t c memo united_states tax_court randal w howard petitioner v commissioner of internal revenue respondent docket no filed date randal w howard pro_se brin k huss for respondent memorandum opinion goldberg special_trial_judge respondent determined a deficiency in petitioner’s federal_income_tax for the taxable_year in the amount of dollar_figure and additions to tax under sec_665l1 a and in the amounts of dollar_figure and dollar_figure respectively unless otherwise indicated section references are to the internal_revenue_code in effect for the year in issue - after a concession by petitioner ’ the remaining issues in this case are whether dollar_figure received by petitioner for his labor in is taxable wage income whether petitioner is liable for the additions to tax for failure to timely file his federal_income_tax return and for failure to pay estimated_tax and whether a penalty should be awarded to the united_states under sec_6673 some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference at the time the petition was filed petitioner resided in tucson arizona we begin by noting that petitioner has been before this court on three prior occasions arguing the same issue namely amounts reported on petitioner’s form_w-2 wage and tax statement from his employment with the family life broadcasting system flbs is not subject_to income_tax see howard v commissioner tcmemo_2000_222 involving tax years through howard v commissioner tcmemo_1998_300 involving tax years and howard v commissioner tcmemo_1998_57 involving tax years and in each of petitioner’s prior cases before this court we petitioner conceded that he received interest_income of dollar_figure from arizona central credit_union in and that such interest_income is taxable of the dollar_figure interest_paid dollar_figure was withheld by arizona central credit_union for federal income taxes have found that petitioner’s labor income was taxable wage income petitioner’s position in the instant case as presented in his petition and during trial is essentially unchanged during petitioner was an engineer for a radio station flbs in tucson arizona he has been a full-time_employee with flbs since prior to petitioner was an independent_contractor of flbs during the year in issue petitioner received health insurance paid vacation and sick leave and other_benefits from flbs flbs provides these benefits only to its employees and not to its independent contractors on date as a requirement of his employment petitioner signed a form_w-4 employee’s withholding allowance certificate on the form_w-4 petitioner claimed nine exemptions petitioner has not signed any other form_w-4 since date at trial the following exchange took place between respondent and petitioner q how many allowances did you claim in -- on that w-4 form a nine qo are you married mr howard a no q do you have nine -- or eight children living with you a no that’s not how that works q the w-4 they had you sign was in order to withhold taxes from you isn’t that true a presumably q and did they -- a because they believed i needed to q did they withhold taxes from you in a uh-huh - flbs prepared a form_w-2 for petitioner showing wage income of dollar_figure and federal_income_tax withheld of dollar_figure petitioner did not make any payments to the internal_revenue_service for the taxable_year other than the withholdings petitioner did not file a federal_income_tax return for the taxable_year in a notice_of_deficiency respondent determined that petitioner received taxable wage income of dollar_figure respondent also determined that petitioner was liable for additions to tax for failure_to_file a federal_income_tax return for the taxable_year and failure to pay the estimated_tax liability at the close of trial respondent orally moved to impose sanctions under sec_6673 a written motion was filed on date this court and federal courts across the nation have repeatedly rejected petitioner’s arguments that amounts he received from flbs do not constitute wage income and that reporting and paying income taxes are strictly voluntary 91_tc_88 howard v commissioner tcmemo_2000_222 howard v commissioner tcmemo_1998_57 we find petitioner’s arguments baseless and wholly without merit as petitioner’s arguments have been addressed by this and other courts we need not exhaustively review and respond to them --- - 737_f2d_1417 5th cir respondent is sustained on this issue respondent determined an addition_to_tax as a result of petitioner’s failure to timely file his tax returns for the tax_year sec_6651 imposes an addition_to_tax for failure to timely file a tax_return the addition_to_tax is equal to percent of the amount of the tax required to be shown on the return if the failure_to_file is not for more than month sec_6651 an additional percent is imposed for each month or fraction thereof in which the failure_to_file continues to a maximum of percent of the tax id the addition is applicable unless petitioner establishes that his failure to timely file the return was due to reasonable_cause and not willful neglect id if petitioner exercised ordinary business care and prudence and was nonetheless unable to file his return within the date prescribed by law then reasonable_cause exists sec_301_6651-1 proceed admin regs willful neglect means a conscious intentional failure because petitioner failed to introduce any credible_evidence he failed to meet the requirements of sec_7491 as amended so as to place the burden_of_proof on respondent with respect to any factual issue relevant to ascertaining liability for the tax_deficiency in issue as to the additions to tax under sec_6651 and sec_6654 we find that respondent has satisfied his burden of production under sec_7491 because the record shows that petitioner’s return was never filed and petitioner underpaid the estimated_tax due 116_tc_438 or reckless indifference 469_us_241 petitioner’s federal_income_tax return was due on date petitioner did not file his federal_income_tax return and offered no explanation for his failure_to_file his return petitioner failed to show that he exercised ordinary care and prudence in this case accordingly petitioner is liable for the addition_to_tax under sec_6651 as determined in the notice_of_deficiency respondent also determined that petitioner is liable for an addition_to_tax pursuant to sec_6654 for failure to pay estimated_tax if the payments of tax through withholding or the payment of estimated guarterly tax_payments during the course of the year are not equal to the statutorily required amount then imposition of this addition is automatic unless one of the statutory exceptions applies to the taxpayer sec_6654 75_tc_1 we have jurisdiction to review this determination because the taxpayer did not file a return for sec_6665 meyer v commissioner 97_tc_555 petitioner offered no evidence and made no argument on this issue we conclude that petitioner is liable for the addition_to_tax for failure to pay estimated_tax under sec_6654 for respondent is sustained on this issue we now turn to respondent’s motion for damages under section - a sec_6673 allows this court to award a penalty not in excess of dollar_figure when proceedings have been instituted or maintained primarily for delay or where the taxpayer’s position is frivolous or groundless ie it is contrary to established law and unsupported by a reasoned colorable argument for a change in the law 791_f2d_68 7th cir affg in part an unreported order of this court we believe and we note that this court has previously held that a penalty against petitioner 1s appropriate petitioner has been admonished in two opinions of this court against presenting to the court nothing more than tax_protester rhetoric and legalistic gibberish which have absolutely no merit and deserve no further attention from this court howard v commissioner tcmemo_2000_222 quoting howard v commissioner t c memo likewise here the positions argued by petitioner are frivolous and wholly without merit accordingly we shall grant respondent’s motion and require petitioner to pay a penalty to the united_states in the amount of dollar_figure under sec_6673 to reflect the foregoing decision will be entered for respondent and an appropriate order will be entered for the award of the penalty under sec_6673


t c memo united_states tax_court thomas f and kathryn h chambers petitioners v commissioner of internal revenue respondent docket no filed date scott w gross for petitioners ronald s collins jr john a guarnieri and arslan malik for respondent memorandum findings_of_fact and opinion wells judge respondent determined income_tax deficiencies of dollar_figure and dollar_figure and fraud penalties pursuant to section of dollar_figure and dollar_figure for petitioners’ and 1unless otherwise indicated section references are to the continued tax years respectively the issues we must decide are whether respondent bears the burden_of_proof on the additional deficiency respondent has asserted for whether petitioners must include in their gross_income for their and tax years the amounts respondent determined on the basis of the analysis of petitioners’ bank_deposits and whether petitioners are liable for the fraud penalties pursuant to sec_6663 findings_of_fact some of the facts and certain exhibits have been stipulated the parties’ stipulations of fact are incorporated in this opinion by reference and are found accordingly at the time they filed their petition petitioners resided in pennsylvania petitioners are husband and wife hereinafter referred to individually as mr chambers and mrs chambers respectively who filed joint tax returns for their and tax years the years in issue continued internal_revenue_code_of_1986 code as amended and in effect for the years in issue and rule references are to the tax_court rules_of_practice and procedure 2the notice_of_deficiency issued to petitioners stated that respondent had determined a deficiency for of dollar_figure but in his answer respondent asserts that that number was incorrect because of a computation error and that the correct amount of petitioners’ deficiency is dollar_figure mr chambers is an ordained minister who during the years in issue was the sole pastor of biblical church ministries sometimes also referred to as biblical church or biblical church and global ministries before he founded biblical church during mr chambers had been the senior pastor of pilgrim bible church since he resigned from his position at pilgrim bible church because he wanted to concentrate more on global evangelism and planned to be out of the country for many weeks during the year however about a dozen of his former congregants at pilgrim bible church asked him to continue leading them in studying the bible on sunday mornings mr chambers agreed to continue leading them in sunday worship with the understanding that he would be ministering abroad a number of weeks during the year and that someone else would lead worship when he was absent during mr chambers organized biblical church as a corporation sole under utah law he designated himself as overseer of biblical church as overseer he had full control_over the corporation sole including the authority to amend its articles of corporation sole and appoint his successor during petitioners transferred the ownership of their home from themselves as individuals to mr chambers as overseer of biblical church a corporation sole since its inception biblical church has held worship services every sunday and bible studies on wednesday nights the sunday services are held at the home of one of the church members and the wednesday night studies meet at petitioners’ home a typical service includes worship music prayer and teaching from the bible the normal attendance at the sunday services ranges from to people many of those individuals attend biblical church exclusively as their regular church in addition to leading worship on sundays and bible studies on wednesdays mr chambers provides pastoral counseling to the members of biblical church mr chambers followed through on his