t c memo united_states tax_court robert m scharringhausen petitioner v commissioner of internal revenue respondent docket no filed date robert m scharringhausen pro_se jeffrey a schlei for respondent memorandum findings_of_fact and opinion laro judge the petition in this case involves petitioner’s and federal_income_tax in the notice_of_deficiency respondent determined deficiencies additions to tax under sec_6651 for failure_to_file and fraud penalties under sec_6663 as follows additions to tax and penalties year deficiency sec_6651 dollar_figure big_number big_number dollar_figure dollar_figure dollar_figure sec_6663 dollar_figure dollar_figure big_number the issues for decision are whether petitioner failed to report income for and of dollar_figure dollar_figure and dollar_figure respectively we hold that he did whether petitioner is entitled to net_operating_loss nol deductions for the years at issue we hold that he is not whether petitioner is liable for additions to tax under sec_6651 for his failure to timely file federal_income_tax returns we hold that he is and whether petitioner is liable for fraud penalties under sec_6663 we hold that he is 1unless otherwise indicated section references are to the internal_revenue_code code in effect for the years at issue and rule references are to the tax_court rules_of_practice and procedure some dollar amounts are rounded findings_of_fact the parties filed with the court a stipulation of facts and related exhibits the stipulated facts and the accompanying exhibits are incorporated herein by this reference we find the facts accordingly petitioner resided in san diego california when he filed the petition for more than a decade and a half petitioner has been entangled in legal battles with the united_states petitioner was indicted in in u s district_court for mail fraud money laundering and bankruptcy fraud he was subsequently found guilty of bankruptcy fraud for hiding certain assets from the bankruptcy court by knowingly and fraudulently making false and material financial statements in separate bankruptcy proceedings for which he served a short sentence see united_states v scharringhausen no cr 415-h-1 s d cal date the government had also brought a tax_assessment action against petitioner seeking to collect federal_income_tax liabilities for and as well as trust fund recovery penalty assessments under sec_6672 see 226_frd_406 s d cal for his part petitioner had attempted to fight off certain administrative summonses that respondent had issued concerning the tax years at issue by petitioning the district_court to quash these summonses see scharringhausen v united_states no cv-2076 wl s d cal scharringhausen v united_states no 02-cv-2343 s d cal order denying petitioner’s motion to quash and granting government’s motion to summarily enforce summons issued to pacific bell scharringhausen v united_states no 02-cv-2499-h wl s d cal in addition petitioner had filed a petition with this court to contest respondent’s filing of a tax_lien against him for tax_liabilities for through see scharringhausen v commissioner tcmemo_2008_26 95_tcm_1109 sustaining respondent’s filing of notice_of_federal_tax_lien against petitioner’s property for outstanding tax_liabilities owed for through as well as a civil suit against the government in the district_court under sec_7433 for damages resulting from respondent’s alleged violations of sec_7602 and sec_301_7602-1 proced admin regs see scharringhausen v united_states no 06-cv-2167 wl at s d cal after he completed his sentence for bankruptcy fraud he purportedly went into different business dealings in real_estate development and marketing nutritional supplements the record is devoid of details of the specific nature of these businesses or their day-to-day operations because petitioner has not provided any in and around respondent instituted a project to identify taxpayers who were holders of credit cards issued by banks in off-shore tax havens because these credit cards tended to provide opportunities for their holders to evade federal_income_tax a series of john doe summonses resulted in a list of taxpayers who had been issued credit cards by cayman national bank petitioner who at the time had not filed his federal_income_tax returns for through was on the list preliminary investigation indicated that petitioner might be conducting personal transactions and business activities through multiple fictitious businesses and entities none of which had filed federal_income_tax returns for at least and see scharringhausen wl scharringhausen no 02-cv-2343 order denying petitioner’s motion to quash and granting government’s motion to summarily enforce pacific bell summons following the leads the internal_revenue_service irs agent in charge of the investigation huong t phan attempted to contact petitioner about why neither he nor the businesses he ostensibly owned had filed tax returns for the subject years on separate occasions agent phan attempted to interview petitioner and his accountant gary list to elicit income information for the years at issue but petitioner was uncooperative and provided little information petitioner’s continued resistance to cooperating with agent phan in the audit left agent phan with no choice but to obtain the information from third-party sources in date respondent issued administrative summonses directing wells fargo bank and other financial institutions to produce petitioner’s financial and banking records in their possession petitioner intervened and petitioned the district_court to quash these summonses see scharringhausen wl scharringhausen no 02-cv-2343 scharringhausen wl after considering the parties’ pleadings and moving papers the district_court in date ordered the summonses to wells fargo bank enforced after finding that the irs had met the standard announced in 379_us_48 for enforcing administrative summonses the district_court found the irs had made a prima facie showing that it had a legitimate purpose in issuing these summonses because it was conducting examinations with regard to petitioner’s and tax_liabilities and had begun looking into petitioner’ sec_2001 tax_liabilities the district_court also concluded that petitioner’s bare assertions of possible nefarious motives were not supported by specific facts and evidence see scharringhausen wl at additionally the district_court found the irs had established a prima facie showing of relevance because 2the notice_of_deficiency relied on bank records produced from the summonses issued to wells fargo bank only the information the summonses sought might shed light on the financial activities of the business entities through which the irs believed petitioner earned_income in the relevant years id finally the district_court found the irs had made a prima facie showing that the information sought was not already in the agency’s possession and that the agency had followed all requisite administrative steps id at using the records produced from these summonses agent phan was able to identify bank accounts over which petitioner had signature_authority and at least entities that petitioner owned none of the bank accounts were in petitioner’s name of all the entities and bank accounts identified agent phan focused on four entities and their bank accounts r michael construction pacific sun construction inc pacific sun torrey beach inc torrey beach and mississippi inc mississippi it is undisputed that these entities did not file federal_income_tax returns for the years at issue except for r michael 3our record shows agent phan sent notices in the form of letter together with the initial contact letter to petitioner before she contacted any third party in compliance with sec_7609 4the bank records relating to these accounts were produced in response to the wells fargo bank summonses in her income reconstruction agent phan relied only on bank records produced from the wells fargo bank summonses 5r michael construction was the subject of an irs audit for and continued construction and mississippi the entities did not have employer identification numbers no one besides petitioner had signature_authority over the bank accounts belonging at least in name to these entities in date while petitioner’s audit was underway petitioner filed his federal_income_tax returns with respondent for the three years at issue both the and returns reported substantial business_losses on schedule c profit or loss from business and the return reported a modicum of business income but claimed substantial net_operating_loss nol carryovers finding inconsistencies between the late-filed returns and petitioner’s previous statements to agent phan as well as petitioner’s bank records obtained through the summonses agent phan concluded petitioner had underreported his income and thus rejected petitioner’s returns with extensive bank records in hand agent phan reconstructed petitioner’s income and made several determinations first agent phan determined that unexplained deposits of approximately dollar_figure million were made to the four bank accounts held by the four businesses that were the focus of the audit agent phan also determined that petitioner owned these four entities a fact that petitioner ha sec_5 continued as a result of the audit the commissioner assessed tax deficiencies of approximately dollar_figure and dollar_figure for and respectively not sought to dispute then she disregarded the corporate form of these four fictitious businesses as entities separate from their owner and treated income of these entities as income to petitioner since petitioner had sole control of their bank accounts and none of these entities had filed federal_income_tax returns or paid any federal income taxes but to be conservative agent phan considered only amounts of withdrawals that personally benefited petitioner first agent phan treated checks petitioner wrote to himself as income to him she also took into account withdrawals that petitioner made to purchase cashier’s checks that he used to make payments on his cayman national bank credit card account finally agent phan included in petitioner’s income checks petitioner wrote to john fikes--who was petitioner’s equity partner in r michael construction pacific sun and mississippi--and to several other individuals and entities7 because those payments were made for petitioner’s personal benefit and were not business_expenses deductible by the entities on whose bank accounts the checks were drawn for the three years pincitein his answer to the petition respondent argues an alternative theory under which the amounts charged to petitioner would be constructive dividends 7these individuals and entities included brad dingham heidi humphreys dawn landrum dan sanders heather winger petitioner’s son michael scharringhausen san diego travel and havasu springs resort issue agent phan sourced petitioner’s income with substantive evidence as follows year r michael construction pacific sun torrey beach mississippi dollar_figure dollar_figure dollar_figure - - - dollar_figure dollar_figure dollar_figure dollar_figure - - - dollar_figure dollar_figure dollar_figure total dollar_figure dollar_figure dollar_figure dollar_figure in total agent phan determined that petitioner had dollar_figure of unreported income in addition to the income determinations agent phan identified several indicia of fraud in the course of the audit first petitioner persistently refused to cooperate with agent phan in his audit further petitioner failed to file his federal_income_tax returns for several years and when he did file his returns after respondent had commenced the audit petitioner underreported his income for multiple years moreover petitioner did not hold any of the