internal_revenue_service cor-115809-00 number info release date uil the honorable tom a coburn u s house of representatives washington d c dear mr coburn date thank you for your letter of date signed by you and a number of your colleagues encouraging the internal_revenue_service to immediately readjust the business standard mileage rate to reflect the recent increase in gasoline prices you note that the increased cost has particularly burdened self-employed taxpayers who use automobiles for business purposes gasoline prices we realize increased gasoline prices are an economic burden however the cost of gasoline is only one part of the business standard mileage rate which includes fixed and operating automobile costs these costs include depreciation or lease payments maintenance and repairs insurance and license and registration fees in addition to gasoline and oil less than one-third of the cents per mile rate comes from the cost of gasoline and oil thus an immediate adjustment in the rate taking into account the recent increase in gasoline prices might not be significant setting the business standard mileage rate the rate is a national average amount determined by an annual study performed by an independent_contractor who is an expert in the cost analysis of business use of automobiles the contractor uses recent data from each state on the component costs of operating the most popular automobiles the contractor then combines this data to achieve a national composite cents-per-mile rate advantages of using the business standard mileage rate reducing a taxpayer’s record-keeping burden is the principal advantage of using the rate gasoline prices rise and fall during the year but taxpayers may continue to use the same rate without having to keep records of actual expenses although rising gasoline prices can be a disadvantage for taxpayers who use the rate falling prices can work to their advantage for example although gasoline prices fell in for all of and through date taxpayers were able to use the rate that reflected the earlier higher prices taxpayer’s options to deduct the ordinary and necessary expenses of using an automobile for business purposes a taxpayer must substantiate the cost date place and business_purpose of each use of the automobile by adequate_records for the cost the taxpayer has two options cid substantiate actual cost by keeping records or by other_sufficient_evidence cid use the business standard mileage rate using the rate gives approximate not actual costs taxpayers can deduct the actual business_expenses of using a personally-owned automobile and this may be advantageous when automobile costs are rising publication travel entertainment gift and car expenses contains further information on how taxpayers should substantiate expenses i have enclosed the relevant pages from that publication i am sending a similar letter to your colleagues i hope this information is helpful please call me at or robert a berkovsky at if you have any questions sincerely charles o rossotti enclosure


t c summary opinion united_states tax_court adam d fehr petitioner v commissioner of internal revenue respondent docket no 14470-16s filed date adam d fehr pro_se sandeep singh janice b geier and catherine j caballero for respondent summary opinion guy special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by 1unless otherwise indicated all section references are to the internal continued any other court and this opinion shall not be treated as precedent for any other case respondent determined that petitioner is liable for federal_income_tax deficiencies and accuracy-related_penalties for the years and in the amounts as follows penalty year deficiency sec_6662 dollar_figure big_number dollar_figure big_number petitioner filed a timely petition for redetermination with the court pursuant to sec_6213 at the time the petition was filed petitioner resided in california after concessions the issues remaining for decision are whether petitioner is entitled to deductions for unreimbursed employee business_expenses of dollar_figure and dollar_figure for and years in issue respectively entitled continued revenue code code as amended and in effect for and and all rule references are to the tax_court rules_of_practice and procedure monetary amounts are rounded to the nearest dollar 2petitioner concedes that he is not entitled to deductions for medical_expenses claimed on schedule a itemized_deductions for or an itemized_deduction for charitable_contributions for to a deduction for charitable_contributions of dollar_figure for and liable for accuracy-related_penalties for the years in issue under sec_6662 i petitioner’s employment background3 during the years in issue petitioner was employed as a sales manager for valley packline solutions inc vps at its headquarters in reedley california vps builds installs and maintains equipment used to process fresh fruits and vegetables at various customer facilities in the united_states and abroad petitioner’s duties at vps included overseeing the sales department maintaining customer relationships and managing sales installation and maintenance of the firm’s equipment petitioner frequently visited customer facilities around the san joaquin valley and other locations the record includes a letter from vps’ general manager stating that vps did not reimburse its employees for expenses for the ordinary conduct of their employment with the firm 3some of the facts have been stipulated ii petitioner’s tax returns a petitioner filed a form_1040 u s individual_income_tax_return for reporting wages of dollar_figure on schedule a attached to his tax_return petitioner claimed in relevant part a deduction of dollar_figure for charitable gifts by cash or check and a deduction of dollar_figure for unreimbursed employee business_expenses before the application of the floor prescribed in sec_67 petitioner also attached to his tax_return a form 2106-ez unreimbursed employee business_expenses and a schedule titled unreimbursed expense statement reporting the following work-related expenses item vehicle expenses parking fees tolls and transportation travel_expenses other expenses meals and entertainment expense sec_4 union and professional dues uniforms tools cell phone miscellaneous work expenses work-related expenses amount dollar_figure big_number big_number big_number big_number big_number big_number big_number b petitioner filed a form_1040 for reporting wages of dollar_figure on schedule a attached to his tax_return petitioner claimed in relevant part a deduction of dollar_figure for unreimbursed employee business_expenses before the application of the floor prescribed in sec_67 petitioner also attached to 4this amount reflects the reduction prescribed in sec_274 his tax_return a form 2106-ez essentially blank and a schedule titled unreimbursed expense statement reporting the following work-related expenses item union and professional dues uniforms tools cell phone miscellaneous work expenses work-related expenses amount dollar_figure big_number big_number big_number big_number big_number iii petitioner’s records petitioner produced eight receipts from goodwill industries goodwill in an effort to substantiate the charitable_contribution_deduction that he claimed for each receipt included a list of several items eg adult bike tv bedroom dressers jackhammer and petitioner recorded his own educated guess of the cumulative value of the items on each receipt the total value that petitioner assigned to the items on each receipt ranged from a low of dollar_figure to a high of dollar_figure and the eight receipts totaled dollar_figure petitioner also offered various records in an effort to substantiate the unreimbursed employee business_expenses that he claimed for the years in issue for petitioner produced a log recording the number of miles that he drove each day the places that he visited and meals and entertainment_expenses he also produced separate schedules listing travel-related expenses amounts that he purportedly paid for tools purchased at lowes jenson pilegard and exeter mercantile and amounts that he paid for golf outings hunting fishing trips and wine and liquor purchases petitioner also provided his bank and credit card statements for petitioner’s mileage log for shows that he frequently drove from his home to a customer’s facility purchased lunch for one or more individuals and then drove home on some days petitioner drove from his home and made two or more stops at customers’ facilities or at vps purchased lunch for one more individuals and then drove home petitioner did not describe the work he performed and he did not record the number of miles that he drove between destinations he recorded only the total number of miles that he drove each day 5petitioner failed to produce receipts identifying the tools that he purchased for petitioner again produced a combined mileage meals and entertainment log unlike his mileage log for this log included a breakdown of the miles that petitioner drove between various destinations each day petitioner’s tax returns for and were prepared at fiesta tax service by javier garcia and tony garcia respectively petitioner testified that he provided his tax records to the tax_return_preparers and his tax returns were prepared and processed while he waited discussion as a general_rule the commissioner’s determination of a taxpayer’s liability in a notice_of_deficiency is presumed correct and the taxpayer bears the burden of proving that the determination is incorrect rule a 290_us_111 deductions and credits are a matter of legislative grace and the taxpayer generally bears the burden of proving entitlement to any deduction or credit claimed rule a 503_us_79 292_us_435 when a taxpayer establishes that he paid_or_incurred a deductible expense but fails to establish the amount of the deduction the court normally may estimate 6petitioner does not contend and the record does not suggest that the burden_of_proof should shift to respondent pursuant to sec_7491 the amount allowable as a deduction 39_f2d_540 2d cir 85_tc_731 there must be sufficient evidence in the record however to permit the court to conclude that a deductible expense was paid_or_incurred in at least the amount allowed 245_f2d_559 5th cir i unreimbursed employee business_expenses a deduction is allowed under sec_162 for ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business as used in sec_162 