t c memo united_states tax_court christopher holden petitioner v commissioner of internal revenue respondent docket nos filed date walter d channels for petitioner jenny r casey and blake j corry specially recognized for respondent these cases are consolidated for purposes of trial briefing and opinion memorandum findings_of_fact and opinion laro judge in separate notices of deficiency respondent determined deficiencies in petitioner’s federal_income_tax for and years at issue as well as accuracy-related_penalties under sec_6662 as follows year deficiency dollar_figure big_number penalty sec_6662 dollar_figure dollar_figure petitioner resided in california at the time he timely petitioned this court for redetermination of the determined deficiencies and accuracy-related_penalties see sec_6213 the parties were able to resolve a number of issues reflected in the stipulation of settled issues the stipulations of fact and the opening briefs after the parties’ concessions the following issues remain for decision petitioner’s tax_year is before the court in a related case docket no that case has not been consolidated with the present ones while the factual backgrounds in these cases are similar the issues presented for resolution and the evidence submitted by the parties differ we express no opinion on the issues presented in docket no all section references are to the internal_revenue_code 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 whether petitioner is entitled to deduct real_estate_taxes and mortgage interest in excess of amounts that respondent already allowed for the tax_year we hold that he is not whether petitioner is entitled to deduct mortgage interest in excess of amounts that respondent already allowed for the tax_year we hold that he is not whether petitioner is entitled to deduct the following business_expenses not already conceded by petitioner or respondent for the tax_year leases contract labor bank service charges continuing education miscellaneous expenses and office supplies we hold that petitioner may deduct as an additional contract labor expense a payment made to rick wong otherwise we hold that petitioner is not entitled to deduct any other business_expenses whether petitioner is entitled to deduct the following business_expenses not already conceded by respondent or petitioner for the tax_year outside services leases contract labor miscellaneous expenses payroll expenses and professional fees we hold that he is not and whether petitioner is liable for the accuracy-related_penalty pursuant to sec_6662 for the and tax years we hold that he is findings_of_fact some of the facts have been stipulated and are so found we incorporate by this reference the parties’ stipulations of facts stipulation of settled issues and accompanying exhibits petitioner was divorced from karen holden in date on date petitioner married ninpapha b niangnouansy and remained married to niangnouansy throughout the tax_year petitioner claimed a filing_status of single on his and tax returns petitioner concedes that his proper filing_status for the years at issue was married_filing_separately on date petitioner filed a bankruptcy petition under chapter of the u s bankruptcy code in the u s bankruptcy court for the central district of california petitioner was granted a discharge_in_bankruptcy on date in his bankruptcy petition petitioner failed to disclose that he was married or to include his wife’s income petitioner is a medical doctor specializing in geriatric medicine with a family practice in orange california at all times during the years at issue petitioner operated this medical practice and was the only doctor providing medical services at his practice petitioner is a cash_basis taxpayer before petitioner was the sole shareholder of and operated his medical practice through christopher holden m d inc chmdi at the end of dr anjana sura was the sole shareholder of chmdi beginning in mid-date and throughout petitioner deposited the receipts from his medical practice into the various bank accounts of discover wellness health association discover wellness a partnership svp enterprises inc svp a c_corporation and holden medical corp hmc an s_corporation petitioner was the sole shareholder of hmc during the tax_year petitioner was neither a partner of discover wellness nor a shareholder of svp or chmdi during the years at issue all of the gross_receipts deposited into the accounts of discover wellness svp chmdi and hmc are petitioner’s gross business receipts for and petitioner’s gross_receipts from his medical practice in and totaled dollar_figure and dollar_figure respectively jane garcia worked as the office manager for petitioner’s medical practice from through date garcia is listed as the partner of discover wellness on its and forms u s return of partnership income schedules b other information and or schedules k-1 partner’s share of income deductions credits etc garcia is listed as being a shareholder and probusinesscoach com is simultaneously listed as a shareholder of svp on svp’s and forms u s_corporation income_tax return the parties agree that all gross_receipts and expenses of petitioner’s medical practice shall be reported on schedules c profit or loss from business of petitioner’s tax returns for the years at issue including gross_receipts received and expenses paid_by discover wellness chmdi svp and hmc i tax_year a schedule a deductions on his schedule a itemized_deductions for the tax_year petitioner claims a mortgage interest_deduction of dollar_figure and a real_estate tax deduction of on brief petitioner claims for the first time that he is entitled to a home mortgage interest_deduction of dollar_figure in addition to the dollar_figure that respondent already conceded totaling dollar_figure in the first stipulation of facts the parties agree that the remaining amount at issue for the tax_year is dollar_figure pursuant to rule e a party’s stipulations shall be binding rule e further provides that no party to a stipulation is permitted to change qualify or contradict a stipulation in whole or in part absent permission of the court petitioner did not move the court to be relieved of this stipulation and is thus bound by it furthermore petitioner raised the issue of additional deductions improperly see carraway v commissioner tcmemo_1994_295 wl at holding that where the taxpayers first claimed at trial an amount in excess of the amount previously claimed as a deduction the taxpayers improperly raised the issue dollar_figure petitioner concedes all but dollar_figure of the real_estate tax deduction respondent concedes petitioner is entitled to a mortgage interest_deduction of dollar_figure for payments made to countrywide home loans for the home in placentia california at the end of the principal balance of the home loan with countrywide home loans was dollar_figure b leases for the tax_year petitioner claims a schedule c lease deduction of dollar_figure for his medical practice in date chmdi entered into a master lease agreement with key equipment finance inc key to purchase computer equipment and software from medsoft solutions inc medsoft for petitioner’s medical office in orange california in date chmdi entered into an equipment lease contract with marlin leasing corp marlin to lease computer equipment and software from medsoft for petitioner’s anaheim california office which closed in at the end of the marlin lease there was on brief petitioner claims that he is entitled to deduct dollar_figure for real_estate_taxes we deem that petitioner concedes the remainder of the dollar_figure amount on brief petitioner claims that he is entitled to a lease expense deduction of dollar_figure in the first stipulation of facts the parties agree that the amount of the lease expense at issue for the tax_year is dollar_figure petitioner did not move the court to be relieved of this stipulation pursuant to rule e a party’s stipulation shall be binding see supra note a dollar_figure buyout option other than the lease agreements with marlin and key petitioner failed to provide any other lease agreements in svp made payments to marlin and key on its tax_return chmdi reported that it had depreciable assets of dollar_figure and accumulated depreciation of dollar_figure at the beginning of the tax_year there are no depreciable assets or depreciation expenses listed at yearend on the tax returns of discover wellness svp and chmdi for petitioner’s accountant treated some of the equipment leases as capital leases and others as operating leases petitioner’s bankruptcy petition listed equipment leases on his schedule d creditors holding secured claims with values totaling dollar_figure petitioner did not enter into any equipment leases in or petitioner contends that any other lease agreements as well as loan documents bank statements canceled checks credit card statements invoices and records stored on a hard drive were lost as a result of flooding in his office c contract labor petitioner claims a contract labor expense deduction of dollar_figure of which dollar_figure is still at issue the amounts still at issue are set forth more fully reflecting the payees and corresponding amounts as follows payee leo miguez kn enterprises ninpapha niangnouansy jack padilla spa n mor bank of america rick wong garret hess unknown check no ralph dudley total amount dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure kn enterprises kn a salon is a partnership of which petitioner’s wife niangouansy is a partner kn failed to file a tax_return for on brief petitioner asserts that he is entitled to deduct dollar_figure of contract labor expenses in excess of the amount that respondent already allowed we observe that this amount is dollar_figure less than the amount that respondent disallowed d bank service charges after the parties’ concessions petitioner claims an additional bank service charges deduction of dollar_figure consisting of payments to chase card services of dollar_figure and dollar_figure e continuing education after the parties’ concessions petitioner claims an additional continuing education deduction of dollar_figure for five payments made to daniel wotring for flight instruction petitioner did not complete the pilot program f miscellaneous expenses after the parties’ concessions petitioner claims an additional miscellaneous expense deduction of dollar_figure the specific items still at issue are as follows payee amount capital one business card american express advanta union capital des lease home depot home depot credit home depot credit services capital one des loan leasing services dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure fff enterprises citizens bank cash withdrawal washington mutual discover missing checks platinum plus rockpart consulting leo miguez bank of america leasing popular leasing usa inc citi cards ifc great america kn enterprises christopher holden chase home finance key equipment finance ge healthcare learsone total dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure g office supplies after the parties’ concessions petitioner claims an additional deduction for office supplies of dollar_figure for a payment made to mike’s tint shop ii tax_year a mortgage interest petitioner claims a schedule a mortgage interest_deduction for the tax_year of dollar_figure respondent concedes petitioner is entitled to a deduction of dollar_figure for mortgage interest_paid to bank