bank accounts under his name but rather held them under various business entities that he used to route and reroute his money to conceal the personal nature of his expenses finally he failed to maintain adequate books_and_records for these businesses and made multiple cash withdrawals from their bank accounts to pay his cayman national bank credit card account in date agent phan referred the case to the criminal_investigation_division cid of the irs but the referral was rejected six weeks later at trial in san diego california petitioner challenged some of agent phan’s findings but did not testify himself he prosecuted his case solely on the basis of the testimony of three witnesses mr fike mr list and agent phan neither petitioner nor any of his witnesses disputed that petitioner owned the four business entities that none of these entities paid any federal_income_tax or that he wrote the checks on which agent phan relied to reconstruct his income petitioner disputed only whether some of these check withdrawals were made for his own benefit in addition to questioning agent phan’s income characterization of these numerous check withdrawals petitioner argues on brief that respondent’s determinations in the deficiency_notice were based on information acquired through invalid administrative summonses and the civil audit was a criminal investigation in disguise petitioner has also raised at trial a different but related argument that the notice_of_deficiency was arbitrary and capricious because it was a part of the government’s vendetta against him in connection with its prior criminal prosecution in the district_court for fraud and money laundering opinion i respondent’s summonses and the civil audit a res_judicata and collateral_estoppel petitioner’s primary argument on brief is that the summonses leading to the discovery of the wells fargo bank records on which respondent based his determinations in the notice_of_deficiency were improperly issued specifically petitioner argues the issuing of these summonses violated sec_7602 because respondent issued them while a referral for criminal prosecution was pending petitioner further claims that respondent violated sec_7602 by making impermissible third-party_contacts without first notifying petitioner these arguments are foreclosed by res_judicata and collateral_estoppel because they were raised and rejected in the district court’s petition-to-quash proceeding in which the district_court ordered the wells fargo bank summonses enforced see scharringhausen wl under res_judicata or claim preclusion a final judgment on the merits in a prior suit bars a second suit involving the same cause of action and the same 8respondent has not asserted res_judicata or collateral_estoppel as affirmative defenses see rule however in the interest of promoting judicial economy the court may raise res_judicata and collateral_estoppel on its own initiative see 891_f2d_1211 6th cir 109_tc_235 parties or their privies 439_us_322 n under federal res_judicata law two suits involve the same cause of action if the claim asserted in the new suit arises out of the same transaction or series of transactions as the claim resolved by the prior judgment 800_f2d_1308 4th cir the same transaction or series of connected transactions invokes a pragmatic standard to be applied with attention to the facts of the cases in general the expression connotes a natural grouping or common nucleus of operative facts restatement judgment 2d sec_24 cmt b even though the district_court proceeding and the petition before this court involve what appear on the surface to be two distinct causes of action ie a petition to quash summonses and a petition for redetermination of deficiencies petitioner’s underlying claims--that the issuing of the wells fargo bank summonses violated sec_7602 and d --are the same and involve common nucleus of operative facts petitioner argued in the district_court that respondent failed to meet the notification requirement under sec_7609 an argument the district_court rejected as factually unfounded and his additional claim now 9clearly if respondent met the requirement under sec_7609 he would also meet the requirement under sec_7602 that he provide reasonable advance notice to petitioner before making contacts with third parties before this court that respondent violated sec_7602 by issuing the summonses when a criminal_referral was pending is a claim that he could have made in the district_court proceeding because the claim arose from the same transaction and involves common facts ie issuance of the administrative summonses to wells fargo bank because the district court’s enforcement order was a final judgment on the merits see 519_us_54 per curiam finding district_court enforcement order is final and immediately appealable regardless of which side prevails in district_court 506_us_9 ndollar_figure finding a district_court order enforcing an irs summons is an appealable final order and that there is no general_rule barring immediate appeal of irs summons enforcement orders and since petitioner did not appeal that order to the court_of_appeals the order became final and will foreclose petitioner’s assertion in this court of the same claims or other claims that he could have made in the district_court see 734_f2d_913 2d cir enforcement order is res_judicata to contestant on his fifth_amendment privilege claim and other claims not expressly dealt with in the order indeed the district_court in a subsequent suit that petitioner brought against the united_states claiming civil damages under sec_7433 alleging violation of sec_7602 notice to taxpayer when making third-party_contacts and sec_301 c proced admin regs proscription on issuing of administrative summonses when a justice_department referral is in effect had already concluded that the district court’s determinations in the petition-to-quash proceedings would bar petitioner’s civil damage claims on res_judicata ground see scharringhausen wl at we see no reason why the same bar would not apply here similarly collateral_estoppel precludes petitioner from relitigating the same issues that he litigated in the district_court the doctrine_of collateral_estoppel or issue preclusion preclude s relitigation of both issues of law and issues of fact if those issues were conclusively determined in a prior action 464_us_165 issue preclusion applies when there was a full and fair opportunity to litigate the issue in the previous action the issue was actually litigated in that action the issue was lost as a result of a final judgment in that action and the person against whom collateral_estoppel is asserted in the present action was a party or in privity with a party in the previous action irs v palmer in re palmer 207_f3d_566 9th cir the district_court decided that respondent had met all the powell requirements one of which is that respondent follow all administrative steps the code requires the district_court explicitly found that respondent satisfied the notice requirement for making third-party_contacts and concluded in its final enforcement order that respondent had timely notified petitioner meeting the requirement under sec_7609dollar_figure thus the issue relating to prior notice was fully and actually litigated in the district_court and petitioner may not relitigate that issue in this court the district court’s finding that respondent had followed all administrative steps also means implicitly that respondent did not impermissibly issue the administrative summonses when a justice_department referral was in effect in violation of sec_7602 and its regulations in a petition to quash irs summonses it is the commissioner’s burden to make a prima facie showing that he has satisfied the powell requirements and once the commissioner has made that showing it is incumbent on the taxpayer to disprove it 72_f3d_1418 9th cir the district_court found respondent made the prima facie case that he had followed all administrative steps petitioner failed to rebut respondent’s showing and did not appeal the enforcement 10see supra note order hence the district court’s finding necessarily decided that respondent had complied with sec_7602 and sec_301_7602-1 proced admin regs which prohibit the issuance of administrative summonses when a justice_department referral is pending see 460_us_752 enforcement order necessarily contained implied finding that no defense of lack of possession or control had been raised and sustained in enforcement proceeding dollar_figure having failed to take his case to the court_of_appeals petitioner may not relitigate the issue now in this courtdollar_figure 11in holding that res_judicata and collateral_estoppel foreclose petitioner’s claims that respondent violated sec_7602 and d we distinguish our decision today from our decision in 88_tc_794 in which we held the taxpayers could not use res_judicata and collateral_estoppel offensively to ask the court to suppress evidence that the commissioner sought to introduce in the vallone case the district_court had quashed the commissioner’s administrative summonses finding that the commissioner had obtained information to be used against the taxpayers through the concealment and misrepresentation of material facts and enforcing the summonses would constitute an abuse of judicial process id pincite before the tax_court the taxpayers contended that the district court’s decision would under res_judicata and collateral_estoppel bar the commissioner from introducing evidence obtained through the improperly issued summonses we disagreed with the taxpayers and concluded that the district court’s final order to quash the commissioner’s summonses had no preclusive effect because the question before the district_court could not be equated with the question of whether evidence obtained by the government is admissible in a civil tax proceeding id pincite then conversely a finding by the district_court that the commissioner has issued administrative summonses valid under 379_us_48 as is the case presently before us necessarily means that any evidence obtained from the summonses cannot be excluded in a deficiency proceeding on the ground that the summonses are defective under powell further the district_court in the vallone case did not as a part of its findings actually and necessarily determine that the commissioner’s conduct rose to a level of a constitutional violation requiring suppression vallone v commissioner t c pincite but here to the extent petitioner is asking us to exclude evidence or to invalidate the statutory_notice_of_deficiency because respondent violated sec_7602 and d our considerations and the district court’s determinations are coextensive in scope 12lawyers appearing before us generally have the duty to advise the court of any relevant and controlling authorities even if they are directly adverse to the continued b summonses properly issued even if petitioner’s claims were not barred by claim preclusion or issue preclusion the facts before us would still compel the conclusion that the issuance of the administrative summonses complied with sec_7602 and d first respondent met the requirement under sec_7602 to notify petitioner before making third-party_contacts because agent phan sent notices in the form of letter together with the initial contact letter to petitioner before she contacted any third party see internal_revenue_manual irm pt date second respondent did not violate sec_7602 because he never made a justice_department referral under sec_7602 the commissioner may not issue any administrative summonses or seek enforcement of summonses if a justice_department referral is in effect with respect to such taxpayer such a continued position being advocated see model rules