an ordinary_expense is defined as one which is normal usual or customary in the taxpayer’s trade_or_business see 308_us_488 and necessary has been defined as appropriate and helpful see welch v helvering u s pincite a deduction normally is not allowed however for personal living or family_expenses sec_262 whether an expenditure satisfies the requirements for deductibility under sec_162 is a question of fact see 320_us_467 the term trade_or_business includes performing services as an employee 54_tc_374 an employee_business_expense is not ordinary and necessary however if the employee is entitled to reimbursement from his or her employer see 24_tc_21 noz v commissioner tcmemo_2012_272 at sec_274 prescribes more stringent substantiation requirements to be met before a taxpayer may deduct certain categories of expenses including travel_expenses meals and entertainment expenditures and expenses related to the use of listed_property as defined in sec_280f see 50_tc_823 aff’d 412_f2d_201 2d cir the term listed_property includes inter alia passenger automobiles sec_280f to satisfy the requirements of sec_274 a taxpayer generally must maintain adequate_records or produce sufficient evidence corroborating his or her own statement which in combination are sufficient to establish the amount date and time and business_purpose for each expenditure for travel away from home or each expenditure or business use of listed_property sec_1_274-5t c temporary income_tax regs fed reg date 7the record includes a statement from vps that the firm did not reimburse its employees for work-related expenses the court concludes that petitioner was not entitled to be reimbursed for the expenses in dispute a vehicle meals and entertainment travel_expenses the logs and related schedules that petitioner offered at trial in an effort to substantiate the vehicle meals and entertainment and travel_expenses in dispute do not satisfy the strict substantiation requirements of sec_274 an overarching shortcoming is the absence of any objective evidence of the business_purpose for the disputed expenses the logs lack any description of the work that petitioner may have performed or business matters that he may have discussed with vps’ customers although we have no reason to doubt petitioner’s testimony that his responsibilities at vps included maintaining good customer relationships his logs indicate that nearly every day for two consecutive years excluding most weekends he drove to a customer’s facility and bought lunch for himself and others assuming that petitioner’s logs are accurate this pattern of activity strongly suggests that the expenditures in dispute were predominantly personal and were only indirectly related to the conduct of vps’ business the foregoing aside petitioner’s logs show that on many days he drove from his home to a customer’s facility had lunch and then returned home he 8for the sake of completeness we note that petitioner failed to produce receipts substantiating many of the expenditures_for meals and entertainment and travel his bank and credit card statements provided little in the way of corroboration of the expenditures likewise reported mileage expenses for round trips from his home to vps’ headquarters in the absence of evidence that petitioner’s principal place of employment was somewhere other than vps’ headquarters the miles that he drove on round trips from his home to customer facilities and to and from vps’ headquarters constitute nondeductible personal commuting expenses see eg 59_tc_456 in sum respondent’s disallowance of the deductions petitioner claimed for vehicle meals and entertainment and travel_expenses for the years in issue is sustained b other expenses petitioner claimed deductions for other employment-related_expenses including union dues uniforms tools cell phone charges and miscellaneous expenses but he offered no documents records or receipts to either substantiate these expenditures or show that those expenditures qualified as ordinary and necessary business_expenses within in the meaning of sec_162 on this record there is insufficient evidence to permit the court to employ the cohan_rule to estimate the amount allowable as a deduction consequently we sustain respondent’s proposed disallowance of the remaining amounts petitioner claimed for unreimbursed employee_expenses for the years in issue ii charitable_contributions for petitioner claimed a deduction of dollar_figure for charitable_contributions by cash or check on schedule a for at trial however he produced eight receipts listing household_items tools and sports equipment that he purportedly had donated to goodwill each receipt included petitioner’s own estimate of the cumulative value of the items at the time of the donations sec_170 allows deductions for contributions made during a taxable_year to qualifying charitable organizations charitable_contributions are deductible only if verified in accordance with regulations prescribed by the secretary sec_170 see 136_tc_515 sec_170 provides that the taxpayer must obtain a contemporaneous written acknowledgment from the donee for any claimed charitable_contribution_deduction of dollar_figure or more sec_170 provides in relevant part that the contemporaneous written acknowledgment must include the amount of cash and a description of any property other than cash contributed whether the donee organization provided any goods or services in consideration in whole or in part for any cash or property contributed and if so a description and good-faith estimate of the value of any goods or services provided by the donee sec_1_170a-13 f income_tax regs in addition to the written acknowledgment requirement sec_170 and related regulations establish more detailed requirements for substantiation of contributions of property other than money for noncash contributions of dollar_figure or less the taxpayer must substantiate the contribution with a receipt from the donee indicating the donee’s name the date and location of the contribution and a description of the property in detail reasonably sufficient under the circumstances sec_1_170a-13 income_tax regs for noncash contributions in excess of dollar_figure the taxpayer normally must also maintain written records showing the manner in which the item was acquired the approximate date_of_acquisition and the cost or adjusted_basis of the property id subpara see lattin v commissioner tcmemo_1995_233 the goodwill receipts that petitioner offered at trial do not include the value of individual items that he donated although it does not appear that any one item was worth more than dollar_figure petitioner offered no evidence on this point in any event the goodwill receipts include only generic descriptions of the items donated petitioner did not identify the age quality or condition of the donated 9if information regarding the acquisition_date or cost_basis of the property is not available and the taxpayer attaches a statement to his return setting forth reasonable_cause for not being able to provide such information the taxpayer’s charitable_contribution_deduction shall not be disallowed on that account sec_1_170a-13 income_tax regs items nor did he explain the method or process he used in making his educated guess as to the value of the items on this record we conclude that petitioner failed to meet the substantiation requirements for contributions of property other than money prescribed in sec_170 and the related regulations consequently we sustain respondent’s determination that petitioner is not entitled to a deduction for charitable_contributions for iii accuracy-related_penalties sec_6662 and b and imposes an accuracy-related_penalty equal to of the amount of any underpayment_of_tax that is due to the taxpayer’s negligence or disregard of rules or regulations or to any substantial_understatement_of_income_tax the term negligence includes any failure to make a reasonable attempt to comply with the provisions of the code and the term disregard includes any careless reckless or intentional disregard of rules or regulations sec_6662 a taxpayer is negligent if he or she fails to maintain sufficient records to substantiate disputed expenses 116_tc_438 sec_1_6662-3 income_tax regs by definition an understatement generally means the excess of the amount of the tax required to be shown on the return over the amount of the tax imposed which is shown on the return reduced by any rebate sec_6662 an understatement is substantial in the case of an individual if the amount of the understatement for the taxable_year exceeds the greater of of the tax required to be shown on the return or dollar_figure sec_6662 with respect to a taxpayer’s liability for any penalty sec_7491 places on the commissioner the burden of production thereby requiring the commissioner to come forward with sufficient evidence indicating that it is appropriate to impose the penalty higbee v commissioner t c pincite once the commissioner meets his burden of production the taxpayer must come forward with persuasive evidence that the commissioner’s determination is incorrect id pincite see rule a welch v helvering u s pincite respondent met his burden of productiondollar_figure petitioner was negligent in failing to maintain adequate_records to substantiate the expenses in dispute moreover the understatements of income_tax for the years in issue are substantial within the meaning of sec_6662 petitioner did not offer a defense to the imposition of accuracy-related_penalties in this case other than to assert that respondent had erred in determining tax deficiencies that matter having been resolved against him respondent’s 10the record includes civil penalty approval forms executed by the examining agent’s group manager with respect to the sec_6662 penalties determined in the notice_of_deficiency determination that petitioner is liable for accuracy-related_penalties under sec_6662 is sustained to reflect the foregoing decision will be entered for respondent


