under a mental_disability to change the disposition of the individual's property continuously from date until the date of death the provisions of chapter do not apply to any generation-skipping_transfer under a_trust as defined in b to the extent such trust consists of property or the proceeds of property the value of which was included in the gross_estate of the individual sec_26_2601-1 defines the term mental_disability as mental incompetence to execute an instrument governing the disposition of the decedent's property whether or not there was an adjudication of incompetence and whether or not there has been an appointment of a guardian fiduciary or other person charged with either the care of the decedent or care of the decedent's property sec_26_2601-1 provides that if a decedent has not been adjudged mentally incompetent by a court the executor must file with form_706 either -- a certification from a qualified physician stating that the decedent was mentally incompetent at all times on and after date and did not regain competence to modify or revoke the terms of the trust or will prior to his or her death or sufficient other evidence demonstrating that the decedent was mentally incompetent at all times on and after date as well as a statement explaining why no certification is plr-161371-05 available from a physician sec_26_2601-1 provides that the items listed in sec_26_2601-1 will be considered relevant but not determinative in establishing decedent’s state of competency 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 months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 provides that the term election includes an application_for relief in respect of tax 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_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides that in general requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 must be made under the rules of sec_301_9100-3 requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government based on the facts submitted and representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied consequently an extension of time of days from the date of this letter is granted to file the required physician’s certification the certifications should be attached to a supplemental form_706 and filed with the internal_revenue_service center cincinnati oh a copy of this letter should be attached to the supplemental form_706 copies are enclosed for this purpose except as ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code specifically we express no opinion as to whether the decedent was under a mental_disability within the meaning of sec_26_2601-1 on and after date resolution of this factual matter would be under the audit jurisdiction of the area director the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination plr-161371-05 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely yours william p o shea associate chief_counsel passthroughs and special industries enclosure copy of this letter copy for purposes cc


internal_revenue_service index number department of the treasury dc washington person to contact telephone number refer reply to cc dom p si date plr-103580-99 jun -2 company subsidiary a subsidiary b subsidiary c dear this letter responds to a letter dated date as b and c by your authorized representative well as subsequent correspondence submitted on behalf of company and subsidiaries a requesting various rulings relating to a proposed corporate_reorganization and the subsequent election by subsidiaries a and c to be s_corporations as your authorized representative was advised the service declines under sec_4 of revproc_99_3 1999_1_irb_103 reorganization to rule on the plan of b in accordance with sec_15 e of revproc_99_1 1999_1_irb_6 subsidiary c's user_fee of dollar_figure we have submitted a- request for the refund of yy plr-103580-99 in accordance with the power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative sincerely lq fra donna m young senior technician reviewer branch office of the assistant chief_counsel passthroughs and special industries ps


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 b02 plr-130635-05 date date ------------------ --------------------- ----------------------------- legend x ----------------------------------------- country date dear ----- ------------- requesting that the service grant x an extension of time under sec_301_9100-3 of the procedure and administration regulations to elect to be treated as a partnership under sec_301_7701-3 x represents that x is a foreign_entity eligible to elect to be treated as a partnership however x inadvertently failed to timely file a form_8832 entity classification election electing to treat x as a partnership effective date entity for federal_income_tax purposes generally a foreign eligible_entity is treated as the information submitted states that x was formed under the laws of country sec_301_7701-3 provides guidance on the classification of a foreign this responds to a letter dated date submitted on behalf of x sec_301_9100-1 through provide the standards the sec_301_9100-1 provides that the commissioner may grant a reasonable sec_301_7701-3 provides that an entity classification election must be filed plr-130635-05 an association_taxable_as_a_corporation if all members have limited_liability unless the entity makes an election to be treated otherwise if the foreign eligible_entity has more than one owner it may elect to be treated as a partnership pursuant to the rules in sec_301_7701-3 on form_8832 and can be effective up to seventy-five days prior to the date the form is filed or up to twelve months after the date on which the form is filed extension of time to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date 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 commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center and elect to be treated as a partnership effective date a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose federal tax consequences of the facts described above under any other provision of the code provides that it may not be used or cited as precedent except as specifically set forth above no opinion is expressed concerning the based solely on the information submitted and the representations made we this ruling is directed only to the taxpayer requesting it sec_6110 pursuant to a power_of_attorney on file with this office a copy of this letter is sincerely heather c maloy associate chief_counsel passthroughs and special industries plr-130635-05 being sent to x’s authorized representative enclosures cc copy of this letter copy for sec_6110 purposes