of prof’l conduct r many of petitioner’s arguments on brief were rejected several times by the district_court with citations of the relevant and controlling authorities even though petitioner is not a member of a state bar and is appearing pro_se his prior experience litigating cases in the district_court and the tax_court is well documented and any claims that he does not know he has a duty to be candid to the court would strain credulity thus his attempt to hide the ball by failing to direct the court’s attention to the relevant authorities is treading the fine line of making a misrepresentation to the court referral is in effect with respect to a taxpayer if the commissioner recommends that the u s attorney_general commence a grand jury investigation or criminal prosecution of the taxpayer for tax-related offensesdollar_figure sec_7602 sec_301_7602-1 proced admin regs the referral becomes effective at the time the commissioner signs the document recommending criminal prosecution or grand jury investigation sec_301_7602-1 proced admin regs thus the relevant point after which a summons may not issue is when a recommendation for criminal prosecution is made to the department of justice 801_f2d_1162 9th cir there is nothing in the record that shows respondent had made such a recommendation to the department of justice when he issued the administrative summonses the only part of the record that even remotely suggests there was a criminal_referral is agent phan’s testimony that she referred the civil audit to the 13a justice_department referral is also in effect when the attorney_general or deputy attorney_general or assistant attorney_general requests under sec_6103 in writing that the secretary disclose a return of or return_information relating to a taxpayer for the purpose of a grand jury investigation of or potential or pending criminal investigation of the taxpayer for any alleged offense connected with the administration or enforcement of the internal revenue laws sec_7602 sec_301_7602-1 proced admin regs petitioner did not allege the attorney_general had made such a request cid in date almost a year and a half after respondent issued the summonses even had agent phan made the referral to the cid at the time respondent issued the summonses that referral was not a justice_department referral within the meaning of the statute indeed congress intended to draw a clear line to limit the commissioner’s power to issue administrative summonses as the criminal aspect of a tax investigation becomes cleardollar_figure respondent did not cross that line in this case c disguised criminal investigation petitioner made one final argument on brief asking the court to disregard the entire civil audit and find against respondent’s deficiency_notice because it was many tax investigations by the internal_revenue_service have both civil and criminal aspects the senate_finance_committee believes that a clear definition of when the power to issue an administrative_summons exists and when it does not exist in cases with a criminal aspect will simplify administration of the laws without prejudicing the rights of taxpayers to permit the drawing of a clear distinction it was necessary to expand the purposes for which an administrative_summons may be issued by the internal_revenue_service s rept no pincite u s c c a n see also internal_revenue_manual pt dollar_figure date stating so-called sole criminal purpose defense has been rejected by congress in sec_7602 and only limitation is when justice_department referral has been made under sec_7602 based on a criminal investigation which violated the law and respondent’s internal guidelines the body of law that petitioner refers to in his brief concerns situations where the commissioner has obtained evidence through a criminal investigation cloaked in a civil audit courts have held that evidence acquired through such deceit trickery or misrepresentation would be excluded in the subsequent criminal prosecution against the taxpayer because such conduct would violate the taxpayer’s constitutional rights under the fourth and the fifth amendments to the constitution see 550_f2d_297 5th cir see also 153_f3d_445 7th cir 477_f2d_13 9th cir but this is a civil tax case and the cases petitioner cites are irrelevantdollar_figure see 919_f2d_115 9th cir aff’g tcmemo_1988_586 petitioner does not specifically point out in his brief the internal guidelines that respondent had allegedly failed to follow in very general language petitioner 15in certain situations the exclusionary rule would apply in a civil tax_deficiency proceeding on due process grounds under the fifth_amendment if the constitutional infirmity in the commissioner’s conduct were so outrageous as to shock the court’s conscience see vallone v united_states t c pincite petitioner has not raised this argument and the record does not show respondent had committed any error so grave as to require us under the constitution to set_aside the notice_of_deficiency states irs guidelines specifically warn the revenue agents who are in the process of determining the appropriateness of a criminal_referral must not obtain evidence and or direction from the criminal_investigation_division for a specific case that is under examination the part of the irm that appears to relate to petitioner’s contention states if after consultation with the district fraud coordinator dfc it is determined a potential fraud case has firm indicators of fraud and meets criminal criteria the compliance employee will suspend all activities without disclosing to the taxpayer or representative the reason for the suspension irm pt date even if for the sake of argument a criminal_referral was pending and respondent did not follow his internal procedures to suspend the civil audit such procedures were not required by either the constitution or statute and noncompliance is not fatal to respondent’s determinations in the notice_of_deficiency see 440_us_741 as petitioner correctly points out in his brief the commissioner issued these internal guidelines in the light of tweel to prevent evidence that the government may use in a future criminal prosecution from being excluded by a court’s later finding that the government had acquired the evidence from the taxpayer in violation of the taxpayer’s constitutional rights but there is more than one way for the commissioner to adhere to the constitutional standard announced in tweel and to protect the criminal prospect of its fraud investigation see tweel f 2d pincite ‘ t he record must disclose some affirmative misrepresentation to establish the existence of fraud’ quoting 424_f2d_1021 5th cir thus because the purpose of these procedures is only to safeguard the government’s interest in pursuing a criminal prosecution in fraud cases and to govern the commissioner’s internal affairs they do not have the effect or the force of law and are merely directory and not mandatory and non-compliance does not render the action of the respondent invalid vallone v commissioner t c pincite see weiss v commissioner f 2d pincite 97_tc_7 see also 79_tc_185 it is a well-settled principle that the court will not look behind a statutory_notice_of_deficiency to examine the evidence used the propriety of the commissioner’s motive or the administrative policy or procedure in making his determinations vallone v commissioner t c pincite 62_tc_324 like the taxpayer in vallone petitioner is attempting to circumvent this bedrock principle by challenging the admissibility of evidence that is the core of respondent’s deficiency determinations see generally greenberg’s express inc v commissioner t c pincite court would look behind deficiency_notice if there is substantial evidence of unconstitutional conduct on respondent’s part having rejected petitioner’s arguments above we will now turn to respondent’s determinations ii respondent’s determinations in the statutory_notice_of_deficiency a unreported income gross_income includes all income from whatever source derived unless otherwise specifically excluded sec_61 the definition of gross_income broadly includes any instance of undeniable accessions to wealth clearly realized and over which the taxpayer has complete dominion and control 348_us_426 see also le v commissioner tcmemo_2003_219 86_tcm_116 absent a provision to the contrary funds which a shareholder diverts from a corporation are generally includable in the shareholder’s gross_income the commissioner’s determinations in a notice_of_deficiency are generally presumed correct and the taxpayer bears the burden of proving that those determinations are erroneous rule a 290_us_111 in the court_of_appeals for the ninth circuit to which the case is appealable the presumption arises only if it is supported by a minimal evidentiary foundation 596_f2d_358 9th cir rev’g 67_tc_672 in the context of unreported income the commissioner must produce some substantive evidence demonstrating that the taxpayer received unreported income 743_f2d_670 9th cir aff’g tcmemo_1982_666 once the commissioner meets his burden of production the taxpayer must establish by a preponderance_of_the_evidence that the determination is arbitrary or erroneous id see also 702_f2d_1288 9th cir because petitioner argues on brief only that respondent had improper motives and allegedly violated the law in issuing the administrative summonses and in conducting the civil audit we will treat petitioner’s silence on the remaining issues as a concession of those issues see 84_tc_716 accordingly because the record supports respondent’s determination that petitioner diverted funds from the four businesses that he owned by making check withdrawals from which he derived personal benefit we sustain respondent’s determinations of petitioner’s unreported income for the years at issue foundation for presumption of correctness of respondent’s income determinations when a taxpayer has provided little information in an audit as is the case here the commissioner may reconstruct the taxpayer’s income using any available method including examining the taxpayer’s bank records see generally 348_us_121 435_f2d_1197 7th cir the record shows that petitioner owned r michael construction pacific sun torrey beach and mississippi that they were income-producing business activities in which petitioner engaged during the relevant period and that over dollar_figure million was deposited in their bank accounts over the years at issue respondent has produced numerous bank records and copies of canceled checks showing that petitioner had sole control_over the bank accounts and wrote checks to himself and to other individuals drawn on the entities’ bank accounts these check withdrawals do not reveal any clear business purposes or any ties to the business entities indeed in several instances the record reveals the personal nature of these withdrawals in one of these instances petitioner had written several checks to heidi humphreys who according to mr fike’s testimony was petitioner’s part- time girlfriend petitioner had also written checks to san diego travel and havasu springs resort which respondent determined to be for petitioner’s personal benefit in addition to the checks he wrote to purchase cashier’s checks to pay off his cayman national bank credit card account petitioner wrote numerous checks separately to brad dingham dawn landrum dan sanders heather winger and petitioner’s son michael scharringhausen which all appear to be personal viewing the record as a whole the court concludes that respondent has established the minimum evidentiary foundation to show that the check withdrawals were not business_expenses deductible by the four business entities but they were rather made for petitioner’s personal gain and