t c memo united_states tax_court normandie metal fabricators inc petitioner v commissioner of internal revenue respondent docket no filed date louis f brush for petitioner halvor n adams iii for respondent memorandum findings_of_fact and opinion colvin judge respondent determined deficiencies in petitioner’s federal_income_tax and a penalty under sec_6662 as follows penalty year deficiency sec_6662 dollar_figure dollar_figure big_number big_number big_number in an amendment to answer filed date respondent contends that petitioner’s deficiencies are dollar_figure for dollar_figure for and dollar_figure for and that petitioner is liable for penalties of dollar_figure for dollar_figure for and dollar_figure for after concessions the issues for decision are whether petitioner may deduct as compensation_for isidore klein and steven klein for and the amounts shown below as the parties contend or some other amount year isidore klein steven klein total petitioner dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number respondent dollar_figure big_number big_number ' respondent does not dispute this amount we hold that petitioner may deduct dollar_figure in dollar_figure in ' petitioner bears the burden of proving the reasonableness of compensation it paid in excess of what respondent determined was reasonable see rule a respondent bears the burden of proving the increases in deficiency and sec_6662 penalty asserted in the amended answer see id however our decision does not depend on which party bears the burden_of_proof and dollar_figure in based on the following amounts of reasonable_compensation year isidore klein steven klein total dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number whether petitioner is liable for the accuracy-related_penalty under sec_6662 for substantial_understatement of tax for and we hold that it is for and but not for section references are to the internal_revenue_code in effect during the years in issue rule references are to the tax_court rules_of_practice and procedure i findings_of_fact some of the facts have been stipulated and are so found petitioner is a corporation the principal office of which was in port washington new york when it filed the petition a the kleins isidore klein was born in he is married to gertrude klein he was a baker and taught baking at a vocational high school in new york he also manufactured small metal products that he used in his baking business steven klein was born in he is the son of isidore and gertrude klein b formation of petitioner petitioner manufactures and sells small implements and metal - food handling equipment primarily for the bakery industry isidore klein and victor lampeh lampeh incorporated petitioner in in new york after isidore klein developed white lung disease similar to emphysema and had to retire from baking isidore klein initially invested only dollar_figure in petitioner petitioner issued shares of common_stock in in lampeh left the company from date to date isidore klein owned shares and gertrude klein owned share of petitioner’s stock before and during the years in issue until date the members of petitioner’s board_of directors were isidore and gertrude klein and isidore klein was chairman of the board_of directors c isidore klein’s and steven klein’s work for petitioner before isidore klein isidore klein created developed and built petitioner into a profitable business his background in the baking industry helped him to understand what bakers needed and to develop products to meet those needs isidore klein worked to hours a day days a week he manufactured baking implements during the day and often sold his products to bakers at night while they worked petitioner grew during the 1950's because isidore klein invented and manufactured several successful products for example he invented a hanging cord dispenser aluminum anodized - cookie display trays in different colors a line of plastic window display stands and a motorized carousel tray petitioner began producing racks cabinets and covers in the 1960's isidore klein continued to invent products in the 1960's and 1970's that petitioner manufactured and sold isidore klein designed most of the products in petitioner’s catalog he developed many products that became widely accepted in the baking industry in the new york metropolitan area baker’s aid a national seller of baking equipment with annual sales of about dollar_figure million during the years in issue has been an important customer of petitioner’s since the 1950's baker’s aid became petitioner’s biggest customer largely due to isidore klein’s innovative products steven klein steven klein worked for petitioner part time and during the summer beginning in the late 1950's when he was in high school he began working full time for petitioner in date after he had finished years of college from to he performed most of the jobs in petitioner's business for example he worked in the factory welded made purchases and prepared sketches for special orders d petitioner’s move to port washington and the guaranty agreement on date petitioner guaranteed a dollar_figure industrial development loan to steven klein to buy a building in -- - port washington to house petitioner petitioner moved from new york to port washington in petitioner’s port washington building has an office and a factory petitioner rented the building from steven klein for years under a triple net_lease under the guaranty petitioner promised not to pay cash dividends or to redeem shares of stock for cash except for stock owned by isidore klein however the bank waived the covenant and consented to petitioner’s redemption of gertrude klein's stock for cash in eb isidore and steven klein’s work for petitioner from through the years in issue as discussed next from to isidore klein was semiretired and steven klein ran petitioner subject_to isidore klein’s overall approval isidore klein isidore and gertrude klein have lived in florida since isidore klein had the title of chief_executive_officer and president of petitioner until he sold his stock in date isidore klein oversaw petitioner’s operations in and he called steven klein at least twice a week in and to discuss the business to monitor the cost of raw materials labor and office personnel and to approve steven klein’s major business decisions steven klein and isidore klein often disagreed about how steven klein should run petitioner which caused a strain in their relationship - in and petitioner’s comptroller jeffrey schwaeber or petitioner’s bookkeeper karen macken sent isidore klein weekly financial reports about petitioner during those years isidore klein called jeffrey schwaeber to ask questions about the weekly financial reports isidore klein also corresponded with richard schwaeber petitioner’s accountant in and to monitor petitioner’s financial position isidore klein visited petitioner's facility four to eight times a year in and he stayed at least a week each time he visited petitioner in and isidore klein did not supervise petitioner’s salespeople warehouses or day-to-day operations however isidore klein occasionally provided product support to or consulted on technical or design questions with baker’s aid during those years he also attended trade shows to look for ideas for new products petitioner could manufacture in and isidore klein designed a portable housing system for use by the military or as emergency housing hdhe attempted unsuccessfully in and to market the housing system to the u s military petitioner did not pursue the portable housing system after steven klein steven klein was petitioner’s vice president and chief operating officer from to steven klein reported to his father during those years he was responsible for --- - petitioner’s day-to-day management which he found to be difficult because he was under the constant scrutiny of his father he managed petitioner’s office staff of four people designed petitioner’s marketing catalogues handled special orders for customers and designed custom-made items for customers he managed petitioner’s sales activities and was the primary contact for petitioner’s biggest customer baker’s aid in and baker’s aid accounted for about one- third of petitioner’s sales in those years steven klein was very familiar with petitioner's customers and operations and had good technical knowledge of its products in and steven klein worked long hours steven klein became president and chief_executive_officer ceo in date when isidore and gertrude klein sold their stock in petitioner in steven klein assumed more responsibility for petitioner he often received business telephone calls at home during and petitioner’s redemption of gertrude and isidore klein’s stock and steven klein’s purchase of petitioner around steven klein proposed buying isidore and gertrude klein’s stock in petitioner because he wanted to control petitioner and to ensure that he and his children would own the business steven klein negotiated intermittently with isidore klein from to to buy the stock isidore klein initially asked steven klein to pay dollar_figure million for the stock - on date petitioner redeemed its stock owned by gertrude klein for dollar_figure and by isidore klein for dollar_figure for a total of dollar_figure petitioner paid isidore klein dollar_figure and gave him a dollar_figure note bearing interest pincite percent for the balance also on that day petitioner issued shares of its stock to steven klein for dollar_figure since then steven klein has owned all of petitioner’s stock petitioner’s net_worth declined from dollar_figure in to dollar_figure in after the redemption f petitioner’s employees and compensation policie sec_1 petitioner’s employees petitioner had three employees during the 1950's isidore klein and two other people by petitioner had nine employees steven klein and three others in the office and five employees in the factory by and petitioner had about or employees in and petitioner had four employees in the office steven klein jeffrey schwaeber karin paterson paterson and karen macken macken jeffrey schwaeber has an accounting degree and worked at his father’s accounting firm from date to date his father is richard schwaeber who was petitioner’s accountant from through the years at issue except for a short time in the late 1970's jeffrey schwaeber worked for petitioner from to he was petitioner’s vice president for operations comptroller and purchasing agent he set priorities for jobs to be performed in the factory and supervised petitioner’s bookkeeper he signed some of petitioner’s guarterly federal_income_tax returns and information statements macken was petitioner's bookkeeper from date through paterson worked at petitioner from date until the end of her work included answering phones taking orders and printing and mailing invoices in and reinaldo ray cruz was petitioner's factory foreman and felix ortega