of america on the property in placentia california after petitioner’s concessions the amount of mortgage interest still at issue is dollar_figure the principal balance of the home loan with bank of america was dollar_figure at the end of on brief respondent erroneously stated that the amount of home mortgage interest at issue for the tax_year was dollar_figure rather than dollar_figure as reported on petitioner’s tax_return and disallowed by respondent in the notice_of_deficiency after respondent’s concessions the amount of home mortgage interest remaining at issue for the tax_year was dollar_figure on brief petitioner claims that he is entitled to an additional deduction in excess of respondent’s concessions of dollar_figure petitioner does not assert that he is entitled to deduct the remaining dollar_figure of home mortgage interest not conceded by respondent we deem this dollar_figure amount to be conceded by petitioner on brief b outside services after the parties’ concessions petitioner claims an additional deduction for outside services of dollar_figure consisting of three payments of dollar_figure each to nibiru rising inc nibiru a c_corporation of which petitioner is the sole shareholder according to nibiru’s form_1120 schedule k other information its business consisted of advertising and public relations petitioner claims he set up nibiru to do a special research project petitioner paid nibiru a total of dollar_figure in dollar_figure of which was paid from august through date these payments to nibiru were classified as outside services contract labor miscellaneous expenses and professional fees petitioner failed to list nibiru as an entity of which he owned or more on his date bankruptcy petition c leases petitioner claims a deduction of dollar_figure for leases the entire amount is still at issue d contract labor after the parties’ concessions petitioner claims an additional contract labor expense deduction of dollar_figure this amount still at issue is set forth more fully reflecting the payees and the corresponding amounts as follows payee kn enterprises bank of america nibiru rising inc total amount dollar_figure dollar_figure dollar_figure dollar_figure of the amounts paid to kn dollar_figure was paid in date and dollar_figure was paid in date no documents other than canceled checks were provided to substantiate these expenses e miscellaneous expenses after the parties’ concessions petitioner claims an additional miscellaneous expense deduction of dollar_figure the amount still at issue is set forth more fully reflecting the payees and corresponding amounts as follows payee amount capital one business card american express nibiru rising inc union capital des home depot home deport credit home depot credit services chase card services dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure business card1 christopher holden chmdi union bank online transfer chase citi cards withdrawal total dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure petitioner’s general ledger as reconstructed by petitioner’s counsel for the purposes of trial shows two groups of payments to payee business card the first group of payments consists of six checks from svp to business card in the following amounts dollar_figure check no dollar_figure check no dollar_figure check no dollar_figure check no dollar_figure check no and dollar_figure check no the total amount of payments made by svp to business card is dollar_figure the second group of payments consists of a single check from discover wellness to business card of dollar_figure check no the seven payments to business card totaled dollar_figure we believe that respondent may have counted the first group of checks twice in determining the amount of miscellaneous expenses still left at issue for the tax_year petitioner did not contest the accuracy of these amounts in either his opening or his reply brief we deem that petitioner has conceded this issue petitioner has provided no documents other than canceled checks and partial bank statements to substantiate these miscellaneous expenses f payroll expenses after the parties’ concessions petitioner claims an additional payroll expense deduction of dollar_figure for a check made payable to svp written on its own accountdollar_figure g professional fees after the parties’ concessions petitioner claims an additional professional fees deduction of dollar_figure for a payment made to nibiru iii tax_return preparation petitioner’s form_1040 u s individual_income_tax_return was prepared by ashley b hallsman and his form_1040 was prepared by shahid ali of etax services inc iv document destruction petitioner claims his books_and_records for the years at issue were destroyed as a result of flooding that occurred in his medical office according to petitioner’s business insurance report two insurance claims have been filed the first was for a loss on date of dollar_figure due to a burst water respondent contends that there is no evidence in the record to substantiate that this check is anything other than a transfer to another svp bank account pipe and the second was for a loss on date of dollar_figure due to heavy rain i burden_of_proof opinion the commissioner’s determinations in a notice_of_deficiency are generally presumed to be correct and the taxpayer bears the burden of proving by a preponderance_of_the_evidence that the determinations are incorrect rule a 290_us_111 pursuant to sec_7491 the burden_of_proof may shift to the commissioner with respect to factual matters if the taxpayer meets certain requirements petitioner has neither alleged that sec_7491 applies nor established compliance with its requirements petitioner bears the burden_of_proof petitioner claims that he is entitled to various itemized and business_expense deductions in excess of amounts that respondent already allowed or conceded for each of the years at issue deductions are a matter of legislative grace and the taxpayer bears the burden of proving his entitlement to any deductions claimed 503_us_79 308_us_488 292_us_435 see rule a welch v helvering u s pincite a taxpayer is required to maintain sufficient records to substantiate expenses underlying the deductions he claims on his federal_income_tax returns sec_6001 sec_1_6001-1 e income_tax regs see also 65_tc_87 aff’d 540_f2d_821 5th cir ii perception of witnesses we observe the sincerity candor and demeanor of each witness to evaluate his testimony and to assign weight thereto for the purpose of finding disputed facts hie holdings inc v commissioner tcmemo_2009_130 wl at aff’d 521_fedappx_602 9th cir we determine each witness’ credibility weigh every piece of evidence draw appropriate inferences and choose between often conflicting inferences when we find the facts of a case id we will not accept the testimony of a witness at face value if we find that the totality of facts conveys to us an impression that is contrary to the witness’ testimony 115_tc_43 aff’d 299_f3d_221 3d cir during the trial we heard testimony from two fact witnesses petitioner and garcia garcia’s testimony was often vague conclusory made without substantiating support and of limited helpfulness to the court garcia’s testimony with respect to the purported loss of petitioner’s documents was self-contradictory and not credible petitioner’s testimony was vague and unhelpful petitioner testified that he could not recall many of the material facts in this case he attempted to avoid answering questions posed to him with respect to his interest in nibiru petitioner then testified that he did not recall whether he had any ownership_interest in nibiru despite being the sole shareholder thereof petitioner affirmatively represented himself as single on his and tax returns and on his bankruptcy petition despite being married during the years at issue petitioner filed his bankruptcy petition without disclosing his wife’s income or his ownership_interest in nibiru petitioner made substantial payments to nibiru after filing for bankruptcy on the basis of his testimony and the entirety of the record we find that petitioner was generally not a credible witness iii real_estate_taxes sec_164 permits a taxpayer to deduct any state local or foreign_property taxes that are paid_or_accrued during the taxable_year petitioner contends that for his tax_year he is entitled to deduct dollar_figure of real_estate_taxes in excess of amounts that respondent already allowed petitioner failed to provide documentation to establish that he personally paid or owed such real_estate_taxes petitioner provided only a loan transaction history summary that mentioned a payment of county taxes with respect to a property in orange california of dollar_figure from an escrow account petitioner failed to provide additional evidence with respect to the escrow account or this purported tax payment petitioner’s loan transaction history summary failed to establish that he either paid_or_incurred any portion of the real_estate_taxes for which he claims he is entitled to a deduction for the tax_year see sec_6001 see eg anyanwu v commissioner tcmemo_2014_123 disallowing a real_estate tax deduction absent substantiation accordingly we agree with respondent and hold that petitioner has failed to carry his burden_of_proof regarding the real_estate tax deduction iv home mortgage interest sec_163 permits an individual taxpayer to deduct any qualified_residence_interest otherwise known as home mortgage interest that is paid_or_accrued during the taxable_year sec_163 h and the code defines qualified_residence_interest as interest_paid or accrued during a taxable_year on either acquisition_indebtedness or home_equity_indebtedness with respect to any qualified_residence of the taxpayer sec_163 acquisition_indebtedness is any indebtedness which is incurred in acquiring constructing or substantially improving any qualified_residence of the taxpayer and is secured_by such residence sec_163 acquisition_indebtedness includes refinanced indebtedness if the refinanced indebtedness constitutes a refinancing of acquisition_indebtedness and is used to finance the construction or substantial_improvement of the qualified_residence id callahan v commissioner tcmemo_2013_131 wl at griggs v commissioner tcmemo_2013_2 wl at home_equity_indebtedness is any other indebtedness that is secured_by a qualified_residence to the extent that the indebtedness does not exceed the fair_market_value of the residence reduced by the acquisition_indebtedness sec_163 a qualified_residence is the taxpayer’s principal_residence and one other residence of the taxpayer which he elects to treat as a qualified_residence for the purposes of sec_163 sec_163 married individuals filing separate returns are treated as one taxpayer and each spouse may take into account only one residence unless both spouses consent in writing that one spouse may take into account both the principal_residence and one other residence id a married taxpayer filing a separate_return is allowed to deduct mortgage interest payments made on only dollar_figure of acquisition_indebtedness and dollar_figure of home_equity_indebtedness sec_163 c ii petitioner was married to niangnouansy during the years at issue he did not file a joint_return for either or petitioner stipulated that his proper filing_status was married_filing_separately petitioner claims that he is entitled to deduct mortgage interest_paid on two properties one in placentia