t c summary opinion united_states tax_court michael r and shelley f fawcett petitioners v commissioner of internal revenue respondent docket no 15851-99s filed date michael r and shelley f fawcett pro sese julie l payne for respondent goldberg special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority unless otherwise indicated subsequent section references are to the internal_revenue_code as amended and in effect for the year at issue respondent determined a deficiency in petitioners’ federal_income_tax in the amount of dollar_figure for the tax_year - - the sole issue for decision is whether settlement proceeds of dollar_figure received by petitioners during constitute damages excludable from gross_income under sec_104 adjustments to wages subject_to fica and medicare and itemized_deductions for attorney’s fees and costs are computational and will be resolved by the court’s holding on the disputed issue in this case the stipulation of facts and the attached exhibits are incorporated herein by this reference at the time of filing the petition petitioners resided in kent washington references to petitioner in the singular are to shelley f fawcett petitioners were married in early after graduating from college in date petitioner was hired by payless drug stores norwest inc payless as a supervisor trainee petitioner was initially placed in a payless store in redmond oregon even though mr fawcett at that time was in the military and stationed in washington petitioner directly reported to an assistant store manager and or a store manager approximately months later petitioner was transferred to a payless store located in bellevue washington only to be subsegquently transferred in months to twin lakes washington petitioner worked at the twin lakes store for approximately months petitioner was transferred on more occasions to different stores in washington within a 3-year period petitioner worked in approximately different payless store locations in oregon and washington while employed with payless petitioner was asked to work long hours due to understaffing of employees at a given store and in different departments within a given store as a result petitioner felt rushed and pushed in every direction petitioner continued to work in this chaotic environment because she desired a promotion however petitioner never received a promotion from payless during this time petitioner complained of chest pains lack of sleep due to her work schedule ’ and nightmares about her work environment and experienced anxiety in both her professional life and personal life ’ in date while petitioner was still employed by payless she received a notice class action notice from b newal squyers esq and debra k ellers esq of holland hart attorneys for plaintiffs notifying her of an unpaid overtime compensation law suit filed against payless this class action lawsuit was described as follows at times petitioner was scheduled to close the store pincite p m and then open the store the next morning pincite a m the strain of petitioner’s working conditions took a toll on her new marriage for instance at one particular store mr fawcett made attempts to visit petitioner at work during her break and was strictly forbidden to do so - - on date laurie sievers roy menges twila kelly and allen burgess brought this suit against payless in the united_states district_court for the district of idaho case no cv 93-0089-s-hlr alleging that they were employed by payless as salaried employees with titles such as floor manager floor supervisor senior supervisor supervisor supervisor and were required to perform clerking stocking or other tasks in excess of forty hours per week without being compensated overtime work plaintiffs bring this action and allege that payless violated the fair labor standards act of u s c plaintiffs seek compensation_for unpaid overtime liquidated_damages attorney fees and costs the class of plaintiffs in the class action consisted of employees of payless including petitioner who joined on date on date petitioner privately met with plaintiffs’ attorney kurt holzer mr holzer in tacoma washington to inform mr holzer of her personal injuries in addition to those alleged in the class action lawsuit complaint petitioner was informed at this meeting that the class action case was under mediation and a jury trial was not likely petitioner was also informed that approximately class members were deposed and allegedly suffered a number of injuries during their employment with payless including emotional distress and physical injuries and that her alleged injuries were experienced by other class members petitioner did not submit any medical bills to mr holzer or provide the same to the court the class action complaint requested relief for unpaid overtime compensation and liquidated_damages in an amount equal - - to the unpaid overtime compensation under section b of the fair labor standards act of flsa ch 52_stat_1069 currently codified pincite u s c sec_216 and attorney’s fees and costs the complaint was never amended during any time relevant to the class action lawsuit on date an order approving the settlement of the class action lawsuit was signed by larry m boyle united_states magistrate judge the settlement agreement and release settlement agreement states release of payless by the plaintiffs in exchange for the payment of the amount set forth in paragraph below and in consideration of the mutual promises and covenants contained in this settlement agreement the named plaintiffs on behalf of themselves and the individual plaintiffs upon the signing by each individual plaintiff of the release required by paragraph b of this document hereby release and discharge payless thrifty payless inc their parents agents and assigns from all actions claims or demands for damages liabilities costs or expenses which the plaintiffs individually or collectively have against payless on account of or in any way arising out the claims that were asserted or that could have been asserted in the lawsuit by the plaintiffs which lawsuit is hereby acknowledged as not fully plead further including but not limited to claims for personal injuries intentional infliction of emotional distress negligent infliction of emotional distress and from all known claims whether based on tort statute or contract which are based in whole or in part or arise out of or in any way relate to the lawsuit and anything done or allegedly done by payless arising out of or in conjunction with or relating to the employment of any and or all plaintiffs prior to date by payless liability denied and basis for settlement payless denies any liability on its part and enters into this agreement solely to avoid litigation and to buy its peace all settlement proceeds are paid to plaintiffs on account of personal injuries none of the provisions of this settlement agreement and nothing contained in this settlement agreement shall be construed as an admission of any liability whatsoever by any party hereto to any other party hereto emphasis added a total of dollar_figure million was paid_by payless to the class in consideration of the settlement agreement specifically petitioner received dollar_figure from holland hart as her net cash recovery from the settlement petitioner’s portion of attorney’s fees and costs approximately dollar_figure was retained by holland hart petitioners timely filed their joint federal_income_tax return for the taxable_year they did not report any portion of the settlement proceeds on their return nor did they claim a corresponding deduction for attorney’s fees or costs in the notice_of_deficiency respondent determined that petitioners failed to include in gross_income the settlement proceeds of dollar_figure of which dollar_figure is wages subject_to employment_tax and that petitioner is allowed a schedule a deduction for attorney’s fees which was not claimed on the original return petitioners contend that the settlement proceeds were paid to petitioner to settle claims for personal injury and intentional infliction of emotional distress therefore the - settlement award of dollar_figure is excludable from income under sec_104 sec_61 broadly defines gross_income to include all income from whatever source derived except as otherwise provided statutory exclusions from income are narrowly construed 515_us_323 sec_104 provides that gross_income does not include the amount of any damages received whether by suit or by agreement on account of personal injuries or sickness sec_1_104-1 income_tax regs provides that the term damages received means an amount received other than workmen’s compensation through prosecution of a legal suit or action based upon tort or tort type rights or through a settlement agreement entered into in lieu of prosecution petitioner’s settlement proceeds may be excluded from gross_income only if she shows the underlying cause of action giving rise to the recovery is based upon tort or tort type rights and the damages were received on account of personal injuries or sickness commissioner v schleier supra pincite the first part of the test examines the legal basis of the claim for tort-like characteristics focusing on the scope of remedies available under the statutory scheme 87_f3d_682 5th cir see also brennan v commissioner tcmemo_1997_317 the second requirement tests - - whether the damages received were due to a personal injury rather than mere economic loss dotson v united_states supra pincite see also 519_us_79 personal injury includes physical injuries and nonphysical injuries such as those affecting emotions reputation or character 504_us_229 n whether damages received pursuant to a settlement agreement are excludable under sec_104 depends on the nature of the underlying claim that was the basis for settlement id pincite determination of the nature of the claim is factual 105_tc_396 affd 121_f3d_393 8th cir we first examine the written terms of the settlement agreement to determine the allocation of settlement proceeds see jacobs v commissioner tcmemo_2000_59 the most important fact in determining the purpose of a settlement payment is ‘express language in the agreement stating that the payment was or was not made on account of personal injury ’ 90_tc_1000 quoting 88_tc_834 affd without published opinion 845_f2d_1013 3d cir revd 883_f2d_211 3d cir see also beckey v commissioner tcmemo_1994_514 however an express allocation may be disregarded if the facts and circumstances surrounding the payment indicate the payment --- - was intended by the parties to be for a different purpose see bagley v commissioner supra pincite 102_tc_116 affd in part revd in part and remanded on other grounds 70_f3d_34 5th cir petitioners rely on section of the settlement agreement that all settlement proceeds are paid to plaintiffs on account of personal injuries however the record clearly shows that the complaint in the class action was exclusively for the recovery_of overtime compensation liquidated_damages attorney’s fees and costs under the flsa in jacobs v commissioner supra this court held that recoveries for claims based on the flsa are not excludable from gross_income because