received incoming raw material and shipped finished products ray cruz began working for petitioner in and felix ortega in compensation paid_by petitioner a isidore klein from through isidore klein set his own salary based on a percentage of petitioner’s gross_sales in the board_of directors 1ie isidore and gertrude klein agreed that petitioner would pay isidore klein a salary of percent of gross_sales but would not reimburse him for his expenses in and isidore klein set his salary pincite percent of petitioner’s gross_sales in and petitioner paid isidore klein dollar_figure per week plus dollar_figure dollar_figure and dollar_figure respectively for the first three quarters and payments just before yearend of dollar_figure in and dollar_figure in petitioner made these guarterly payments after richard schwaeber had prepared petitioner's guarterly financial statements petitioner compensated isidore klein from to as follows percentage of year amount gross_sales dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number -- b steven klein from sometime in the 1980's until date steven klein and isidore klein disagreed about how much petitioner would pay steven klein but isidore klein ultimately paid steven klein what he requested steven klein set his own pay in petitioner compensated steven klein from to as follows year amount dollar_figure big_number in petitioner paid steven klein dollar_figure per week dollar_figure on date and dollar_figure on date steven klein discussed with richard schwaeber how much -- petitioner could reasonably pay him in richard schwaeber advised him around the time petitioner redeemed isidore klein’s stock in date that since he was taking on the responsibilities of two jobs his and isidore klein’s a salary of about dollar_figure in would be reasonable cc other employees petitioner paid jeffrey schwaeber dollar_figure in dollar_figure in dollar_figure in and dollar_figure in in and petitioner had sales representatives to sell its products petitioner paid its sales representatives commissions of percent in petitioner’s board_of directors ie isidore and gertrude klein authorized isidore klein to conduct business on its behalf in florida from to howard appell appell was petitioner's exclusive sales representative in florida in appell talked to jeffrey schwaeber three to five times a week appell dealt with steven klein several times in and but not with isidore klein g petitioner’s financial history petitioner’s sales and taxable_income petitioner's sales increased in nominal dollars from to petitioner’s net_income before taxes declined sharply as follows year in statistical abstract of the united_states sales dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number net_income before officers’ compensation and taxes prp prp pr dollar_figure big_number big_number big_number big_number big_number big_number big_number thus not in record in real dollars net_income before taxes dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number pincite dollar_figure equaled dollar_figure in dollars chart petitioner’s sales did not increase from to see petitioner's annual and cumulative retained earnings were as follows petitioner has never paid dividends year annual dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number cumulative dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number -- petitioner’s return on the fair_market_value of its operating_assets was dollar_figure percent in dollar_figure percent in and dollar_figure percent in petitioner’s federal_income_tax returns richard schwaeber prepared and signed petitioner’s tax returns from through the years at issue petitioner attached schedules e compensation of officers to its and returns however petitioner did not report the percentage of time that its officers devoted to the business il opinion a positions of the parties a taxpayer may deduct payments for compensation if the amount_paid is reasonable in amount and for services actually rendered see sec_162 853_f2d_1267 5th cir affg tcmemo_1986_407 819_f2d_1315 5th cir affg tcmemo_1985_267 petitioner paid isidore klein dollar_figure in and dollar_figure in and paid steven klein dollar_figure in dollar_figure in and dollar_figure in petitioner contends that those amounts were reasonable and were for services they provided to petitioner respondent contends that compensation petitioner paid in excess of dollar_figure for dollar_figure for and dollar_figure for was unreasonable was disguised dividends and was not for services to petitioner b controlling factors in 85_f3d_950 2d cir affg tcmemo_1995_128 the u s court_of_appeals for the second circuit the court to which an appeal in this case would lie stated five factors to be considered in assessing the reasonableness of an employee's compensation the employee's role in the taxpaying company including the employee's position hours worked and duties performed potential conflicts of interest such as the ability to disguise dividends as salary the employer’s compensation policy for all employees the character and financial condition of the company and comparison of the employee's salary with those paid_by similar companies for similar services no single factor controls these factors should be examined from the perspective of an independent investor see id pincite 147_f3d_96 2d cir vacating and remanding tcmemo_1995_135 both parties called experts to testify about whether the amount of compensation paid to the kleins was reasonable petitioner's expert was paul dorf dorf and respondent's expert was scott d hakala hakala we next apply the factors listed above in deciding whether the amount of compensation petitioner paid to the kleins was reasonable -- - the employee's role in the company the employee's position hours worked and duties performed plus any special duties or role from the perspective of an independent investor we consider whether the employee's role in the taxpaying company including the employee's position hours worked and duties performed plus any special duties or role such as personally guaranteeing corporate loans justify the compensation paid see rapco inc v commissioner supra pincite a isidore klein’s role isidore klein founded petitioner built it into a profitable business and was a prolific inventor however isidore klein was less actively involved in petitioner’s operations in and than he had been in earlier years isidore klein had no dealings with petitioner’s exclusive sales representative in florida in and isidore klein did not manage petitioner day to day after as he had before he moved to florida isidore klein spoke freguently on the phone to steven klein and approved the major decisions but day-to-day responsibility had shifted to steven klein we think an independent investor would have objected to an increase in isidore klein’s salary from percent of gross_sales in to percent of gross_sales in and petitioner contends that part of isidore klein’s compensation in and was catchup pay for years in which he was underpaid we disagree petitioner relies on dorf’s testimony that isidore klein’s salary in and was reasonable because isidore klein was somewhat underpaid in earlier years and had no long-term financial incentives and benefits dorf’s conclusion that isidore klein was underpaid in earlier years is unconvincing because he disregarded large bonuses that petitioner paid isidore klein in and dorf’s testimony does not establish and there is no evidence that petitioner intended any of isidore klein’s pay in and to be catchup pay see 399_f2d_603 9th cir court found that corporate president was not underpaid in part because taxpayer's board did not state that some part of the payments were for his prior services affg tcmemo_1967_7 h a intl jewelry ltd v commissioner tcmemo_1997_467 pay was not catchup pay where minutes from shareholder meetings showed that the compensation_for the current_year was not intended to reward the employee's efforts for prior years petitioner points out that isidore klein was trying to develop a portable housing system in and and contends that it could have increased petitioner’s annual revenue from dollar_figure million to dollar_figure million however there is no credible_evidence that the portable housing system could have generated dollar_figure million of revenue the fact that steven klein abandoned work on the -- - portable housing system as soon as he became owner of petitioner in suggests that it did not petitioner now claims have the profit potential b steven klein’s role petitioner contends that the amount of compensation it paid to steven klein during the years in issue was reasonable because of his superior skills and because he was the driving force behind petitioner and solely responsible for its success in we disagree in part steven klein ran petitioner evidenced by petitioner’s modest sales below average performance according to hakala and sharp we agree with hakala that an independent investor with at best moderate success as increase in the real value of after officers’ compensation decrease in profits from to these results would not satisfy we also disagree that steven klein’s added duties or longer hours in merit the large raise in his salary in we do not believe that an independent investor would have been satisfied with steven klein’s operation of petitioner in light of steven klein’s assessment that petitioner was not very valuable and that petitioner might not survive the loss of isidore klein in richard schwaeber testified that petitioner had a cash- flow problem and that its net_worth essentially disappeared when it redeemed isidore klein’s stock in we do not - - believe that an independent investor would have approved doubling steven klein’s salary in citing dexsil corp v commissioner f 3d pincite petitioner contends that steven klein’s salary increase from dollar_figure in to dollar_figure in was reasonable because he was performing his and isidore klein’s jobs petitioner’s reliance on dexsil is misplaced in dexsil the u s court_of_appeals for the second circuit directed the tax_court to consider whether compensation paid to a corporate president was reasonable in light of the fact that he performed multiple roles and compared to compensation paid_by similar companies for comparable services see id pincite steven klein’s compensation in exceeded the total compensation paid to isidore and steven klein in by dollar_figure steven klein admitted that he could not perform