thus are income to petitionerdollar_figure 16mr fike also testified that ms humphreys was also working for petitioner and mr fike under another entity called stimulife inc 17under the constructive_dividend theory which respondent argues as an alternative theory for finding the unreported income expenses nondeductible to a corporation are income to the corporation’s shareholder if they also represent some economic gain or benefit to the owner-taxpayer 565_f2d_1388 9th cir remanding tcmemo_1973_223 our finding that the check withdrawals were made for petitioner’s benefit applies equally under the constructive_dividend theory because respondent has met his burden to give rise to the presumption of correctness of his income determinations it is upon petitioner to produce evidence continued petitioner’s rebuttal of the presumption for his part petitioner called mr fike at trial to challenge respondent’s determination of petitioner’s unreported income petitioner also called agent phan and mr list to testify regarding respondent’s computation of petitioner’s income and respondent’s motives behind the civil audit petitioner himself did not testify on brief petitioner argues only that respondent violated the law and his internal procedures when he issued the administrative summonses and conducted the civil audit arguments we have already rejected as unfounded to the extent petitioner also claims that respondent’s determinations were otherwise arbitrary and capricious because the audit was part of the government’s vendetta against him in connection with its prior criminal prosecution in the district_court for fraud and money laundering we also reject that argument because as it is worth emphasizing again the court will not look behind the statutory notice to question the propriety of respondent’s motive unless petitioner is able to show by continued that the corporations he owned lacked sufficient earnings_and_profits for the distributions to be characterized as taxable dividends as opposed to nontaxable return_of_capital see 552_us_421 ndollar_figure suggesting taxpayer bears the burden of producing some evidence to show corporation lacked sufficient earnings_and_profits and taxpayer had sufficient basis in his stock petitioner has failed to produce any such evidence substantial evidence that respondent’s conduct gravely offends the constitution greenberg’s express inc v commissioner t c pincite petitioner has not made such a showing moreover respondent selected petitioner for audit because petitioner appeared on a list of potential tax evaders that respondent had compiled as a result of the john doe summonses and also because petitioner did not file his federal_income_tax returns for the years at issue thus we cannot say respondent selected petitioner for audit for a clearly unjustifiable criterion that would justify relief see id in any event petitioner’s presentation at trial alone did not succeed in rebutting the presumption of the correctness of the notice_of_deficiency by a preponderance_of_the_evidence the only relevant testimony was from mr fike who testified that he received a number of checks from petitioner that were drawn on some of the bank accounts at issue that he kept the money and that the amounts deposited were of no benefit to petitioner mr fike also testified as to the checks that petitioner wrote to the other individuals and entities and attempted to explain how they did not personally benefit petitioner even though mr fike admitted that he had no personal knowledge of the specific circumstances surrounding the writing of those checks on cross-examination mr fike stated that he was not aware of any forms 1099-misc miscellaneous income or forms w-2 wage and tax statement issued to these individuals and admitted he did not have much personal knowledge of the financial affairs and accounting of the four business entities involved and that these were all mr scharringhausen’s department he could not even recall the nature of some of the checks that he received from petitioner thus as the trier of fact we are unable to rely on mr fike’s wavering testimony which was ambiguous at times and self-contradicting as a whole especially given his admission that petitioner was the only person in charge of the finances of the four business entities involved in sum petitioner has failed to show by a preponderance_of_the_evidence that respondent’s determinations in the statutory notice are incorrect b nol deductions are a matter of legislative grace and a taxpayer bears the burden of producing sufficient evidence to substantiate any allowable deduction under the code sec_6001 rule a 503_us_79 sec_1_6001-1 income_tax regs sec_172 allows a taxpayer to deduct an nol for a taxable_year in an amount equal to the sum of the nol carryovers plus nol carrybacks to that year sec_172 unless an election is made an nol for any taxable_year must first be carried back years and then carried over years sec_172 a taxpayer claiming an nol deduction bears the burden of establishing both the existence of the nol and the amount of any nol that may be carried over to the subject years rule a 349_us_232 green v commissioner tcmemo_2003_244 86_tcm_273 as part of meeting that burden the taxpayer must file with his return for that year a concise statement setting forth the amount of the nol deduction claimed and all material and pertinent facts including a detailed schedule showing the computation of the nol deduction sec_1_172-1 income_tax regs because petitioner’s brief does not discuss whether he is entitled to the nol deductions for the years at issue we consider petitioner to have waived the argument see 124_tc_223 aff’d 652_f3d_1042 9th cir in any event petitioner has not met his burden to show that he is entitled to any of the nol deductions as a result of the court’s finding today that petitioner had unreported income for years through we conclude that petitioner did not incur any net_operating_loss in or to carry over to petitioner’s federal_income_tax return in evidence shows he reported an nol of dollar_figure for that year all of which was claimed as a schedule c business loss however petitioner failed to submit the schedule c into evidence to provide details of any business income or any business_expenses that he purportedly claimed moreover petitioner has also failed to show whether he had income in any of the carryback years that used the nol from without more we decline to find that petitioner in fact incurred deductible losses in or that even if he did incur an nol in he could carry it to any of the tax years at issue accordingly we sustain respondent’s disallowance of the nol deductions petitioner claimed c sec_6651 addition_to_tax sec_6651 imposes an addition_to_tax on a taxpayer for failure to timely file a federal_income_tax return unless the taxpayer can show that such failure was due to reasonable_cause and not willful neglect it is undisputed that petitioner did not timely file his tax returns at trial or on brief petitioner neither advanced any arguments nor articulated any reasons as to why his failure to timely file his income_tax returns was due to reasonable_cause and not a result of his willful neglect thus the court finds that he has conceded the issue and is liable for the addition_to_tax for each year at issue see zapara v commissioner t c pincite see also 116_tc_438 d sec_6663 fraud_penalty sec_6663 imposes a penalty on the portion of any underpayment_of_tax attributable to fraud sec_6663 provides that where the commissioner establishes that any portion of an underpayment_of_tax is attributable to fraud the entire underpayment is treated as attributable to fraud except with respect to the portion of the underpayment that the taxpayer establishes by a preponderance_of_the_evidence is not attributable to fraud the commissioner bears the initial burden of establishing fraud by clear_and_convincing evidence sec_7454 rule b clear_and_convincing evidence is that measure or degree of proof which will produce in the mind of the trier of facts a firm belief or conviction as to the allegations sought to be established it is intermediate being more than a mere preponderance but not to the extent of such certainty as is required beyond a reasonable doubt as in criminal cases it does not mean clear and unequivocal 497_us_502 quoting cross v ledford n e 2d ohio see also waits v frito-lay inc 978_f2d_1093 9th cir clear_and_convincing evidence means evidence sufficient to support a finding of ‘high probability ’ citing mock v mich millers mut ins co cal rptr 2d ct app to carry his burden the commissioner must prove for each year in which fraud is alleged that an underpayment_of_tax existed and a portion of the underpayment was attributable to fraud 92_tc_661 because we conclude respondent has met his burden with clear_and_convincing evidence and petitioner has failed to rebut it by a preponderance_of_the_evidence we sustain respondent’s determination to impose the fraud_penalty underpayment_of_tax the commissioner may satisfy his burden of proving an underpayment_of_tax attributable to unreported income by either proving a likely source of the unreported income or disproving any alleged nontaxable source of that income 96_tc_858 aff’d 959_f2d_16 2d cir to prove an underpayment the commissioner need not prove the precise amount of the deficiency he has determined he need only prove clearly and convincingly that there is a deficiency and at least some part of the deficiency was due to fraud 266_f2d_698 9th cir remanding tcmemo_1957_129 see also downing v commissioner tcmemo_2003_347 86_tcm_738 moore v commissioner tcmemo_2001_77 81_tcm_1442 the presumption of correctness attached to the commissioner’s deficiency determination does not extend to his fraud determination clark v commissioner f 2d pincite as we have stated elsewhere in this opinion the record shows that petitioner had written many checks drawn on the bank accounts held by his business entities more specifically of all the check withdrawals totaling more than dollar_figure petitioner wrote checks to himself and checks payable to cash or to wells fargo bank to purchase cashier’s checks for more than dollar_figure--a fact that petitioner has not disputed by even a scintilla of evidence--which clearly represents pecuniary gain and thus income to petitioner our finding is further bolstered by our finding that the four business entities petitioner owned were shell companies whose corporate form should be disregarded and whose assets should be imputed to petitioner thus respondent has met his burden to prove by clear_and_convincing evidence the first element for imposing the fraud_penalty as the record clearly shows that for each of the years at issue petitioner had unreported income resulting in underpayment_of_tax fraudulent intent whether a portion of the underpayment_of_tax is attributable to fraud is a question of fact to be resolved on the basis of the record as a whole 94_tc_654 67_tc_181 aff’d without published opinion 578_f2d_1383 8th cir fraud is defined as the intentional commission of an act or acts for the specific purpose of evading tax believed to be owing petzoldt v commissioner t c pincite fraudulent intent is never imputed or presumed but must always be established by independent evidence id pincite because fraud is rarely admitted and the taxpayer’s intent is rarely available fraud may be proven by circumstantial evidence and reasonable inferences drawn from the facts 317_us_492 796_f2d_303 9th cir aff’g tcmemo_1984_601 the intent to conceal or mislead may be inferred from a pattern of conduct see spies u s pincite there are several nonexclusive badges_of_fraud from which the court may infer a taxpayer’s fraudulent intent understating