flsa does not provide for personal injury compensation the flsa was enacted to establish minimum wages and maximum hours for employees see 324_us_697 the only relief available under the flsa for excessive hours worked is the payment of back wages and payment of liguidated damages see flsa u s c sec_216 liquidated_damages are intended to compensate the employee for damages too obscure or difficult to estimate caused by the delay of late payment jacobs v commissioner supra see also 316_us_572 also we note petitioner’s own testimony during trial -- - that the damages awarded were actually based on length of employment and number of hours worked by petitioner damages for petitioner’s personal injuries however real and distressful for petitioners were not claimed in the class action lawsuit against payless nor was the settlement agreement intended to provide relief for such injuries the class action notice informed petitioners that they were not required to join the class action the notice clearly stated that if you choose not to join this suit you are free to file your own lawsuit with an attorney of your choosing in order for petitioners to prevail under sec_104 both components of the test as stated above must be satisfied petitioners failed to show that the settlement award was paid as compensation_for personal_injury_or_sickness therefore the entire settlement award is includable in gross_income and petitioners are entitled to a corresponding deduction for attorney’s fees and costs under sec_67 subject_to limitations we have considered all arguments by the parties and to the extent not discussed above conclude that they are irrelevant or without merit reviewed and adopted as the report of the small_tax_case division decision will be entered for respondent


s wf fgf coe - - eo internal_revenue_service op e-edty tt department on0r0 washington oc contac pers telephone nurnber in reference to date nov legend c d dear sir or madam this is in response to your letter dated date in which you requested certain rulings with respect to the proposed transfer of all the net assets of c and d of to b b c and d are exempt under sec_501 of the internal_revenue_code and are classified as private_foundations under sec_509 b's directors have had differences of opinion as b can best be achieved charitable objectives of directors propose to distribute all of b's assets to that both will receive approximately fifty percent assets subject_to adjustment to reflect distributions made to charitable organizations directly by b prior to distribution and d will continue to pursue the exempt purposes of the transfer directors of the control of the hands of c and d will c and d be in b b after so of b's the to how the therefore the b represents that the transfers to c and p will consideration and will not day after the transfer of interna revenue service of foundation status pursuant such time as no remaining assets to section so7 a rb netifies the service of such be from current inceme all of its assets k will notify the its intent to terminate its private be without at least one the of intent jode it will a have jus b represents that it does not have any outstanding grants with respect to which it responsibility under sec_4945 of the code is required to exercise expenditure b has not notified the service that it intends to terminate its private_foundation_status nor has b ever received notification that its status as terminated acts or failures to act or to act giving rise to of a willful and flagrant act or failure a termination pursuant to sec_507 a furthermore b has not committed willful repeated a private_foundation has been the code sec_507 of the code which provides for the voluntary that except for transfers described in section an organization's private_foundation_status will be and involuntary termination of private_foundation_status provides in part b terminated only if its intent to terminate or repeated acts or failure to act giving rise to liability for tax under chapter or failures to act there has been either willful the organization notifies the service of a willful and flagrant act or sec_507 of the code provides that when a private_foundation transfers assets to another private_foundation pursuant to any liquidation merger redemption recapitalization or other adjustment organization or reorganization the transferee foundation shall not be treated as a new organization sec_1_507-1 of the income_tax regulations provides that neither a transfer of all of the assets of foundation nor a significant disposition of assets in sec_1_507-3 by a private_foundation whether or not any portion of such significant disposition of assets is made to another private_foundation shall be deemed to result ina lermination of the transferor private_foundation under sec_507 elects to terminate pursuant to sec_507 a the code unless the transferor private_foundation applicable as defined or section a private of sec_1_507-3 of the regulations provides that a of of the code the transferor organization in transferee organization in the case of section dollar_figure b benefit ameunt nbganization mujtiplied by the such transferee and the denominator of which is wade such aggregate tax_benefit pothe transferor the assets market of assets pothe less fair of of a transfer described in shall succeed to the aggregate tax an amount equal to the the transferor a fraction the numerator of which is less encumbrances transferred to the fair market enocumb ances lf immediately before the transfer at the time of transfer fair_market_value is determined sec_1_507-3 of the regulations provides that except as provided in sec_1_507-3 to b transfers where all net assets are transferred to one or more controlled private_foundations a private_foundation is required to meet the distribution_requirements of sec_4942 of b transfer of all or part of private_foundation satisfaction of the requirements to the extent the amount transferred meets the requirements of sec_4942 the code for any taxable_year in which it makes a section such transfer shall itself be counted toward its net assets to another which only relates sec_1_507-3 i and iii of the regulations provides a private_foundation transfers all of that if another private_foundation that is effectively controlled within the meaning of sec_1_482-1 of same or persons who effectively controlled the transferor private_foundation the transferee shall be treated as transferor for purposes of chapter and sec_507 through of the regulations by the its net assets to it were the the code if sec_1_507-3 of the regulations provides that in order for a transfer of assets pursuant to any liquidation merger redemption recapitalization or other adjustment organization or reorganization not an organization described in sec_501 c organization described in sec_509 or treated as described in sec_501 under sec_4947 a taxable_expenditure it must be other than an be to to sec_4940 of the code imposes a tax on the net_investment_income of private_foundations sec_4941 of the code imposes a tax on each act of self-dealing between a disqualified_person and a private- foundation sec_4942 of the code defines a qualifying a distribution as purposes described in sec_170 c b contribution to or one or more disqualified persons or which 1s not provided or directly in carrying out seet roan an operating_foundation except b re any amount_paid tc ace 1i any amount_paid to accomplish one or more other than any an organization controlled by the foundation a private_foundation one or more purposes deseribed in as otherwise used ag ' an jed sec_4944 of the code imposes certain taxes on investments jeopardizing a private foundation's charitable purposes sec_4945 of the code imposes a tax on the foundation on of the code provides that for purposes of this each taxable_expenditure as defined in sec_4945 sec_4945 section the term taxable_expenditure means any amount_paid or incurred by a private_foundation as unless a or of sec_509 foundation as defined in sec_4940 or foundation exercises expenditure_responsibility with respect to such grant in accordance with subsection h such organization is described in paragraph a grant to an organization an exempt operating the private b or is sec_4945 of the code provides that expenditure_responsibility referred to private_foundation is responsible to exert all reasonable efforts and to establish adequate procedures to see that the grant is spent solely for the purpose for which made and detailed reports with respect to such expenditures and to make full and detailed reports to the secretary in subsection d means that the to obtain full sec_53_4945-5 i of the foundation and similar excise_taxes regulations refers to the rules relating to the extent to which the expenditure_responsibility_rules contained in sec_4945 of assets described in sec_507 b and this section apply to transfers h and based upon the above facts to b c and d will allow c and d of charitable purpose and activities previously conducted by b and d will be controlled by the same directors that controlled b to continue the same c the transfer of the net assets because b is not terminating its existence and because there has been no willful repeated or flagrant act giving rise to liability under chapter sec_507 and d a result of the transfer of assets from b no tax will be imposed on b under as to because b will not notify the service of its intent to the transfer of all lerminate its private_foundation_status until at after rwceomplished sec_507 i ‘ peundation status being terminated under section sec_67 la te the code will the service has not notified b b c and d has been of b's assets to the transfer of assets to the imposition of a termination_tax under its privat a cc and least one day apply te not that not also fer all of of tly therefore oresulr oop bs in has ceodee howep because c and d are controlled by b for purposes of chapter of the code and sec_507 through sec_509 c and d will be treated subsequent to the transfer of all of b's assets as in the proportion which the fair_market_value of the fair_market_value of b's assets less encumbrances immediately before the transfer less encumbrances transferred to each bears to if each were b the assets of the code because the transfers of b's assets to of transfers described in sec_507 aggregate tax_benefit of proportions determined in accordance with sec_1 a i c and d will be the code b should be carried over to of the regulations the c and d in the code because b as an organization described in sec_501 c is not a disqualified_person with respect to either of cc or d acts of self-dealing within the meaning of sec_4941 of code c and d will not constitute the the transfers of assets to because the proposed transfers of assets to c and d will be made to accomplish the exempt purposes of not constitute investments for purposes of sec_4944 of code under sec_4944 of assets from b the excise_taxes imposed on jeopardizing investments the transfers will the the code will not apply to the transfer c and d thus of to b because c and d should be treated as if they are b for the purposes of chapter will not impose tax under