plans to participate in many overseas evangelism trips in addition to his job as a pastor at biblical church he is on the staff of e3 partners an organization that is exempt from tax pursuant to sec_501 mr chambers’ role with e3 partners is church planter and his primary responsibility is to lead short-term mission trips to other countries where he trains local pastors and other volunteers in evangelism during each of the years in issue mr chambers led two trips with e3 partners and participated in a third trip his travels included a trip to peru during date trips to two 3the organization was also known as global partners during some of the years in issue however to avoid confusion we will refer to it only as e3 partners different locations in venezuela from late june to mid-date a trip to india that lasted from date until early date a trip to costa rica during date and a trip to south africa during date his family accompanied him on the mission trips and at least five members of his congregation also participated in at least one trip other congregations sent volunteers on the trips he led and he was responsible for training the members of his team in the united_states before they traveled abroad the team members were responsible for raising their own funds for each trip but e3 partners coordinated fundraising by receiving donations on behalf of individual team members and using those donations to pay trip expenses for those team members portions of the funds raised by all of the team members were directed to the team leaders like mr chambers who were responsible for handling all of the day-to-day expenses the team would encounter on the trip before each trip e3 partners deposited funds into a bank account provided by the team leader who then withdrew the cash needed for the trip all expenses_incurred during the trip had to be documented by receipts and the team leader was responsible for returning any unused funds to e3 partners at the end of the trip during the years in issue mr chambers received into his personal bank account numerous deposits to cover trip expenses from e3 partners and the parties agree that such funds were properly excluded from petitioners’ income in addition to the funds deposited into petitioners’ personal checking account by e3 partners on behalf of other team members petitioners also conducted their own separate fundraising for their missions trips mr chambers solicited donations by personally contacting people through letters or phone calls some of the individuals he contacted made donations by writing checks to e3 partners but others gave by writing checks to biblical church which mr chambers would deposit in one of biblical church’s bank accounts during both and petitioners maintained a personal checking account at m t bank m t account petitioners also maintained checking accounts for biblical church at national penn bank national penn account and the bank of lancaster county lancaster account collectively the biblical church bank accounts or the church bank accounts petitioners were the only authorized signatories for the biblical church bank accounts the name listed on the church bank accounts was biblical church and global ministries but petitioners usually deposited checks made payable to biblical church into the national penn account and checks made payable to global ministries into the lancaster account biblical church had two bank accounts because mr chambers was trying to separate funds for the church itself from funds that were intended to support its overseas mission trips he had originally planned to save some of the church funds to purchase a building but because he was very passionate about the mission work he put most of the money toward missions petitioners opened the lancaster account before they had obtained an employment identification_number ein from the internal_revenue_service irs they told the bank representative that they had applied for an ein but had not yet received it the bank representative nonetheless allowed them to open a bank account and she typed all of the information required on the new deposit account coversheet but left blank the space for the ein she then printed out the new deposit account coversheet had petitioners sign it and instructed them to inform the bank as soon as they received the ein from the irs the bank representative’s actions in setting up the account printing out the new account coversheet and leaving blank the space for the ein were consistent with protocol established by the bank of lancaster county at that time at some point a nine-digit number was handwritten in the space for the tax identification_number on the new account coversheet the nine-digit number written on the new account coversheet and subsequently associated with the lancaster account is the social_security_number of a minor child unrelated to petitioners not the ein assigned to biblical church the minor child who was assigned the social_security_number was not an account_holder at the bank of lancaster county when petitioners created the lancaster account several months after they opened the lancaster account petitioners also opened the national penn account petitioners supplied national penn bank with biblical church’s ein which they had obtained from the irs by the time they opened the national penn account when petitioners discovered that the ein associated with the lancaster account was incorrect at some point during they closed that account and opened a new account at northwest savings bank northwest account using a new ein biblical church also maintained an investment account at lpl financial during the years in issue during the years in issue petitioners performed part-time janitorial work for superior walls of america ltd superior walls petitioners were paid dollar_figure per hour for performing cleaning services about hours each week mr chambers intended the compensation from superior walls as a fundraiser for his mission trips and for biblical church he spoke with the financial controller at superior walls and explained his desire to perform janitorial services as a fundraiser for biblical church pursuant to an agreement with superior walls instead of 4respondent has not contended that deposits into the northwest account or into the investment account at lpl financial should be included in petitioners’ income paying petitioners themselves for the work superior walls paid biblical church directly mr chambers executed a form_w-9 request for taxpayer_identification_number and certification on behalf of biblical church which he submitted to superior walls claiming to be exempt from federal tax withholding petitioners later learned that the law required them to report the compensation from superior walls as taxable_income and they began to report the compensation as income during petitioners reported their income from superior walls during on a schedule c attached to their form_1040 u s individual_income_tax_return during the years in issue the deposits into the biblical church bank accounts primarily consisted of numerous small checks written by individuals members and regular attendees of biblical church wrote checks that accounted for the largest number of deposits many of those individuals contributed a regular tithe or offering other checks were written by individuals who made only a few donations during the years in issue some checks were written by other churches in total about individuals and three churches wrote at least one check to biblical church during the years in issue 5petitioners concede that compensation of dollar_figure that they received from superior walls during should have been reported on their return for that year during the years in issue petitioners wrote checks or otherwise used the funds in the church bank accounts as follows date check no payee amount lancaster account debit card debit card debit card debit card dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure lpl financial_account unknown lpl financial_account apple computer unknown lpl financial_account cmts association for biblical research dollar_figure unknown dollar_figure unknown dollar_figure kathryn chambers dollar_figure unknown dollar_figure unknown dollar_figure unknown dollar_figure thomas chambers dollar_figure best buy dollar_figure cash dollar_figure cash dollar_figure cash dollar_figure cash dollar_figure cash dollar_figure wawa dollar_figure chr christian bk dell catalog sales dollar_figure trinity evangelical divinity dollar_figure school unknown unknown secretary of state byers garage webster chamberlain bean dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure national penn account date check no payee none none none thomas f chambers tom chambers thomas chambers amount dollar_figure big_number big_number none none none none none none none none none none none thomas chambers thomas chambers tom chambers thomas chambers thomas chambers casa thomas chambers thomas chambers kathryn anne chambers thomas f chambers tom chambers big_number big_number big_number big_number big_number big_number big_number big_number big_number the irs reconstructed petitioners’ income for the years in issue by examining the deposits to the m t account the lancaster account and the national penn account the irs did not include deposits into the northwest account when it reconstructed petitioners’ income however the parties have included bank statements and canceled checks from the northwest account among the stipulated exhibits before the court those records show that petitioners used the debit card from the northwest account to pay for numerous purchases at wal-mart k-mart staples dollar general and a variety of other retailers as well as many purchases at gas stations and restaurants petitioners wrote checks on the northwest account to pay for many household expenses including their gas bills cable bills and sewer bills they also wrote checks to a tile company a chimney sweep a mattress store a dentist a newspaper a mechanic and a cement company on date respondent mailed to petitioners a notice_of_deficiency determining deficiencies in income_tax of dollar_figure and dollar_figure and penalties pursuant to sec_6663 of dollar_figure and dollar_figure for their and tax years respectively petitioners timely filed their petition with this court as noted above in his answer respondent asserts that there was a computation error in the notice_of_deficiency and that the correct deficiency and penalty under sec_6663 for are dollar_figure and dollar_figure respectively opinion i whether respondent bears the burden_of_proof on the additional deficiency generally the commissioner’s determination_of_a_deficiency is presumed correct and the taxpayer has the burden of proving it incorrect rule a 290_us_111 however the commissioner generally bears the burden_of_proof with respect to any increases in deficiency rule a the parties agree that petitioners bear the burden_of_proof on the amounts determined on the first page of the notice_of_deficiency however petitioners contend that respondent has the burden_of_proof on the additional_amount of deficiency for asserted in the answer respondent contends that the additional deficiency should not be considered an increase in deficiency because the increase was due to a computation error we agree with respondent there is no increase in deficiency where the increase results from a computation error 94_tc_582 in the instant case the increase in deficiency resulted from the irs’ omission of the deposits into the lancaster account when the irs calculated the total deposits during the irs attached a form 886a explanation of items to the notice_of_deficiency in a table in that form 886a labeled tax_year the irs included the deposits into the lancaster account however in a column of that table the irs erroneously labeled those deposits deposits the irs used another table to calculate the total deposits for however the irs did not include the deposits into the lancaster account when it actually summed the deposits for either or it is clear