income maintaining inadequate records failing to file tax returns giving implausible or inconsistent explanations of behavior concealing assets failing to cooperate with tax authorities engaging in illegal activities attempting to conceal illegal activities and dealing extensively in cash see bradford v commissioner f 2d pincite 99_tc_202 bussell v commissioner tcmemo_2005_77 89_tcm_1032 aff’d 262_fedappx_770 9th cir a taxpayer’s education as well as business background and sophistication are also relevant to our inquiry niedringhaus v commissioner t c pincite after thoroughly examining the record we found present in this case all but one indicium of fraud that the court_of_appeals stated in bradford accordingly we conclude respondent has proven by clear_and_convincing evidence that petitioner had the requisite fraudulent intent before respondent opened an audit relating to petitioner’s through tax years petitioner failed to file federal_income_tax returns for those years the same is true with his various business entities and when he finally did file the returns after respondent commenced the audit petitioner repeatedly underreported his income and reported substantial losses time and time again throughout his audit petitioner steadfastly refused to cooperate with respondent he also made groundless arguments in the district court’s petition-to-quash proceedings to obstruct respondent’s efforts to obtain information from third parties about his financial and business affairs hoping that one hand of the federal judiciary does not know what the other hand is doing petitioner is now making the same meritless arguments why the administrative summonses respondent had issued were invalid arguments which the district_court had already rejected in those proceedings given petitioner’s rich experience litigating cases in federal courts and the fact that he is also an intelligent and sophisticated businessman we will infer with conviction from petitioner’s evasive and litigious behavior that he intended to conceal and obscure the true nature of his financial dealings in the years at issue the evidence has also convinced us that petitioner’s various entities were part of an elaborate scheme to conceal his income and expenses it is undisputed that petitioner owned these business entities which had not filed any federal_income_tax returns these entities held multiple bank accounts in their names over which petitioner--who had no bank accounts under his name--had the sole signatory authority petitioner offered no explanation as to how he supported himself financially whereas the record provides us a clear picture of how petitioner regularly withdrew money from the bank accounts to pay his personal expenses he repeatedly withdrew large sums of cash some of which he used to purchase cashier’s checks to pay off the cayman national bank credit card account that he used to conduct personal transactions further petitioner has not come forward with any detail or any accounting to show the daily operations the business structures or the financial affairs of his business entities he did not testify at trial but instead presented his case with misleading arguments and innuendos these facts together with petitioner’s evasive behavior and failure to maintain adequate_records for his businesses allow a strong inference that these businesses are a sham to hide income in addition petitioner’s involvement in prior illegal fraudulent activities also weighs against him in our analysis he was previously charged with five counts of mail fraud two counts of money laundering and four counts of bankruptcy fraud ultimately a jury convicted him of three counts of bankruptcy fraud for hiding assets from the bankruptcy court this is highly probative because respondent determined petitioner committed tax_fraud by concealing his income and assets from respondent the absence of the fourth bradford factor--namely giving implausible or inconsistent explanations of behavior--is not surprising and does not affect our analysis through his experience in navigating the federal judicial system petitioner has familiarized himself with legal proceedings and can appreciate the positive as well as the adverse consequences of testifying which we believe explains why he has chosen not to testify at trial and subject himself to examination by respondent’s counsel petitioner did not give implausible or inconsistent explanations of his behavior because petitioner did not give any explanations at all moreover we will draw a negative inference from petitioner’s failure to testify and to present evidence when respondent’s probative evidence against petitioner is so overwhelming see 425_us_308 petzoldt v commissioner t c pincite drawing adverse inference from failure to testify permitted in civil case in the light of the foregoing discussion we are convinced that petitioner’s underreporting of income for the years at issue resulted in underpayments of tax we are also convinced that at least a portion of each underpayment was attributable to fraud because petitioner has not provided any evidence that any portion of any underpayment was not attributable to fraud we find the entire amount of each underpayment_of_tax was attributable to fraud and sustain respondent’s determinations of the fraud penalties iii epilogue in reaching our holdings we have considered all arguments raised by the parties to the extent not discussed herein we find them to be irrelevant moot or without merit to reflect the foregoing decision will be entered for respondent


department of the treasury int ernal revenue service washington d c date o f f i c e o f c h i e f c o u n s e l number release date cc pa cbs br2 mjlew gl-129160-00 uilc memorandum for abbey b garber associate area_counsel sbse from joseph w clark senior technician reviewer branch collection bankruptcy summonses subject offer_in_compromise this memorandum refers to your request for advice dated date this document is not to be cited as precedent issue whether the internal_revenue_service can accept an offer_in_compromise submitted by one of the general partners to compromise his individual derivative share of the employment_tax obligations of the partnership conclusion the internal_revenue_service may not accept an offer_in_compromise submitted by one of the general partners to compromise his individual derivative share of the employment_tax obligations of the partnership the employment_tax obligations of the partnership represent a single liability assessed against the partnership entity the partnership_liability is the only liability subject_to compromise and any compromise of this liability must involve a thorough analysis of the partnership assets and the assets of the other general partners facts the information provided by your office indicates that is a general_partner of a now defunct partnership she is indebted to the united_states for outstanding federal_income_tax liabilities form_1040 sole_proprietorship employment_tax liabilities form and partnership liabilities the partnership liabilities represent gl-129160-00 employment_tax obligations of the partnership for the first and second quarters of submitted an offer_in_compromise intended to cover her personal income_tax and sole_proprietorship employment_tax liabilities as well as her portion of the partnership’s employment_tax obligations she also signed a co-obligor letter agreeing that the compromise of the outstanding partnership taxes is for her liability only and that the service is free to collect the remaining debt from the other general_partner s you requested our advice as to whether the government can accept an offer_in_compromise submitted by the general_partner to compromise her individual derivative share of the partnership employment_tax liabilities without also considering the value of the assets of the partnership and the other general_partner s discussion the offer_in_compromise handbook irm addresses the liabilities of a partnership and provides as follows the amount that must be offered to compromise a partnership tax_liability must include the maximum collection potential for the partnership and all general partners secure collection information statements from the partnership and all partners before beginning your analysis the handbook however offers no specific guidance with regard to a derivative portion of a partnership’s employment_tax liabilities the partnership’s employment_tax liabilities arise when the partnership fails to pay certain taxes as required by the internal_revenue_code for example the partnership as an employer is required to pay withheld income taxes sec_3403 withheld federal_insurance_contributions_act fica_taxes sec_3102 employer’s share of fica_taxes sec_3111 and federal_unemployment_tax_act futa taxes sec_3301 under texas state law the general partners are jointly and severally liable for the partnership’s debts and obligations including its employment_tax obligations see tex the partnership is considered an employer for purposes of income_tax_withholding pursuant to sec_3401 the term person referenced in sec_3401 includes an individual trust estate partnership_association company or corporation sec_7701 in addition for purposes of the fica and futa provisions employer is defined the same as in sec_3401 see 419_us_43 gl-129160-00 civ stat ann art 6132b-dollar_figure however there is no provision in the internal_revenue_code with regard to the general partners’ individual liability for these tax obligations their liability stems from state law it is important to note that although the general partners are jointly and severally liable for the unpaid debts of the partnership under state law the actual partnership employment_tax liability is a single liability assessed once against the partnership and owed by the partnership itself state law allows the service to collect the debt from the general partners but that ability to collect does not alter the nature of the employment_tax liability - it remains a singular debt for which the partnership entity is primarily liable liability for this debt is not based on the internal revenue laws the internal_revenue_code does not provide that the partnership employment_tax liabilities are joint_and_several consequently there is no individual partnership employment_tax liability for the general_partner to compromise under the internal_revenue_code under sec_7122 the secretary has the authority to compromise any case arising under the internal revenue laws a case is defined to be a civil or criminal liability see temp sec_301_7122-1t a the liability at issue in this case is that of the partnership again as a general_partner does not have an individual liability for partnership employment_taxes under the internal revenue laws only under state law however because she is a general_partner she can bind the partnership to a compromise of the partnership_liability see tex civ stat ann art 6132b-dollar_figure the offer_in_compromise in this case may be considered to be an offer to compromise the partnership_liability submitted by the general_partner on behalf of the partnership if makes this offer in her capacity as a general_partner and it is accepted as such then it is binding not just on the partner submitting the offer but also on the partnership the government and all the other partners see temp sec_301_7122-1t d accordingly if the offer_in_compromise submitted by is accepted it would serve to compromise the partnership_liability and it would be binding on the partnership all the partners and the government as indicated above a co-obligor agreement would not be effective to preserve the service’s right to proceed against the other general_partner s for the full amount of