office_of_chief_counsel internal_revenue_service memorandum number release date cc fip b04 jeglover postu-111412-16 uilc date date to reid m huey associate area_counsel lb_i cc lb_i rfth stp attn jack forsberg sr counsel third party communication none date of communication not applicable from alexis a macivor branch chief branch associate chief_counsel financial institutions products subject qualification under sec_816 this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent legend taxpayer state contribution contract amount dollar_figurea amount dollar_figureb amount dollar_figurec amount dollar_figured date year year year year ---------------------------------------------- ------- ---------------------------------------------------------------------------------- ----------------- ------------------------------------------------------------------------ ---------------------- -------------------- ---------------------- ---------------------- ------- ------- ------- ------- postu-111412-16 ---- ------ ------ ------ ------ ------ ------ ------ ------ amount e amount f amount g amount h amount i amount j amount k amount l amount m issue when applying the reserve_ratio_test of sec_816 are the taxpayer’s reserves with respect to certain annuity_contracts life_insurance_reserves as defined by sec_816 if the reserves for those contracts are not life_insurance_reserves are the reserves excluded from total_reserves by operation of sec_816 conclusion the developed facts do not establish whether the taxpayer’s reserves for certain annuity_contracts are life_insurance_reserves advice for further development is provided if the taxpayer’s reserves for the certain annuity_contracts are not life_insurance_reserves the reserves are not excluded from total_reserves by operation of sec_816 facts thetaxpayer the taxpayer is an insurance_company regulated by state for recent tax years the taxpayer filed a form 1120-pc u s property and casualty insurance_company income_tax return determining its taxable_income under sec_832 as an insurance_company other than a life_insurance_company the taxpayer provides pension products and services for employer-sponsored retirement plans individual life_insurance annuity and disability products to retail markets and group life disability dental and vision insurance products offered to businesses and their employees the taxpayer files annual and quarterly national association of insurance commissioners naic life and accident and health statements as required by regulatory agencies the contracts postu-111412-16 among the products marketed by the taxpayer is a contract the contribution contract that is designed as an investment vehicle for defined contribution plans the taxpayer’s customers the contractholders enter into a contribution contract to provide investment options recordkeeping services and benefit payment options for their employees members under the contractholders’ plans investment options available under the contribution contract include guaranteed_interest investments with various maturities and a variety of separate_account investments contractholders’ plans provide that upon a benefit event ie retirement disability or termination of employment a member may elect to receive benefits under one or more options one of which may be a life_annuity a contribution contract that includes a life_annuity option is hereinafter referred to as a contract if a contractholder’s plan permits selection of a life_annuity the taxpayer will not issue an annuity unless -------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- a specified amount the amount of the annuity payable under the annuity option is to be determined based on ---------------------------------- -------------------------------------- ------------------------------------ ---------------------------------- --------------------------------------------------------------- ------------------------------------------------ ----------------------------------------------------------------------------------------------- the contract provides that --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- ----------------------------------------------------- ------ --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- ------------------------------------- the purchase rate for an annuity is the dollar amount required to purchase a specific level of periodic_income payments for life an annuity purchase rate is calculated based postu-111412-16 on a mortality_table an interest rate the annuitant s attained age and the issuing insurer’s loading percentage the contract provides that --------------------------------------------------------------------------------------------------- -------------------------------------- ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ ---------------------------- ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ the contract provides that amendments are binding on members except that among other things --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------- as interpreted and applied by the taxpayer the contract guarantees that the annuity purchase rate in effect when a contract is purchased will remain unchanged for a minimum of ---------------and will apply to all contributions made during the ------------------- ----------as well as to the earnings thereon regardless of whether the amounts are used to acquire an annuity during or after the ---------------------- the contract provides that it will continue in force as long as the taxpayer is holding funds or making annuity payments under certain conditions the taxpayer may refuse further premium contributions and may begin ------------ proceedings annual_statement reporting loading is the amount charged by an insurer above the pure risk premium as calculated using the applicable mortality morbidity table and the assumed rate of interest it represents the insurer’s acquisition costs overhead contingencies and profit margin see harvey w rubin dictionary of insurance terms 6th ed p loading is the addition to the pure cost of insurance that reflects agent commissions premium taxes administrative costs associated with putting business on an insurance company’s books and contingencies postu-111412-16 the taxpayer reported the contribution contract as a deposit-type contract on its year annual_statement for separate_accounts the statutory accounting principles promulgated by the naic define a deposit contract as one that does not incorporate insurance risk that is one that does not have morbidity or mortality risk see ssap no per ssap no a morbidity or mortality risk is present if under the terms of the contract the reporting entity is required to make payments or forego required premiums