from the form 886a that the irs intended to include the deposits into the lancaster account as part of petitioners’ income for that year indeed it is obvious that the table in the form 886a contains a computation error because the separate amounts in the table sum to more than the purported total for that year this computation error is similar to that in estate of bowers where we held that because the increase in deficiency resulted solely from a computation error it was unrelated to the burden_of_proof and the correct deficiency would be determined by computation in accordance with estate of bowers we hold that petitioners bear the burden_of_proof on the additional deficiency asserted in the answer ii petitioners’ tax_liability a whether petitioners must include biblical church deposits in their income respondent contends that biblical church is not a church respondent also contends that even if biblical church is a church money deposited into the church bank accounts was still income to petitioners because they exercised complete control_over the bank accounts and used money from those accounts to pay personal expenses the term church is not defined in the code or the regulations we have held that whether an entity is a church is a fact-specific inquiry that considers primarily the entity’s religious purposes and the means by which those purposes are accomplished 88_tc_1341 the irs uses the following criteria the criteria to determine whether an entity is a church a distinct legal existence a recognized creed and form of worship a definite and distinct ecclesiastical government a formal code of doctrine and discipline a distinct religious history a membership not associated with any other church or denomination an organization of ordained ministers ordained ministers selected after completing prescribed studies a literature of its own established places of worship regular congregations regular religious services sunday schools_for religious instruction of the young and schools_for the preparation of its ministers id pincite quoting internal_revenue_manual exempt_organizations examination guidelines handbook date although we have declined to adopt the criteria we have stated that they are helpful in deciding the factual question of whether an entity is a church id we recognize that few traditional churches could satisfy all of the criteria see id as a minimum threshold we have held that ‘a church includes a body of believers or communicants that assembles regularly in order to worship ’ id pincite quoting am guidance found inc v united_states 490_fsupp_304 d d c biblical church satisfies many of the criteria mr chambers is an ordained minister the church has a distinct legal existence as a corporation sole the church has been meeting regularly on sundays since its worship services include a core group of to attendees who exclusively attend biblical church its worship services are consistently held at the same place and mr chambers teaches recognized christian doctrine on the basis of the foregoing we conclude that biblical church is a church we next consider respondent’s contention that even if biblical church is a church money deposited into its accounts was still income to petitioners because they exercised full control_over it and used it to pay personal expenses when a taxpayer fails to keep adequate books_and_records the commissioner is authorized to determine the existence and amount of the taxpayer’s income by any method that clearly reflects income see sec_446 92_tc_661 the commissioner may use indirect methods and he is given latitude in determining which method of reconstruction to apply petzoldt v commissioner supra pincite the commissioner’s reconstruction of a taxpayer’s income need only be reasonable in the light of all surrounding facts and circumstances 40_tc_30 see also 54_tc_1530 one of the indirect methods of reconstructing income is the bank_deposit_method the use of the bank_deposit_method for computing income has long been sanctioned by the courts 64_tc_651 affd 566_f2d_2 6th cir bank_deposits constitute prima facie evidence of income 87_tc_74 see also 102_tc_632 when a taxpayer keeps inadequate or incomplete books_or_records and has large_bank deposits the commissioner is not acting arbitrarily or capriciously by resorting to the bank_deposit_method see 96_tc_858 affd 959_f2d_16 2d cir the bank_deposit_method of reconstruction assumes that all of the deposits into a taxpayer’s account are taxable_income unless the taxpayer can show that the deposits are not taxable id pincite the commissioner need not show a likely source of the income when using the bank_deposit_method but the commissioner must take into account any nontaxable items or deductible expenses of which the commissioner has knowledge see 335_f2d_671 5th cir see also dileo v commissioner supra pincite the burden_of_proof is on the taxpayer to show that the deposits are not taxable_income rule a 96_tc_172 affd in part revd in part and remanded on other grounds 981_f2d_350 8th cir 31_tc_690 affd 295_f2d_336 5th cir generally where a taxpayer has dominion and control_over diverted funds they are includable in the taxpayer’s gross_income under sec_61 330_f2d_30 3d cir 226_f2d_331 6th cir we generally have held that when the commissioner uses the bank_deposit_method to reconstruct a taxpayer’s income the taxpayer’s gross_income includes deposits into all accounts over which the taxpayer has dominion and control not just deposits into the taxpayer’s personal bank accounts see price v commissioner tcmemo_2004_103 cohen v commissioner tcmemo_2003_42 woodall v commissioner tcmemo_2002_318 woods v commissioner tcmemo_1989_611 affd without published opinion 929_f2d_702 6th cir a taxpayer has dominion and control_over an account when the taxpayer has the freedom to use its funds at will see 343_us_130 we have held that deposits made to a lawyer’s cash management accounts were income to the taxpayer where she was the only signatory on the account used it to pay personal expenses and did not disclose its existence to her law firm’s accountant see price v commissioner supra additionally we have held that deposits made into the account of a taxpayer’s s_corporation of which he was the sole shareholder were includable in his gross_income see cohen v commissioner supra furthermore we have held that deposits into the accounts of a purported trust for an investment project were income to a taxpayer where he had the power to make withdrawals his social_security_number was the only one on the accounts he was one of two signatories his business address was on the accounts and he made transfers into and out of the accounts see woodall v commissioner supra finally we have held that deposits made into the account of a purported church were includable in the taxpayers’ gross_income where the taxpayers were the owners of the bank accounts exercised complete control_over the funds in the accounts and used those funds for personal expenditures see woods v commissioner supra in woods we held that it was unnecessary to disregard the separate existence of the purported church in order to reach our conclusion that funds deposited in the church’s accounts were income to the taxpayers we stated it is not necessary to disregard the separate existence of the church or to challenge the tax status of the church as an entity in order to sustain respondent’s determinations in this case whether they were entitled to the funds or embezzled the funds from the church petitioners exercised complete dominion and control_over deposits into the various bank accounts that were the basis of respondent’s determination id respondent contends that we should apply the same reasoning to hold that all of the funds deposited into biblical church’s bank accounts during the years in issue are includable in petitioners’ gross_income it is undisputed that petitioners were the only signatories on the biblical church bank accounts and that the address listed on those accounts was that of petitioners mr chambers testified that he used the money in the church bank accounts for mission trips mission expenses other ministry expenses and church expenses petitioners contend that the large number of checks written to themselves or to cash totaling more than dollar_figure were all for use on their mission trips and they contend that the dates of those withdrawals line up with the dates of their mission trips yet many of the withdrawal dates bear little relationship to the dates of their mission trips for instance mr chambers wrote checks to himself for dollar_figure on date dollar_figure on date and dollar_figure on date yet petitioners did not leave on their trip to india until date petitioners have supplied no receipts records or other evidence to substantiate their testimony regarding the use of the cash they withdrew from the biblical church bank accounts petitioners contend that their failure to supply records from biblical church to substantiate their testimony regarding the use of church funds should be excused because pursuant to sec_7611 the irs cannot compel them to produce church_records sec_7611 sets forth certain procedures with which the irs must comply before it can obtain records of a church in connection with an examination of that church’s tax_liability however sec_7611 provides that those procedural requirements do not apply to any inquiry or examination relating to the tax_liability of any person other than a church courts generally have held that where the irs is examining the tax_liability of an individual such as a pastor rather than the church itself sec_7611 does not apply see st german of alaska e orthodox catholic church v united 840_f2d_1087 n 2d cir 801_f2d_1162 9th cir we agree accordingly petitioners’ failure to produce church_records that would substantiate their testimony about how they used the cash withdrawn from the biblical church bank accounts is not excused by sec_7611 the record suggests that petitioners sometimes used biblical church funds to pay personal expenses although respondent has not contended that deposits into the northwest account are includable in petitioners’ income the parties nonetheless have included bank statements and canceled checks from that account in the evidence before the court respondent contends that the statements and canceled checks from the northwest account show that petitioners used biblical church funds to pay personal expenses indeed those records show that petitioners used the debit card from the northwest account to pay for numerous purchases at retail stores gas stations and restaurants petitioners wrote checks on the northwest account to pay for many household expenses very few of the purchases from the northwest account bear any obvious relation to biblical church and petitioners did not offer any testimony or other evidence to explain how those purchases were used by the church petitioners contend that even if some of the expenses paid from the northwest account were personal those amounts are not includable in petitioners’ income because they were for the purpose of providing a home for mr chambers a minister_of_the_gospel and therefore are exempt from taxation under sec_107 however in order for a minister’s housing allowance to be exempt from taxation under sec_107 it must be designated as a housing allowance by an official action of the church in accordance with sec_1_107-1 income_tax regs which provides the term rental allowance means an amount_paid to a minister to rent or otherwise provide a home if such amount is designated as rental allowance pursuant to official action taken in advance of such payment by the employing church or other qualified_organization the designation of an amount as rental allowance may be evidenced in an employment contract in minutes of or in a resolution by a church or other qualified_organization or in its budget or in any other appropriate instrument evidencing such official action the designation referred to in this paragraph is a sufficient designation if it permits a