california and the other in orange california petitioner provided no evidence of any agreement with his spouse that would allow him to take into account two qualified residences for mortgage interest_deduction purposes petitioner is allowed to take into account mortgage interest_paid on up to dollar_figure of acquisition_indebtedness and up to dollar_figure of home_equity_indebtedness with respect to only one qualified_residence petitioner has failed to demonstrate that he is entitled to any deductions of mortgage interest in excess of mortgage interest_paid on dollar_figure of home_equity_indebtedness additionally petitioner failed to show that he is entitled to any mortgage interest deductions with respect to acquisition_indebtedness for either of the years at issue with respect to the placentia california property petitioner testified that he originally purchased the property in for dollar_figure he did not provide any evidence to show how much if any of this amount was financed petitioner testified that he mortgaged the placentia california property several times to fund his medical practice he did not offer any evidence to show that he used the proceeds of these mortgages to improve or construct on the property instead petitioner’s mortgages were used to fund his business petitioner did not show that he incurred any indebtedness to acquire construct on or substantially improve the property and thus failed to demonstrate that there was any acquisition_indebtedness on the placentia california property see sec_163 petitioner failed to provide any information with respect to the origin or purpose of indebtedness secured_by the orange california property therefore petitioner failed to prove that any amount of the indebtedness secured_by the orange california property would qualify as acquisition_indebtedness under sec_163 home_equity_indebtedness is any indebtedness other than acquisition_indebtedness that is secured_by a qualified_residence to the extent such indebtedness does not exceed the fair market values of the qualified_residence as it is reduced by the acquisition_indebtedness sec_163 we must treat the mortgages on the two properties as home_equity_indebtedness to the extent these mortgages do not exceed the fair market values of these properties because petitioner’s filing_status is married_filing_separately for both years at issue for each year he may deduct mortgage interest_paid on the first dollar_figure of home equity indebtedness with respect to only one property that qualifies as his qualifying residence see sec_163 for both years at issue respondent has already allowed petitioner home mortgage interest deductions on mortgages in excess of the dollar_figure limitation for respondent allowed petitioner to take into account dollar_figure of mortgage interest_paid on the placentia california property for a mortgage with a principal yearend balance of dollar_figure for respondent allowed petitioner to take into account dollar_figure of mortgage interest_paid on the placentia california property for a mortgage with a principal yearend balance of dollar_figure petitioner is not entitled to any additional home mortgage interest deductions we sustain respondent’s disallowance with respect to home mortgage interest deductions for the years at issue v schedule c business_expenses sec_162 allows a taxpayer to deduct all ordinary and necessary expenses_incurred in carrying_on_a_trade_or_business ordinary expenses are those expenses that are frequent common usual or customary in a taxpayer’s trade_or_business deputy v du pont u s pincite necessary expenses are those that are appropriate and helpful to a taxpayer’s trade_or_business welch v helvering u s pincite a cash_method taxpayer may deduct only those business_expenses that are paid during the tax_year sec_1_446-1 income_tax regs petitioner is a cash_method taxpayer as such he may deduct for each of the years at issue only business_expenses that he paid during those years see 139_tc_19 as with all deductions a taxpayer is required to maintain adequate_records to establish his entitlement to business deductions sec_1_6001-1 income_tax regs if a taxpayer’s records are lost or destroyed as a result of circumstances that are beyond his control he may substantiate his expenses through a reasonable reconstruction of his records 122_tc_305 mcclellan v commissioner tcmemo_2014_257 wl at the burden is on the taxpayer to show that his records were actually lost or destroyed mcclellan v commissioner wl at petitioner asserts that many of his records were either lost or destroyed in the aftermath of one of several instances of flooding at his business the burden is on petitioner to prove that his records were actually lost or destroyed as a result of flooding see id petitioner provided evidence to prove that his office sustained water damage or flooding on two occasions petitioner’s insurance summary statement shows that his business filed claims for incidents of flooding or water damage in date and in date the summary statement does not mention any destruction of records petitioner and garcia both testified that petitioner’s records were destroyed as a result of flooding garcia left petitioner’s employ in date she has no personal knowledge of the flood in date garcia’s testimony with respect to the flood was inconsistent for instance garcia first testified that she used various equipment lease agreements to prepare petitioner’s bankruptcy petition garcia then testified that most of these lease agreements were lost as a result of the flood and consequently she had to recreate the information she included in the bankruptcy petition in part by calling the leasing companies we do not find garcia’s testimony with respect to the destruction of records to be credible petitioner testified that only the equipment lease invoices used for preparing the bankruptcy petition were lost as a result of the floods petitioner did not offer any additional testimony with respect to the loss or destruction of documents petitioner did not explain what happened to the documents used to file his tax_return which was filed after the date flood petitioner’s testimony was not sufficient to show that his records were lost or destroyed similarly petitioner has generally failed to substantiate his expenses through other evidence see boyd v commissioner t c pincite mcclellan v commissioner wl at a leases sec_162 allows a deduction for rental or lease payments for property that is used in a trade_or_business and in which the taxpayer has no title or equity interests see also sec_1_162-1 income_tax regs where a lessee acquires something more than use of the property his payments build up equity in the property and are not within the definition of rental or other_payments under sec_162 san diego transit-mixed concrete co v commissioner tcmemo_1962_141 the code makes a distinction allowing deductions for operating leases and disallowing deductions for capital leases in a prior case we defined a capital lease of equipment as an agreement by a lessee to purchase that equipment over time after making a series of lease payments during a set period and thereafter being entitled to acquire the property at a nominal cost at the end of the lease_term yearout mech eng’g inc v commissioner tcmemo_2008_217 wl at n in yearout we defined an operating_lease as a lease where the lessee pays to make use of an asset during the lease_term but does not have an option to purchase the equipment at the termination of the lease period id sec_162 allows a taxpayer to deduct as a business_expense only the cost of operating leases on brief petitioner argues that all of the leases with respect to which there are payments at issue are capital leases by virtue of this claim petitioner concedes that he is not entitled to any business_expense deductions for any of the lease paymentsdollar_figure petitioner claims entitlement to depreciation_deductions with respect to the leases petitioner first asserted this claim at trial where he made an oral motion to amend his pleadings to presumably claim depreciation with respect to all or some of the leased property the court granted petitioner’s oral motion however petitioner failed to present evidence sufficient to substantiate his entitlement to any sec_167 depreciation or sec_179 accelerated_depreciation deductions accordingly petitioner is not entitled to any deductions with respect to the lease payments petitioner characterized additional payments made to the leasing companies as miscellaneous expenses for the years at issue by virtue of his claim petitioner concedes that he is not entitled to business_expense deductions for any of the payments made to leasing companies characterized as miscellaneous expenses b payments to nibiru categorized as outside services professional fees contract labor and miscellaneous expenses petitioner claims that he is entitled to additional deductions for outside services professional fees contract labor and miscellaneous expenses for the tax_year for payments made to nibiru petitioner claims that these payments were made with respect to research purportedly performed by nibiru nibiru is a wholly owned c_corporation of petitioner we examine transactions between related parties with special scrutiny vanney assocs inc v commissioner tcmemo_2014_184 at see also 337_us_733 transactions between family members require careful scrutiny chapman v commissioner tcmemo_2014_82 at applying special scrutiny to transactions between a husband and wife’s respective business entities pepsico p r inc v commissioner tcmemo_2012_269 at greater scrutiny is applied to related_party transactions estate of rosen v commissioner tcmemo_2006_115 wl at requiring heightened scrutiny for intrafamily transactions where a taxpayer is able to show that a genuine transaction exists between himself and a related_entity we allow that taxpayer to deduct properly substantiated ordinary and necessary business_expenses under sec_162 see chapman v commissioner at allowing a taxpayer to deduct as business_expenses payments made to a related business_entity for services provided by that entity that were ordinary and necessary for the taxpayer’s business petitioner testified that he set up nibiru in order to carry out a special research project however on its tax_return nibiru listed its business activities as advertising and public relations petitioner failed to show that nibiru performed any research or provided any services for petitioner petitioner’s testimony with respect to his purported research project was extremely vague petitioner testified that the purported research project concerned a condition called acedia petitioner testified that nibiru helped him gather information relating to the research project but he did not explain what this information entailed how it was compiled and why or how such information was either related to or useful for his medical practice petitioner testified that nibiru did not have any other sources of funding and petitioner failed to offer any other evidence with respect to nibiru’s operations garcia petitioner’s office manager testified that she did not know who nibiru was petitioner did not list his ownership_interest in nibiru on his bankruptcy petition after filing for bankruptcy petitioner made substantial payments to nibiru during his testimony petitioner initially avoided two questions posed to him about his ownership_interest in nibiru