contingent upon the disability or death in the case of life and disability insurance contracts or the continued survival in the case of annuity_contracts of a specific individual or group of individuals ssap no the taxpayer established reserves for all contractual obligations arising out of the contribution contract pursuant to ssap no which requires the reserve to be generally calculated as the excess of the present_value of future_benefits to be paid to or on behalf of policyholders less the present_value of future net_premiums using the methodologies prescribed in the applicable_portion of ssap appendices a and c actuarial guidelines for reserving purposes state law requires that the reserve be established pursuant to the requirements of the standard valuation law in accordance with actuarial procedures that recognize the variable nature of the benefits and the taxpayer is required to provide an actuarial opinion that the reserves were computed appropriately based on appropriate assumptions here the taxpayer’s appointed actuary attested that among other things the reserve sec_1 are computed in accordance with presently accepted actuarial standards consistently applied and are fairly stated in accordance with sound actuarial principles are based on actuarial assumptions that produce reserves at least as great as those called for by law as to reserve basis and method and are in accordance with all other contract provisions and include provision for all actuarial reserves and related annual_statement items that ought to be established in response to the exam team’s request for the actuarial reserving methodology used to calculate the amount attributable to the separate_accounts portion of the contracts the taxpayer stated that t he tax reserve for the separate_accounts is equal to the underlying market_value of the assets in the separate_accounts the reserves are not calculated using mortality and morbidity tables and assumed rates of interest qualification fraction in the course of the audit of tax_year the exam team requested the taxpayer’s detailed calculation of what is commonly referred to as the qualification fraction the the contribution contract was included on the taxpayer’s year annual_statement for separate_accounts both on page as liability for deposit-type contracts on line of liabilities and surplus and on page as guaranteed_interest contracts in column of exhibit - deposit-type contracts the qualification fraction determines whether an insurance_company is a life_insurance_company for federal_income_tax purposes a taxpayer qualifies as a life_insurance_company for postu-111412-16 taxpayer provided the exam team a high-level spreadsheet showing the calculation of both the numerator and denominator of the fraction and a more detailed spreadsheet for the calculation of the denominator the taxpayer included in the denominator of the qualification ratio but not the numerator amount dollar_figurea representing amounts the taxpayer treated as reserves for contracts with permanent purchase rate guarantees in total not just with respect to contracts this amount included amount dollar_figureb held for the contribution contracts discussed above amount dollar_figureb consists of amount dollar_figurec relating to guaranteed_interest investments held in the general account and amount dollar_figured relating to separate_account investments held in separate_accounts if amount dollar_figureb is a life_insurance_reserve the taxpayer’s qualification fraction percentages for year through year are well above in such case the taxpayer was a life_insurance_company in year through year if a portion of amount dollar_figureb held for the contracts is a life_insurance_reserve additional computations need to be done to determine taxpayer’s qualification fraction percentages if amount dollar_figureb is not a life_insurance_reserve but is included in total_reserves the qualification ratio percentages for year year year and year would be amount f amount g amount h and amount i respectively in such case the taxpayer was not a life_insurance_company in year through year if all of amount dollar_figureb is excluded from both the numerator and the denominator of the qualification fraction the taxpayer’s qualification fraction percentages for year year year and year are amount j amount k amount l and amount m respectively in such case the taxpayer was a life_insurance_company for year through year law and analysis at issue is the application of the sec_816 qualification fraction test more specifically the issue is whether the taxpayer’s reserves under the contracts are life_insurance_reserves as defined by sec_816 if the taxpayer’s reserves under the contracts are not life_insurance_reserves the issue is whether the amounts are excluded from total_reserves by operation of sec_816 the taxpayer’s position is that the reserves under the contracts are not life_insurance_reserves but are included in total_reserves hence the result of the qualification fraction test would be that the taxpayer is not a life_insurance_company assuming the reserves are not life_insurance_reserves exam questions whether the contracts involve a permanent purchase rate guarantee if the contracts do not involve a permanent purchase rate guarantee pursuant to the rule_of sec_816 the reserves federal_income_tax purposes if its life_insurance_reserves plus unearned premiums and unpaid_losses on noncancellable life accident or health policies not included in life_insurance_reserves comprise more than percent of its total_reserves sec_816 postu-111412-16 under the contracts are not included in total_reserves and thus the result of the qualification fraction test would be that the taxpayer is a life_insurance_company as described below the developed facts do not establish whether the reserves for the contracts are life_insurance_reserves advice for further development is provided if the reserves are life_insurance_reserves the taxpayer is a life_insurance_company if the reserves are not life_insurance_reserves and the reserves are included in total_reserves ie are not excluded by sec_816 the taxpayer is not a life_insurance_company life_insurance_reserves a life_insurance_company is an insurance company4 that is engaged in the business of issuing life_insurance and annuity_contracts either separately or combined with accident_and_health_insurance or noncancellable contracts of health and accident insurance if its life_insurance_reserves as defined in sec_816 plus unearned premiums and unpaid_losses whether or not ascertained on noncancellable life accident or health policies not included in life_insurance_reserves comprise more than percent of its total_reserves as defined in sec_816 this computation