payment or a part thereof to be identified as a payment of rental allowance as distinguished from salary or other remuneration on the basis of the record it appears that mr chambers received no official salary from biblical church and nothing in the record suggests that biblical church took any official action to designate a housing allowance for mr chambers accordingly petitioners’ argument that their personal housing_expenses are exempt from taxation fails see 41_tc_605 petitioners testified that they used the cash they withdrew from the biblical church accounts for their overseas mission trips and we believe they may have used some of the cash for those trips however the evidence also shows that petitioners sometimes used funds from the church bank accounts to pay their personal expenses suggesting the likelihood that they also used some of the cash they withdrew from the church bank accounts for trips to pay their personal expenses petitioners produced no receipts or other documentation to show how the cash was used or how much money they spent on overseas mission trips because the burden_of_proof is on petitioners to produce such records and because petitioners have failed to produce any documentation we conclude that petitioners have failed to meet their burden petitioners had unfettered access to the funds in the church accounts and there is no evidence that the biblical church congregation had any say over how those funds were used indeed the only member of the biblical church congregation who testified at trial had no knowledge of the church’s finances suggesting that petitioners did not share any information about church finances with the congregation the facts show that petitioners fully controlled the church accounts used money in those accounts at will including to pay personal expenses and were not accountable to anyone in their congregation for their use of the church funds accordingly we conclude that petitioners exercised dominion and control_over the church bank accounts consequently all deposits into those accounts except those from nontaxable sources are properly includable in petitioners’ gross_income see price v commissioner tcmemo_2004_103 cohen v commissioner tcmemo_2003_42 woodall v commissioner tcmemo_2002_318 woods v commissioner tcmemo_1989_611 b reconstructing petitioners’ income using bank_deposits when using the bank_deposit_method the irs may assume that all money deposited into the taxpayer’s account during a given period constitutes taxable_income but it is required to take into account any nontaxable source or deductible expense of which it has knowledge dileo v commissioner t c pincite in the instant case respondent’s bank deposit analysis appears to us to be overzealous requiring that we review respondent’s determinations of what items are obviously from nontaxable sources or constitute deductible expenses petitioners’ tax_year respondent refused to concede that petitioners’ federal tax refunds for should not be included in petitioners’ income for in his reply brief respondent contends the following the deposited checks in include federal_income_tax refund checks in light of the circumstances and facts of this case respondent is unwilling to concede that those refunds were correctly and properly made to petitioners therefore respondent does not concede that those refunds are non-taxable in it appears that respondent is contending that petitioners are liable for deficiencies in income taxes from prior years and is attempting to recover some of those deficiencies by including petitioners’ tax refunds from in their income for respondent cites no authority that would permit such a determination and we find none accordingly we conclude that petitioners’ federal tax refunds should not be included in their income for in addition to petitioners’ federal tax refunds from and in addition to those items already conceded by respondent totaling dollar_figure we also conclude that the following deposits into petitioners’ personal bank account the m t account during obviously were nontaxable date payor payee memo line category1 amount nontaxable elizabeth r kathryn chambers art supplies b chamber sec_5 illegible jeremy chambers prom gel erie insurance kathryn chambers c2 b elizabeth r justin chambers group thomas chambers elizabeth r kathryn chambers chambers chambers cheryl d chambers christy chambers elizabeth r thomas f chambers elizabeth r jeremiah chambers chambers chambers a a a a a b-day dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure l jane johnson tom chambers lisa b corby christy chambers mission trip a joseph b a dollar_figure dollar_figure dollar_figure kirkland iii dollar_figure jeremy chambers happy 50th a3 india total 1the letters correspond to the following nontaxable categories a gifts b reimbursements and c refunds 2although the purpose of the check from erie insurance group is not obvious to us respondent conceded that a similar check paid to petitioners during was nontaxable 3although we view purported gifts within the employment context including gifts from church members to pastors with some skepticism see eg banks v commissioner tcmemo_1991_641 the small size and isolated nature of such a check from a single church member on the occasion of mr chambers’ birthday lead us to conclude that the transfer proceeded from a detached and disinterested generosity and is therefore a gift petitioners contend that a number of other deposits should also be considered nontaxable disputed deposits many of which petitioners contend are gifts however we conclude that the disputed deposits are properly included in petitioners’ income although petitioners contend that the disputed deposits are nontaxable petitioners have offered no testimony or other evidence to show that the disputed deposits are indeed nontaxable it is not clear from looking at the list of disputed deposits that they are as petitioners claim them to be because petitioners have the burden of proving that such deposits are nontaxable but have not done so we conclude that the disputed deposits are taxable the parties agree that some of the payments into the m t account from e3 partners also known as global partners or global missions are nontaxable reimbursements in the stipulations of fact the parties agreed that those reimbursements totaled dollar_figure for however petitioners now contend that the reimbursements total more we are unable to determine how the parties arrived at the sum of dollar_figure and believe it to be an error we may disregard a stipulation where it is clearly contrary to the evidence in the record and we do so here see 93_tc_181 petitioners received two types of distributions from e3 partners during the years in issue mr chambers received what appears to be a regular salary from e3 partners which came in the form of regular checks of dollar_figure during those checks were labeled as paid from the e3 partners’ payroll account mr chambers received other checks from e3 partners which were payable in a variety of denominations halfway through e3 partners switched to direct deposit for the nonpayroll checks during the sum of those deposits equals exactly the amount that the parties have agreed constitutes nontaxable reimbursements we therefore assume that those deposits are the nontaxable reimbursements to which the stipulation refers the sum of those deposits during is dollar_figure but that amount does not include checks that also appear to be reimbursements but that were received by mr chambers before e3 partners began depositing them directly into his account including those checks increases the total for nontaxable reimbursements to dollar_figure unless the parties agree to some other amount during their rule_155_computations that we order below we hold that dollar_figure is the amount that should be excluded from petitioners’ income as nontaxable reimbursements from e3 partners during we also conclude that respondent made several errors in his calculation of the sum of deposits into the m t account during he made errors in petitioners’ favor when he neglected to include dollar_figure in cash back that petitioners received as part of two deposits he also made an error in respondent’s favor when he neglected to subtract a dollar_figure deposit adjustment made by the bank after petitioners incorrectly recorded a dollar_figure deposit as a dollar_figure deposit accordingly we have adjusted the sum of deposits listed below to reflect those corrections we conclude that petitioners should include in their gross_income for the deposits to the m t account as follows total deposits less federal tax_refund less nontaxable items conceded by respondent less nontaxable items found by the court less nontaxable reimbursements from e3 partners dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure amount to be included in gross_income dollar_figure we now consider the amount from deposits into the biblical church bank accounts that should be included in petitioners’ gross_income for petitioners contend that certain amounts deposited into the biblical church bank accounts during the years in issue are not includable in petitioners’ income because they represent proceeds from sales of gold coins that petitioners donated to biblical church mrs chambers testified that she inherited cash from her parents used that cash to purchase gold coins and later donated those gold coins to biblical church she testified that petitioners then sold those gold coins on behalf of biblical church over the course of several years to a man named james schlosser petitioners testified that james schlosser paid for those coins with checks written on the account of surgical resources business_trust by the trustee leroy e glick during the years in issue petitioners deposited those checks totaling dollar_figure into the biblical church bank accounts petitioners offered no other evidence to substantiate their testimony about the sale of the gold coins the checks from surgical resources business_trust neither corroborate nor contradict petitioners’ testimony many of the checks have no notation in the memo line but a few contain enigmatic notes such as resources - ie see attached private confidential lawful agreement or lawful resources per agreement respondent contends that petitioners’ testimony regarding the sale of the gold coins was contradictory respondent’s contention is based on the premise that mr chambers stated that mrs chambers inherited the gold coins directly from her parents which would contradict mrs chambers’ testimony that petitioners used cash they inherited from mrs chambers’ parents to purchase the coins however mr chambers never clearly explained where the gold coins originated in addition he separately testified that petitioners had received cash from the inheritance although petitioners’ testimony regarding the gold coins was somewhat difficult to follow we do not find it contradictory nonetheless because petitioners have the burden of proving that the dollar_figure should not be included in their income and because petitioners failed to provide any evidence to corroborate their testimony we conclude that petitioners have failed to carry their burden_of_proof that the income from the surgical resources business_trust checks should be excluded from petitioners’ gross_income in reviewing respondent’s bank deposit analysis of the biblical church bank accounts we found that respondent made two minor transcription errors when he calculated the sum of deposits into the national penn account during which we have corrected in the totals we set forth below we found that respondent’s calculations of total deposits into the lancaster account were accurate with minor differences due to rounding accordingly we conclude that petitioners’ gross_income for is as follows dollar_figure taxable deposits into m t account taxable deposits into lancaster account dollar_figure taxable deposits into national penn account dollar_figure total dollar_figure the sum of taxable deposits into the three accounts includes the income