sec_4940 of investment_income under sec_4940 of as the income of to each c and d the code will be treated in proportion to the assets transferred the code b's net the transfer of assets from b to c and d because b has no outstanding grants with respect to which it be is required to exercise expenditure_responsibility b witl obligated to satisfy the expenditure_responsibility requirement of sec_4945 c and d will the code and the transfer of assets to a taxable_expenditure under sec_4945 of the code not not of be because all of the assets of b will be transferred to c and in d which are private_foundations effectively controlled by the same persons who central b were b assets market the transfer minimum dostripution requitrements caf section at c and d should be treated as value of encumbrances transferred to each bears to ymmrediiats of the proportion which the fair market be peared tes meet encumbrances therefore b if each the the v before bis assets less veir thie cade fair othe nor bea its assets and for on the same basis c and d's distributable the year in which it transfers all of subsequent years amount for such taxable_year should be increased by their respective pro_rata share of b's distributable_amount for the year of the transfer and all qualifying distributions made by b in the year of the transfer should be treated on a pro_rata basis as having been made by c and d responsible for reporting their respective pro_rata share of all undistributed_income for the year of the transfer as determined in accordance with sec_4942 of moreover c and d would be the code accordingly based on the information furnished we rule as follows the transfer of all of b's assets to c and d will constitute a transfer of assets described in section s07 b of the code and will not result in the imposition of tax pursuant to sec_507 a termination the code of c and d provided that b notifies the service of the code at least one day after the transfer of all its intention to terminate private_foundation_status pursuant to sec_507 a of assets to sec_507 preparation and or filing by b documents required by state law in winding up dissolution and termination will result in imposition of tax under sec_507 of then the amount of termination_tax under the code will be zero and neither the of any final accounting or other the code of b's of for purposes of chapter the code and sec_507 c and d will be treated subsequent to through of the code the transfer of all of b's assets if each were b proportion which the fair_market_value of the assets encumbrances transferred to each bears to the fair_market_value of b's assets transfer less encumbrances immediately before the in the less of a sec_4 the aggregate tax_benefit defined in sec_507 the code will be carried over to of determined in accordance with sec_1_507-3 of regulations in proportions the c and d s the transfer of b's assets to c and d will not constitute solf-dealing under sec_4941 of the code the transfer of b's assets to c and d will not constitute jeopardizing investment within the meaning of sec_4944 of code i dh ‘4 ’ the transfer of b's assets to c and d will not result in tax under sec_4940 of the code the transfer of b's assets to c and d will not constitute taxable_expenditures within the meaning of sec_4945 of the code and b will have no expenditure_responsibility as in sec_4945 transfers and h with respect to these set forth b will not be required to comply with the record-keeping requirements of sec_4942 the transfers subsequent to the transfer of all of cc and d b of the code with respect to its assets to for the taxable_year of the proposed transfer and any subsequent year minimum distribution_requirements of sec_4942 with respect to the proposed transfer of assets b will not be required to comply with the and d will assume all obligations with respect to any of the code for the taxable_year of of b's undistributed_income within the meaning of sec_4942 in proportions determined in accordance with sec_1 a i proportions determined in accordance with sec_1 a distributions for the taxable_year of the proposed transfer any of the regulations and c and d will also succeed the regulations to b's excess qualifying as determined in sec_4942 the code of of in if the proposed transfer we are informing the ohio ep eo key district_office of this action organization's permanent records please keep a copy of this ruling with your this ruling is directed only to the organization that requested it may not sec_6110 of the code provides that it be used or cited as precedent - sincerely raid v sack f exempt ordganizat ions vecohniceal reiniech 6g


t c memo united_states tax_court david c mcdonald petitioner v commissioner of internal revenue respondent docket no filed date larry d harvey for petitioner randall l preheim for respondent memorandum opinion vasquez judge this case is before the court on respondent’s motion for summary_judgment pursuant to rule unless otherwise indicated all rule references are to the tax_court rules_of_practice and procedure and all section references are to the internal_revenue_code in effect for the year in issue after a concession the sole issue for decision is whether petitioner can exclude from income wages earned during from working in antarctica background at the time he filed the petition petitioner resided in winston salem north carolina during petitioner performed services at mcmurdo station in ross island antarctica on his federal_income_tax return petitioner excluded wage income earned and received during for services performed in antarctica i summary_judgment discussion rule a provides that either party may move for summary_judgment upon all or any part of the legal issues in controversy full or partial summary_judgment may be granted only if it is demonstrated that no genuine issue exists as to any material fact and that the legal issues presented by the motion may be decided as a matter of law see rule b 98_tc_518 affd 17_f3d_965 7th cir we conclude that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law respondent concedes that no penalty pursuant to sec_6662 is due from petitioner for ii in general sec_61 provides that gross_income means all income from whatever source derived accordingly citizens of the united_states generally are taxed on income earned outside the geographical boundaries of the united_states unless the income is specifically excluded from gross_income 117_tc_95 affd sub nom 68_fedappx_44 9th cir affd sub nom 357_f3d_1108 10th cir exclusions from income are construed narrowly and taxpayers must bring themselves within the clear scope of the exclusion id iii sec_911 in 126_tc_89 473_f3d_790 7th cir arnett ii we addressed the arguments made by the parties herein regarding sec_911 the u s court_of_appeals for the seventh circuit agreed with our analysis of sec_911 and affirmed our conclusion that antarctica is not a foreign_country pursuant to sec_911 and the regulations thereunder arnett v commissioner f 3d pincite we shall not repeat our analysis from arnett i herein we follow our analysis and holding in arnett i and the analysis and holding of the court_of_appeals in arnett ii in 126_tc_89 affd 473_f3d_790 7th cir we concluded our opinion with a continued iv conclusion accordingly for the reasons stated in arnett i arnett ii and herein we conclude that petitioner cannot exclude from gross_income wages earned during from working in antarctica to reflect the foregoing an appropriate order and decision will be entered continued citation of sec_863 suggesting that sec_863 provided an additional reason to rule against the taxpayer id pincite see also sec_863 providing that income earned in antarctica by a u_s_person is sourced in the united_states in arnett v commissioner f 3d pincite the u s court_of_appeals for the seventh circuit addressed sec_863 in greater detail stating at the outset we think that it is important to note that considering antarctica not to be a foreign_country is compatible with the general statutory scheme notably sec_911 is found under subtitle a chapter subchapter_n of the irc which is designated tax based on income from sources within or without the united_states part i of this subchapter entitled source_rules and other general rules relating to foreign_income deems any activity in antarctica to be space_or_ocean_activity in turn the united_states is designated the source country of income from such activity when earned by a citizen_of_the_united_states sec_863 although this provision does not provide a definitive answer as to whether antarctica is a foreign_country it supports the conclusion that sec_911 is not intended to apply to income earned for services provided in antarctica we take this opportunity to state our agreement with the court of appeals’ conclusion set forth above see also 450_us_1


internal_revenue_service number release date index numbers --------------------------------------- ---------------------------- ------------------------------- ------------------------------------------------------------ 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 b03 plr-112592-10 date date company ------------------------------------------------------------------------------------------------- ----------------------- legend date state a ----------------------- --------- ------------------------------------------------------------------------------------------------- ------------------------- dear --------------------- this letter responds to a letter dated date submitted on behalf of company requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as an association_taxable_as_a_corporation for federal tax purposes as well as relief to file a late s_corporation_election under sec_1362 of the internal_revenue_code code facts company was formed on date as a state limited_liability_company company’s sole member a intended that company be treated as an s_corporation for federal tax purposes effective date however company inadvertently failed to timely file a form_8832 entity classification election and a form_2553 election by a small_business_corporation plr-112592-10 law and analysis sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1362 provides that an election under sec_1362 may be made by a small_business_corporation for any taxable_year a at any time during the preceding_taxable_year or b at any time during the taxable_year and on or before the 15th day of the third month of the taxable_year sec_1362 provides that if a a small_business_corporation makes an election under sec_1362 for any taxable_year and b the election is made after the 15th day of the third month of the taxable_year and on or before the 15th day of the third month of the following taxable_year then the election shall be treated as made for the following taxable_year sec_1362 provides that if a an election under sec_1362 is made for any taxable_year determined without regard to sec_1362 after the date prescribed by sec_1362 for making the election for the taxable_year or no sec_1362 election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat the election as timely made for the taxable_year and sec_1362 shall not apply sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 an eligible_entity with a single owner can elect to be classified as an association and thus a corporation under sec_301_7701-2 or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that except as provided in sec_301_7701-3 unless the entity elects otherwise a domestic eligible_entity is i a partnership if it has two or more members or ii disregarded as an entity separate from its owner if it has a single owner sec_301_7701-3 provides in part that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides that an election under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed plr-112592-10 and can not be more than months after the date on which the election is filed if an election specifies an effective date more than days prior to the date on which the election is filed it will be effective days prior to the date it was filed sec_301_7701-3 provides that an eligible_entity that timely elects to be an s_corporation under sec_1362 is treated as having made an election under sec_301_7701-3 to be classified as an association provided that as of the effective date of the election under sec_1362 the entity meets all other requirements to qualify as a small_business_corporation under sec_1361 subject_to sec_301_7701-3 the deemed_election to be classified as an association will apply as of the effective date of the s_corporation_election and will remain in effect until the entity makes a valid election under sec_301_7701-3 to be classified as other than an association sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but not more than 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_9100-2 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 sec_301_9100-3 provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based solely on the facts submitted and representations made we conclude that company has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 accordingly company is granted an extension of time of one-hundred and twenty days from the date of this letter to elect to be treated as an association_taxable_as_a_corporation for federal tax purposes effective date the election should be made by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the election in addition we conclude that company has established reasonable_cause for failing to timely make an election to be an s_corporation and thus is eligible for relief under sec_1362 provided that company otherwise qualifies as an s_corporation we conclude that company will be recognized as an s_corporation effective date if company files a completed form_2553 effective date with the appropriate service plr-112592-10 center within one-hundred and twenty days from the date of this letter a copy of this letter should be attached to the election except as expressly provided herein we express or imply no opinion concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion as to whether company is otherwise eligible to be an s_corporation for federal tax purposes this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the ruling requests it is subject_to verification on examination in accordance with the power_of_attorney on file with this office we are sending a copy of this letter to your authorized representative sincerely associate chief_counsel passthroughs and special industries s mary beth carchia senior technician reviewer branch office of the associate chief_counsel passthroughs special industries by enclosures a copy of this letter a copy for sec_6110 purposes


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division apr vil tp ea t3 5e-t et attention legend plan p excess_plan x state s county c dear this is in response to your request for a private_letter_ruling dated date as supplemented by a letter dated date concerning the applicability of sec_415 of the internal_revenue_code to the county c excess_benefit savings_plan excess_plan x and the tax consequences related thereto you have submitted the following facts and representations in support of your request plan p is a defined contribution profit sharing plan maintained by county c plan p is a governmental_plan as described in code sec_414 of the code it is intended to meet the requirements of code sec_401 it is funded by employer contributions no employee contributions are made to plan p plan p is made available to the employees of county c and the employees of other local agencies which elect by agreement to participate in plan p participation in plan p by eligible employees of a participating employer is automatic and mandatory except for employees who are represented by a collective bargaining representative and whose participation in plan p is subject_to mandatory negotiation under the applicable law of state s such individuals will not be permitted to participate in plan p until their collective bargaining representative has negotiated their participation in plan p with their employer contributions for some participants will exceed the applicable limits imposed by sec_415 and cannot be provided under plan p excess_plan x was adopted effective date by county c to provide participants in plan p a benefit not augmented by earnings or gains equal to the part of the employer_contribution that would otherwise have been contributed to participants’ accounts in plan p but page for the fact that it exceeded the applicable limits on contributions to such plan under sec_415 of the code excess_plan x is intended to be a qualified_governmental_excess_benefit_arrangement within the meaning of that term in code sec_415 participation in excess_plan x and the payment of benefits under excess_plan x automatically cease once the participant has received a complete distribution of his or her benefits under excess_plan x eligibility to participate in and receive benefits under excess_plan x will resume upon reemployment if a former participant’s employer contributions under plan p are once again limited by the applicable limitation on annual_additions imposed by sec_415 a participant receives a distribution of his or her benefits under excess_plan x in a lump sum within sixty days of his or her termination of employment local governmental agencies in addition to county x may with the approval of county x elect by agreement to participate in excess_plan x for the benefit of their eligible current and former employees provided that they agree that i the local governmental agency cannot designate participation in excess_plan x by employees or exclusion of employees from participation in excess_plan x on an individual basis and ii current and former employees will not be given the opportunity to elect directly or indirectly to defer income under excess_plan x no election is provided under excess_plan x at any time directly or indirectly to defer compensation no employee contributions will be made to excess_plan x participation in excess_plan x is mandatory and automatic for all eligible employees of employers who participate in excess_plan x except for employees who are represented by a collective bargaining representative and whose participation in excess_plan x is subject_to negotiation under applicable state m law such individuals will not be permitted to participate in excess_plan x until their collective bargaining representative has negotiated their participation in excess_plan x with their employer excess_plan x will not accept contributions or transfers from plan p and will not pay any plan p benefits the excess_plan x trust is separate from the plan p trusts and is maintained solely for the purpose of providing excess_benefits benefits under excess_plan x will not be paid or funded from the qualified_trust assets of plan p to the extent there are excess_assets in excess_plan x they will be used to defray the expenses of administering excess_plan x and its trust each participating employer has a separate sub-trust established under the excess_plan x trust solely to hold assets contributed to the trust by such participating employer and solely from which the benefits under excess_plan x for the participants of such participating employer are paid the excess_plan x trust is a grantor_trust under the applicable state law the trust is revocable and for income_tax purposes is intended to be a grantor_trust of which each participating employer is the grantor with respect to its own sub-trust within the meaning of the term in code sec_672 through all assets held in the trust all property rights and beneficial interests acquired through the use of trust assets will remain the general unpledged unrestricted assets of the trust the interests of participants and their beneficiaries in the trust are not senior to the claims of unsecured creditors of county c and the other participating employers if the assets of the excess_plan x trust are not sufficient to pay the benefits under excess_plan x by agreement each participating employer and not plan p will pay such required amounts to the trust to provide benefits with respect to its employees contributions to the trust to provide benefits under excess_plan x for a particular participating employer’s covered current and former employees and to defray a portion of the reasonable expenses for administration of excess_plan x and its trust will come from such participating employer by agreement a page participating employer is not required to and shall not be permitted to pre-fund the benefits under excess_plan x and may contribute only such amounts for a plan_year as are necessary to provide benefits under excess_plan x for such year only plus the administrative expenses based on the above facts and representations you have requested the following rulings that excess_plan x and its trust as adopted effective eligible employees of county c and the other participating employers meet the legal requirements of code sec_415 for a qualified_governmental_excess_benefit_arrangement and for the benefit of the benefit payments from excess_plan x will be taxed to the participants as income only as they are actually paid or made available code sec_415 sets forth the treatment of qualified governmental excess_benefit arrangements code sec_415 provides in part that in determining whether a governmental_plan as defined in sec_414 meets the requirements of sec_415 benefits provided under a qualified_governmental_excess_benefit_arrangement shall not be taken into account sec_415 defines such an arrangement as a portion of a governmental_plan which meets the following three requirements a such portion is maintained solely for the purpose of providing to participants in the plan that part of the participant's annual_benefit otherwise payable under the terms of the plan that exceeds the limitations on benefits imposed by sec_415 excess_benefits b under such portion no election is provided at any time to the participant directly or indirectly to defer compensation and c excess_benefits are not paid from a_trust forming a part of such governmental_plan unless such trust is maintained solely for the purpose of providing such benefits with respect to your first requested ruling excess_plan x is a portion of plan p which your _ authorized