isidore klein’s research_and_development activities as well as isidore klein steven klein testified that petitioner would have had to pay someone dollar_figure-dollar_figure to fill the research_and_development position held by isidore klein dorf provided market data showing that the annual compensation of a research_and_development executive was dollar_figure for and dollar_figure for we conclude that an independent investor would not approve paying steven klein dollar_figure in for research_and_development activities that he admitted that he could not perform as well as isidore klein - - cc petitioner’s other contentions petitioner argues that the compensation paid to isidore and steven klein is justified by the fact that they both guaranteed the industrial_development_bond and remained liable on it in and we disagree first steven klein not petitioner held title to the building purchased with the proceeds of the industrial_development_bond second there is nothing about the financing of petitioner’s building to justify higher compensation_for steven or isidore klein in and petitioner contends that we should treat it as a personal service company because its success depends on the skill and efforts of its officers isidore and steven klein rather than on capital petitioner contends that courts are more deferential in deciding whether payments for services to officers of personal service companies are reasonable citing c t i inc v commissioner tcmemo_1994_82 affd without published opinion 54_f3d_767 3d cir kay inc v commissioner a memorandum opinion of this court dated date j brodie son inc v commissioner a memorandum opinion of this court dated date and firefoam sales co v commissioner a memorandum opinion of this court dated date petitioner’s reliance on these cases is misplaced because petitioner was not a personal service company it manufactures and sells products --- - this factor favors respondent potential conflicts of interest ability to disquise dividends as salary particularly if the employee is the sole or majority shareholder or if a large percentage of the compensation is paid as a bonus the ability to disguise dividends as salary particularly if the employee is the sole or majority shareholder or if a large percentage of the compensation is paid as a bonus may suggest that compensation is not reasonable see rapco inc v commissioner f 3d pincite payment of bonuses at the end of a tax_year when a corporation knows its revenue for the year may enable it to disguise dividends as compensation see owensby kritikos inc v commissioner f 2d pincite 95_tc_525 affd 965_f2d_1038 11th cir a ability to disguise dividends_paid to isidore klein as compensation isidore klein set his own salary in and isidore klein and petitioner did not deal at arm's length in those years because he was the controlling shareholder and chairman of the board_of directors see estate of wallace v commissioner supra pincite cf 178_f2d_115 6th cir bonus plan established by board_of directors for minority shareholders was an arm's-length_transaction -- - b ability to disguise dividends_paid to steven klein as compensation petitioner contends that steven klein’s salary was reasonable in amount in and because he had an arm’ s- length relationship with his father isidore klein in those years we closely scrutinize intrafamily transactions see 332_f2d_899 2d cir remanding tcmemo_1962_307 12_tc_1158 affd per curiam 192_f2d_391 2d cir richard schwaeber testified that although isidore and steven klein negotiated steven klein’s salary isidore klein ultimately paid steven klein what steven wanted there is no evidence that isidore klein tried to hire someone to replace steven klein or to sell petitioner to a third party or that steven klein ever sought another job steven klein’s impressive salary in and despite petitioner’s unimpressive performance suggests that his compensation did not result from arm’s-length negotiations and was not handled as an independent investor would have handled it these facts suggest that the salary negotiations were not at arm’s length cc yearend bonuses the large yearend payments to isidore and steven klein suggest that part of their compensation was disguised dividends - - see 602_f2d_959 court inferred that bonuses paid to shareholder-employees near the end of the year which absorbed nearly all of the taxpayer's earnings were at least in part a distribution of profits 197_f2d_263 8th cir owensby kritikos inc v commissioner tcmemo_1985_267 affd 819_f2d_1315 5th cir see eg rich plan of northern new england inc v commissioner tcmemo_1978_514 petitioner paid dollar_figure to isidore klein in both and after the end of the first three quarters and dollar_figure in and dollar_figure in just before the end of the year steven klein had petitioner pay him dollar_figure in the final week of the yearend payments to isidore and steven klein were made after petitioner’s accounting firm had prepared petitioner’s quarterly financial statements and computed petitioner’s earnings for the first three periods the payments to isidore and steven klein left petitioner with a nominal amount of operating profits in and petitioner paid isidore and steven klein percent of its taxable_income before officers’ compensation in and and steven klein percent of its taxable_income before officers’ compensation in paying most of petitioner’s taxable_income as compensation to its officers suggests that its -- - distributions to isidore and steven klein were in part disguised dividends see owensby kritikos inc v commissioner f 2d pincite we believe isidore klein decided the amount of his compensation late in and and steven klein late in so that they could receive a greater part of petitioner's net profits as compensation petitioner contends that petitioner did not pay steven klein bonuses in petitioner contends that the amount of the yearend payments to steven klein were determined shortly after the redemption of isidore klein’s stock in consultation with the outside accountants and that petitioner did not pay it until yearend to protect its cash-flow we disagree unlike the payments to isidore klein petitioner did not compensate steven klein based on a compensation formula steven klein owned all of petitioner’s stock in and set his own compensation that year the large yearend payments to steven klein in suggest that part of his payments were disguised dividends we believe that an independent investor would not have been satisfied with the large amount petitioner paid to steven klein the last week of since it appears that profits were being siphoned out of the company disguised as salary see dexsil corp v commissioner f 3d pincite 716_f2d_1241 9th cir revg and - - remanding on other grounds tcmemo_1980_282 see also owensby kritikos inc v commissioner f 2d pincite this factor favors respondent internal consistency in compensation consistency of the compensation system throughout the company inconsistency of the compensation system throughout the ranks of the company may suggest that the employee’s compensation is not reasonable see rapco inc v commissioner f 3d pincite isidore and steven klein paid themselves and jeffrey schwaeber generously petitioner contends that it paid all of its employees at or above market rate salaries we disagree petitioner presented no persuasive evidence that it paid all of its employees at or above market rate salaries on brief petitioner concedes that it did not have a bonus program during the years in issue there is no evidence that any of petitioner’s employees other than tsidore and steven klein shared in the large distribution of profits petitioner made at yearend in and cf 73_tc_1142 compensation paid to the taxpayer's shareholder- employees was reasonable in part because the taxpayer had longstanding practice of paying all of its key employees on the basis of commissions this factor favors respondent - - character and condition of the company including sales net_income capital value and general kconomic fitness of the company from the perspective of an independent investor the character and condition of the company including its sales net_income capital value and general economic fitness are important in deciding how much compensation to pay to a corporation’s top officers see rapco inc v commissioner supra petitioner contends that the fact that its sales increased from dollar_figure in to dollar_figure in dollar_figure in and dollar_figure in shows that its financial condition was good we disagree petitioner’s retained earnings were lower each year from to than they were for any year from to petitioner’s sales did not increase from to in real dollars petitioner’s net_income before taxes declined from dollar_figure in to dollar_figure in dollar_figure in and dollar_figure in petitioner’s income declined from to petitioner’s sales and income increased from to but were still well below the to amounts we believe petitioner’s financial condition in the years in issue would give an independent investor doubts about the performance of petitioner’s top management see 725_f2d_945 3d cir taxpayer’s deduction for large increases in an employee’s salary disallowed -- p7 - absent evidence that the company’s financial condition improved sufficiently to warrant the increases affg in part and vacating in part on other grounds tcmemo_1982_98 the instant case is distinguishable from 196_f3d_833 7th cir compensation of dollar_figure and dollar_figure million paid to taxpayer’s chief executive and principal_owner was reasonable corporation had substantial earnings sales and shareholder equity and ceo’s salary was approved by corporation’s two other unrelated 20-percent shareholders revg heitz v commissioner tcmemo_1998_220 172_f3d_942 6th cir court held that compensation of dollar_figure paid to the president and sole shareholder of a medical management_corporation was reasonable because the taxpayer was financially successful revg tcmemo_1997_464 mayson manufacturing co v commissioner f 2d pincite larger compensation paid in a particularly successful year was reasonable the prime indicator of the return a corporation is earning for its investors is its return on equity see owensby kritikos inc v commissioner supra pincite petitioner contends that it had an annual return on equity of dollar_figure percent and that this return on equity would satisfy an independent investor petitioner contends that its return on equity should - - be based