from superior walls which the parties have agreed was taxable the sum of dollar_figure must be reduced by the income petitioners already reported on their return for insofar as any of that income was deposited into any of the three bank accounts petitioners’ tax_year we now proceed to consider respondent’s analysis of petitioners’ bank_deposits during in addition to those items already conceded by respondent in his reply brief totaling dollar_figure we conclude that the following deposits into the m t account during were nontaxable date payor payee memo line category1 amount nontaxable jeremy chambers congratulations a dollar_figure l jane johnson jeremy chambers congratulations a dollar_figure dollar_figure elizabeth r jeremy chambers a yvonne s miller chamber sec_5 timothy p chambers jeremy chambers graduation a jeremy chambers graduation gift a dollar_figure gail j reitzel jeremy chamber sec_5 lancaster bible jeremiah thomas college chamber sec_5 elizabeth r christen chamber sec_5 elizabeth r kathryn chambers chambers chamber sec_5 donna j gregory elizabeth r christen chambers elizabeth r kathryn chambers pennsylvania kathy chambers chambers chambers turnpike commission chambers gift a c drawing of a a birthday cake a a a c paul n thomas f chambers birthday a elizabeth r thomas f chambers drawing of a a birthday cake christy chambers amazon bk refund c dollar_figure chambers temitope o jegede total dollar_figure 1the letters correspond to the following nontaxable categories a gifts b reimbursements and c refunds dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure petitioners contend that a number of other deposits also are nontaxable many of which petitioners contend are gifts as we explained above those deposits are properly included in petitioners’ income because petitioners have the burden of proving that they are nontaxable but did not do so the parties agree that dollar_figure in deposits from e3 partners during should not be included in petitioners’ income because those deposits represent nontaxable reimbursements we conclude that respondent made an error in calculating the total deposits into the m t account during because he double-counted one deposit accordingly we have adjusted the sum of deposits to reflect that correction we conclude that petitioners should include in their gross_income for the deposits from the m t account as follows total deposits less nontaxable items conceded by respondent less nontaxable items found by the court less nontaxable reimbursements from e3 partners dollar_figure amount to be included in gross_income dollar_figure dollar_figure dollar_figure dollar_figure for the reasons explained above we conclude that petitioners also must include the deposits into the biblical church bank accounts in their income for upon review of respondent’s bank deposit analysis of the biblical church bank accounts for we conclude that respondent neglected to include one dollar_figure deposit from the national penn account that we have included in the total we set forth below we conclude that respondent’s reconstruction of deposits into the lancaster account was accurate accordingly we conclude that petitioners’ gross_income for is as follows dollar_figure taxable deposits into m t account taxable deposits into lancaster account dollar_figure taxable deposits into national penn account dollar_figure dollar_figure total the sum of taxable deposits into the three accounts includes the income from superior walls that the parties have agreed was taxable the sum of dollar_figure also must be reduced by the income petitioners already reported on their return for including the income from superior walls reported on their schedule c insofar as any of that income was deposited into any of the three bank accounts in summary we conclude that petitioners must include the following amounts from the bank deposit analysis in their income for the years in issue year amount includable in income dollar_figure dollar_figure iii whether any portion of the underpayment was due to fraud sec_6663 imposes a penalty equal to percent of the portion of the underpayment which is attributable to fraud taxpayers commit fraud when they evade taxes known to be owing by conduct intended to conceal mislead or otherwise prevent the collection_of_taxes 94_tc_654 see also 116_tc_79 the commissioner bears the burden of proving fraud and must establish it by clear_and_convincing evidence see sec_7454 rule b to satisfy his burden_of_proof the commissioner must show that an underpayment in tax exists and the taxpayer intended to conceal mislead or otherwise prevent the collection_of_taxes neely v commissioner supra pincite if the commissioner establishes that any portion of an underpayment is attributable to fraud the entire underpayment is treated as attributable to fraud see sec_6663 the existence of fraud is a question of fact to be resolved upon consideration of the entire record 98_tc_511 fraud will never be presumed id 55_tc_85 however fraud may be proved by circumstantial evidence and inferences drawn from the facts because direct proof of a taxpayer’s intent is rarely available 317_us_492 99_tc_202 circumstantial evidence that may give rise to a finding of fraudulent intent includes understatement of income inadequate records failure_to_file tax returns concealment of assets failure to cooperate with tax authorities filing false documents failure to make estimated_tax payments engaging in illegal activity attempting to conceal illegal activity dealing in cash implausible or inconsistent explanations of behavior an intent to mislead which may be inferred from a pattern of conduct and lack of credibility of the taxpayer’s testimony spies v united_states supra pincite respondent contends that there is sufficient circumstantial evidence in the record to conclude that petitioners fraudulently intended to evade taxes for and respondent argues that petitioners’ lack of records is circumstantial evidence of fraud petitioners failed to produce any biblical church_records to substantiate their testimony that they used cash withdrawn from the church bank accounts to fund their mission trips petitioners contend that pursuant to sec_7611 they were not required to produce church_records as we explained above petitioners’ contention is mistaken however petitioners’ mistaken contention indicates little about whether petitioners had fraudulent intent moreover the record does not establish that petitioners failed to keep records it merely shows that they failed to give those records to respondent indeed petitioners testified that they did keep records and attempted to introduce such records for the first time at trial we sustained respondent’s objection to the admission of such records on the basis that petitioners had failed to produce such records in response to our pretrial order while petitioners’ course of action could be taken as a lack of cooperation with respondent it appears that some of that lack of cooperation was based upon petitioners’ mistaken understanding of sec_7611 respondent contends that the organization of biblical church as a corporation sole under utah law shows that petitioners fraudulently intended to avoid paying taxes the commissioner has defined a corporation sole as a corporate form authorized under certain state laws to enable bona_fide religious leaders to hold property and conduct business for the benefit of the religious entity revrul_2004_27 2004_1_cb_625 the corporation sole originated in the common_law of england where it was used to ensure that property dedicated to the church would remain so rather than passing to the heirs of the bishop or other church leader see terrett v taylor 13_us_43 cnty of san luis obispo v ashurst cal rptr ct app the corporation sole operates to ensure that property held in the name of the church’s titular head passes by operation of law to his successors in office see cnty of san luis obispo v ashurst supra pincite although as revrul_2004_27 c b pincite discusses corporations sole have been abused by taxpayers trying to avoid paying taxes they are also a legitimate form of religious_organization recognized in a handful of states until date utah was one of the states that allowed churches to organize as corporations sole under its laws because we have concluded that biblical church was a legitimate church we reject respondent’s contention that petitioners’ choice to organize it as a corporation sole suggests that petitioners fraudulently intended to evade taxes respondent draws our attention to petitioners’ failure to have biblical church recognized as a tax-exempt_entity under sec_501 however the code does not require churches to apply for tax-exempt status it grants that status automatically see sec_508 6states that have corporation sole statutes include alabama ala code sec 10a-20-dollar_figure to dollar_figure lexisnexis alaska alaska stat sec to arizona ariz rev stat ann sec to -11908 california cal corp code secs to west colorado colo rev stat secs to -106 hawaii haw rev stat secs to -9 montana mont code ann sec to -210 nevada nev rev stat ann sec_84 to - lexisnexi sec_2010 oregon or rev stat sec_65 washington wash rev code ann sec_24 to west and wyoming wyo stat sec to -117 in addition arkansas and florida have recognized the common_law corporation sole see eg city of little rock v linn s w 2d ark reid v barry so fla 7utah code ann sec lexisnexis provides notwithstanding any other provision of this chapter a corporation sole may not be formed or incorporated under this chapter after date respondent further contends that biblical church’s organizing documents set it up as a tax-hostile entity showing that petitioners had no intention of complying with the tax law respondent points specifically to an article from biblical church’s organizing document that states this corporation sole is a full-time ministry and spiritual order which is mandatorily excepted by an unrestricted right as referenced in united_states law title_26 sec_6033 and iii sec_1341 and sec_508 from any form of taxation and from filing any returns or reports documents however the paragraph respondent cites is largely a recitation of the tax law applicable to all churches sec_6033 provides that all churches have a mandatory exception from filing the information returns that almost all other tax-exempt organizations are required to file annually sec_508 provides that all churches have a mandatory exception from filing for recognition of their tax-exempt status under sec_501 those statutes provide the mandatory exceptions from reporting and exemption from paying tax that biblical church claimed in its articles of corporation sole biblical church’s reference to those mandatory exceptions does not establish that petitioners harbored any intent to evade taxes believed to be owing respondent contends that petitioners’ attempt to assign the income they earned from janitorial work at superior walls to biblical church is evidence of their intent to conceal income petitioners contend that they intended their work for superior walls as a fundraiser for biblical church the circumstances surrounding petitioners’ conduct with superior walls are certainly suspect however the fact that petitioners later learned that they needed to report the income from superior walls on their income_tax return and that they did report that income during mitigates the suspiciousness of the situation suggesting that petitioners had no intent to evade taxes in any case mere suspicion does not satisfy respondent’s burden_of_proof for fraud which requires clear_and_convincing evidence see 90_tc_1130 finally and most forcefully respondent contends that petitioners’ fraudulent intent to evade taxes is evidenced by the fact that they opened the lancaster account using a false taxpayer_identification_number if the record supported respondent’s version of events it would indeed be a badge of fraudulent intent however petitioners have offered a different story that is consistent with the uncontested facts both parties agree that the