after being asked for a third time petitioner claimed that he could not remember whether he was a shareholder in nibiru petitioner’s vague testimony and his attempted avoidance of questions posed to him are not sufficient to substantiate that his payments to nibiru constituted deductible business_expenses petitioner has not shown that nibiru actually provided services for his medical practice or that the cost of such services was an ordinary and necessary business_expense see id accordingly we agree with respondent and hold that petitioner has failed to meet his burden_of_proof regarding claimed additional deductions for outside services professional fees contract labor and miscellaneous expenses to the extent that these claimed deductions relate to payments made to nibiru c contract labor petitioner claims additional deductions for contract labor expense for the years at issue payments to the following payees are still at issue niangnouansy kn leo miguez jack padilla spa n mor bank of america rick wong garret hess ralph dudley and an unknown payee niangnouansy petitioner’s wife has a partnership_interest in kn a hair salon we must exercise special scrutiny when examining payments to related payees to determine whether such payments constitute ordinary and necessary business_expenses see chapman v commissioner at petitioner fails to offer sufficient evidence to substantiate that payments to kn were ordinary and necessary business_expenses the only evidence petitioner offered to prove that the payments to kn were ordinary and necessary business_expenses was garcia’s testimony garcia’s testimony with respect to kn was generally vague and of no help she testified that kn oversaw the billing for petitioner’s medical practice kn’s form_1065 listed kn’s principal product or service as hair products neither petitioner nor garcia explained why petitioner purportedly engaged a hair salon to oversee billing garcia testified that she was aware of a written_agreement between kn and petitioner for the provision of services she did not answer when asked about the whereabouts of this petitioner claims that additional payments made to kn during the and tax years qualify as miscellaneous expenses deductions petitioner claims that an additional payment to leo miguez is deductible as a miscellaneous expense for the tax_year agreement petitioner neither offered any such agreement into evidence nor provided an explanation as to his failure to provide the agreement there is nothing in the record to support petitioner’s claim that payments to a hair salon were ordinary and necessary business_expenses of his medical practice petitioner did not disclose his marital status on his bankruptcy petition he made payments of dollar_figure to kn in the last two months of after filing for bankruptcy on the basis of all these facts we find that petitioner has not shown that kn actually provided services for his medical practice or that the cost of those services was an ordinary and necessary business_expense see id we find that petitioner has failed to meet his burden of proving that payments to kn for contract labor and miscellaneous expenses are deductible business_expenses petitioner claims a deduction for a payment issued by check and made out to niangouansy for the tax_year the check is dated in garcia testified that this check was not paid in petitioner is a cash_method taxpayer and may deduct business_expenses only for the year they were paid see sec_1 c i income_tax regs consequently we find that because it was not an expense paid during the tax_year this payment is not deductible for the tax_year petitioner offered no evidence other than canceled checks and bank statements with respect to payments made to jack padilla garret hess ralph dudley and an unknown payee garcia testified that the checks made out to bank of america were not payments for services but rather were for either equipment_leasing or medical_supplies petitioner conceded that his leases were capital leases lease payments to bank of america are therefore not deductible expenses petitioner did not provide any additional documentation with respect to the bank of america checks to prove that they are for a deductible expense accordingly we agree with respondent and hold that petitioner has failed to meet his burden of proving that payments made to bank of america garret hess ralph dudley bank of america and an unknown payee are deductible business_expenses garcia testified that spa n mor performed cosmetic services for petitioner’s practice however petitioner did not present any evidence to show that these services were ordinary and necessary business_expenses of his medical practice accordingly we find petitioner has failed to meet his burden of proving that those payments to spa n mor are deductible business_expenses garcia testified that rick wong occasionally provided mobile ultrasound or x-ray imaging services for petitioner’s medical practice petitioner provided a canceled check issued to rick wong for dollar_figure accordingly petitioner carried his burden_of_proof for an additional contract labor expense deduction of dollar_figure for the payment made to rick wong in the tax_year garcia testified that leo miguez was a construction contractor that petitioner hired to repair his office petitioner either rents or leases his medical office although the cost of incidental repairs may be deductible as a business_expense a taxpayer lessee may not deduct the cost of permanent improvements that he makes to leased property 47_tc_471 see also sec_1_162-11 income_tax regs petitioner failed to offer any evidence with respect to the repairs that leo miguez performed or to whether these repairs were incidental repairs that would be deductible under sec_162 accordingly we agree with respondent and hold that petitioner failed to meet his burden of proving that payments made to leo miguez including payments characterized both as contract labor payments and miscellaneous expenses were improperly disallowed d bank service charges petitioner contends that he is entitled to deduct additional bank service charges for two payments made to chase card services for the tax_year a taxpayer may deduct credit card fees if such fees are an ordinary_and_necessary_expense of his business see eg thunstedt v commissioner t c memo at allowing a deduction for merchant credit card fees however petitioner provided no evidence to prove that these payments represented payments for deductible credit card fees and not credit card payments a taxpayer may deduct an otherwise deductible expense even if that expense is paid with a credit card lawler v commissioner tcmemo_1995_26 wl at n see also revrul_78_38 1978_1_cb_67 allowing a charitable_contribution_deduction for a payment made with a credit card however if a taxpayer uses borrowed funds to pay an otherwise deductible expense the taxpayer may deduct that expense only when it is paid not when the borrowed funds are repaid 55_tc_753 pursuant to granan if petitioner had used the credit card to make payments for deductible expenses those expenses would be deductible when they were charged on the card not when the credit card balances were paid see id petitioner failed to provide sufficient evidence for us to conclude that the credit card was used to pay deductible expenses furthermore petitioner’s evidence shows that there was no correlation between the time when his expenses were incurred and charged on the card and the time when he made payments to the credit card company garcia testified that petitioner’s practice did not always pay in full all of its monthly credit card balances petitioner has failed to demonstrate both that the payments to the credit card company were for service fees and that they were to repay the card balance for deductible expenses charged on the card during the same year accordingly we find petitioner has failed to meet his burden_of_proof and that he is not entitled to additional bank service charge deductions for e continuing education expenses sec_162 allows a deduction for all ordinary and necessary expenses paid in carrying_on_a_trade_or_business sec_162 does not explicitly provide for a deduction for continuing education expenses but such expenses may be deductible under sec_162 if they fall within its regulations the regulations under sec_162 allow a taxpayer to deduct expenditures_for education if that education either maintains or improves skills that are required by an individual in his employment trade_or_business or meets express requirements set by the individual’s employer or by a law or regulation as a condition of continued employment status or compensation sec_1_162-5 income_tax regs education undertaken by an individual to meet minimum education requirements for qualification in his own or any other trade_or_business are not deductible id para b and income_tax regs petitioner’s continuing education expenses that remain at issue for the tax_year consist of payments he made for flying lessons petitioner testified that he was taking flying lessons in a small aircraft in order to join a purportedly charitable movement that provides medical services to remote areas because of financial difficulties petitioner did not complete the program in deciding whether petitioner’s flying lessons are deductible education expenses under sec_162 we need to determine whether the education expenses were incurred to maintain or improve his skills for use in his business or whether the education would qualify him to meet the minimum education requirements of some other trade_or_business see id para b we have previously held that if the education for which deductions are at issue qualifies a taxpayer to perform tasks and activities that are significantly different from those that he could perform before receiving the education then the education qualifies the taxpayer for a new trade_or_business 70_tc_1067 aff’d without published opinion 607_f2d_995 2d cir it is irrelevant whether this education actually leads to qualification in a new trade_or_business id pincite petitioner paid educational expenses for flight instruction petitioner testified that he intended to use these skills in his business however petitioner failed to demonstrate that his flying lessons improved or maintained his skills as a doctor the skills petitioner learned during the flying lessons were significantly different from the skills he already possessed see id pincite consequently the cost of petitioner’s flying lessons are not deductible continuing education expenses under sec_162 it is irrelevant that these lessons may have helped petitioner reach patients in rural areas see katz v commissioner tcmemo_1968_16 holding that an accountant’s flight lessons were not deductible continuing education expenses even where the lessons improved the taxpayer’s ability to reach out-of-town clients petitioner has not shown that his flying lessons were an ordinary and necessary business_expense accordingly we agree with respondent and hold that petitioner failed to carry his burden of proving entitlement to the continuing education expense deductions remaining at issue f miscellaneous expenses petitioner claims additional deductions for payments made to credit card companies leasing companies banks home depot kn nibiru chmdi leo miguez learsone and rockpart consulting rockpart as well as for payments made to unidentified payees cash withdrawals and transfers for the