is sometimes referred to as the qualification fraction or qualification ratio_test life_insurance_reserves are defined as amounts that meet the following three elements they are computed or estimated on the basis of recognized mortality or morbidity tables and assumed rates of interest they are set_aside to mature or liquidate either by payment or reinsurance future unaccrued claims arising from life_insurance annuity and noncancellable accident_and_health_insurance contracts including life_insurance or annuity_contracts combined with noncancellable accident_and_health_insurance involving at the time with respect to which the reserve is computed life accident or health contingencies and they are required_by_law sec_816 regulation sec_1_801-4 presents examples of reserves that qualify as life_insurance_reserves provided among other things they meet the requirements of sec_801 now sec_816 among these examples are reserves held by a life_insurance_company on both the active and retired lives under deposit administration contracts the issue is whether the reserves for the contracts meet the three elements in sec_816 to qualify as life_insurance_reserves the reserves meet the third element because they are required by state law an insurance_company is defined as any company more than half of the business of which during the taxable_year is the issuing of insurance or annuity_contracts or the reinsuring of risks underwritten by insurance_companies sec_816 postu-111412-16 with respect to the second element the issue is whether the contracts are within the scope of sec_816 sec_816 includes contracts that are life_insurance annuity or noncancellable accident_and_health_insurance contracts including a combination the contracts are not life_insurance_contract as defined by sec_7702 and the contracts do not provide any accident_and_health_insurance benefits therefore the contracts are within sec_816 only if the contracts are annuity_contracts a contract may be an annuity if it provides a permanent right to purchase an annuity at a guaranteed purchase rate a permanent purchase guarantee in revrul_77_286 1977_2_cb_228 the service considered an arrangement involving a deposit_administration_contract which contained a limited annuity purchase rate guarantee lasting for an initial period the service ruled that because the contract did not provide for permanent purchase rate guarantees it did not constitute an annuity_contract during its accumulation_phase and accordingly the funds held under the contract were not life_insurance_reserves the corollary is that if such deposit administration contracts provided for permanent purchase rate guarantees the contracts would be annuity_contracts for purposes of sec_816 sec_816 provides that amounts set_aside and held at interest to satisfy obligations under contracts that do not contain permanent guarantees with respect to life accident or health contingencies are not included in the life_insurance_reserve or the total reserve consequently reserves for contracts that do provide for permanent purchase rate guarantees may be included in the life_insurance_reserves provided other requirements are met the legislative_history to sec_816 reports that congress adopted the service’s position in revrul_77_286 that a purchase rate guarantee must be permanent for the reserves with respect to such guarantee to be deemed life_insurance_reserves in general the bill adopts the the act definition of total_reserves however the bill also provides that for purposes of determining whether an insurance_company is a life_insurance_company amounts set_aside and held at interest to satisfy obligations under contracts which do not contain permanent purchase rate guarantees with respect to life accident or health contingencies shall not be included in life_insurance_reserves or in total_reserves thus these amounts are not included in either the numerator or the denominator of the qualification fraction when determining whether a company’s life_insurance_reserves and unearned premiums and unpaid_losses on noncancellable accident_and_health_insurance contracts comprise more than half its total_reserves the internal_revenue_service has ruled that a reserve for a benefit is not a life_insurance_reserve unless a life benefit is permanently guaranteed under the contract postu-111412-16 rev_rul c b the provision of the bill substantially adopts this position and extends it to total_reserves also but only for purposes of the qualification fraction s prt vol i pincite see also h_r rep part pincite in 897_f2d_599 1st cir the issue was whether certain amounts maintained to safeguard the payment of obligations under deposit administration contracts qualified as pension_plan reserves the answer was dispositive of the amount of deduction allowed under then-applicable law attached to unum’s contracts in question was a table that lists the price of a one-dollar monthly annuity for a person depending on age unum guaranteed these prices with respect to any annuity bought with money deposited by the employer during the first five years of the contract’s life regardless of when the annuity was actually bought for money deposited after the initial five-year period unum did not guarantee a price for an annuity the court noted that b ecause the employer can take advantage of the contract’s guaranteed annuity purchase rates at any time even long after the five year period for depositing money to which the rates apply has passed the parties call the annuity price guarantees ‘permanent ’ f 2d pincite here the original purchase rate applies for the duration of a contract albeit only to contributions made during its effective period which is the greater of five years or when the rate is amended and the account value accumulated thereon amended purchase rates if any apply to subsequent contributions and the account value accumulated thereon a guarantee is generally defined to be the assurance that a contract or legal act will be duly carried out black’s law dictionary 10th ed in the context of the qualification fraction the concept of a guarantee is whether there is a legally cognizable promise to perform in the future here the taxpayer has a legally cognizable promise to perform in the future hence there is guarantee that is permanent for the life of a contract accordingly the second element of the definition of a life_insurance_reserve for purposes of the qualification fraction is satisfied the remaining element element one is the requirement that reserves be computed or estimated on the basis of recognized mortality or morbidity tables and assumed rates of interest the taxpayer asserts that the reserve was not so computed or estimated and that the account value was used as the