coversheet setting up the lancaster account is typed except for the handwritten ein respondent’s witness from the bank8 established that the policies and 8we note that respondent’s witness was not the person who actually opened the lancaster account for petitioners nor did respondent’s witness work for the bank of lancaster county at the time petitioners opened the account rather respondent’s continued procedures in place at that time permitted bank of lancaster county employees to open accounts for customers without an ein as long as those customers agreed to later supply the number the employees were instructed to leave blank the ein field which would later be filled in by hand mr chambers testified that several months after petitioners originally had opened the lancaster account he went back to the bank of lancaster county to give the bank the ein he had received from the irs however when he told the bank representative that he wanted to provide the ein for biblical church she looked up the account and told him that the bank already had an ein in its system mr chambers did not give the bank of lancaster county the ein he had received from the irs or verify that the ein matched the number in the bank’s system the facts surrounding the ein associated with the lancaster account are certainly suspect but respondent has the burden_of_proof to clearly and convincingly prove fraudulent intent and he has not convinced us that his version of events is the one we should believe as stated above we will not sustain a finding of fraud on the basis of circumstances which at the most create only suspicion katz v commissioner supra pincite moreover continued witness was a bank employee familiar with the procedures for opening a new account that were in place at the bank of lancaster county during the period when petitioners opened the lancaster account respondent’s version of events also is somewhat at odds with other uncontested facts for instance petitioners established several other bank accounts for biblical church and all of those accounts have the correct ein additionally during petitioners discovered that the lancaster account had the wrong ein at which time they closed it and opened a new account using a correct ein considering all of the facts and circumstances we conclude that respondent has failed to prove petitioners’ fraudulent intent by clear_and_convincing evidence accordingly we hold that petitioners are not liable for the fraud_penalty pursuant to sec_6663 for either year in reaching these holdings we have considered all the parties’ arguments and to the extent not addressed herein we conclude that they are moot irrelevant or without merit to reflect the foregoing decision will be entered under rule


uniform issue list kikekrerererereekeeekereerererereee hrekekekekekrrekrkeerkeeekekeek he hk hk k ih ich kh hk kik erik aen kita ree keekkkeekeekeraeeekereeeeeeeerekeeer kekkekekrkekeeereeaeeek fei kkh ik iie ir ki iria iea reet hekkereeeerereeeeueeere mar attn kkk kkk kkk legend employer m plan x free kee kkk kerikeri eeekik eerie eere krkekkekerere eek kerr ene er re kee ree eeriek eerie eere seeker hhh ii it ikk resta ere eee riker ere eere riera eere eeere state a hk akhtar eir ree eere kite iie kererer er etek eere eee dear kkk kk this letter is in response to a request for a ruling_request dated date as supplemented by correspondence dated date and date which was submitted on your behalf by your authorized representative concerning an arrangement described under sec_403 of the internal_revenue_code code the following facts and representations have been submitted on your behalf employer m is a nonprofit corporation organized in under the laws of state a and is a private non-operating foundation under sec_501 and sec_509 of the code effective date employer m established plan x for the benefit of its employees plan x received favorable b rulings in and in employer m now seeks approval of its amended and restated plan effective date sec_1 of plan x requires that funding be exclusively through the purchase of annuity_contracts issued by one or more insurance_companies effective as of date plan contributions may be invested with such insurers as are approved by the board_of directors of plan x sec_1 of plan x has been amended to provide that in the event of conflict between the terms of plan x and the contract the terms of plan x shall prevail oe page -2- rkkrkeekkekrerereeeerereeeererrererereeereet sec_2_1 of plan x provides that in accordance with article each employee of employer m on or after the effective date is eligible to enter into a salary reduction agreement with employer m under sec_2 of plan x all employees of employer m and participating employers except employees who i are hired prior to date and work less than hours per week and ii leased employees as defined in sec_414 of the code are immediately eligible to enter into a salary reduction agreement article sec_3_3 of plan x provides that effective as of date a participant shall not be permitted to execute or modify more than two salary reduction agreements during a single_plan year which shall become effective as of the earlier of january of the year following the year in which the salary reduction agreement was executed or modified or july of the year in which the salary reduction agreement was executed or modified if such an agreement was executed or modified before such effective date sec_3_1 of plan x is amended to read as follows a participant may elect under a salary reduction agreement to make contributions to plan x for any plan_year of i not less than one percent and not more than twenty percent of his earnings as defined herein or ii a specified dollar amount per pay_period not in excess of the percentage limitation described in i above provided however that the amount of a participant's elective_deferral contributions must be at least dollar_figure for each payroll_period under sec_4 of plan x participating employers are required to contribute on behalf of each participant who has satisfied the applicable participation requirements of article of plan x and who is employed by employer m an amount equal to fifteen percent of the eligible participant's earnings during the plan_year for plan years commencing on or after date participants may choose to invest contributions in such investment products selected in the discretion of the administrative committee which constitute qualified_investment products for purposes of annuity_plans described in sec_403 of the code under sec_5 of plan x a participant's assets are distributable only after the participant's termination of employment on account of the participant's i retirement ii early retirement iii death iv resignation or dismissal or v disability distributions must commence under section of plan x by april of the calendar_year next following the later of the calendar_year in which the participant attains age or the calendar_year in which the participant retires all distributions must be made in accordance with sec_401 of the code and regulations thereunder for plan years commencing on or after date participants may choose to invest contributions in such investment products selected in the discretion of the administrative committee which constitute qualified_investment products for purposes of annuity_plans described in sec_403 of the code hhh haa ki rik ik ik ik eker ir eike sera page -3- section of plan x limits an employee's annual_additions for any plan_year to the lesser_of dollar_figure or percent of the employee's total compensation as defined under sec_415 of the code annual_additions are defined as the total of a participant's elective_deferral contributions and employer contributions to plan x for a plan_year section of plan x limits the total benefits a participant may receive from ail benefit plans maintained by employer m and participating employers to the combined fraction limitation contained in sec_415 of the code section of plan x limits contributions made pursuant to salary reduction agreement for each plan_year to an amount not to exceed dollar_figure or such other amount as determined by the secretary_of_the_treasury for a plan_year under sec_402 of the code salary reduction contributions which exceed the dollar_figure limit during a plan_year are distributed to the participant according to a procedure set forth in section of plan x under section of plan x plan contributions are not permitted to exceed the exclusion_allowance for each participant as set forth in sec_403 of the code plan x provides that the exclusion_allowance is percent of a participant's includible_compensation as defined in sec_403 of the code multiplied by the participant’s years_of_service less amounts previously excludable section of plan x provides that plan contributions are nonforfeitable at all times pursuant to section of plan x the normal form of benefit is a single_life_annuity for unmarried participants and a qualified_joint_and_survivor_annuity for married participants for which no consent to waive this form of payment has been made additional forms of benefit having an equal actuarial value including a single lump sum payment option may be selected by participants in accordance with section of plan x under section of plan x a participant may withdraw contributions made pursuant to the salary reduction agreement on or after attaining age or on account of a participant’s hardship as defined in plan x effective on or after date withdrawals on account of a participant’s hardship as defined in plan x may be made during the participant's employment section of plan x provides that rollover amounts may be contributed or transferred directly to plan x if such amounts are distributed or transferred directly from plan x if such amounts are distributed or transferred directly from a plan qualified under sec_403 of the code or from a conduit individual_retirement_arrangement under sec_408 of the code and will be credited to an account established in the name of the participant any rollover or transferred amounts received by plan x in accordance with the preceding sentence shall be applied toward the purchase of one or more contracts and participants making such rollover or transferred amounts may elect the manner in which the amounts are invested among the investment funds offered by the insurer effective for distributions under plan x made on or after date and page -4- notwithstanding any provision of plan x to the contrary that would otherwise limit an election under plan x a distributee may elect in the manner prescribed by the administrative committee to have any portion of an eligible_rollover_distribution paid directly to an eligible_retirement_plan specified by the distributee in a direct_rollover section of plan x provides that the interests of any participant in plan x or the related annuity_contracts are not subject_to voluntary or involuntary sale transfer alienation or encumbrance except as permitted under sec_414 of the code regarding qualified domestic relations orders or as required by the tax withholding provisions of the code or any state’s income_tax act all amounts held under plan x or related annuity_contracts must be used for the exclusive benefit of plan x participants and cannot be diverted to employer m or used for any purpose other than the benefit of employees based on the foregoing facts and representations you have requested the following rulings contributions to plan x shall be treated under sec_403 of the code as amounts contributed by employer m or participating employers for annuity_contracts and contributions to plan x and earnings thereon shall not be taxable in the year contributed to the extent that such contributions satisfy the applicable limits under sec_402 sec_403 and sec_415 of the code but instead will be taxable under sec_72 of the code in the year in which such amounts are received by the participant sec_403 of the code provides in part that if a an annuity_contract is purchased for an employee by an employer described in sec_501 which is exempt from