on isidore klein's original dollar_figure investment we disagree first petitioner cites no case in which a court gave significant weight to a high return on equity computed based on a founding shareholder's small initial investment courts have relied on other financial factors when a shareholder's capital_contribution is small see eg alpha med inc v commissioner tcmemo_1997_464 court derived return on equity by using as shareholder’s equity retained earnings for the year at issue plus the shareholder's capital_investment and then comparing the increase in shareholder’s equity from prior year to the year at issue revd on other grounds 172_f3d_942 6th cir labelgraphics inc v commissioner tcmemo_1998_343 annual return on equity may be skewed in years in which the taxpayer's equity is low h a intl jewelry ltd v commissioner tcmemo_1997_467 using the approach in alpha medical inc v commissioner supra petitioner’s return on equity wa sec_2 percent in percent in and percent in second hakala testified that it is misleading to measure return on equity based on a shareholder’s nominal investment in the company because the shareholder may have invested capital or sweat equity and the company may have contributed patents intellectual_property or other intangibles that do not appear on - - the balance_sheet he testified that the rate of return on equity is best measured by comparing the company’s operating return to the fair_market_value of its operating_assets petitioner did not respond to hakala’s analysis on this point hakala stated that an independent investor would have expected an average net operating return on assets of about percent in the years in issue and that petitioner’s operating returns which ranged from percent to dollar_figure percent in the years in issue were far below the returns that would have satisfied an independent investor thus we give little weight to petitioner’s use of isidore klein’s dollar_figure initial capital_contribution to calculate return on equity for and petitioner also contends that it did not need to pay dividends because a hypothetical shareholder would be satisfied with the appreciation in value of his or her stock due to petitioner's retention of earnings and the growth in petitioner's annual sales we disagree although hakala testified that an investor would be happy with a return of dollar_figure the redemption price of isidore and gertrude klein’s stock on dollar_figure isidore klein’s capital_investment he also stated that it is inappropriate in this case to analyze rate of return based on isidore klein’s dollar_figure investment -- - this factor favors respondent comparison with other companies salaries paid to comparable employees in similar companies in deciding whether compensation is reasonable we compare it to compensation paid to persons holding comparable positions in comparable companies see rapco inc v commissioner f 3d pincite 853_f2d_1267 5th cir affg tcmemo_1986_407 mayson manufacturing co v commissioner supra pincite respondent’s expert hakala and petitioner’s expert dorf submitted reports in which they analyzed compensation paid to persons holding comparable positions in other companies each of their reports provides some basis for us to apply this factor however we give less weight to dorf’s opinion because we believe his analysis contains major flaws a dorf dorf concluded that the compensation petitioner paid to isidore klein in dollar_figure and dollar_figure and steven klein in dollar_figure dollar_figure and dollar_figure could be deemed reasonable we believe he overstated the amount of compensation that could be deemed reasonable because he did not consider petitioner’s financial performance from the standpoint of an independent investor incorrectly assumed that isidore klein had been undercompensated in prior - - years overstated isidore klein’s contributions to petitioner in and gave too little weight to data from surveys he cited in his report which suggest that isidore and steven klein were overpaid used as comparables corporations that were more than four times larger than petitioner analyzed the reasonableness of steven klein’s compensation based in part on data for which he provided no source and using a method that in effect assumed that steven klein’s compensation was reasonable and incorrectly assumed that petitioner’s compensation practices were similarly generous to all of petitioner’s employees the companies which dorf compared to petitioner had annual revenues averaging dollar_figure million more than four times those of petitioner he estimated that isidore klein was paid about dollar_figure more in and about dollar_figure more in than the average compensation paid to the ceo’s of those companies isidore klein was paid dollar_figure to dollar_figure more in and dollar_figure to dollar_figure more in than ceo’s whose compensation ranked in the third quartile of companies that responded to and national executive compensation and panel publication surveys e ceho’s whose pay ranked from the 50th percentile to the 75th percentile despite the data from these surveys dorf concluded that isidore klein was not overpaid - -- dorf estimated how much it would have been reasonable for petitioner to pay isidore klein from to dorf added what he estimated was the compensation of a full-time chief_executive_officer without isidore klein’s research_and_development capabilities dollar_figure in and dollar_figure in to percent of what he said was the compensation of a full-time research_and_development professional dollar_figure in and dollar_figure in he concluded that petitioner overpaid isidore klein by dollar_figure in and dollar_figure in but he concluded that isidore klein’s compensation was reasonable in those years in part because it was catchup pay for prior years we rejected dorf’s suggestion that isidore klein was paid catchup pay at paragraph ii-b-l-a above dorf's data suggests that compensation paid to isidore klein up to dollar_figure in and dollar_figure in might have been reasonable if he had worked full time there 1s no convincing evidence of how much time he worked we think two-thirds or somewhat less time would be a reasonable estimate based on how often he called and visited employees the fact that he attended some trade shows and worked on the portable housing project and because he reviewed various records of petitioner’s dorf’s data which is based on full- time service suggests that compensation_for isidore klein of about dollar_figure per year for and would be reasonable - - we start with dorf’s data for the average ceo ée dollar_figure in and dollar_figure in to decide the reasonableness of steven klein’s compensation but we do not increase it based on compensation paid to a person with research_and_development skills because he lacked isidore klein’s skills in that area however due to steven klein’s long hours worked we think dorf’s data suggests the maximum amount of reasonable_compensation for steven klein would be dollar_figure for and dollar_figure for b hakala hakala testified that the most a similar company would have reasonably paid for the combined services of isidore and steven klein was dollar_figure in and dollar_figure in he also testified that the most a similar company would have reasonably paid steven klein in was dollar_figure we believe that he underestimated the total amount isidore and steven klein could reasonably be paid in and but that his estimate of steven klein’s reasonable_compensation for was correct petitioner argues that hakala relied on companies that were not comparable to petitioner we disagree although hakala considered conference board surveys of larger public companies he primarily focused on data from companies that specialized in fabricating metal products and that had annual sales comparable - -- in size to petitioner’s that is between dollar_figure and dollar_figure million petitioner contends that hakala failed to consider that petitioner and the services of isidore klein and steven klein are unique although all companies and corporate officers are in one sense unique we believe that survey data cited by hakala as well as dorf is helpful in deciding the amount of isidore and steven klein’s reasonable_compensation hakala concluded that from the standpoint of a hypothetical independent investor the compensation petitioner paid to isidore and steven klein in and and to steven klein in was unreasonable hakala pointed out that although petitioner was very profitable before paying officers’ compensation its performance after paying officers’ compensation was well below what would satisfy an independent investor hakala estimated the maximum amount petitioner could pay isidore and steven klein while paying a reasonable return to an independent investor and concluded that the compensation paid to isidore and steven klein was about twice the maximum reasonable_compensation petitioner criticizes hakala for not separately valuing the services of steven and isidore klein we agree that having a separate opinion for their reasonable_compensation would have been more helpful but despite that we still find hakala’s analysis to be helpful cc baker’s aid petitioner argues that the best evidence of how much comparable firms pay officers’ holding comparable positions was the testimony that the two owners officers of baker’s aid a father and son each earned dollar_figure-dollar_figure million per year in and we disagree because there is no evidence of their duties or accomplishments and because baker’s aid had annual sales of about dollar_figure million in and which is more than times petitioner’s sales in those years d conclusion this factor suggests that it would have been reasonable to pay isidore klein up to dollar_figure in and dollar_figure in and to pay steven klein up to dollar_figure in dollar_figure in and dollar_figure or for simplicity dollar_figure in c applying the factors from the perspective of the hypothetical independent investor we apply each of these five factors from the standpoint of whether a hypothetical independent investor would approve the compensation petitioner paid to isidore and steven klein in the years in issue see dexsil corp v commissioner f 3d pincite rapco inc v commissioner f 3d pincite elliotts inc v commissioner f 2d pincite tsidore klein we believe that an independent investor would not have approved the increase in isidore klein’s longstanding - - compensation formula from