the employment_tax debt the other partners would be liable only for the unpaid portion of the compromise reached with in order to protect the government’s interest as part of your analysis of whether or not to accept the offer_in_compromise the collection potential of the other partners and the partnership must be considered based on the information provided it is not known if there are other general partners or the circumstances surrounding the dissolution of the defunct partnership if there was a dissolution we recommend that appropriate action be taken to ascertain the value of the other general partners’ assets at this time either for the purpose of assisting with a new offer or for collection gl-129160-00 purposes since the offer_in_compromise submitted by in its present form is not acceptable the service may seek to collect the outstanding partnership debt from the other general partners in the event that the value of the assets of the partnership and the other general partners is not ascertainable either because the other partners are uncooperative their whereabouts are not known or for some other reason the service of course is not required to accept an offer_in_compromise for the partnership_liability the service may seek to collect the outstanding partnership debt administratively as it deems appropriate another option is that the service may entertain an offer_in_compromise submitted by that includes only her personal income_tax liabilities form_1040 and the sole_proprietorship employment_tax liabilities form since she is not individually liable for the partnership employment_tax liabilities under the internal revenue laws an offer_in_compromise submitted by her need not include that liability in order to be considered an acceptable offer if you have any questions please contact the attorney assigned to this case at in accordance with sec_7122 an offer_in_compromise is a discretionary collection tool and is used if the service deems a compromise to be in the best interests of both the taxpayer and the government policy statement p-5-100 in any situation where the commissioner does not believe that a compromise can be constructed so as to adequately protect the interests of the government it is within his discretion to exercise other collection methods normally an offer_in_compromise must include all outstanding tax_liabilities under the internal revenue laws of the individual or entity submitting the offer irm


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-136495-07 date date ----------- ------------------ ------------------ ---------------------------------------- legend ----------------------------------- x ------------------------------------------ state d1 d2 dear --------------- submitted on behalf of x requesting that the service grant x an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an entity classification election company on d1 and commenced operations on d2 x elected to be treated as an association_taxable_as_a_corporation effective d2 a the managing member of x represents that x intended to be treated as a partnership for federal tax purposes effective d2 however form_8832 entity classification election electing to be treated as a partnership was not filed timely for x this responds to a letter dated july and subsequent correspondence the information submitted states that x was formed as a state limited_liability sec_301_7701-2 generally provides that a business_entity is any entity sec_301_7701-3 further provides that so long as a business_entity is not 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-136495-07 recognized for federal tax purposes that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the internal_revenue_code sec_301_7701-3 provides that an eligible_entity with at least two members may elect to be classified as either an association and thus a corporation under sec_301_7701-2 or as a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner classified as a corporation under sec_301_7701-2 or an eligible_entity it may elect its classification for federal tax purposes 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 to elect to be treated as a partnership for u s income_tax purposes effective d2 a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose based solely on the information submitted and the representations made we sec_301_9100-1 through provide the standards the except as specifically set forth above no opinion is expressed concerning the plr-136495-07 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 being sent to x’s authorized representative pursuant to a power_of_attorney on file with this office a copy of this letter is this ruling is directed only to the taxpayer requesting it sec_6110 sincerely william p o’shea associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


department of the treasury employer_identification_number contact person - id number contact telephone number vil internal_revenue_service p o box cincinnati oh release number release date date date legend c llc d grant program e religion f dollar amount g dollar amount h dollar amount j dollar amount k dollar amount m dollar amount dear you asked for advance approval of your educational grant procedures under internal_revenue_code sec_4945 this approval is required because you are a private_foundation that is exempt from federal_income_tax our determination we approved your procedures for awarding educational grants based on the information you submitted and assuming you will conduct your program as proposed we determined that your procedures for awarding educational grants meet the requirements of code sec_4945 as a result expenditures you make under these procedures won't be taxable description of your request is to deepen you will operate an educational grant program called d the purpose of d and enrich the e educational learning opportunities of students and where relevant or desired their families by offering grants to organizations for use in such programs while you will primarily fund d you may also request that other donors enter into the original grant agreement with the recipient in providing additional funding as an affiliate affiliates would provide grants to the original recipient under the procedures established below funds will be administered in conjunction with c of which you are the sole member the duration and amounts of the grants awarded to educational organizations will vary but most are expected to be in the form of three year grants in amounts ranging between f and g dollars per annum you will fund each grantee’s program in the first year thereafter grantee organizations are expected to obtain increasing amounts of donor commitments to cover the costs of their programs you expect to mail informational materials to individual educators who are working at organizations that provide e educational programming to students in grades kindergarten through twelfth grade and college the educators who have received or will receive the solicitation materials and application package have been or will be pre-selected by nominators engaged by you to identify and recruit potential applicant organizations with outstanding educators at their organizations since you do not have educational staff with e educational experience you developed relationships with individual consultants who have experience with formal and informal programming to help identify an appropriate applicant pool and to ensure high quality among the applicant pool you have engaged individuals to serve as nominators in connection with d you requested that the nominators identify a group of outstanding innovative educators working with educational organizations who you could invite to apply for funding nominators were asked to identify individuals with a reputation for implementing high quality programming and a proven track record for achieving educational results additionally you requested that nominators identify educators who the nominators believe can propose new programs that could be implemented by the educational organizations where such educators are employed that would deepen and enrich the knowledge and identity of the students of such organizations and educators and if relevant the families of these students while the objective is to have innovative educators design d programs you will also consider the nature of the organization where the educator is employed as the organization will be responsible for supporting sustaining and implementing the educational programming if the organization is awarded a d grant the class of eligible grantees is limited to educational organizations at which educators identified by the nominators are employed although the invitations are intended to be non-transferable and personal to the identified educators you are committed to building educational programming at the grantee organization under the supervision of either the nominated educator or another qualified educator at the organization that is selected by the grantee organization in making their initial nominations the nominators will take into account the experience of the organization in implementing high quality educational programming you will review the submitted applications based upon a number of criteria including experience and track record of the applicant organization in executing effective e educational programming the clarity of the plan and budget readiness of the letter catalog number 58222y organization to implement the proposed project and goals of the proposal and the probability of the organization achieving the stated goals of the proposal you expect to commit funds to d in its first year sufficient to enable between ten to twenty grantee organizations to begin developing programs with the nominated educators thereafter the extent to which you will commit to funding programs and new grantees will be determined after an assessment regarding the success of the first grantees’ programs and available_resources each grantee may request a different amount for each of the three years as it builds its program in the first year grantees may request between f and g dollars in the second year grantees may request between f and h dollars in the third year grantees may request between f and j dollars in years two and three the grantee organization is expected to also raise program funds from other sources during the third year of the grant you will evaluate the impact of the program and effectiveness of grantee organizations for achieving proposal objectives based upon implementation feedback such as increases in the program participants quantity of time participants spend engaged in programming supported by d or increased depth or measure of learning as determined by valid educational measures you will invite a number of grantees to apply for an additional two years of grant funding if awarded an extension grant each grantee organization would be eligible to receive a maximum of k dollars in year four and m dollars in year five as with the standard three year grants such extension grant will be made with the expectation that the grantees secure increasing amounts of donor commitments to offset program_costs you will fund each grant in installments with an initial payment up front to fund the first eight months of programming in year one thereafter each grantee organization would submit a report to you every six months upon receipt of a report which evidences the satisfactory continued implementation of the program supervised by an adequately qualified educator whether the initial nominated educator or a replacement selected by the educational_organization you will fund the subsequent payments in years one two and three and if extended years four and five if