years at issue we have already disallowed deductions for payments made to several of these payees as discussed supra in this section we will discuss only those deductions for payments remaining at issue for the remaining payees petitioner provided no evidence other than bank statements and canceled checks with respect to payments made to learsone and home depot those canceled checks and bank statements referring to home depot list payments to three home depot payees home depot home depot credit and home depot credit services petitioner failed to explain whether these payees are one and the same entity and whether these payees are direct payees or credit card companies petitioner failed to substantiate that payments made to the home depot entity or entities and to learsone were for deductible expenses accordingly we sustain respondent’s disallowance of miscellaneous_expense_deductions with respect to those payments made to the home depot and learsone payees garcia offered vague testimony which provided no assistance with respect to rockpart she testified that rockpart was a consulting service that advised petitioner’s practice on how to obtain more money aside from garcia’s vague testimony petitioner provided no other information with respect to the rockpart payments consequently we find that petitioner failed to substantiate that those payments to rockpart were deductible business_expenses we sustain respondent’s disallowance insofar as it pertains to payments made to rockpart see eg fernandez v commissioner tcmemo_2011_216 wl at disallowing a deduction for consulting fees where the taxpayer failed to provide substantiating documentation a taxpayer may deduct an expense paid_by credit card but only for the year in which the expense is paid rather than when the credit card balance is paid see revrul_78_38 supra see also granan v commissioner t c pincite petitioner and garcia both testified that the credit cards were used for various expenses of petitioner’s business aside from canceled checks and bank statements petitioner offered no other evidence with respect to these payments petitioner did not provide any itemized lists of expenses that he used his credit cards to pay garcia testified that the payments made to various credit card companies were for monthly bills petitioner’s medical practice carried balances on these credit card accounts that could not be paid in full every month petitioner has not provided sufficient evidence for us to conclude that the credit cards were used to pay deductible expenses furthermore petitioner’s evidence fails to show any correlation between the time when his expenses were incurred and charged onto the credit card companies and the time when he made payments on the credit cards petitioner has failed to demonstrate that the payments made to the credit card companies were to repay deductible expenses charged thereto during the same year petitioner similarly failed to show that the payments were for deductible business_expenses we sustain respondent’s disallowance with respect to these items petitioner failed to show that the cash withdrawals bank transfers payments to himself and chdmi and the missing checks were payments for deductible expenses accordingly petitioner has failed to meet his burden and we sustain respondent’s disallowance with respect to these items g office supplies petitioner claims that he is entitled to an additional deduction for office supplies for the tax_year for a payment made to mike’s tint shop petitioner did not offer any evidence with respect to this payment other than a canceled check from chmdi the chmdi check stated in its memo line that the payment was for window tinting at trial neither petitioner nor garcia provided any explanation as to the purpose of this expense and how this payment was an ordinary_and_necessary_expense of petitioner’s business see eg peterson v commissioner tcmemo_2015_23 holding that office expenses were not deductible where the taxpayer did not explain the business_purpose of the expenses odujinrin v commissioner tcmemo_2014_213 allowing a deduction for office expenses where the taxpayer offered as evidence bank statements and canceled checks only to the extent the taxpayer demonstrated a business_purpose for the expenses accordingly we hold that petitioner has failed to carry his burden of proving entitlement to the additional deduction for office supplies for h payroll expenses petitioner claims an additional deduction for payroll expenses for the tax_year the amount at issue is a check written on the account of svp to itself there is no evidence in the record to show that this check is anything other than a transfer between different bank accounts of svp accordingly petitioner has failed to carry his burden of proving that this payment is a deductible business_expense for vi accuracy-related_penalty respondent imposed a sec_6662 accuracy-related_penalty against petitioner for both of the years at issue sec_6662 and b and imposes a penalty on the portion of any underpayment which is attributable to negligence or disregard of rules or regulations or a substantial_understatement_of_income_tax negligence includes any failure to make a reasonable attempt to comply with the provisions of the code or to exercise ordinary and reasonable care in the preparation of a n income_tax return sec_6662 sec_1_6662-3 income_tax regs negligence also includes any failure to maintain adequate books_and_records or to substantiate items properly sec_1_6662-3 income_tax regs disregard includes any careless reckless or intentional disregard of the rules or regulations id subpara a substantial_understatement_of_income_tax exists for an individual if the amount of the understatement exceeds the greater of of the tax required to be shown on the return or dollar_figure sec_6662 the burden of production shifts to the commissioner with respect to the liability of a taxpayer for any penalty addition_to_tax or additional_amount set forth sec_7491 to meet this burden the commissioner must produce sufficient evidence indicating that is appropriate to impose a penalty on the taxpayer 116_tc_438 the commissioner meets his burden of production by demonstrating a substantial_understatement_of_income_tax see eg bobrow v commissioner tcmemo_2014_21 at the exact amount of petitioner’s understatement for each of the years at issue shall be computed as part of the rule calculation even if petitioner’s understatement is not substantial within the meaning of sec_6662 respondent may meet his burden by demonstrating that petitioner negligently claimed deductions to which he is not entitled petitioner failed to produce sufficient records to substantiate his claimed income_tax deductions and he claimed income_tax deductions to which he was not entitled for each of the years at issue see scully v commissioner tcmemo_2013_229 wl at where a taxpayer’s records have been lost or destroyed because of circumstances beyond the taxpayer’s control the taxpayer may substantiate his expenses through reasonable reconstruction the burden is on the taxpayer to show that the documentation was actually lost or destroyed see adler v commissioner tcmemo_2010_47 aff’d 443_fedappx_736 3d cir petitioner did not establish that his records were lost through circumstances beyond his control and the record shows that he failed to make reasonable efforts to reconstruct his books_and_records to substantiate his expenses in dispute for the years at issue accordingly respondent has met his burden of production as to negligence once the commissioner has met the burden of production the taxpayer must come forward with persuasive evidence that the imposition of a penalty is inappropriate because for example he acted with reasonable_cause and in good_faith sec_6664 higbee v commissioner t c pincite a determination as to whether a taxpayer acted with reasonable_cause and in good_faith is made on a case by case basis taking into account all pertinent facts and circumstances see sec_1_6664-4 income_tax regs circumstances that may signal reasonable_cause and good_faith include an honest misunderstanding of fact or law that is reasonable in light of all of the facts and circumstances including the experience knowledge and education of the taxpayer id reasonable_cause may also be shown by demonstrating reliance on the advice of a competent tax professional higbee v commissioner t c pincite sec_1_6664-4 c income_tax regs in order to show reasonable_cause and good-faith reliance on the advice of a tax professional a taxpayer must demonstrate that the adviser was a competent professional who had sufficient expertise to justify the taxpayer’s reliance the taxpayer provided necessary and accurate information to the adviser and the taxpayer actually relied in good_faith on the adviser’s judgment neonatology assocs p a v commissioner t c pincite petitioner failed to demonstrate that he acted with reasonable_cause and in good_faith or that he reasonably relied on the advice of his tax preparers first petitioner failed to provide evidence of the qualifications of his tax_return_preparers ashley b hallsman and shahid ali petitioner did not call hallsman or ali to testify at trial second petitioner failed to prove that he provided the necessary and accurate information or documentation to his tax_return_preparers petitioner’s returns do not reflect knowledge of all necessary facts on the part of his advisers for instance petitioner’s returns both elect a filing_status of single despite his being married during the years at issue third petitioner has failed to demonstrate that he relied in good_faith on the advice of either of his tax preparers thus petitioner failed to demonstrate that he acted with reasonable_cause and in good_faith as a result petitioner failed to meet the three-factor test as set forth in neonatology for establishing good-faith reliance on his tax advisers see id accordingly we find that petitioner has not met his burden of proving that it is improper to impose sec_6662 accuracy-related_penalties for all of the years at issue any arguments not discussed in this opinion are irrelevant moot or lacking in merit to reflect the foregoing and to give effect to the parties’ concessions decisions will be entered under rule