percent to percent of sales in view of his lessened contribution to petitioner in and and petitioner’s financial performance compared to earlier years we conclude that an independent investor would consider compensation paid to isidore klein of dollar_figure in and dollar_figure in to be reasonable these amounts are based in part on dorf’s data however they are less than the amounts dorf said might be reasonable for reasons stated above where we discussed dorf’s analysis as discussed at paragraph ii-b-3-a above we estimate that isidore klein worked at most two-thirds of the time in and under the circumstances we think paying isidore klein more than dollar_figure which equaled to percent of sales about two-thirds of his customary percent of sales was unreasonable steven klein we conclude that an independent investor would not have approved steven klein’s compensation based on petitioner’s performance in those years we do not think an independent investor would believe that steven klein should be paid in year more than the cumulative amount petitioner earned in the previous years see h a intl jewelry ltd v commissioner tcmemo_1997_467 compensation paid to president of corporation was held unreasonable because he was paid more in year than the company earned in the prior years we conclude that compensation paid to steven klein in excess - - of dollar_figure in and dollar_figure in was unreasonable due to steven klein’s assumption of more responsibilities when he became ceo in and based on hakala’s estimate of reasonable_compensation to steven klein for we conclude that compensation up to dollar_figure in was reasonable these amounts for steven klein for and are based on dorf’s data but without any additional_amounts added for research_and_development work previously done by isidore klein and with an adjustment for hours worked our amount for steven klein for dollar_figure is essentially the same as believed reasonable by hakala dollar_figure dorf did not provide data for hakala’s data is a suitable substitute d whether petitioner is liable for the penalty under sec_6662 for substantial_understatement respondent determined that petitioner is liable for the accuracy-related_penalty for substantial_understatement for and under sec_6662 taxpayers are liable for a penalty equal to percent of the part of the underpayment attributable to negligence or substantial_understatement of tax see sec_6662 b and a substantial_understatement_of_income_tax occurs when the amount of the understatement for a taxable_year exceeds the greater of percent of the tax required to be shown on the return or dollar_figure in the case of a corporation see sec_6662 d a -- - the accuracy-related_penalty does not apply to any part of an underpayment if the taxpayer shows that there was reasonable_cause for the underpayment and that the taxpayer acted in good_faith see sec_6664 reliance on the advice of a professional such as an accountant may constitute reasonable_cause if under all the facts and circumstances that reliance is reasonable and the taxpayer acted in good_faith see sec_1_6664-4 income_tax regs petitioner argues that it is not liable for the accuracy- related penalty for the years in issue because the issues in this case are highly technical petitioner disclosed the deductions on its tax returns for and and steven klein reasonably relied on petitioner’s accountant to advise petitioner about what would constitute reasonable_compensation to pay steven klein in and petitioner is not liable for the substantial_understatement_penalty if it had a reasonable basis for and adequately disclosed the facts relating to the kleins’ compensation on its and returns see sec_6662 b revproc_94_36 1994_1_cb_682 revproc_94_74 1994_2_cb_823 revproc_95_55 1995_2_cb_457 sec_4 d of each of those revenue procedures provides that for purposes of reducing the understatement of income_tax under sec_6662 d additional disclosure of facts relating to an issue involving -- -- reasonable_compensation is unnecessary if the taxpayer properly completes form_1120 schedule e compensation of officers including the percent of time each officer devoted to the business petitioner did not adequately disclose the facts relating to the kleins’ compensation on its and returns because it left blank the percent of time devoted to business section of its and schedules e petitioner contends that its failure to list the percentage of time petitioner’s officers devoted to the business is not significant because the kleins each devoted a substantial amount of time to the business we disagree see c t i1 inc v commissioner tcmemo_1994_82 taxpayer’s disclosure was inadequate because it did not state the percentage of time its officers devoted to the business we do not believe that the issues in this case were highly technical petitioner does not contend that it relied on its accountant to advise it on the reasonable_compensation issue for and thus we conclude that petitioner is liable for the accuracy-related_penalty under sec_6662 for and respondent argues that petitioner did not have reasonable_cause for deducting the compensation it paid to steven klein in because it made no attempt to determine whether the amount it deducted as compensation in was reasonable we disagree - - steven klein relied on richard schwaeber to advise petitioner about the amount of compensation it could reasonably pay him in richard schwaeber told steven klein that a salary of about dollar_figure in would be reasonable we hold that petitioner’s reliance on richard schwaeber was reasonable_cause for deducting the compensation it paid to steven klein in we conclude that petitioner is liable for the accuracy- related penalty under sec_6662 for and but it is not liable for to reflect the foregoing and concessions decision will be entered under rule


department of the treasury employer_identification_number contact person - id number contact telephone number uil list internal_revenue_service p o box cincinnati oh release number release date date date legend a b c m w xx y z dear why you are receiving this letter this is our response to your date letter requesting approval of a set- aside under internal_revenue_code sec_4942 you've been recognized as tax-exempt under sec_501 of the code and have been determined to be a private_foundation under sec_509 our determination based on the information furnished your set-aside program is approved under internal_revenue_code sec_4942 as required under sec_4942 the set_aside amount must be paid within the 60-month period after the date of the first set-aside description of set-aside request you have requested approval of a set-aside of a dollars for the taxable_year ending december 20_ for the purpose of funding an addition to the existing w located in x w houses a museum dedicated to educating the public about the pe second temple period and exhibiting items excavated from the temple mount area the set-aside will be paid to y a publicly supported charity exempt under sec_501 will provide funding to z an independent governmental authority of foreign_country m for the archaeological excavation restoration and infrastructure improvements to a structure dating from the seventh century augmenting the existing w facilities through the addition of a big_number square foot exhibition space the project the project is currently in the planning stage furthermore archeologists have never fully excavated the site consequently various permits and approvals will have to be obtained before the project can proceed and local parties to supervise the excavation and construction have not been identified construction will not begin until and is expected to span several years the accomplishment of the project through an immediate payment of funds is therefore impractical the set-aside will be disbursed to y in two payments by the terms of your agreement with y you will disburse b dollars within thirty days of having been provided a written certification of the completion of the project including a certification that all approvals authorizations consents and permits from all applicable governmental authorities have been validly obtained and a written itemization of project costs and you will make the second payment of c dollars within thirty days of having been provided a written certification confirming the opening of all parts of the project to the public y will in the meantime furnish you with quarterly progress reports on the project y expects that the completed project will be ready for opening to the public for its intended use no later than the fifth anniversary of the date of the agreement about ten months before the end of the sixtieth month from the date of the set-aside reimbursement of y for the expenditures it incurred on condition of its providing the certifications is a prudent and effective means of ensuring that the project will be completed in a proper and timely fashion one of your foundation managers has provided a written_statement that the a dollars set_aside will actually be paid for the projects within months after the date of the set-aside basis for our determination internal_revenue_code sec_4942 states that an amount set_aside for a specific project which includes one or more purposes described in sec_170 may be treated as a qualifying_distribution if requirements of sec_4942 it meets the sec_4942 of the code states that an amount set_aside for a specific project will meet the requirements of this subparagraph if at the time of the set- aside the foundation establishes that the amount will be paid within five years and either clause i or ii are satisfied sec_4942 of the code is satisfied if at the time of the set-aside the private_foundation establishes that the project can better be accomplished using the set-aside than by making an immediate payment sec_53_4942_a_-3 of the foundations and similar excise_taxes regulations provides that a private_foundation may establish a project as better accomplished by a set-aside than by immediate payment if the set-aside satisfies the suitability test described in sec_53_4942_a_-3 sec_53_4942_a_-3 of the foundations and similar excise_taxes regulations provides that specific projects better accomplished using a set-aside include but are not limited to projects where relatively long-term expenditures must be made requiring more than one year’s income to assure their continuity in revrul_77_7 1977_1_cb_354 the term specific project as defined in sec_53_4942_a_-3 of the excise_tax regulations was held to include a building project to be undertaken by a public charity unrelated to the foundation making the set-aside what you must do your approved set-aside will be documented on your records as a pledge or obligation to be paid_by the date specified the amounts set_aside will be taken into account to determine your minimum_investment_return under internal_revenue_code sec_4942 and the income attributable to your set_aside s will also be taken into account in computing your adjusted_net_income under sec_4942 of the code additional information this determination is directed only to the organization that requested it internal_revenue_code sec_6110 provides that it may not be used or cited as a precedent please keep a copy of this letter in your records we have sent a copy of this letter to your representative as indicated in your power_of_attorney if you have any questions please contact the person listed in the heading of this letter sincerely holly o paz director exempt_organizations rulings and agreements enclosure