the nominated educator leaves the educational_organization after you enter into the grant agreement the educational_organization would be responsible for selecting an adequately qualified educator to continue implementing the program grantees will submit written reports to you every six months reports will include a narrative description of the implementation of the educational programming and will be accompanied by a financial report on the use of granted funds compared against the budget a program coordinator or other c representative will regularly communicate with each recipient organization to receive feedback on the funded program and how the grant monies are being spent in connection to such programming each grant recipient must keep and maintain financial records in such a manner so as to adequately reflect and account for_the_use_of the organization grant funds and to furnish letter catalog number 58222y originals or authentic copies to the program coordinator upon request c in its sole discretion may take any and all such reasonable and appropriate steps including possible legal action to compel compliance of the use of funds for their intended purpose including requiring the return of all or any portion of funds remitted and the withholding of funds not previously remitted the awarding of d is a multi-faceted process which begins with the initial identification of educational organizations at which nominated educators are then employed nominated educators are then sent informational materials and grant applications which they are encouraged to complete with the appropriate stakeholders at their respective educational organizations applications must be submitted by educational organizations completed applications submitted by those educational organizations are then received by you and evaluated by your selection committee each completed application will be reviewed by one or more members of your staff anda nominator other than the nominator who originally nominated the educator who was the architect for the related proposal each member will rate the application in connection with following parameters e e e e the internal logic educational strength and process of implementing the educational proposal described in the application the evidence and probability that the proposed educational programming will significantly deepen and enrich the educational growth of the program participants the track record of the organization in implementing educational programming and in successfully implementing new educational programming the readiness of the organization and commitment of the organization to expand and offer the new programming the level of involvement and supervision which the selected educator will assume in guiding the project the selection committee will also be responsible for identifying any relationships between potential grant applicants and disqualified persons and ensure that organizations with any such relationship s are not awarded grants your selection committee consists of one or more members of your staff and a nominator other than the nominator who originally nominated the educator who was the architect for the related proposal lf any member of the senior staff or management of a potential grant recipient is either related to whether by blood or through marriage or has any direct or indirect affiliation with the d program coordinator or any director officer_or_employee of you or c they will be ineligible to participate in the program no director officer_or_employee of you or c or any other person who is involved in the letter catalog number 58222y process of selecting applicants for the program will be in a position to derive a private benefit directly or indirectly if certain potential grantees are selected over others basis for our determination the law imposes certain excise_taxes on the taxable_expenditures of private_foundations code sec_4945 a taxable_expenditure is any amount a private_foundation pays as a grant to an individual for travel study or other similar purposes however a grant that meets all of the following requirements of code sec_4945 is not a taxable_expenditure the foundation awards the grant on an objective and nondiscriminatory basis the irs approves in advance the procedure for awarding the grant the grant is - - - ascholarship or fellowship subject_to sec_117 and is to be used for study at an educational_organization described in sec_170 or a prize or award subject_to the provisions of sec_74 if the recipient of the prize or award is selected from the general_public or toachieve a specific objective produce a report or similar product or improve or enhance a literary artistic musical scientific teaching or other similar skill or talent of the recipient to receive approval of its educational grant procedures sec_53_4945-4 requires that a private_foundation show the grant procedure includes an objective and nondiscriminatory selection process the grant procedure results in the recipients performing the activities the grants were intended to finance the foundation plans to obtain reports to determine whether the recipients have performed the activities that the grants were intended to finance other conditions that apply to this determination this determination covers only the grant program described above this approval will apply to succeeding grant programs only if their standards and procedures don't differ significantly from those described in your original request this determination applies only to you it may not be cited as precedent you cannot rely on the conclusions in this letter if the facts you provided have changed substantially you must report any significant changes in your program to the cincinnati office of exempt_organizations at internal_revenue_service exempt_organizations determinations letter catalog number 58222y p o box cincinnati oh e e e you cannot make grants to your creators officers directors trustees foundation managers or members of selection committees or their relatives all funds distributed to individuals must be made on a charitable basis and must further the purposes of your organization you cannot award grants for a purpose that is inconsistent with code sec_170 b you should keep adequate_records and case histories so that you can substantiate your grant distributions with the irs if necessary we've sent a copy of this letter to your representative as indicated in your power_of_attorney please keep a copy of this letter in your records if you have any questions please contact the person listed at the top of this letter sincerely director exempt_organizations letter catalog number 58222y


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 b1 plr-153321-07 date date legend x -------------------------------------------------- ------------------------------------------------------------------- y -------------------------------------------------- ------------------------- country country date dear ------------- ---------------- ------------ -------------------- this is in response to a letter dated date requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election to treat y as an entity disregarded as separate from its owner for federal tax purposes under sec_301_7701-3 facts according to the information submitted and representations made within the request on date x an entity formed under the laws of country acquired y an entity formed under the laws of country y intended to be treated as a disregarded_entity for federal tax purposes effective date however the form_8832 entity classification election inadvertently was not timely filed law and analysis plr-153321-07 sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally unless the entity makes an election to be treated otherwise a foreign eligible_entity is treated as an association_taxable_as_a_corporation if all members have limited_liability if a foreign eligible_entity has only one owner it may elect to be treated as a disregarded_entity pursuant to the rules in sec_301_7701-3 if a 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 sec_301_7701-3 further provides that an entity classification election must be filed on form_8832 entity classification election and can be effective up to days prior to the date the form is filed or up to months after the date on which the form 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 regulatory election as including an election with a deadline prescribed by a regulation published in the federal_register 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 interests of the government sec_301_9100-3 conclusion based solely upon the information submitted we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result an extension of days from the date of this letter is granted to elect to treat y as disregarded as an entity separate from its owner for federal tax purposes effective date the entity classification election should be made by filing form_8832 with the appropriate service_center a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose plr-153321-07 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer s 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 will be sent to your authorized representative sincerely william p o’shea william p o’shea associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


cca_2013050114164761 ----------------- id office uilc number release date from ---------------------- sent wednesday may pm to ------------------- cc -------------------------------------------------------------------------------------- subject re revproc_2011_34 dear -- you have requested our interpretation of one of the procedural requirements for obtaining relief under revproc_2011_34 which provides guidance under sec_1_469-9 of the income_tax regulations allowing certain taxpayers to make late elections to treat all interests in rental real_estate as a single rental real_estate activity in particular section dollar_figure of revproc_2011_34 provides in part that to obtain relief the taxpayer must attach the statement required by sec_1_469-9 to an amended_return for the most recent tax_year and mail the amended_return to the irs service_center where the taxpayer will file its current_year tax_return you have asked whether if appeals otherwise has authority to accept amended returns from a taxpayer appeals may accept the amended_return required by section dollar_figure of revproc_2011_34 our view is if appeals otherwise has authority to accept amended returns from a taxpayer appeals may accept the amended_return required by section dollar_figure of revproc_2011_34 we appreciate the opportunity to provide assistance to you