reserve amount however the taxpayer’s actuary attested that the reserve was determined in accordance with presently accepted actuarial standards consistently applied based on actuarial assumptions that produce reserves at least as great as those called for by law as to reserve basis and method the taxpayer does not explain the connection between the use of the account value and the actuarial standards thus it is not clear how the amount of the reserve was actually determined further factual development will be needed to conclude whether the first element of the definition of a life_insurance_reserve for purposes of the qualification fraction is satisfied as a consequence no conclusion can be reached postu-111412-16 with respect to the issue of whether the reserves for the contracts are life_insurance_reserves as defined by sec_816 total_reserves sec_816 defines total_reserves for purposes of the qualification fraction test to be life_insurance_reserves unearned premiums and unpaid_losses whether or not ascertained not included in life_insurance_reserves and all other insurance_reserves_required_by_law sec_1_801-5 provides that the term reserves_required_by_law means reserves which are required either by express statutory provisions or by rules and regulations of the insurance department of a state territory or the district of columbia when promulgated in the exercise of a power conferred by statute and which are reported in the annual_statement of the company and accepted by state regulatory authorities as held for the fulfillment of the claims of policyholders or beneficiaries here if the contracts’ reserves are life_insurance_reserves they are included in total_reserves for purposes of the qualification fraction sec_816 if the contracts’ reserves are not life_insurance_reserves the reserves are required_by_law as that term is defined by sec_1_801-5 because the contracts involves a permanent purchase rate guarantee the reserves are not excluded from total_reserves under sec_816 thus the reserves are included in total_reserves if there were no permanent purchase rate guarantee the reserves would be excluded from both the numerator life_insurance_reserves and the denominator total_reserves of the qualification fraction other considerations the contracts are used to support pension plans consideration could be given to whether any contract fails to meet the requirements of sec_72 if any contract does not provide for distribution as required by sec_72 the contract is not an annuity for federal tax purposes and the reserves on the contracts are not life_insurance_reserves case development hazards and other considerations postu-111412-16 this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information determined to be necessary please contact this office for our views if disclosure is please call if you have any further questions


internal_revenue_service national_office technical_advice_memorandum february tam-150717-03 cc fip number release date index uil no case-mis no ------------------------------------------------- ----------------------------------------- --------------------------- -------------------------- taxpayers’ names taxpayers’ address taxpayers’ identification nos years involved date of conference ---------------------------------- ------------------------------ ---------------------------- ----------------------------------------- ------- --------------------------- legend taxpayer year agent a date date date date date issue ---------------------------------- ------- --------------- ------------------ -------------- --------------------------- ------------------------ ----------------------- did taxpayer elect under sec_475 of the internal_revenue_code to change to the mark-to-market method_of_accounting beginning with the year tax_year tam-150717-03 conclusion taxpayer did not elect under sec_475 to change to the mark-to-market method_of_accounting beginning with the year tax_year facts taxpayer traded stocks and bonds for calendar_year year taxpayer asserts that beginning in date the trading activity was substantial enough to enable taxpayer to qualify as a trader in securities taxpayer intending to make an election under sec_475 filed a form_3115 application_for change in accounting_method with the internal_revenue_service national_office on date a copy of the form_3115 was mailed to agent a an internal revenue_agent on date a copy of the form_3115 also was attached to taxpayer’s year individual tax_return received by the internal_revenue_service the service on date a statement electing to use the mark-to- market method_of_accounting beginning with the year tax_year was attached to the form_3115 taxpayer had been accounting for stocks and bonds using the cash_method_of_accounting the due_date without regard to extensions of the original federal_income_tax return for the taxable_year immediately preceding year was date law and analysis based on the intent of the legislative_history and under the authority granted by sec_475 provides that a person who is engaged in a trade_or_business as a trader in securities may elect to change to the mark-to-market method_of_accounting for securities held in connection with such trade_or_business the legislative_history to sec_475 states that the mark-to-market_election will be made in the time and manner prescribed by the secretary h_r rep no 105th cong 1st sess 1997_4_cb_444 sec_7805 provides that except to the extent otherwise provided by the code any election under this title shall be made at such time and in such manner as the secretary shall prescribe the code the service published revproc_99_17 1999_1_cb_503 section a portion of the revenue_procedure that is not relevant to answering the issue of this ruling was superseded by revproc_2002_9 c b revproc_99_17 provides the exclusive means of making an election under sec_475 including when and how sec_301_9100-1 of the procedure and administration regulations provides in relevant part that the commissioner has discretion to grant a reasonable extension of time to make a regulatory election sec_5 of revproc_2004_1 2004_1_irb_1 provides that a request for an extension must be through a letter_ruling request taxpayer previously requested such relief but withdrew the request when the service proposed to rule adversely tam-150717-03 the election is made section dollar_figure of revproc_99_17 provides the mandatory procedure for certain traders including taxpayer to make an effective sec_475 election the election is made by filing a statement describing the election the first taxable_year for which the election is effective and the trade_or_business for which the election is made this statement must be filed not later than the due_date without