significant index flo tax exempt and government entities omvsrone department of the treasury internal_revenue_service u6 au washington d c ngv ser oatrd employer date date date3 plan c leas plan e plan d plant y this letter constitutes notice that with respect to the above-named defined benefit pension_plan the three 4mendments described below are reasonable and provide for de_minimis increases in plan liabilities of the plan within the meaning of section a a of the internal_revenue_code code and section i of the employment retirement income security act of erisa sec_401 of the code provides that a plan is not a qualified_plan if there is an amendment that increases the liabilities of a plan where the plan is maintained by a debtor in a case under title of the united_states_code however sec_401 a b ii provides an exception to sec_401 a if the plan were such amendment to take effect would have a funded_current_liability_percentage as - defined in sec_412 of at least percent or if the secretary determines ’ that such amendment is reasonable and provides for only de_minimis increases in the liabilities of the plan with respect to employees of the debtor sec_401 a b iv also provides an exception to sec_401 if the amendment is required as a condition of qualification section i of the erisa prohibits a plan amendment that increases the _ liabilities of a plan maintained by an employer that is a ‘debtor undér title of the united_states cod section i a of erisa provides an exception to section of erisa if the secretary_of_the_treasury determines that the amendment is reasonable and provides for only de_minimis increases in the liabilities of the plan with respect to employees of the debtor section i c of erisa also provides an exception if the amendment is required as a condition of qualification under part of subchapter_d of chapter of the internal_revenue_code section i of erisa provides that that subsection shall only apply to plans other than multiemployer plans covered under section of erisa for which the funded_current_liability_percentage is less than percent after taking into account the effect of the amendment on date the employer filed for protection under chapter of the united_states bankruptcy code the employer has not yet been reorganized on date the employer received a favorable ruling letter the certain plan amendments were reasonable and provided for de_minimis increases in plan amendments on date the employer received a favorable ruling letter the aggregated with the amendments adopted pursuant to the reasonable and provided for de_minimis increases in plan amendments prior ruling indicating that certain additional plan amendments when - prior ruling indi icating that ‘prior ruling were plan is a defined_benefit_plan with salaried and non-union hourly the - employees generally accruing benefits under a pay credit cash balance formula and bargained employees generally accruing benefits as varying flat dollar amounts per year_of_service however there are a small number of non-union hourly employees and bargained employees that accrue benefits under service_credit cash balance formulas in this context a pay credit formula is a formula that calculates credits to participants’ cash balance accounts as percentages of salary and a service_credit formula is a formula that calculates such credits as flat dollar amounts per month of service the representing the formerly separate plans that merged to form the plan consists of a preamble two schedules a and b and attachments ‘plan the plan is a single_plan within the meaning of code sec_414 and sec_1 i -1 b of the income_tax regulations - schedule a provides special transfer and rehire rules that are applicable for all of the attachments schedule b provides the names and dates of merger of the plans that merged to form the attachment is self-controlling and governs all terms of participation of individuals covered by the part ofthe plan represented by the particular attachment plan except for schedules a and b each - the three largest of the attachments attachment sec_1 and are known - respectively as the c plan the d plan and the e plan schedule a of the plan concerns transfers of employees’ coverages from the d plan or e plan to the c plan schedule aa provides that when an employee formerly covered under the d plan or e plan transfers coverage to the c plan the employee’s accrued_benefit is converted to an opening account value where he subsequently becomes eligible for pay or service credits as applicable and interest credits in accordance with the - terms of the c plan there is one pay credit formula the permanent pay credit formula provided under the c plan that formula provides for contributions to the participants’ accounts equal to two percent of pay plus an additional two percent for pay above the integration_level defined in the c plan as one half of the social_security_wage_base there are nine different service_credit formulas provided in the c plan two of the amendments approvedinthe prior ruling affected ona temporary basis the benefits provided under the c plan the first amendment changed the pay credit formula for the period from july ij through june to a formula the temporary pay credit formula’ providing fo compensation ie for pay both above and below the integration_level the second amendment for the period from julyflthrough june lll substituted the temporary pay credit formula for the applicable service_credit formulas for certain non-union hourly participants at certain of the employer's facilities the temporary pay credit for service_credit substitution percent of pay for all the employer proposes three additional amendments to the plan subject_to the restrictions of code sec_401 the amendments are described below amendment the c plan would be amended to extend the sunset provisions of the - temporary pay credit formula and the temporary pay credit for service- credit substitution from june 2665ito ek the employer states that the business reasons for this amendment are to continue to provide higher plan benefits to plan participants and to continue to maintain - consistency among plan benefits among its non-union hourly employees many of whom are already entitled to receive pay credits underthe - regard to the proposed amendment plan without - amendment schedule a would be amended with regard to participants who were - formerly covered under the d plan to provide that the benefit of a transferred employee would at any time subsequent to the transfer be the greater of the benefit currently provided by the determined as the sum of the employee’s accrued_benefit under the d plan at the time of transfer and the actuarial equivalent of the employee’s account determined using an opening account value ie at time of transfer of zero plan and a benefit the employer states the business reason for this amendment is that it is having difficulty recruiting employees covered under the d plan to fill positions covered under the c plan because under the current terms of the can result in reduced pension accruals plan the transfer - amendment the employees at plant y under the c plan plan would be amended to provide benefits to the salaried the employer states that the business reason for this amendment is to maintain competitive benefit levels as compared with other similar situated employee groups both within and outside its business currently the small_group of employees covered by this amendment is not accruing pension benefits after the amendments described above the plan hes a funded_current_liability_percentage that is less than percent and the employer is a debtor in possession in a case under title of the united_states_code merely because the amendments were negotiated in the context of broader collective bargaining processes does not cause them to be considered reasonable however the employer believes that the amendments will help it to remain competitive furthérmore upon receipt of this - tuling letter the employer will contribute to the plan an amount equal to the increase - in current_liability resulting from all of the proposed amendments accordingly if such contribution is made the amendments are considered reasonable the actuarial information furnished indicates that the sum of the increase in current - liability resulting from the proposed amendments plus the amendments adopted pursuant to the’ similarly the sum of the increase in accrued liability resulting from the three proposed amendments plus the amendments adopted pursuant to the ruling letters is less than three percent and and ruling letters is less than three percent this ruling is directed only to the taxpayer that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited by others as precedent the employer has not requested a ruling as to whether any of the proposed amendments in particular amendment above meet the exception provided under sec_401 of the code and section i c of erisa accordingly we have not addressed whether any of the proposed amendments would otherwise be required as a condition of qualification a copy of this letter is being furnished to your authorized representative pursuant to a power_of_attorney form on file a copy of this letter is also being sent to the’ manager employee_plans classification in baltimore maryland and the manager employee_plans compliance unit in chicago if ilinois if you ‘have any questions on this rufing letter please contact sincerely james e holland jr manager employee_plans technical


ot significant index number department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division ‘jan at ep ra az re taxpayer dear this letter constitutes notice that approval has been granted for your request for a 5-year automatic_extension for amortizing the unfunded liabilities as of date for the above-named plan which are described in sec_431 and sec_431 of the internal_revenue_code code and sec_304 and sec_304 of the employee_retirement_income_security_act_of_1974 erisa this extension is effective with the plan_year beginning date this extension applies to the eligible amortization charge bases as identified in your application submission established as of date the extension of the amortization periods of the unfunded liabilities of the plan was granted in accordance with sec_431 of the code sec_431 of the code requires the secretary to extend the period of time required to amortize any unfunded_liability of a plan for a period of time not in excess of years if the plan submits an application meeting the criteria stated in sec_431 the plan has submitted the required information to meet the criteria in sec_431 including a certification from the plan’s actuary that i absent the extension under subparagraph a the plan would have an accumulated_funding_deficiency in the current plan_year or any of the succeeding plan years ii the plan_sponsor has adopted a plan to improve the plan's funding status iii the plan is projected to have sufficient assets to timely pay expected benefits and anticipated expenditures over the amortization period as extended and iv the notice required under paragraph a has bee provided we have sent a copy of this letter to the - to the oo and to your authorized representative pursuant to a power ot attorney on file in this office this ruling is directed only to the taxpayer that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited by others as precedent if you require further assistance in this matter please contact sincerely yours david m ziegler manager ep actuarial group