tax under sec_501 b such annuity_contract is not subject_to sec_403 c the employee's rights under the contract are nonforfeitable except for failure to pay future premiums d such contract is purchased under a plan which meets the nondiscrimination requirements of paragraph except in the case of a contract purchased by a church and e in the case of a contract purchased under a plan which provides a salary reduction agreement the contract meets the requirements of sec_401 then such amounts contributed by such employer for such annuity_contract on or after such rights become nonforfeitable shall be excluded from the gross_income of the employee for the taxable_year to the extent that the aggregate of such amounts does not exceed the exclusion_allowance for such taxable_year sec_403 of the code provides further that the employee shall include in his gross_income the amounts actually distributed under such contract in the year distributed as provided in sec_72 of the code relating to annuities hrkk ik eh kerierie ree erika ike aker er erik page -5- sec_403 of the code provides that the exclusion_allowance equals percent of the employee's includible_compensation multiplied by the employee's years_of_service with the employer less amounts previously excludable sec_403 of the code defines includible_compensation to mean the amount of compensation received from the employer in the employee’s most recent one-year period_of_service which is includible in the employee's gross_income sec_415 of the code provides in relevant part that an annuity_contract described in sec_403 shall not be considered described in sec_403 unless it satisfies the sec_415 limitations in the case of an annuity_contract described in sec_403 the preceding sentence applies only to the portion of the annuity_contract exceeding the sec_415 limitations and the amount of the contribution for such portion shall reduce the exclusion_allowance as provided for by sec_403 under sec_415 of the code contributions to a sec_403 plan for a limitation_year are generally limited to the lesser_of a dollar_figure or b of compensation sec_403 of the code requires that arrangements pursuant to sec_403 must satisfy requirements similar to those of sec_401 and similar to the incidental death_benefit requirements of sec_401 with respect to benefits accruing after date in taxable years ending after such date in addition this section requires that for distributions made after date the requirements of sec_401 are met regarding direct rollovers a distributee of an eligible_rollover_distribution be given the option of having the distribution directly rollover to an eligible_retirement_plan sec_401 of the code requires that sec_401 of the code generally provides for a mandatory benefit_commencement_date at age and specifies required_minimum_distribution rules for the payment of benefits from qualified_plans section a of sbjpa amended sec_401 to provide that the term required_beginning_date means april of the calendar_year following the later of the calendar_year in which the employee attains age or the calendar_year in which the employee retires for taxable years beginning after december sec_403 of the code provides that in the case of a contract purchased under a plan which provides a salary reduction agreement the contract must meet the requirements of sec_401 arrangement which provides for elective_deferrals to limit such deferrals under the arrangement in combination with any other qualified_plans or arrangements of an employer maintaining such pians or arrangements providing for elective_deferrals to the limitation in effect under sec_402 for taxable years beginning in such calendar_year sec_401 requires a sec_403 erekrekerekreeekekreererereeeekekrekreeeaeekk page -6- sec_402 and g of the code provide generally that the elective_deferrals of any individual for any taxable_year shall be included in such individual's gross_income to the extent the amount of such deferrals exceeds dollar_figure as adjusted for cost of living increases sec_402 of the code provides that the limitation under paragraph shall be increased but not to an amount in excess of dollar_figure by the amount of any employer contributions for the taxable_year used to purchase an annuity_contract under sec_403 under a salary reduction agreement sec_402 of the code provides that the term elective_deferrals includes any employer_contribution to purchase an annuity_contract under sec_403 under a salary reduction agreement within the meaning of sec_3121 sec_403 of the code provides generally that sec_403 annuity_contract distributions attributable to contributions made pursuant to a salary reduction agreement within the meaning of sec_402 of the code may be paid only when the employee attains age separates from service dies becomes disabled within the meaning of sec_72 of the code or in the case of hardship such contract may not provide for the distribution of any income attributable to such contributions in the case of hardship sec_401 of the code requires that the contract be nontransferable in this case you represent that employer m an employer described in sec_403 of the code has established plan x as its sec_403 program for its employees a participant's salary reduction contributions and the earnings thereon are fully vested and nonforfeitable at all times plan x is not an annuity_contract described in sec_403 of the code the annuity_contracts are nontransferable as required by sec_401 plan x correctly limits under sec_403 of the code the distributions made pursuant to the salary reduction agreement to the attainment of age separation_from_service or hardship in addition plan x satisfies the sec_403 and sec_402 requirements and limits contributions in accordance with sec_403 and sec_415 of the code plan x also provides participants with an election to make a direct_rollover distribution plan x meets the general code sec_403 requirements in addition plan x limits elective contributions to the dollar_figure limitation set by sec_402 of the code therefore based on the foregoing law and facts we conclude with respect to ruling_request number one that contributions to plan x shall be treated under sec_403 of the code as amounts contributed by employer m for annuity_contracts khakearereriearerrere eer erereeeaeaae rik page -7- with respect to ruling_request number two sec_403 of the code provides that the amount actually distributed to any distributee under a contract purchased pursuant to this section shall be taxable to the distributee in the year in which so distributed under sec_72 and sec_403 of the code because the limitations of sec_402 sec_403 and sec_415 of the code are satisfied as enumerated under the provisions of plan x and as set forth above we conclude that contributions to plan x and earnings thereon shall not be taxable in the year contributed to the extent that such contributions satisfy the applicable limits under sec_402 sec_403 and sec_415 of the code but instead will be taxable under sec_72 of the code in the year in which such amounts are received by the participant this ruling is limited to the form of plan x excluding any form defects which may violate the nondiscrimination requirements of sec_403 of the code this ruling does not extend to any operational violations of sec_403 of the code by plan x now or in the future this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited by others as precedent in accordance with a power_of_attorney on file in this office a copy of this ruling is being sent to your authorized representative sincerely yours signed soycb fi joyce e floyd manager employee_plans technical group tax_exempt_and_government_entities_division enclosures deleted copy of this letter notice


t c memo united_states tax_court edgar perry and isa perry petitioners v commissioner of internal revenue respondent docket no filed date edgar perry and isa perry pro sese kimberly a trujillo for respondent memorandum findings_of_fact and opinion chiechi judge respondent determined a deficiency in and an accuracy- related penalty under sec_6662 a on petitioners’ federal_income_tax tax for their taxable_year of dollar_figure and dollar_figure respectively 1all section references are to the internal_revenue_code code in effect for the year at issue all rule references are to the tax_court rules_of_practice and procedure the issues remaining for decision for the year at issue are are petitioners entitled to deduct certain claimed miscellaneous expens- es incurred with respect to a house that they owned we hold that they are not are petitioners required to include in gross_income the gross amount of the distribution to which petitioner isa perry was entitled when she closed a cer- tain retirement account we hold that they are findings of fact3 petitioners resided in california at the time they filed the petition in addition to the house in which they resided petitioners owned another house petitioners’ second house in which their daughter and her family peti- tioners’ relatives resided purportedly under a rental agreement dated date purported rental agreement the purported rental agreement showed that the term of that purported rental agreement was not fixed and that the monthly rent that petitioners’ relatives were to pay to petitioners was dollar_figure petitioners’ relatives were not required to make a security deposit under the purported rental agreement 2at the beginning of the trial in this case petitioners conceded that they are liable for additional tax in an amount equal to the excess advance premium tax_credits received see sec_36b shortly before trial respondent conceded the accuracy-related_penalty under sec_6662 3unless otherwise indicated our findings_of_fact pertain to the year for clarity we sometimes refer in our findings to the year during petitioners’ relatives paid petitioners at least dollar_figure but no more than dollar_figure purportedly as rent for petitioners’ second house during that year pe- titioners and to a much lesser extent petitioners’ relatives spent thousands of dollars on certain home improvements and certain repairs of petitioners’ second house expenses relating to petitioners’ second house petitioner isa perry ms perry maintained certain retirement accounts with lincoln national life_insurance co lincoln national before ms perry had borrowed money on at least two occasions two outstanding loans from at least one of those retirement accounts ms perry’s retirement account in ques- tion sometime before date ms perry notified lincoln national that she wanted to close ms perry’s retirement account in question on date lin- coln national complied with ms perry’s request and closed that account pursu- ant to a so-called contract loan endorsement contract loan endorsement in ques- tion that was in effect with respect to ms perry’s retirement account in question 4the record does not establish how much of the expenses relating to peti- tioners’ second house petitioners paid and how much of those expenses petition- ers’ relatives paid 5the contract loan endorsement in question provided in pertinent part if contract ms perry’s retirement account in question is surrendered while there is an outstanding contract loan the surrender_value will be reduced by the amount of the loan plus loan interest due lincoln national repaid the unpaid balances of ms perry’s two outstanding loans by using funds from ms perry’s retirement account in question lincoln national then made a direct deposit to petitioners’ bank account at mechanics bank of dollar_figure which was the balance in ms perry’s retirement account in question after lincoln national repaid the unpaid balances of ms perry’s two outstanding loans with funds from that retirement account withheld tax and made a credit of dollar_figure to ms perry’s retirement account in question which was a refund of a nondeductible_employee_contribution that ms perry had made to that account credit refund lincoln national issued to ms perry form 1099-r distributions from pen- sions annuities retirement or profit-sharing_plans