regard to extensions of the original federal_income_tax return for the taxable_year immediately preceding the election_year and the statement must be attached either to that return or if applicable to a request for an extension of time to file that return income_tax return for the taxable_year immediately preceding the election_year was date in accordance with revproc_99_17 taxpayer had until date to make the election for year however taxpayer did not file the election statement until date because taxpayer failed to file the election statement within the time period provided by revproc_99_17 a mandatory prerequisite for making the election under sec_475 and because the revenue_procedure provides the exclusive means of making the election taxpayer has not made a timely election to use the mark-to-market method_of_accounting consequently taxpayer cannot change to the mark-to-market method_of_accounting for the year tax_year but must continue to use the cash_method according to the information submitted the due_date of taxpayer’s federal caveat s for purposes of this ruling taxpayer is treated as qualifying as a trader in securities however we have neither considered nor determined if taxpayer qualifies as a trader in securities and therefore no inference should be drawn from this ruling in determining if taxpayer is a trader in securities a copy of this technical_advice_memorandum is to be given to the taxpayer s sec_6110 of the code provides that it may not be used or cited as precedent


wyitiral elime duwume index no cc dom p si - plr-103477-99 may date year dear mr this is in reply to a letter dated date and subsequent correspondence submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x began doing business a as x's president represents that it was the on date intent of x's shareholders a and his spouse that x elect to be an s_corporation effective for year however a form_2553 election by a small_business_corporation was not timely filed for that year by x because the person who the shareholders relied on to handle the s election did not do so their individual returns consistent with x's having made a timely s election for year xx filed a form_1120s for year and x's shareholders filed x's first taxable_year sec_1362 of the code provides that if -- a an is made for any taxable_year after the election under sec_1362 for making such election for such date prescribed by sec_1362 taxable_year or no such election is made for any taxable_year and for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year the secretary determines that there was reasonable_cause b based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an corporation for x's first taxable_year accordingly provided x makes an election to be an sb corporation by filing a completed form_2553 with the appropriate service_center effective for its year taxable_year within days following the date of this letter then such election will be treated as timely made for x's year taxable_year a copy of this letter should be attached to the form_2553 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code including a small_business_corporation under sec_1361 whether x was or of the code is this ruling is directed only to the taxpayer who requested of the code provides that it may not be sec_6110 it used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to x's authorized representative sincerely yours signed j thomas hines j thomas hines senior technician reviewer branch office of the assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


department of the treasury internal_revenue_service washington d c c tax_exempt_and_government_entities_division apr uniform issue list xxxxxxkxxxkx xxxxxxkxxxx xxxxkxxxxxx legend taxpayer a ira x amount c date xxxxxxxkxxkxk xxxxxxkxxkxkx xxxxxxxxkx xxxxxkxxxkx xxxxxxkxxkx - ‘ tiler ray tlv dear xxxxxxxxxx this is in response to your request for a private_letter_ruling submitted on date as supplemented by correspondence submitted on date date and date in which you request a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code the code’ the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a age represents that he received a distribution from ira x totaling amount c on date taxpayer a asserts that his failure to accomplish a rollover within the 60-day period prescribed by sec_408 of the code was because he forgot to deposit the check ina rollover account taxpayer a represents that he did not deposit the distribution check he received on date in any account taxpayer a represents that in february of ira x which was an ira cd matured rather than renew ira x taxpayer a took a distribution by check because interest rates were low taxpayer a represents that he intended to roll amount c over into another ira cd with better interest rates or a non-cd investment within the day period taxpayer a represents that he inadvertently left the check among financial papers and overlooked rolling it over on the date he requested the ruling taxpayer a found the check among financial records and realized that he had not deposited it in a rollover ira account based on the facts and representations taxpayer a requests a ruling that the internal_revenue_service waive the 60-day rollover requirement contained in sec_408 of the code with respect to the distribution of amount c from ira x sec_408 of the code provides that except as otherwise provided in sec_408 d any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if-- i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 of the code sec_408 of the code provides that the secretary may waive the 60-day requirement under sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 of the code revproc_2003_16 2003_4_irb_359 date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the service has the authority to waive the day requirement for a rollover to another ira where the individual was prevented from completing a rollover in a timely manner because of circumstances described in sec_408 of the code or revproc_2003_16 here taxpayer a has indicated that he failed to timely accomplish a rollover because he inadvertently forgot to do so taxpayer a has neither presented any evidence to the service as to how any of the factors outlined in revproc_2003_16 affected his ability to timely roll over amount c to an ira nor has he provided any evidence of events beyond his reasonable control which would have prevented him from accomplishing a timely rollover under the circumstances presented in this case the service hereby declines to waive the 60-day rollover requirement with respect to the distribution of amount c from ira x thus the contribution of amount c to an ira will not be considered a valid rollover_contribution within the meaning of sec_408 of the code because the 60-day rollover requirement was not satisfied no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent if you wish to inquire about this ruling please contact xxxxxxxxxx by phone at _ please address all correspondence to se t ep ra t2 donzell h employee_plans technical group d meeps tthe ha littlejohn manager deleted copy of ruling letter notice of intention to disclose enclosures sincerely