representative has stated is a governmental_plan as described in code sec_414 it is represented that the only purpose of excess_plan x is to provide participants in plan p that portion of a participant’s benefits that would otherwise be payable under the terms of plan p except for the limitations on contributions imposed by code sec_415 the excess_plan x limits participation to plan p participants for whom contributions would exceed the code sec_415 limits therefore we have determined that excess_plan x is a portion of a governmental_plan which is maintained solely for the purpose of providing to plan p participants that part of the participant’s benefit otherwise payable under the terms of plan p that exceeds the sec_415 limits and as such meets the requirements of sec_415 your authorized representative has stated that participation in excess_plan x is automatic and mandatory for plan p participants for whom contributions are limited by code sec_415 and that there are no employee contributions to excess_plan x your representative also asserts that no direct or indirect election to defer compensation is provided to any participant in excess_plan x thus we have determined that no direct or indirect election is provided at any time to participants to defer compensation and accordingly the requirements of sec_415 are met code sec_415 requires that the trust from which excess_benefits are paid must not form a part of the governmental_plan in this case plan p which contains the excess_benefit page arrangement unless such trust is maintained solely for the purpose of providing such benefits in the present case the excess_plan x trust is part of plan p but it is maintained separately contributions to the trust consist only of the amount required to pay the excess_benefits for the plan_year and the amount required to pay administrative expenses to pay benefits in future plan years therefore we have determined that the requirements of sec_415 are met funds are not accumulated since excess_plan x and its trust satisfy all of the requirements of sec_415 we conclude with respect to your first ruling_request that excess_plan x and its trust being implemented for the eligible employees of county c and the other participating employers meet the legal requirements of code sec_415 for a qualified_governmental_excess_benefit_arrangement with respect to the second requested ruling sec_415 provides that for purposes of this chapter a the taxable_year or years for which amounts in respect of a qualified_governmental_excess_benefit_arrangement are includible in gross_income by a participant and b the treatment of such amounts when so includible by the participant shall be determined as if such qualified_governmental_excess_benefit_arrangement were treated as a plan for the deferral of compensation which is maintained by a corporation not exempt from tax under this _ chapter and which does not meet the requirements for qualification under sec_401 ruling has already determined that excess_plan x meets the legal requirements of sec_415 of the code for qualified governmental excess_benefit arrangements accordingly the tax treatment of the amounts distributed under excess_plan x to the participants is determined as if such qualified_governmental_excess_benefit_arrangement were treated as a plan for the deferral of compensation which is maintained by a corporation not exempt from tax under this it has chapter and which does not meet the requirements for qualification under sec_401 been represented that the trust is a grantor_trust within the meaning of code sec_672 through and under state law sec_83 of the code provides that the excess if any of the fair_market_value of property transferred in_connection_with_the_performance_of_services over the amount_paid if any for the property is includible in the gross_income of the person who performed the services for the first taxable_year in which the property becomes transferable or is not subject_to a substantial_risk_of_forfeiture sec_1_83-3 of the income_tax regulations provides that for purposes of sec_83 the term property includes real and personal_property other than money or an unfunded and unsecured promise to pay money or property in the future property also includes a beneficial_interest in assets including money transferred or set_aside from claims of the transferor's creditors for example in a_trust or escrow account sec_402 of the code provides that contributions made by an employer to an employee's trust that is not exempt from tax under sec_501 are included in the employee's gross_income in accordance with sec_83 except that the value of the employee's interest in the trust will be substituted for the fair_market_value of the property in applying sec_83 under sec_1_402_b_-1 of the regulations an employer's contributions to a nonexempt employee's trust are included as compensation in the employee's gross_income for the taxable_year in which the contribution is made but only to the extent that the employee's interest in such contribution is substantially_vested as defined in the regulations under sec_83 page sec_451 of the code and sec_1_451-1 of the regulations provide that an item_of_gross_income is includible in gross_income for the taxable_year in which actually or constructively received by a taxpayer using the cash_receipts_and_disbursements_method of accounting under sec_1_451-2 of the regulations income is constructively received in the taxable_year during which it is credited to a taxpayer's account set apart or otherwise made available so that the taxpayer may draw on it at any time however income is not constructively received if the taxpayer's control of its receipt is subject_to substantial limitations or restrictions various revenue rulings have considered the tax consequences of nonqualified_deferred_compensation arrangements revrul_60_31 situations 1960_1_cb_174 holds that a mere promise to pay not represented by notes or secured in any way does not constitute receipt of income within the meaning of the cash_receipts_and_disbursements_method of accounting see also revrul_69_650 1969_2_cb_106 and revrul_69_649 1969_2_cb_106 under the economic_benefit_doctrine an employee has currently includible income from an economic or financial benefit received as compensation though not in cash form economic benefit applies when assets are unconditionally and irrevocably paid into a fund or trust to be used for the employee's sole benefit 16_tc_244 affd per in revrul_72_25 curiam 194_f2d_541 6th cir revrul_60_31 situation c b and revrul_68_99 1968_1_cb_193 an employee does not receive income as a result of the employer's purchase of an insurance_contract to provide a source of funds for deferred_compensation because the insurance_contract is the employer's asset subject_to claims of the employer's creditors accordingly with respect to the second ruling_request it is concluded that the benefit payments from excess_plan x will be taxed to the participants as income only as they are actually paid or made available a copy of this letter has been sent to your authorized representative in accordance with the power_of_attorney on file in this office this ruling letter is directed only to the taxpayer who requested it sec_6110 of the code provides that this ruling may not be used or cited as precedent this ruling letter is based on the assumption that plan p is a governmental_plan as described in code sec_414 and that it meets all of the applicable_requirements under code sec_401 page if you have any questions about this letter please contact at please refer to se t ep ra t3 sincerely yours hug v- pga frances v sloan manager employee_plans technical group enclosures notice deleted copy of ruling letter cc


t c memo united_states tax_court peter e hendrickson and doreen m hendrickson petitioners v commissioner of internal revenue respondent docket no filed date peter e hendrickson and doreen m hendrickson pro sese robert d heitmeyer steven l williams and charles v dumas iii for respondent memorandum findings_of_fact and opinion buch judge during the years at issue the hendricksons were married and received income from which taxes were withheld mrs hendrickson also received nonemployee compensation and mr hendrickson received payments from lost horizons corp lost horizons a michigan corporation of which he was the sole shareholder the hendricksons did not report their income filing zero returns and claiming refunds of the withheld taxes the commissioner issued two notices of deficiency one to the hendricksons jointly for and and one to mr hendrickson separately for and the hendricksons timely filed a petition while residing in michigan the hendricksons are tax protesters their returns were frivolous and their positions in this litigation are also frivolous we addressed most of their arguments in waltner v commissioner tcmemo_2014_35 aff’d 659_fedappx_440 9th cir and we need not address them further the issues we will address are whether the statute_of_limitations on assessment bars collection of the hendricksons’ tax_liabilities whether mrs hendrickson’s nonemployee compensation received in and mr hendrickson’s wages received in through and mr hendrickson’ sec_1lost horizons was a michigan corporation incorporated on date and dissolved on date tax protesters and tax defiers are p ersons who make frivolous anti- tax arguments 136_tc_498 n 3see 737_f2d_1417 5th cir we perceive no need to refute these arguments with somber reasoning and copious citation of precedent to do so might suggest that these arguments have some colorable merit income received from lost horizons are taxable whether the hendricksons are liable for penalties under sec_6663 or additions to tax under sec_6651 for taxable_year sec_2002 and and whether mr hendrickson is separately liable for the same penalty and addition_to_tax for whether mr hendrickson is liable for additions to tax under sec_6651 and f for taxable years and and whether the commissioner is collaterally estopped from contesting the hendricksons’ tax_liabilities because of the hendricksons’ prior criminal conviction and subsequent payment of restitution findings_of_fact the hendricksons are not strangers to judicial proceedings relating to their federal_income_tax the issues before the court stand in a long line of civil and criminal proceedings relating to their federal_income_tax as is directly relevant here the hendricksons have participated in civil and criminal proceedings that relate to the years before the court 4all section references are to the internal_revenue_code in effect for the years at issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated all monetary amounts are rounded to the nearest dollar i the hendricksons’ and returns during and mr and mrs hendrickson received income that was reported to the internal_revenue_service irs mr hendrickson worked for personnel management inc personnel management earning dollar_figure and dollar_figure for and respectively personnel management filed and issued forms w-2 wage and tax statement reporting tax withheld of dollar_figure and dollar_figure respectively mrs hendrickson received nonemployee compensation