internal_revenue_service number release date index numbers ---------------------------------------------------- ------------------------------------------------------------ -------- ------------------------------------------------------ ------------------------------- department of the treasury washington dc person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc corp b01 - plr-155570-09 date date legend purchaser sub sub target seller date a date b ------------------------------------------------- ------------------------ ------------------------------------- ------------------------ -------------------------------------------------------------- ------------------------ --------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ------------------------ ----------------------- -------------------------- ------------------- company official ---------------------------------- ------------- ---------------------------------------------------- tax professional --------------------------------------------------------------- dear ------------- plr-155570-09 this letter responds to a letter dated date submitted on behalf of purchaser requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election purchaser is requesting an extension to file a sec_338 election under sec_338 with respect to purchaser’s acquisition of the stock of target sometimes hereinafter referred to as the election on date a through sub the material information is summarized below purchaser is directly and indirectly owned by united_states and foreign investors purchaser wholly owns sub purchaser and sub own all the stock of sub sub and sub are disregarded entities for u s federal_income_tax purposes target a foreign_corporation was percent owned by seller on date a purchaser through sub acquired all of the stock of target owned by seller in exchange for cash it is represented the acquisition of the stock of target qualified as a qualified_stock_purchase as defined in sec_338 target was not a controlled_foreign_corporation or a foreign_personal_holding_company at any time during the portion of its taxable_year that ends on the acquisition_date as defined in sec_338 purchaser intended to file the election the election was due on date b but for various reasons a valid election was not filed after the due_date for the election it was discovered that the election had not been filed subsequently this request was submitted under sec_301_9100-3 for an extension of time to file the election the period of limitations on assessment under sec_6501 has not expired for purchaser’s or target’s taxable years in which the acquisition occurred the taxable years in which the election should have been filed or any taxable years that would have been affected by the election had it been timely filed sec_338 permits certain stock purchases to be treated as asset acquisitions if the purchasing_corporation makes or is treated as having made a sec_338 election or a sec_338 election and the acquisition is a qualified_stock_purchase under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic plr-155570-09 extensions of time for making certain elections requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 in this case the time for filing the election is fixed by the regulations ie sec_1_338-2 therefore the commissioner has discretionary authority under sec_301_9100-3 to grant an extension of time for purchaser to file the election provided purchaser acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by purchaser company official and tax professional explain the circumstances that resulted in the failure to timely file a valid election the information establishes the request for relief was filed before the failure to make the election was discovered by the internal_revenue_service see sec_301_9100-3 based on the facts and information submitted including the representations made we conclude that purchaser has shown it acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly an extension of time is granted under sec_301_9100-3 until days from the date on this letter for purchaser to file the election with respect to the acquisition of the stock of target as described above within days of the date on this letter purchaser must file the election on form_8023 in accordance with sec_1_338-2 and the instructions to the form a copy of this letter must be attached to form_8023 within days of the date on this letter all relevant parties must file or amend as applicable all returns and amended returns if any necessary to report the transaction as a sec_338 transaction for the taxable_year in which the transaction was consummated and for any other affected_taxable_year a copy of this letter and a copy of form_8883 must be attached to any_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy the requirement of attaching a copy of this letter by attaching a statement to their return that provides the date and control number of the letter_ruling purchaser must also deliver written notice of the election and a copy of form sec_8023 and their attachments and instructions to u s persons selling or holding stock in target see sec_1_338-2 plr-155570-09 the above extension of time is conditioned on the taxpayers' purchaser's and target’s tax_liability if any being not lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money no opinion is expressed as to the taxpayers’ tax_liability for the years involved a determination thereof will be made by the applicable director’s office upon audit of the federal_income_tax returns involved further no opinion is expressed as to the federal_income_tax effect if any if it is determined that the taxpayers’ tax_liability is lower sec_301_9100-3 we express no opinion as to whether the acquisition of the target stock qualifies as a qualified_stock_purchase under sec_338 or any other tax consequences arising from the election in addition we express no opinion as to the tax consequences of filing the election late under the provisions of any other section of the code and regulations or as to the tax treatment of any conditions existing at the time of or resulting from filing the election late that are not specifically set forth in the above ruling for purposes of granting relief under sec_301_9100-3 we relied on certain statements and representations made by the taxpayers however the director should verify all essential facts in addition notwithstanding that an extension is granted under sec_301_9100-3 to file the election penalties and interest that would otherwise be applicable if any continue to apply this letter is directed only to the taxpayer s who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file in this office a copy of this letter is being sent to your authorized representatives sincerely _______________________________ ken cohen senior technician reviewer branch office of associate chief_counsel corporate


of f i c e of c h i ef c ou n sel department of the treasury i n t e r n al r e v e n u e s e r v i c e w ashington d c date cc ita b4 conex-111706-09 number info release date uil the honorable suzanne m kosmas member u s house of representative sec_1000 city center circle 2nd floor port orange fl attention ------------------ dear congresswoman kosmas this letter responds to your request for information dated date on behalf of your constituent ------------------------ she asked whether the congress or the white house will address waiving repayment of the first-time_homebuyer credit for taxpayers who purchased homes in to provide a first-time_homebuyer credit the congress added sec_36 to the internal_revenue_code in section of the economic and housing recovery act of pub_l_no stat the congress amended sec_36 in section of the american reinvestment and recovery tax act of pub_l_no stat due to the amendment the rules for the first-time_homebuyer credit are different depending on whether a taxpayer purchases a home in or in rules for home purchases on or after date and before date a first_time_homebuyer who purchased a home on or after date and before date can take a credit on his or her federal_income_tax return equal to percent of the purchase_price of the residence up to a maximum of dollar_figure taxpayers who take this credit must repay the credit in equal installments over fifteen years see former sec_36 sec_36 and sec_36 of the code rules for home purchases on or after date and before date for taxpayers who purchased their home on or after date and before date the law increases the maximum credit to dollar_figure taxpayers who conex-111706-09 claim the credit and use the residence as their principal_residence for at least three years beginning on the date of purchase are not required to repay the credit see sec_36 sec_36 and sec_36 of the code as amended because --------------- bought her residence on date the rules for home purchases apply to her home purchase and she must repay the credit the statute does not grant the irs the authority to expand the scope of the credit administratively the congress would have to change the law to waive repayment of the credit for taxpayers who purchased their homes in i hope this information is helpful if you have any additional questions please contact me or ----------------------at ----- ------------- sincerely michael j montemurro branch chief office of associate chief_counsel income_tax accounting