t c summary opinion united_states tax_court ronald l heidrick petitioner v commissioner of internal revenue respondent docket no 9964-00s filed date dennis r watt for petitioner jeremy l mcpherson for respondent couvillion special_trial_judge this case was heard pursuant to sec_7463 of the internal_revenue_code in effect at the time the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the years at issue all rule references are to the tax_court rules_of_practice and procedure respondent determined deficiencies of dollar_figure dollar_figure and dollar_figure in petitioner’s federal income taxes for and respectively a dollar_figure addition_to_tax under sec_6651 for and accuracy-related_penalties under sec_6662 in the amounts of dollar_figure dollar_figure and dollar_figure respectively for the years at issue the issues for decision are whether petitioner’s gold mining activity was an activity_not_engaged_in_for_profit under sec_183 during the years in question whether petitioner is entitled to certain deductions attributable to the activity whether petitioner is liable for an addition_to_tax under sec_6651 for and whether petitioner is liable for accuracy-related_penalties under sec_6662 for and some of the facts were stipulated those facts with the exhibits annexed thereto are so found and are made part hereof petitioner’s legal residence at the time the petition was filed was georgetown california during the years at issue petitioner worked as a deck engineer and hydraulic equipment operator for a dredging and numerous other issues were settled by the parties both prior to and during trial involving a child care tax_credit a cost_of_goods_sold deduction certain unreimbursed employee business_expenses the amount of applicable self-employment_tax and amounts allowable on schedule c profit or loss from business as expenses relating to the business activity at issue construction company his employer was not in the gold mining business petitioner began searching for gold using a pan shovel and pick in in using his knowledge of dredging gained from his employment he began mining for gold in rivers and streams in the foothills of mountains petitioner maintained his regular job expecting that the mining activity would supplement his income he mined sometimes at night but mostly on weekends because of the demands of his regular job he was able to perform additional mining during layoff periods petitioner read mining literature and attended a few meetings with others interested in gold mining but otherwise had no formal training in the activity he admired the work of author dave mccracken who has made a profit in gold dredging according to petitioner the mccracken operation enlists others to dredge for the gold that mccracken ultimately keeps other than a window-washing business in or petitioner was not engaged in other trade_or_business activities petitioner’s gold mining activity involved time effort money and risk after identifying a site for prospecting petitioner would haul heavy dredging equipment to the site he was a certified scuba diver to search for gold he would dive to depths of to feet and operate the dredging equipment for up to to hours mud gravel and other material from the river were brought up and screened through what was referred to as a sluice box any gold found would remain in the sluice box and the remaining material was returned to the river petitioner thereafter refined the material from the sluice box at his home and garage whatever gold petitioner refined was stored in glass vials that held or ounces each other than these vials petitioner did not keep records of the amounts of his gold recoveries he usually kept the vials in ammunition boxes buried underwater near his mining sites in petitioner brought his gold home to bottle and weigh it and it was stolen froma desk at his home a police report was filed petitioner estimates that the gold that was stolen was worth dollar_figure following the theft to the time of trial petitioner amassed approximately pounds of gold measured troy ounces to the pound petitioner sold dollar_figure dollar_figure and dollar_figure worth of gold in and respectively which he reported on his income_tax returns for those years in each of the years through petitioner sold less than dollar_figure worth of gold in the years at issue petitioner made all of his sales to petitioner did not claim a casualty_loss deduction for the theft and that question was not presented to the court ‘ petitioner estimated his accumulated gold to be worth approximately dollar_figure at the time of trial the same local jeweler but kept no receipts to document the transactions during the years at issue petitioner kept a calendar that contained notations of his mileage location dates worked at the gold mining activity and some expenditures he wrote san andreas cement plant or other notations on days he was dredging or tending to his equipment these calendars indicate that petitioner worked approximately days during and days during either dredging for gold or working at home on his gold dredging equipment no calendar for was introduced into evidence nor was any testimony offered as to how much time petitioner spent on his activity that year with respect to expenses_incurred in the gold mining activity petitioner did not keep a general ledger or other formal records he kept some store receipts and canceled checks for items purchased for the mining operation and had photographs of his dredging and gold mining equipment other expenses and items such as mileage were documented only by notations on petitioner’s calendar or using receipts handwritten by petitioner or acquaintances who had sold petitioner pieces of equipment at least some of these homemade receipts were not prepared contemporaneously with the transactions rather petitioner admitted that he took inventory and gathered his receipts in about the same time he filed his returns for the years at issue petitioner utilized numerous items of equipment tools and supplies in his gold mining activity these items included dredges trailers winches tools dive gear rigging a ford truck a smoker craft a chevrolet van anda toyota petitioner performed his mining activity alone using this equipment petitioner filed his and federal_income_tax returns on date