iras insurance contracts etc form 1099-r with respect to ms perry’s retirement account in question in that form lincoln national showed the gross amount of the distribution to which ms perry was entitled when she closed that account not the net amount that she received after the repayment of two outstanding loans that she had made from that account 6in form 1099-r lincoln national also showed tax withheld and reduced the gross amount of the distribution to which ms perry was entitled when she closed that account by dollar_figure in determining the taxable_portion of that gross amount petitioners timely filed a tax_return for their taxable_year return in that return petitioners reported total income of dollar_figure consisting of wage income of dollar_figure taxable interest_income of dollar_figure state and local_tax refund in- come of dollar_figure taxable individual_retirement_account distribution income of dollar_figure pension and annuity income of dollar_figure rental income from schedule e supplemental income and loss schedule e of dollar_figure unemployment compensa- tion of dollar_figure and total social_security_benefits of dollar_figure dollar_figure of which they reported as taxable social_security_benefits petitioners did not report as income any of the expenses relating to petitioners’ second house that petitioners’ relatives had paid petitioners included schedule a itemized_deductions schedule a as part of their return schedule a in that schedule they claimed total item- 7although the parties stipulated that petitioners reported total income of dollar_figure the income items comprised in that total amount total dollar_figure less than that total amount in addition the total amount of social_security_benefits that the parties stipulated ie dollar_figure is dollar_figure more than the total amount of the social_security_benefits shown in the internal_revenue_service transcript that is part of the record these relatively small inexplicable inconsistencies in the record do not affect our resolution of the issues presented 8the dollar_figure of pension and annuity income that petitioners reported in their return included the gross amount of the distribution to which ms perry was entitled when she closed ms perry’s retirement account in question not the net amount that she received after the repayment of certain loans that she had made from that account ized deductions of dollar_figure which included so-called miscellaneous expenses claimed of dollar_figure dollar_figure of claimed miscellaneous expenses the dollar_figure of claimed miscellaneous expenses consisted of the expenses that petitioners and to a lesser extent petitioners’ relatives had paid for certain home improvements and certain repairs of petitioners’ second house on date petitioners filed an amended tax_return for their tax- able year amended_return in that amended_return petitioners claimed an increase of dollar_figure in the itemized_deductions that they had claimed in their dollar_figure respondent issued a notice_of_deficiency notice to petitioners for their taxable_year in that notice respondent determined inter alia to disallow the dollar_figure of claimed miscellaneous expenses opinion petitioners bear the burden of establishing that the determination in the notice that remains at issue ie the disallowance of the dollar_figure of claimed mis- 9the record does not establish how much of the dollar_figure of claimed miscel- laneous expenses petitioners paid and how much of those expenses petitioners’ relatives paid 10in their amended_return petitioners also claimed an increase of dollar_figure in the tax withheld that they had claimed in their return thereby increasing the tax withheld that they were claiming to dollar_figure cellaneous expenses is erroneous they also bear the burden_of_proof with respect to the affirmative issue that they raised at trial involving ms perry’s retirement account in question that is to say petitioners have the burden of establishing that they are required to include in gross_income for their taxable_year only the net amount that ms perry received from ms perry’s retirement account in question after she closed that account and lincoln national repaid two outstanding loans that she had made from that account with funds from that account less tax withheld and plus the credit refund see rule a 290_us_111 moreover deductions are a matter of legislative grace and petitioners bear the burden of proving entitlement to any deduction claimed see 503_us_79 the code and the regulations thereunder required petitioners to maintain records sufficient to establish the amount of any deduction claimed see sec_6001 sec_1_6001-1 income_tax regs we address first whether petitioners are entitled to deduct for their taxable_year the dollar_figure of claimed miscellaneous expensesdollar_figure it appears to be peti- 11although not clear it appears that petitioners may be claiming that they are entitled to deduct for the year at issue an amount of miscellaneous expenses greater than the amount they claimed in their schedule a and that respondent disallowed in the notice tioners’ position that petitioners’ second house to which those claimed expense pertain was a rental property during and that consequently they are entitled to deduct those expensesdollar_figure sec_280a provides that generally no deduction is allowable with re- spect to the use of a dwelling_unit which is used by the taxpayer during the taxable_year as a residence one of the exceptions in sec_280a to the general_rule in sec_280a is a deduction otherwise allowable to the taxpayer without regard to its connection with the taxpayer’s trade_or_business or income-producing activity as pertinent here a taxpayer is otherwise entitled under sec_164 to deduct state and local real_estate_taxes the record contains four real_estate property_tax bills from contra costa county california property_tax bills on which petitioners’ names appear two of the property_tax bills are for a certain parcel of land identified therein as parcel no and the remaining two property_tax bills relate to another parcel of land identified therein as parcel no nothing in the record establishes the addresses of the respective properties to which those bills pertain nor does any- 12in the light of our understanding of petitioners’ position with respect to the dollar_figure of claimed miscellaneous expenses we believe that petitioners should have claimed those expenses in their return in schedule e not in their schedule a thing in the record establish that those four property_tax bills were paid or if paid_by whom on the record before us we find that petitioners have failed to carry their burden of establishing that they are entitled for their taxable_year to deduct under sec_164 any real_estate_taxes with respect to petitioners’ second house another exception in sec_280a to the general_rule in sec_280a is for any item which is attributable to the rental of the dwelling_unit or portion thereof petitioners apparently are relying on this exception to support their position that they are entitled to deduct the dollar_figure of claimed miscellaneous expenses in order to determine whether the exception in sec_280a applies here we must first examine sec_280a titled use as residence sec_280a provides that a taxpayer uses a dwelling_unit during the taxable_year as a residence if the taxpayer uses the unit or a portion thereof for personal purposes for the greater of days during the taxable_year or percent of the number of days during such year for which such unit is rented at a fair rental pursuant to sec_280a and c a taxpayer is deemed to have used a dwelling_unit for personal purposes for any day or part of that day on which the dwelling_unit is used for personal purposes by the taxpayer or by a member_of_the_family including a lineal descendant or by any individual except an employee with respect to whose use sec_119 applies unless for that day the dwelling_unit is rented for a rental which is a fair rental under the facts and circumstances however sec_280a provides that a taxpayer will not be treated as using a dwelling_unit for personal purposes by reason of a rental arrangement for any period if for such period such dwelling_unit is rented at a fair rental to any person for use as such person’s principal_residence in order for petitioners to be entitled to deduct the dollar_figure of claimed mis- cellaneous expenses they must inter alia establish that petitioners’ second house was rented to petitioners’ relatives at fair rental on the record before us we find that petitioners have failed to carry their burden of establishing that during they in fact rented petitioners’ second house to petitioners’ relatives even if we had found that petitioners had carried their burden of establishing that during they in fact rented petitioners’ second house to petitioners’ relatives we would find on the record before us that they have failed to carry their burden of establishing that they rented petitioners’ second house to petitioners’ relatives at fair rental based upon our examination of the entire record before us we find that pe- titioners have failed to carry their burden of establishing that they are entitled for their taxable_year to deduct the dollar_figure or any other amount of claimed miscellaneous expenses with respect to petitioners’ second house we turn now to the affirmative issue that petitioners raised at trial it is pe- titioners’ position that they are not required for their taxable_year to include in gross_income the gross amount of the distribution to which ms perry was enti- tled when she closed ms perry’s retirement account in question according to petitioners they are required to include in gross_income for that year only the net amount that ms perry received after the repayment of two outstanding loans that she had made from that account on the record before us we reject petitioners’ position petitioners apparently do not understand that what lincoln national in ef- fect did when it used certain funds in ms perry’s retirement account in question to pay two outstanding loans that she had made from that account was to distribute those funds to ms perry which she then used to repay those outstanding loans lincoln national took that shortcut pursuant to the contract loan endorsement in question that was in effect with respect to ms perry’s retirement account in ques- tiondollar_figure that endorsement provided in pertinent part if ms perry’s retirement contract in question is surrendered while there is an outstanding contract loan the surrender_value will be reduced by the amount of the loan plus loan interest due based upon our examination of the entire record before us we find that pe- titioners are required for their taxable_year to include in gross_income the gross amount of the distribution to which ms perry was entitled when she closed ms perry’s retirement account in questiondollar_figure we have considered all of the contentions and arguments of the parties that are not discussed herein and we find them to be without merit irrelevant and or mootdollar_figure 13see eg murtaugh v commissioner tcmemo_1997_319 wl 14pursuant to form 1099-r that lincoln national issued to ms perry with respect to ms perry’s retirement account in question petitioners are entitled to reduce that gross amount by dollar_figure in determining the taxable_portion of that gross amount if respondent did not take account of that reduction in the notice we expect the parties to take account of that reduction in computations under rule 15as noted above petitioners conceded at the beginning of the trial in this case that they are liable for additional tax in an amount equal to the excess ad- vance premium tax_credits received nonetheless respondent advances arguments on brief regarding the premium_tax_credit issue in the light of petitioners’ con- continued to reflect the foregoing and the parties’ respective concessions an appropriate decision will be entered continued cession we find those arguments to be moot