of dollar_figure and dollar_figure for and respectively the payor created and filed forms 1099-misc miscellaneous income reporting these payments mr hendrickson also received additional income in and from lost horizons during those years lost horizons promoted his book cracking the code the fascinating truth about taxation in america bank records show that lost horizons issued checks to mr hendrickson totaling dollar_figure in and dollar_figure in the hendricksons submitted a joint_return for they reported zero wages and dollar_figure in taxable interest which resulted in no tax_liability and a refund of dollar_figure mr hendrickson did not submit the form_w-2 issued to him by personnel management and instead submitted form_4852 substitute for form w-2 zeroing out the wages reported by personnel management the substitute w-2 states that mr hendrickson determined his wages and withholdings using c ompany provided records and the statutory language behind sec_3401 and sec_3121 and others in explaining his efforts to obtain a corrected form_w-2 mr hendrickson states that he r equest ed but the company refuses to issue forms correctly listing payments of ‘wages as defined in a and a ’ for fear of irs retaliation the amounts listed as withheld on the w-2 it submitted are correct however the hendricksons did not report any earnings from lost horizons the hendricksons also attached to their return a form 1099-misc disputing mrs hendrickson’s nonemployee compensation the form 1099-misc was marked corrected and at the bottom of the form included the following statement signed by mrs hendrickson this corrected form 1099-misc is submitted to rebut a document known to have been submitted by the party identified above as ‘payer’ which erroneously alleges a payment to the party identified above as the ‘recipient’ of gains profit or income made in the course of a trade_or_business under penalty of perjury i declare that i have examined this statement and to the best of my knowledge and belief it is true correct and complete 5the complete title of this form is substitute for form_w-2 wage and tax statement or form 1099-r distributions from pensions annuities retirement or profit-sharing_plans iras insurance contracts etc this use of a zero return zeroing out wages and compensation and reporting zero tax_liability has been repeatedly characterized as frivolous the hendricksons submitted a joint_return for the hendricksons return reported zero wages dollar_figure in taxable interest and an ira distribution of dollar_figure that resulted in zero tax_liability and a refund of dollar_figure the hendricksons maintained the same frivolous reporting positions as used on their return in a nearly identical manner they submitted form_4852 disputing mr hendrickson’s wages from personnel management and a corrected form 1099-misc disputing mrs hendrickson’s nonemployee compensation the hendricksons did not include any earnings from lost horizons ii mr hendrickson’s and returns mr hendrickson submitted separate returns for and during and mr hendrickson worked for personnel management earning dollar_figure dollar_figure and dollar_figure respectively for and 6see eg 136_tc_455 jagos v commissioner tcmemo_2017_202 aff’d a f t r 2d ria 6th cir waltner v commissioner tcmemo_2014_35 aff’d 659_fedappx_440 9th cir blaga v commissioner tcmemo_2010_170 100_tcm_91 ulloa v commissioner tcmemo_2010_68 hill v commissioner tcmemo_2003_144 rayner v commissioner tcmemo_2002_30 aff’d 70_fedappx_739 5th cir personnel management filed and issued forms w-2 reporting tax withheld of dollar_figure dollar_figure and dollar_figure respectively mr hendrickson continued using form_4852 to dispute his wages and withholding from personnel management and submitted zero returns for and this frivolous reporting position resulted in zero tax_liability for each of these three years the commissioner processed mr hendrickson’s return but rejected his and returns substitutes for returns were prepared for and under sec_6020 the and substitutes for returns used single filing_status included income reported from mr hendrickson’s employment with personnel management applied the standard_deduction and allowed for one exemption on those returns the commissioner calculated increased tax_liabilities and imposed additions to tax under sec_6651 and f mr hendrickson did not pay any of the tax calculated on the and substitutes for returns iii civil refund proceeding in date the united_states filed a civil complaint for erroneous tax refunds for and and sought a permanent injunction against the hendricksons the complaint sought to recover the hendricksons’ refunds issued as a result of the misrepresentations the hendricksons made on their and form_1040 tax returns and to enjoin defendants under sec_7402 from filing a false and fraudulent tax returns and forms with the internal_revenue_service the complaint further states that mr hendrickson’s bogus zero- income scheme fraudulently asserts that the payment of federal taxes is voluntary and that his customers are legally entitled to refunds of all taxes withheld from their paychecks in date the u s district_court for the eastern district of michigan issued an amended judgment and order of permanent injunction the judgment required that the hendricksons return their erroneous refunds received from their and returns under sec_7405 and ordered a permanent injunction prohibit ing the hendricksons from filing any_tax return amended_return form or other writing or paper with the irs that is based on the false and frivolous claims set forth in cracking the code that only federal state_or_local_government workers are liable for the payment of federal_income_tax or subject_to the withholding of federal income social_security and medicare taxes from their 7complaint united_states v hendrickson no e d mich date the complaint highlights mr hendrickson’s book cracking the code and his use of www losthorizons com to promote his book and the frivolous positions expressed therein wages the hendricksons appealed to the u s court_of_appeals for the sixth circuit and the judgment was affirmed iv criminal proceeding mr hendrickson was indicted on counts of filing a false document under sec_7206 in date counts relating to the use of form_4852 in place of forms w-2 for tax years and through and counts relating to form sec_1040 u s individual_income_tax_return for tax years and through during his criminal proceeding mr hendrickson argued the same frivolous positions discussed in cracking the code a jury found mr hendrickson guilty on all counts and a criminal judgment was entered against him in date the judgment included imprisonment fines and restitution the hendricksons’ restitution amount was calculated to include the tax due and owing by the defendant for through dollar_figure as well as the fraudulent refund that the defendant obtained by filing a false return for dollar_figure totaling dollar_figure the hendricksons have fully paid the restitution amount mr hendrickson’s conviction was affirmed by 8amended judgment and order of permanent injunction pincite united_states v hendrickson no e d mich date 9indictment united_states v hendrickson no e d mich date the u s court_of_appeals for the sixth circuit and his petition for certiorari was denieddollar_figure v current deficiency proceeding the commissioner issued two notices of deficiency on date the first determined the following deficiencies and penalties with respect to mr and mrs hendrickson’s federal_income_tax for year sec_2002 and year deficiency dollar_figure big_number penalty sec_6663 dollar_figure big_number the notice states that should sec_6663 not apply in the alternative sec_6651 should apply to impose an addition_to_tax for fraudulent_failure_to_file for each year the second notice determined the following deficiencies penalties and additions to tax with respect to mr hendrickson’s federal_income_tax for years and 10see 460_fedappx_516 6th cir cert_denied 567_us_906 additions to tax_year deficiency dollar_figure big_number big_number penalty sec_6663 dollar_figure --- --- sec_6651 --- dollar_figure sec_6651 --- dollar_figure big_number the hendricksons filed a single petition arguing that n o underpayment of petitioners’ federal_income_tax liabilities exists for the year sec_2002 through and that petitioners were not negligent nor did petitioners knowingly or negligently disregard any rules or regulations governing the preparation of tax returns for the year sec_2002 through and did not intentionally disregard any_tax rules or regulations they also dispute all adjustments and calculations for each of the years at issue arguing that the commissioner erred in determining their deficiencies in federal_income_tax penalties under sec_6663 and additions to tax under sec_6651 the hendricksons further claim that the payment of restitution was in full satisfaction of the alleged tax debt and that respondent knowingly waived any rights he may have had after the fact of payment to seek anew sic assessment and collection of that alleged debt through respondent’s deficiency procedures or in any other way the hendricksons also claim that the commissioner is barred from litigating this matter under the doctrines of res_judicata and collateral_estoppel that the commissioner’s acceptance of restitution waives all future claims that the period of limitations for assessment and collection has passed and that the commissioner’s notice_of_deficiency fails to set forth accurate numerical information is arbitrary capricious ambiguous unclear indefinite uncertain and or illogical and fails to state a claim on which relief can be granted this case was tried in date the following december we issued our opinion in graev v commissioner graev iii t c ___ date supplementing and overruling in part 147_tc_460 on date we ordered the parties to address the effect of graev iii on this case the parties responded and the commissioner moved to reopen the record to submit evidence of sec_6751 supervisory approval the court granted the commissioner’s motion over the hendricksons’ objection and further trial was held at trial the court admitted into evidence documents that the commissioner relies on for sec_6751 supervisory approval of penalties these documents include a form fraud development recommendation - examination and a civil_fraud lead sheet form lists mr hendrickson’s name includes the revenue agent’s notes asserting fraud penalties for and is dated august and is signed by the revenue agent’s immediate supervisor the civil_fraud lead sheet lists both mr and mrs hendrickson asserts fraud penalties for and is undated and includes a detailed description of the hendricksons’ frivolous filing techniques the hendricksons argue that the commissioner’s evidence of supervisory approval was not actually intended to meet the requirements of sec_6751 and that its purpose is to provide a framework for making potential fraud determinations not an actual fraud determination they contend that form and the civil_fraud lead sheet do not meet the commissioner’s own requirements and fail to identify or document any potential fraud indicators the