beginning with the return petitioner reported the income and expenses from his gold mining activity on schedule c profit or loss from business on his tax returns petitioner reported wage income of dollar_figure dollar_figure and dollar_figure respectively for and he reported unemployment_compensation of dollar_figure in dollar_figure in and dollar_figure in and on schedules c of his returns he reported gross_receipts from the sale of gold in the amounts of dollar_figure in dollar_figure in and dollar_figure in petitioner claimed depreciation_deductions of dollar_figure in dollar_figure in and dollar_figure in in petitioner reduced his gross_receipts by cost_of_goods_sold of dollar_figure petitioner reported net losses from his gold mining activity of dollar_figure in a dollar_figure cost_of_goods_sold claimed on the return and disallowed by respondent was conceded by petitioner dollar_figure in and dollar_figure in petitioner also experienced net losses from the gold mining activity in the years subseguent to the years at issue respondent determined that petitioner’s gold mining activity was not an activity engaged in for profit under sec_183 on this and all other issues petitioner bears the burden_of_proof sec_183 provides that if an activity engaged in by an individual is not engaged in for profit no deduction attributable to such activity shall be allowed except as provided in sec_183 to deduct expenses of an activity under either sec_162 or sec_212 and thus avoid the limitations of sec_183 a taxpayer must show that he or she engaged in or carried on the activity with the objective of making a profit see sec_1 a income_tax regs in the u s court_of_appeals for the ninth circuit ’ a taxpayer must show that the activity was sec_7491 provides that under certain circumstances the burden_of_proof is on the secretary with respect to a taxpayer’s liability for taxes penalties and additions to tax in court proceedings arising in connection with examinations commencing after date the parties stipulated that the examination of petitioner’s returns commenced prior to date but for the provisions of sec_7463 the decision in this case would be appealable to the u s court_of_appeals for the ninth circuit see sec_7482 a this court generally applies the law in a manner consistent with the holdings of the continued entered into with the dominant hope and intent of realizing a profit 4_f3d_709 9th cir profit must be the predominant primary or principal objective affg tcmemo_1991_212 933_f2d_757 9th cir machado v commissioner tcmemo_1995_526 affd without published opinion 119_f3d_6 9th cir warden v commissioner tcmemo_1995_176 affd without published opinion 111_f3d_139 9th cir this court considers whether an activity is engaged in for profit ona case by case basis taking into account the facts and circumstances involved see 72_tc_411 affd without published opinion 647_f2d_170 9th cir the taxpayer’s expectation of profit need not be reasonable but it must be established that the activity was conducted with a good_faith expectation of making a profit 72_tc_659 golanty v commissioner supra pincite sec_1_183-2 income_tax regs in assessing a profit_motive greater weight is given to objective facts over the taxpayer’s mere statement of intent 781_f2d_724 9th cir continued court_of_appeals to which an appeal of its decision lies 54_tc_742 affd 445_f2d_985 10th cir even in cases subject_to sec_7463 affg lahr v commissioner tcmemo_1984_472 sec_1_183-2 income_tax regs a nonexclusive list of factors set forth in the income_tax regulations guides the sec_183 analysis by providing relevant facts and circumstances to be considered in determining whether the requisite profit objective has been shown these factors include the manner in which the taxpayer carried on the activity the expertise of the taxpayer or his advisers the time and effort expended by the taxpayer in carrying on the activity the expectation that assets used in the activity may appreciate in value the success of the taxpayer in carrying on similar or dissimilar activities the taxpayer’s history of income or loss with respect to the activity the amount of occasional profit if any which is earned the financial status of the taxpayer and whether elements of personal pleasure or recreation are involved sec_1_183-2 income_tax regs although no one factor is conclusive a record of substantial losses over many years and the unlikelihood of achieving a profit are indicative that an activity is not engaged in for profit 28_f3d_1024 10th cir affg 99_tc_132 in evaluating the foregoing factors the court may consider evidence from years subsequent to the years in issue to -- - the extent it may create inferences regarding the existence of a profit_motive in the earlier years hillman v commissioner tcmemo_1999_255 citing hoyle v commissioner t c memo a ctual profits or losses in those and subsequent years have probative although not determinative significance in such evaluation smith v commissioner tcmemo_1993_140 the fact that the taxpayer carries on an activity ina businesslike manner and maintains complete and accurate books_and_records may indicate that the activity is engaged in for profit sec_1_183-2 income_tax regs other indicia of a profit objective include carrying on an activity in a manner substantially_similar to other activities of the same nature that are profitable changing operating methods adopting new techniques or abandoning unprofitable methods in a manner consistent with an intent to improve profitability id gold mining and other similar speculative activities are different from most other business activities because they generally produce no significant income until a find is made and then the income is earned in one lump sum in harrison v commissioner tcmemo_1996_509 this court found that a taxpayer’s contemporaneous handwritten lists of expenses were sufficient records of his gold mining and treasure salvaging activity for purposes of sec_183 the court acknowledged in that case the treasure hunting activity was different from petitioner’s other businesses different record keeping methods are therefore expected and lack of record keeping is not determinative of intent treasure hunting is not the type of business where thorough records of gains and losses are necessary to a successful operation cf farrell v commissioner tcmemo_1983_542 this type of activity is likely to generate only expenditures with no income until a find is made at which time the income will come in one lump sum therefore we find that contemporaneous handwritten lists of expenses were sufficient records for this type of activity in this case petitioner did not maintain any contemporaneous written record of the timing location and amount