sin internal_revenue_service department of the treasu washington dc contact person xxxxx telephone number in bae to dateiep ra t2 feb 206i xxxxx xxxxx xxxxx xxxxx attn xxxxx legend taxpayer a xxxxx company b contract s x xxxxx form f state c options c account d options d account xxxxx xxxxx xxxxx xxxxx annuity payments xxxxx program method g xxxxx xxxxx qs xhook page method h method dear xxxxx xxxxx xxxxx this is in response to your request dated xxxxx as amended and supplemented by your letters dated xxxxx xxxxx and xxxxx for a ruling that taxpayer a should treat each automatic payment made pursuant to a systematic withdrawal program adopted with respect to certain deferred variable_annuity contracts as part of a series of substantially_equal_periodic_payments within the meaning of sec_72 of the internal_revenue_code taxpayer a a life_insurance_company within the meaning of sec_816 of the code is organized and operated under the laws of state i taxpayer a is licensed to engage in the life_insurance and annuity business in several states and is a wholly owned subsidiary of company b contract s x are non-participating flexible premium variable deferred_annuity contracts which are offered by taxpayer a contract s x are issued as either an individual_retirement_annuity described in sec_408 of the code iras or an annuity_contract described in sec_403 of the code sec_403 contract contract s x consists of a base contract and either an ira endorsement or a sec_403 contract endorsement the endorsements provide that in the case of any conflict with any provision in contract s x the provisions of the applicable endorsement will control in general under the terms of contract s x premiums may be paid at any time prior to the date on which the annuity payments are to begin with regard to iras contributions must be in cash and the total of such contributions for any taxable_year must not exceed the lesser_of dollar_figure or percent of compensation except in the case of a rollover_contributions as permitted by code sec_402 sec_403 sec_403 or sec_408 or as a contribution made in accordance with the terms of a simplified_employee_pension as escribed in sec_408 of the code with regard to sec_403 contracts if premium payments are made pursuant to a salary reduction agreement the maximum contribution when combined with all other plans contracts or arrangements may not be more than the amount of the limitation in sec_402 of the code in addition premium payments under sec_403 contracts cannot exceed the amount allowed by sec_415 and sec_403 of the code a contract s x holder holder may allocate premiums and the earnings thereon among c options which are fixed investment options and d options which are variable investment options a2 se ook page each c option corresponds to a c account identified on the holder's application each c account earns a fixed rate of interest throughout a certain period however such period may differ from the duration of the guaranteed period of other c accounts the c account contract value is subject_to a market_value adjustment set forth in contract s x in the event that amounts are withdrawn transferred or annuitized from the c account prior to the end of a guaranteed period of the corresponding c option each d option corresponds to a portfolio of d account the portfolios of d account purchase shares of a corresponding series of a_trust that is a registered investment_company for federal_income_tax purposes contract values allocated to a portfolio are credited with units in that portfolio these units of measure are used in the computation of the d account contract value the value of these units for each portfolio will vary with the investment performance of the assets underlying the portfolio the d account contract value is the sum of all units credited under contract s x before the annuity_starting_date the contract value of contract s x equals the sum of the c account contract value and the d account contract value a holder is required to select an annuity_starting_date and an annuity_payment option a holder may change subject_to certain rules the annuity_starting_date and the payment option up to seven days before the annuity_starting_date in the case of contract s x with an ira endorsement the entire_interest of the holder must be distributed or commence to be distributed no later than april of the calendar_year following the calendar_year in which the holder attains age over a the life of the holder or the lives of the holder and an individual who is his or her designated_beneficiary within the meaning of sec_401 a or b a period certain not extending beyond the life expectancy of the holder or the joint and last survivor expectancy of the holder and the designated_beneficiary in the case of a contract s x with a sec_403 contract endorsement distributions under the contract must start no later than april of the calendar_year following the later of the calendar_year in which a holder attains age b holder retires and must be made over the life of the holder or the lives of the holder and his or her designated_beneficiary within the meaning of sec_401 a or a period certain not extending beyond the life expectancy of the holder or the joint and last survivor expectancy of the holder and his or her designated_beneficiary in addition all distributions from a sec_403 contract are subject_to the distribution_requirements of sec_403 of the code a holder may elect one of the annuity_payment options e on the annuity_starting_date the holder may choose to receive payments from c hxxxx page account d account or both death_benefit will be paid to the beneficiaries designated by the holder if a hoider dies before the annuity_starting_date a prior to the annuity_starting_date the holder may withdraw all of a portion in the case of sec_403 contracts the holder of the value of contract s x may not withdraw any amounts in contract s x attributable to contributions made due to a salary reduction agreement after date and the earnings on such contribution and on amounts held on date unless the holder has attained age separated from service died incurred a hardship or become disabled within the meaning of sec_72 additional limitations apply in connection with withdrawals attributable to amounts that are subject_to the code sec_403 restrictions withdrawals and any surrender charges applicable will be deducted from the value of contract s x in proportion to their allocation among c options and d options unless the holder chooses a different allocation method a surrender charge may apply to certain withdrawals the surrender charge will vary in amount depending upon the contribution_year as defined under the terms of contract s x of the premium at the time of withdrawal for purposes of determining the surrender charge withdrawals will be allocated first to earnings if any which may be withdrawn free of a surrender charge and then to premiums on a first-in_first-out basis so that all withdrawals are allocated to premiums to which the lowest surrender charge applies taxpayer a has developed the program subject_to the withdrawal restrictions applicable to sec_403 contracts a holder can arrange to have money sent to the holder automatically according to a periodic schedule that begins prior to the date on which annuity payments are to start under holder's contract s x taxpayer a offers three methods for the calculation of these automatic payments that commence to be made while contract s x is still in the accumulation_phase the three methods of taxpayer a correspond to the three methods described in q a-12 of notice_89_25 1989_1_cb_662 unless the holder chooses to terminate or modify his or her participation in the program taxpayer a will continue to make these automatic payments to the holder until the holder's account value is exhausted election of annual semi-annual quarterly or monthly payments will be permitted to participate in the program a holder is required to submit form f to taxpayer a form f requires the holder to specify from which d options and or c options the automatic payments are to be made if however a holder should submit form f without specifying the sources from which the automatic o2 sb xxxxx page payments are to be made taxpayer a will withdraw the automatic payments from each d option and c option on a pro-rata basis form f requires the holder to elect by which of the three methods the automatic payments will be calculated the three methods methods g h and are described below method g taxpayer a will use the method described in sec_1_401_a_9_-1 q a f-1 of the proposed income_tax regulations to calculate the automatic payment under this method sec_1_401_a_9_-1 q a f-1 of the proposed_regulations provides that where the account balance of a qualified_retirement_plan is to be distributed over the life expectancy of an employee the minimum_required_distribution is determined by dividing such account balance generally determined as of the last day of the preceding calendar_year by the employee’s life expectancy as set out in sec_1_72-9 table v of the regulations taxpayer a will divide the contract value as of the last day of the preceding calendar_year by the applicable life expectancy as set out in table v of sec_1_72-9 of the regulations or the joint life and last survivor expectancy of the holder and beneficiary as set out in table vi of sec_1_72-9 of the regulations ll method h taxpayer a will calculate the automatic payment as the amount necessary to amortize the holder's contract value over a number of years equal to the life expectancy of the holder or the joint life and last survivor expectancy of the hoider and beneficiary with life expectancies determined in accordance with sec_1_401_a_9_-1 of the proposed_regulations based on an assumed interest rate equal to either percent of the federal midterm rate in effect under sec_1274 or sec_2 percent of the federal long term rate in effect under sec_1274 of the code taxpayer a determines the joint and last survivor life expectancy of a holder and beneficiary by using table vi of sec_1_72-9 of the regulations ill method under this method taxpayer a will divide the holder's contract value by an annuity factor the present_value of an annuity of dollar_figure per year beginning at the holder’s age attained in the first distribution year and continuing for the life of the holder the annuity factor will be derived using the up-1984 mortality_table in the case of a single life or in the case of joint lives the life table cnsmt and an assumed interest rate equal to either percent of the federal midterm rate in effect under sec_1274 or sec_2 percent of the federal long term rate in effect under sec_1274 of the cade based on the above facts and representations a ruling is requested that taxpayer a should treat each automatic payment under the program frorn a xxxxx page contract s x as part of a series of substantially equal periodic payments’ within the meaning of sec_72 of the code sec_72 of the code provides rules for determining how amounts received as annuities endowments or life_insurance contracts and distributions from qualified_retirement_plans are to be taxed sec_72 of the code was added by the tax_reform_act_of_1986 tra_'86 effective generally for taxable years beginning after date sec_72 of the code provides that if any taxpayer receives any amount from a qualified_retirement_plan as defined in sec_4974 the taxpayer's tax under this chapter for the taxable_year in which such amount is received shall be increased by an amount equal to percent of the portion of such amount which is includible in gross_income the definition of a qualified_retirement_plan under sec_4974 of the code includes an annuity_contract described in sec_403 of the code and an individual_retirement_annuity described in sec_408 of the code sec_72 of the code provides an exception to the tax imposed by sec_72 in the case of distributions which are part of a series of substantially_equal_periodic_payments not less frequently than annually made for the life or the life expectancy of the employee or the joint lives or joint life expectancies of such employee and his or her designated_beneficiary sec_72 of the code imposes a limitation on distributions excepted on account of sec_72 from the percent additional tax by providing that if the series of payments is subsequently modified other than by reason of death or disability before the later of the close of the 5-year period beginning with the date of the first payment or the employee's attainment of age then the taxpayer's