hendricksons further argue that sec_6751 approval is required for additions to tax under sec_6651 and f because congress intended sec_6751 to apply to all penalties not automatically calculated through electronic means the commissioner’s position is that sec_6751 requires only approval in writing by the immediate supervisor of the individual who made the initial determination he argues that the form and the civil_fraud lead sheet show that a penalty was determined by a revenue_agent in writing and that the determination was approved by the revenue agent’s supervisor the commissioner further argues that approval of sec_6651 additions to tax is specifically excluded under sec_6751 opinion the hendricksons’ tax-protester arguments have burdened the judicial system and the irs for nearly three decades their use of substitute forms w-2 and corrected forms 1099-misc as discussed in cracking the code and used by taxpayers such as those in waltner have been repeatedly rejected by the courtdollar_figure but the hendricksons also raise an argument not addressed in waltner the main premise of this argument is that the commissioner has no proof that the hendricksons engaged in any taxable activities and the commissioner’s reliance on forms w-2 and 1099-misc is hearsaydollar_figure the hendricksons incorrectly argue that this shifts the burden to the commissioner but this frivolous argument is not 11see eg 136_tc_455 jagos v commissioner tcmemo_2017_202 waltner v commissioner tcmemo_2014_35 mooney v commissioner tcmemo_2011_35 blaga v commissioner tcmemo_2010_170 ulloa v commissioner tcmemo_2010_68 hill v commissioner tcmemo_2003_144 rayner v commissioner tcmemo_2002_30 12cracking the code supra pincite about 1040’s and claiming refunds describes the hendricksons’ strategy to claim a full refund by submitting corrected forms 1099-misc with a declaration that income received was not taxable and substitute forms w-2 zeroing out reported wages new to the court and we will not waste judicial resources addressing it furtherdollar_figure the hendricksons’ frivolous arguments will be addressed by the court where we can dispense with them in a quick and efficient manner otherwise they will be ignoreddollar_figure i statute_of_limitations generally the period of limitations for the assessment of tax_liabilities is three years except in instances of fraud a willful_attempt_to_evade_tax and the taxpayers’ failure_to_file a returndollar_figure under such exceptions the commissioner may assess an increased tax_liability at any timedollar_figure for instances of fraud the commissioner bears the burden of proving an exception to the general limitations perioddollar_figure likewise the commissioner has the burden_of_proof with respect to fraud determinations for the penalty under section 13see crain v commissioner f 2d pincite wnuck v commissioner t c pincite explaining why we do not address frivolous arguments 14see wnuck v commissioner t c pincite sec_6501 c sec_6501 and 17see sec_7454 139_tc_418 aff’d 552_fedappx_250 4th cir 116_tc_31 a or an addition_to_tax under sec_6651dollar_figure fraud must be shown by clear_and_convincing evidencedollar_figure fraudulent intent is a question of fact determined after careful review of the entire record of the taxpayer’s entire course of conduct and of circumstantial evidence reasonably inferred from the factsdollar_figure a conviction under sec_7206 for intentionally filing false returns does not in and of itself prove that sec_6501 applies because the intent to evade tax is not an element of the crime charged under sec_7206 however a conviction under sec_7206 may be considered in connection with other facts in determining fraud the hendricksons’ tax-protester positions civil refund proceeding and criminal convictions under sec_7206 show a clear fraudulent and willful 18see sec_7454 19rule b see sec_7454 gould v commissioner t c pincite o’neal v commissioner tcmemo_2016_49 at 20317_us_492 99_tc_202 98_tc_511 80_tc_1111 56_tc_213 21o’neal v commissioner at citing 84_tc_636 intent to evade tax because of this clear intent the hendricksons’ period of limitations for assessment remains open for through dollar_figure ii receipt of income under sec_61 under sec_61 gross_income means all income from whatever source derived that includes mr hendrickson’s wages from personnel management and income from lost horizons received in through and mrs hendrickson’s nonemployee compensation received in and the commissioner’s separate notices account for the income wages and nonemployee compensation that were reported to the commissioner on information returns and discovered through the examination of bank records in general the commissioner’s determinations in a notice_of_deficiency are presumed correct and taxpayers bear the burden of proving those determinations incorrectdollar_figure but the hendricksons’ deficiencies involve unreported income in the sixth circuit the circuit in which appeal in this case would normally lie a deficiency involving unreported income is not entitled to the presumption of correctness unless the commissioner can provide a minimal factual predicate or foundation of substantive evidence linking the taxpayer to the income-producing 22see sec_6501 23rule a 290_us_111 activitydollar_figure if the commissioner produces evidence linking the hendricksons to an income-producing activity then the burden remains with the hendricksons to rebut the presumptiondollar_figure to satisfy this minimal factual burden the commissioner introduced into evidence forms w-2 issued to mr hendrickson by personnel management and original forms 1099-misc to rebut mrs hendrickson’s corrected forms misc the parties’ stipulations also establish the requisite evidentiary foundation with respect to mr hendrickson’s wages and mrs hendrickson’s nonemployee compensation regarding mr hendrickson’s receipt of income from lost horizons the commissioner’s notice asserts that lost horizons issued checks to mr hendrickson in and mr hendrickson stipulated that he was the sole shareholder of lost horizons for and and the record indicates that lost horizons was in the business of promoting mr hendrickson’s book the 24909_f2d_915 6th cir citing 596_f2d_358 9th cir rev’g 67_tc_672 richardson v commissioner tcmemo_2006_69 91_tcm_981 aff’d 509_f3d_736 6th cir 25richardson v commissioner t c m cch pincite commissioner linked the hendricksons to an income-producing activity and the burden of showing error lies with them the hendricksons failed to advance any credible arguments or offer any credible_evidence showing that the nonemployee compensation wages and payments they received are not taxable_income the general premise of the hendricksons’ arguments is that information returns filed by employers cannot be relied upon by the commissioner are hearsay and do not fall under the ‘business records’ exception to rule of the federal rules of evidence as to their allegations that any payments made to petitioners constituted or were connected with taxable events the hendricksons’ position is frivolousdollar_figure the hendricksons continue to offer only tax_protester or tax defier arguments and nothing else consequently we will not address them the hendricksons received taxable_income in and and mr hendrickson received taxable_income in and 26a frivolous argument is one that is contrary to established law and unsupported by a reasoned colorable argument for change in the law 791_f2d_68 7th cir iii filing_status the returns submitted by the hendricksons did not consistently show the same filing_status the hendricksons submitted returns for and electing joint filing_status mr hendrickson submitted a separate_return for electing married_filing_separately for it is unclear what filing_status mr hendrickson purported to elect but the return did not include mrs hendrickson’s name at the top of the return or her signature at the bottom for mr hendrickson submitted a return that purported to elect joint filing_status but that return listed mrs hendrickson on the line used to identify a spouse who filed a separate_return and the return did not include mrs hendrickson’s name at the top of the return or her signature at the bottom these various ambiguities were all resolved by stipulation the parties stipulated that the through returns were submitted as married_filing_separately in his notices of deficiency the commissioner determined various filing statuses for and the commissioner determined the hendricksons’ filing_status to be married_filing_jointly for the commissioner determined mr hendrickson’s filing_status to be married_filing_separately and for and the commissioner determined mr hendrickson’s filing_status to be single for and the commissioner erred in determining mr hendrickson’s filing_status to be single the parties stipulated that the hendricksons were married at all times during the years in question a married_person is ineligible for single filing statusdollar_figure iv mr and mrs hendrickson’s penalties for and the commissioner determined sec_6663 fraud penalties for the hendricksons for and and for mr hendrickson separately for in the and notice_of_deficiency the commissioner determined that should sec_6663 not apply in the alternative sec_6651 should impose additions to tax for fraudulent_failure_to_file the commissioner further asserts in his answer that should the court not find fraud under sec_6663 the court should find fraudulent_failure_to_file under sec_6651 for the hendricksons’ and returns and mr hendrickson’s return the sec_6663 fraud_penalty and the addition_to_tax under sec_6651 for fraudulent_failure_to_file are similar in mohamed v commissioner tcmemo_2013_255 the court provides a lengthy comparison of the two sec_1 see also 68_tc_632 holding that the taxpayer who was married at the relevant time was not eligible for the filing_status of single penaltiesdollar_figure as relevant here imposition of a sec_6663 penalty requires that the taxpayer file a valid_return and a sec_6651 addition_to_tax is applicable only if the taxpayer fails to file a timely return and then only if the delinquency is fraudulent although the hendricksons and mr hendrickson separately submitted documents purporting to be returns for and we must determine whether the returns are valid for the purpose of imposing a sec_6663 penalty or a sec_6651 addition_to_tax it is generally accepted that a taxpayer’s return reporting zeros for all income lines is not a valid returndollar_figure additionally even if the taxpayer provides some income information the return is not valid as there must also be an honest and reasonable intent to supply the information required by the tax code in our self-reporting tax system the government should not be forced to accept as a return a document which plainly is not intended to give the required 28mohamed v commissioner tcmemo_2013_255 at 29mohamed v commissioner at 30see eg 120_tc_163 taxpayer reported zeros for all income lines aff’d without published opinion a f t r 2d ria 3d cir caton v commissioner tcmemo_2012_92 103_tcm_1488 taxpayer reported zero for wages total income adjusted_gross_income taxable_income and total_tax