tcmemo_2011_26 united_states tax_court nathaniel j holmes petitioner v commissioner of internal revenue respondent docket no filed date nathaniel j holmes pro_se laura a price for respondent memorandum opinion goeke judge respondent determined that income petitioner received in from blackwater security consulting blackwater for dangerous security work while in iraq was not excludable from his gross_income under sec_112 this issue and additions to 1all section references are to the internal_revenue_code in continued tax under sec_6651 and and for are before us for the reasons stated herein we hold that petitioner’s income may not be excluded and that he is liable only for the sec_6654 addition_to_tax background some of the facts have been stipulated and are so found at the time petitioner filed his petition he resided in florida petitioner was engaged in performing dangerous security services in iraq during petitioner was hired and paid_by blackwater to perform these security services in iraq his work in iraq related to military operations petitioner received compensation of dollar_figure for those services he also received dollar_figure in taxable interest from navy federal credit_union for iraq was identified as a combat_zone under executive_order fed reg date while in iraq petitioner was given a memorandum issued by robert l hunt the acting deputy director compliance field operations internal_revenue_service irs this memorandum discussed the appropriate steps for civilian personnel to take when engaged in an irs examination and collection activity involving a taxpayer deployed to a qualified combat_zone petitioner did not remember who gave the memorandum to him continued effect for the year in issue petitioner did not file an income_tax return for or on date respondent prepared a substitute for return for petitioner under sec_6020 for at some point in petitioner provided respondent with a form_1040 u s individual_income_tax_return dated may petitioner reported zero income and zero tax due on the form_1040 respondent did not accept the form_1040 as a valid_return on date respondent mailed petitioner a notice_of_deficiency regarding his income_tax_liability on date petitioner timely filed a petition with this court i sec_112 discussion sec_61 provides that gross_income includes all income from whatever source derived unless the taxpayer can establish a specific legislative authorization to exclude income from taxation 348_us_426 sec_112 provides gross_income does not include compensation received for active_service as a member below the grade of commissioned_officer in the armed_forces_of_the_united_states for any month during any part of which such member-- served in a combat_zone 2petitioner did not make any estimated_tax payments for tax_year but made estimated_tax payments of dollar_figure during sec_7701 defines armed_forces_of_the_united_states as including all regular and reserve components of the uniformed_services which are subject_to the jurisdiction of the secretary of defense the secretary of the army the secretary of the navy or the secretary of the air force and includes the coast guard the members of such forces include commissioned officers and personnel below the grade of commissioned officers in such forces in petitioner did not serve in the armed_forces_of_the_united_states he was a private citizen who was hired by and paid_by a private company blackwater petitioner argues that because he was performing services similar to those performed by the u s military and because he performed those services in a combat_zone he should be allowed to exclude from gross_income the pay he received from blackwater while performing those duties however at no time in was petitioner actually a member of the armed_forces_of_the_united_states sec_1_112-1 income_tax regs states only compensation paid_by the armed_forces_of_the_united_states to members of the armed_forces can be excluded under sec_112 except for compensation paid_by an agency_or_instrumentality of the united_states or by an international_organization to a member of the armed_forces whose military active_duty status continues during the member’s assignment to the agency_or_instrumentality or organization on official detail compensation paid_by other employers whether private enterprises or governmental entities to members of the armed_forces cannot be excluded under sec_112 even if the payment is made to supplement the member’s military compensation or is labeled by the employer as compensation_for active_service in the armed_forces_of_the_united_states under sec_1_112-1 income_tax regs petitioner cannot exclude the compensation he received from blackwater in from gross_income because it was not compensation paid_by the armed_forces_of_the_united_states to members of the armed_forces the tax_court has held that employees of private companies performing services similar to those performed by members of the armed_forces_of_the_united_states while in combat zones do not qualify for the exclusion under sec_112 see 61_tc_675 a pilot employed by a private airline flying civilian aircraft under contract with the department of defense in support of the u s military in a combat_zone during the vietnam war was not a member of the armed_forces and therefore not entitled to the sec_112 exclusion see also hildebran v commissioner tcmemo_2004_42 in hildebran the taxpayer was employed as a merchant marine by bay ship management a private company during part of tax years and the taxpayer was assigned to work aboard a u s naval ship which operated in a combat_zone id the taxpayer was subject_to navy physical standards and navy standards of appearance training and mission completion the taxpayer was required to and did have security clearances wear uniforms receive an anthrax vaccination receive training in small arms and antiterrorism and carry a department of defense identification card which showed his ship assignment and specialty in hildebran the commissioner issued a notice_of_deficiency to the taxpayer who petitioned the court arguing that the income he received while working in a combat_zone should be excluded from gross_income under sec_112 the court held in hildebran that because the taxpayer was not a member of the armed_forces_of_the_united_states during the years at issue within the meaning of sec_112 and sec_7701 he was not entitled under sec_112 to exclude from gross_income any of the wages that he received while working for bay ship management aboard the navy ship the court stated that although the taxpayer met certain navy standards those facts did not in any way change the status of mr hildebran as a civilian employee of bay ship management the facts in hildebran are similar to the facts in this case although petitioner may have performed work similar to that of members of the armed_forces_of_the_united_states while in a combat_zone those facts do not change the status of petitioner as a civilian who was recruited and paid_by blackwater a private company therefore like the taxpayer in hildebran petitioner is not entitled under sec_112 to exclude from gross_income the compensation he received from a private company blackwater while working in iraq petitioner asserts that sec_1_112-1 examples and income_tax regs clearly illustrate that individuals providing military service in a combat_zone need not be members of the armed_forces however this is not the case examples and refer to member b described in examples and as a member of the armed_forces petitioner also asserts that congress did not intend to limit the definition of armed_forces_of_the_united_states as defined in sec_7701 and that this definition may include individuals who are not members of the armed_forces and who perform services similar to those of the united_states military congress has considered the issue of whether income earned by individuals who are not members of the armed_forces_of_the_united_states and who are working in combat zones should be excluded from gross_income it has yet to amend sec_112 to extend the exclusion to such taxpayers h_r 109th congress proposed to extend the combat_zone income_tax exclusion to civilian contract employees serving in combat jackson cong research serv rl proposed federal_income_tax exclusion for civilians serving in combat zones h_r was sent to the house ways_and_means_committee and never came forth similar bills were also introduced in h_r 107th cong and in h_r 108th cong both bills were also sent to the house ways_and_means_committee and never came forth ii additions to tax respondent determined that petitioner is liable for additions to tax for failure to timely file a return under sec_6651 failure to timely pay tax under sec_6651 and failure to pay estimated income_tax under sec_6654 sec_6651 imposes an addition_to_tax for failure to timely file a required federal_income_tax return unless the taxpayer can establish that the failure is due to reasonable_cause and not due to willful neglect sec_7491 places the burden of production on the commissioner to present sufficient evidence showing that the addition_to_tax is appropriate 116_tc_438 once the commissioner meets this burden the taxpayer has the burden_of_proof with respect to exculpatory factors such as reasonable_cause id pincite petitioner admitted on brief that he did not file a return for calender year petitioner’s only explanation for failing to file is that in while in iraq he was given a memorandum that caused him to believe that the income he was receiving from blackwater was not taxable this memorandum was an internal memorandum written to give the commissioner’s employees field guidance for examination and collection activity involving taxpayers in iraq the memorandum titled memorandum for acting deputy director compliance field operations was issued by the internal_revenue_service small_business self- employment division on date the memorandum states that civilian or military personnel who are in direct support of a combat_zone military initiative and physically located in the combat area are entitled to the exclusion it also states that time spent in a combat_zone by an individual serving in support of the armed_forces will be disregarded with respect to certain acts required under the internal_revenue_code it goes on to state that this change in procedure will be reflected in the next revision of the irm which is in the process of being written petitioner satisfies all the criteria found in the memorandum he was serving in iraq alongside the military provided security to government officials and aided in giving air support medical aid and emergency response assistance petitioner had no background in tax law and was given this memorandum written by an irs employee while serving in iraq we believe that receiving this memorandum while serving in iraq could give someone reasonable_cause to believe that his payments from blackwater were excluded from gross_income therefore petitioner is not liable for the addition_to_tax under sec_6651 respondent also determined a sec_6651 addition_to_tax sec_6651 imposes an addition_to_tax for failure to pay the amount shown as tax on a return on or before the due_date prescribed unless the taxpayer can establish such failure was due to reasonable_cause and not willful neglect the amount of the addition is equal to percent of the amount shown as tax on the tax_return but not paid with an additional percent each month or fraction thereof during which the failure to pay continues up to a maximum of percent see 120_tc_163 ndollar_figure for the reasons stated above we find that petitioner had reasonable_cause and is not liable for the sec_6651 addition_to_tax respondent also determined that petitioner is liable for an addition_to_tax under sec_6654 for failure to pay estimated_tax for sec_6654 imposes an addition_to_tax for failure to make timely and sufficient payments for estimated_tax a taxpayer has an obligation to pay estimated_tax for a particular year only if he has a required_annual_payment for that year sec_6654 a required_annual_payment is equal to the lesser_of percent of the tax shown on the taxpayer’s return due for the year in issue or if no return is filed percent of the tax for such year or if the taxpayer filed a return for the immediately preceding_taxable_year percent of the tax shown on that return sec_6654 generally sec_6654 provides no exception for reasonable_cause sec_1_6654-1 income_tax regs see also bray v commissioner tcmemo_2008_113 petitioner made no estimated_tax payments for and therefore such payments were less than percent of the amount of tax shown on the substitute for return and petitioner failed to file a income_tax return therefore petitioner is liable for the sec_6654 addition_to_tax to reflect the foregoing an appropriate decision will be entered