tax for the first taxable_year in which such modification occurs shall be increased by an amount determined under regulations equal to the tax which would have been imposed except for the sec_72 exception plus interest for the deferral_period sec_1_72-9 of the income_tax regulations provides tables that are to be used in connection with computations under sec_72 and the regulations thereunder included in this section are tables giving life expectancies for one life table v and the joint life and last survivor expectancies for two lives table vi notice_89_25 1989_1_cb_662 was published on date and provided guidance in the form of questions and answers on certain provisions of the tra ‘86 in the absence of regulations under sec_72 of the code notice_89_25 provides guidance with respect to the exception to the tax on premature distributions provided under sec_72 of the code odo0 xxx page q a-12 of notice_89_25 provides that certain payments will be considered substantially_equal_periodic_payments within the meaning of sec_72 of the code if such payments are calculated under one of the three methods set forth in q a-12 of notice_89_25 under the life expectancy method payments will be treated as substantially_equal_periodic_payments within the meaning of code sec_72 if the annual payment is determined using a method that would be acceptable for purposes of calculating the minimum distribution required under code sec_401 under the amortization_method payments will be treated as substantially_equal_periodic_payments within the meaning of code sec_72 if the amount to be distributed annually is determined by amortizing the taxpayer's account balance over a number of years equal to the life expectancy of the account owner or the joint life and last survivor expectancy of the account owner and beneficiary at a reasonable interest rate on the date payments commence under the annuity table method payments will be treated as substantially_equal_periodic_payments within the meaning of code sec_72 if the amount to be distributed annually is determined by dividing the taxpayer's account balance by an annuity factor with such annuity factor derived using a reasonable mortality_table and using reasonable interest rate on the date payments commence in this case payments from contract s x that are limited and paid as described and made pursuant to taxpayer a’s program satisfy the requirements of each of the three methods set forth in q a-12 method g comports with the code sec_401 a life expectancy method in q a-12 of notice_89_25 methods h and comport with the amortization_method and the annuity table method respectively in q a-12 of notice_89_25 the life expectancies mortality_table and the interest rates that will be used are reasonable accordingly we conclude that taxpayer a should treat each automatic payment under the program from a contract x as part of a series of substantially_equal_periodic_payments within the meaning of sec_72 of the code this ruling is directed only to the taxpayer who requested it sec_6110 of the code states that it may not be used or cited by others as precedent xxxxx page a copy of this letter has been sent to your authorized representative in accordance with the power_of_attorney submitted with the ruling_request sincerely yours jgagned gotcr b- wai joyce e floyd manager employee_plans technical group tax_exempt_and_government_entities_division enclosures deleted copy of this letter notice of intention to disclose ce ep manager xxxxx area xxxxx xxxxx xxxxx xxxxx xxxxx hon


department of the treasury internal_revenue_service washington d c t a x e x e m p t a n d g o v e r n m e n t e n t i t i e s d i v i s i o n contact person contact number identification_number number release date uil uil date date dear ------------ requested certain rulings relating to the tax consequences of a proposed transaction employer_identification_number this is in response to a letter from l’s veba authorized representative who has the information submitted shows that m the employer established l as a voluntary employees_beneficiary_association trust effective ------------------------- l based on a determination_letter dated --------------------------- is exempt from federal_income_tax under sec_501 of the internal_revenue_code it provided sickness accident and other_benefits for eligible employees of the employer and its affiliates due to a series of business reversals the employer and its affiliates ceased operations beginning in ------- or subsequently were placed under federal_agency control with assets and operations disposed by such agencies as a result of the termination of the business operations of the employer and its affiliates the veba ceased to receive new contributions on ---------------- ------ at that time the percentage of employer and employee contributions which had been private_letter_ruling made to the veba was approximately --- to --- respectively subsequently the veba satisfied all liabilities however it did not exhaust its assets as of ---------------------- the veba held dollar_figure----------- in assets because the funds were not segregated on the veba’s records by contributions it is difficult to ascertain the proportion of employer and employee funds remaining in the veba article i sec_2 of the veba document states ------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------ ------------------------------------------------------- on ---------------------- n an affiliate of the employer which participated in the veba contracted with o to manage certain real_estate limited_partnerships and or properties which it either owned or for which it was a general_partner due to its insolvency o subsequently became the general_partner of the entity that acted as the individual general_partner and acquired the corporate general_partner of various real_estate partnerships that held certain of the properties and or interests formerly owned by n ------ individuals including ------- of the employer’s former employees formed o at the time of the employer’s insolvency at that time o offered employment to a large number of former employees of the employer and its affiliates including employees of the employer’s affiliates n and p o currently employs several of the employer’s former employees o‘s remaining employees perform services which are similar to the services that are performed by the employer’s former employees on ---------------------- o established r the trust as a voluntary employees_beneficiary_association trust the trust based on a determination_letter dated ----------------------- is exempt from federal_income_tax under sec_501 of the code the veba currently does not have any records documenting the location of the employer’s former employees who contributed to the veba in connection with their attempts to liquidate the veba the trustees of the veba previously have determined that the cost associated with locating a substantial portion of the former beneficiaries of the veba would consume a substantial portion of the veba’s assets sec_501 of the code provides for the exemption from federal_income_tax of voluntary employees’ beneficiary associations providing for the payment of life sick accident or other_benefits to the members of such association or their dependents or designated beneficiaries if no part of the net_earnings of such association inures other than through such payments to the benefit of any private_shareholder_or_individual be described in sec_501 it must be an employees’ association membership in the sec_1_501_c_9_-1 of the income_tax regulations provides that for an organization to sec_1_501_c_9_-4 of the regulations provides in part that whether prohibited private_letter_ruling association must be voluntary the organization must provide for the payment fo life sick accident or other_benefits to its members and there can be no inurement other than by payment of permitted benefits to the benefit of any private_shareholder_or_individual inurement has occurred is a question to be determined with regard to all of the facts and circumstances taking into account the guidelines set forth in this section sec_1 c - d of the regulations provides that it will not constitute prohibited inurement if on termination of a plan funded through a veba any assets remaining after satisfying all liabilities to existing plan beneficiaries are applied to provide life sick accident or other appropriate welfare benefits pursuant to criteria that do not provide for disproportionate benefits to officers shareholders or highly compensated employees disqualified_benefit provided by an employer-maintained welfare_benefit_fund of a welfare fund reverting to the benefit of the employer sec_4976 of the code defines a disqualified_benefit to include any portion sec_4976 of the code imposes an excise_tax on an employer equal to of any based on a provision adopted by the trustees of the veba the trustees have the authority to determine the disposition of surplus assets upon termination of the plan provided that the surplus is used to provide benefits allowable under a_trust governed by sec_501 of the code the veba has paid all outstanding obligations and has no outstanding debts the trust provides health care benefits to current employees of o in a nondiscriminatory manner and is recognized as exempt under sec_501 the trustee of the trust has represented to the trustee of the veba that any transferred assets will be utilized to provide benefits to former employees of the employer and similarly situated employees of o in a nondiscriminatory manner assets transferred into the trust will be used to continue to provide permissible c benefits for employees of participating o members the proposed transfer will not constitute impermissible inurement under sec_501 of the code because the surplus assets will be used to provide permissible benefits on a nondiscriminatory basis to former employees of the employer and similarly-situated employees of o which has a common employment-related bond because it is affiliated with the employer through its continued management of one of the real_estate partnerships the balance of partnerships having been liquidated since date the two most recent liquidations occurring in date the transfer of the veba’s funds to the trust does not constitute a disqualified_benefit because no portion of the funds reverts back to the benefit of the employer therefore sec_4976 excise_tax does not apply accordingly we conclude as follows that the transfer of excess funds from the veba to the trust successor veba will not cause either the veba or the trust to cease to be recognized as exempt from federal_income_tax under sec_501 of the code private_letter_ruling that the transfer of excess funds from the veba to the trust will not constitute prohibited inurement under sec_501 of the code that the transfer of assets from the veba to the trust will not subject o any company related to o or the veba to the excise_tax under sec_4976 of the code this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file in this office a copy of this letter is being sent to foundation’s authorized representative a copy of this letter should be kept in foundation’s permanent records if there are any questions about this ruling please contact the person whose name and telephone are shown in the heading of this letter sincerely robert c harper jr robert c harper jr manager exempt_organizations technical group