information finally the commissioner’s processing of an invalid return does not make it validdollar_figure as the court has similarly held regarding the open limitations_period with which to assess liabilities under sec_6501 the commissioner’s processing of a fraudulent return does not in and of itself start the limitations perioddollar_figure the hendricksons’ returns for and and mr hendrickson’s separate_return for are not valid returns the and returns are not complete zero returns they conveniently report either a minuscule amount of taxable interest or ira_distributions but we nonetheless hold that the returns for and do not show an honest and reasonable intent to supply information required by the tax code and are the result of the hendricksons’ frivolous attempt in protesting the federal_income_tax because the hendricksons’ 31738_f2d_157 6th cir quoting 627_f2d_830 7th cir see 82_tc_766 aff’d 793_f2d_139 6th cir 32see beard v commissioner t c pincite holding return was invalid when taxpayer made alterations to form_1040 that allowed taxpayer to claim a refund mohamed v commissioner at finding taxpayer’s unsigned return was invalid although processed by the irs see eg 270_f3d_1297 10th cir holding that acceptance cannot cure an invalid return when the taxpayer failed to sign the return aff’g tcmemo_1999_426 33see 135_tc_497 returns for and and mr hendrickson’s return for are not valid returns we cannot uphold sec_6663 penalties however sec_6651 provides an increased addition_to_tax of of the amount_required_to_be_shown_as_tax on an unfiled return if the failure_to_file the return is fraudulent the hendricksons’ and returns and mr hendrickson’s return are not valid because of their fraudulent and willful intent to evade tax because their invalid returns are not due to reasonable_cause we uphold the commissioner’s sec_6651 additions to tax for and v mr hendrickson’s additions to tax for and a sec_6651 failure to pay sec_6651 imposes an addition_to_tax for failure to timely pay the amount shown on a return unless the taxpayer shows that the failure was due to reasonable_cause and not due to willful neglect in instances where the taxpayer fails to file a return and a return is prepared by the secretary under sec_6020 commonly known as a substitute for return the substitute for return is treated as the return filed by the taxpayer for purposes of determining an addition to tax for failure to timely paydollar_figure the commissioner introduced into evidence the substitutes for returns prepared by the secretary for mr hendrickson’s and returns which satisfy the requirements of sec_6020 therefore the commissioner has met his burden and the burden shifts to mr hendrickson mr hendrickson failed to raise any credible defense at trial or on brief arguing only frivolous positions that the court will not waste its time addressing accordingly mr hendrickson is liable for additions to tax under sec_6651 b sec_6651 fraudulent_failure_to_file mr hendrickson’s and returns were rejected by the commissioner because of fraud and substitutes for returns were prepared under sec_6020 mr hendrickson’s rejected and returns used the same frivolous reporting positions as his prior returns and his reporting was not due to reasonable_cause mr hendrickson’s pattern of filing frivolous returns shows a deliberate intent to conceal taxable_income and he is liable for additions to tax under sec_6651 sec_6651 127_tc_200 aff’d 521_f3d_1289 10th cir vi sec_6751 supervisory approval the hendricksons are jointly liable for additions to tax under sec_6651 for and and mr hendrickson is separately liable for additions to tax under sec_6651 for and and sec_6651 for and they argue that sec_6751 requires supervisory approval of additions to tax under sec_6651 and f because these additions to tax are not automatically calculated through electronic means their position is that sec_6751 is ambiguous and that the rule_of lenity requires us to resolve any ambiguity in their favor we disagree sec_6751 explicitly provides that the requirement of an approval of assessment shall not apply to any addition_to_tax under sec_6651 therefore the commissioner was not required to provide written approval of sec_6651 and f additions to taxdollar_figure vii collateral_estoppel res_judicata and restitution payments the hendricksons argue that the commissioner’s claims are res_judicata and collaterally estopped and that the commissioner’s acceptance of restitution waives all future claims we disagree 35beam v commissioner tcmemo_2017_200 at sec_6751 by its terms does not apply to ‘any addition_to_tax under sec_6651 sec_6654 or sec_6655 ’ quoting sec_6751 res_judicata generally prevents parties from relitigating the same cause of action and applies to a claim if it was or could have been litigated as part of the cause of action in a prior case collateral_estoppel or issue preclusion provides that once an issue of fact or law is ‘actually and necessarily determined by a court of competent jurisdiction that determination is conclusive in subsequent suits based on a different cause of action involving a party to the prior litigation ’ a prior court’s factual determinations are preclusive if the court had jurisdiction to and did determine the facts at issue and the disputed issue was necessary to the outcome of the prior decisiondollar_figure mr hendrickson was found guilty under sec_7206 of filing a false document the commissioner’s determinations regarding the hendricksons’ tax_liabilities or the amounts were not a necessary element of the criminal conviction rather mr hendrickson was charged for willfully filing a false document that excluded income he knowingly received a crime that does not require as an 36morse v commissioner tcmemo_2003_332 86_tcm_673 citing 333_us_591 aff’d 419_f3d_829 8th cir see 95_tc_560 37morse v commissioner t c m cch pincite quoting 440_us_147 38see 91_tc_273 element the determination of federal_income_tax liabilitiesdollar_figure because the criminal proceeding involved a different cause of action and did not require a calculation of liabilities as a necessary element of the conviction res judicta and collateral_estoppel do not apply the hendricksons further contend that the restitution ordered in mr hendrickson’s criminal conviction is the total due from petitioners as tax_liabilities for all the years involved in the case now before the court and that the amount of restitution was fully briefed and argued by both sides in a protracted litigation over the course of a month the hendricksons also argue that their payments of restitution and the commissioner’s acceptance waive the commissioner’s right to future litigation again we disagree the district_court did not adjudicate the hendricksons’ joint tax_liabilities or mr hendrickson’s separate tax_liabilities rather the court based the restitution amount on an estimate of the hendricksons’ civil tax_liabilities an estimate that is not determinative of any potential future tax liabilitydollar_figure it is well established that a district court’s ordering or deciding not to order restitution has no effect on the 39m j wood assocs inc v commissioner tcmemo_1998_375 76_tcm_700 40see morse v commissioner f 3d pincite durland v commissioner tcmemo_2016_133 at commissioner’s authority to assess the taxpayer’s liabilitydollar_figure consequently the hendricksons’ payment of restitution does not preclude the commissioner from pursuing the hendricksons’ federal_income_tax deficiencies conclusion the hendricksons received taxable_income in and and mr hendrickson received taxable_income in and they have offered no credible_evidence or meritorious legal arguments that the income they received is not taxable their only arguments are frivolous therefore they are liable for tax the hendricksons are not liable for penalties under sec_6663 because they did not file valid returns for any of the years before us but we uphold for each year the sec_6651 fraudulent_failure_to_file addition_to_tax in the alternative mr hendrickson is also liable for sec_6651 additions to tax for and to reflect the foregoing decision will be entered under rule 41see morse v commissioner f 3d pincite holding that sentencing court’s restitution order does not preclude commissioner from litigating defendant’s civil deficiency 183_f3d_535 6th cir same aff’g tcmemo_1997_566


department of the treasury internal_revenue_service washington d c date number info release date cc tege eoeg et1 - genin-131357-03 uilc memorandum for director internal_revenue_service center cincinnati oh attn technical unit from subject office of division counsel associate chief_counsel tax exempt and government entities cc tege eoeg et1 - genin-131357-03 railroad retirement act tax status in accordance with the coordination procedure established between the service and the railroad retirement board rrb the rrb has provided us with its opinion that the following businesses are not employers under the railroad retirement act and the railroad unemployment insurance act we have reviewed the opinion of the rrb and based upon the information submitted to the rrb we also conclude that and are not employers under the railroad_retirement_tax_act please take the appropriate action regarding these businesses will e mcleod cc


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 b01 plr-140076-05 date date ------------------------------------------ ----------------------------- legend x --------------------------------------------------- y ---------------------------------------------------- country date 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 x is the ultimate owner of an affiliated_group of entities among this affiliated_group is y which is an entity that was formed under the laws of country on date x acquired y x timely made a sec_338 election relating to its acquisition of y due to inadvertence a form_8832 entity classification election to treat y as an entity disregarded as separate from its owner effective date was not filed plr-140076-05 law and analysis 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 sec_301_7701-3 provides that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no date is specified on the election form the effective date specified on form_8832 cannot be more than days prior to the date on which the election is filed and cannot be more than months after the date on which the election is filed if a purchasing_corporation makes an election under sec_338 regarding an acquired subsidiary an election under sec_301_7701-3 for the acquired subsidiary can be effective no earlier than the day after the acquisition_date within the meaning of sec_338 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 plr-140076-05 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 concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter except as expressly provided herein no opinion is expressed or implied 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 sincerely letter will be sent to your authorized representative enclosures copy of this letter copy for sec_6110 purposes william p o’shea associate chief_counsel passthroughs and special industries