of gold he recovered he stored his gold in vials that would hold only specified amounts while the vials could provide some visual indication of the amount of gold on hand they were kept buried in ammunition boxes under water at dredging sites making regular visual inventory difficult he maintained no records of the gold so stored such a practice while permissible is hardly businesslike in addition when petitioner sold small amounts of gold he kept no receipts petitioner did maintain some written records of his expenses although not in an organized or systematic way and not in harrison v commissioner tcmemo_1996_509 the court treated the taxpayer’s gold mining and treasure salvaging operations as one activity for purposes of sec_183 for all his expenses these records mainly consisted of canceled checks some store receipts a significant number of handwritten self-prepared or general purposes receipts and calendars for and with notations indicating locations mileage anda few expenses on given dates some of these expense records were obviously prepared for trial unlike the taxpayer in harrison v commissioner supra petitioner did not keep records contemporaneously with his expenditures at least not consistently no calendar for was introduced into evidence the manner in which petitioner kept records of his activity was not in the traditional sense businesslike the conclusion reached in massingill v commissioner tcmemo_1996_162 affd without published opinion 156_f3d_1237 9th cir also applies here petitioner’s compendium is not an adequate substitute for books_or_records of income and expenses the nonbusinesslike manner in which petitioner conducted his gold mining activity weighs against him in the determination of whether the activity was carried on for profit even with due recognition of the speculative nature of gold mining and prospecting petitioner did not demonstrate that he kept the kinds of books_and_records that would have enabled him to evaluate the financial condition of his mining activities nor did petitioner use his records to optimize profitability in tinnell v commissioner tcmemo_2001_106 the court stated the purpose of maintaining books_and_records is more than to memorialize for tax purposes the existence of the subject transactions it is to facilitate a means of periodically determining profitability and analyzing expenses such that proper cost saving measures might be implemented ina timely and efficient manner citations omitted see also steele v commissioner tcmemo_1983_63 checks served as adequate substantiation for claimed expenses but were not businesslike records this factor favors respondent preparation for the activity by extensive study of its accepted business economic and scientific practices or consultation with people who are expert in these practices may indicate a profit objective where the taxpayer carries on the activity in accordance with such practices sec_1_183-2 income_tax regs petitioner had personal experience that enabled him to conduct his gold mining activity he knew dredging from his primary job as a deck engineer and hydraulic equipment operator he was a certified scuba diver he was skilled in the use of dredging equipment he studied mining literature and attended a few meetings with others interested in gold mining he gained gold dredging experience from years of prospecting prior to however petitioner did not consult with experts in the manner designed to establish how such an activity could be conducted profitably petitioner’s gold mining efforts including those made in the years prior to those at issue had yielded what he valued as dollar_figure worth of gold all of which was stolen in thereafter he accumulated what he estimated to be dollar_figure worth of gold from the time of the theft to the time of trial considering the expenses petitioner claimed for the years at issue with the dollar_figure he accumulated in gold the court is skeptical that petitioner achieved a reasonable return petitioner believed that increasing his profitability was simply a matter of having more time to mine yet he did not increase his time in mining this factor favors respondent the fact that the taxpayer devotes much of his personal time and effort to carrying on an activity particularly if the activity does not have substantial personal or recreational aspects may indicate an intention to derive a profit daley v commissioner tcmemo_1996_259 sec_1_183-2 income_tax regs a taxpayer’s withdrawal from another occupation to devote most of his energies to the activity may also be evidence that the activity is engaged in for profit sec_1_183-2 income_tax regs because petitioner had a full-time job during the years in question his time spent on the gold mining activity was necessarily limited primarily to weekends and layoff periods the record reflects that petitioner spent approximately days during and days during either working on the gold -- - mining activity or working at home on the equipment used in the activity although no calendar for was introduced the court infers a similar amount of activity for given the record as a whole moreover the activity was conducted regularly throughout the years at issue and occasionally petitioner took time off from his regular job to attend to his dredging equipment the court is satisfied that petitioner’s activity was not primarily recreational on this record petitioner’s expenditures of time and effort imply a profit objective this factor weighs in petitioner’s favor the term profit encompasses appreciation in the value of assets such as land used in an activity sec_1_183-2 income_tax regs the equipment petitioner used in his gold mining activity could only depreciate in the absence of any property with substantial appreciation potential the court does not consider this factor significant the fact that a taxpayer has engaged in similar activities in the past and converted them from unprofitable to profitable enterprises may indicate that he is engaged in the present activity for profit even though the activity is presently unprofitable sec_1_183-2 income_tax regs the record reflects only one other entrepreneurial activity by petitioner a window cleaning business he operated in or -- - petitioner started that business as he put it just to put food in my gut and kept a log book of accounts and appointments petitioner’s window cleaning business experience is not particularly useful in deciding whether the gold mining activity was engaged in for profit the two activities were fundamentally different no evidence was offered on the window cleaning business at most his experience in the other business should have instilled in petitioner the need for complete and accurate books_and_records which petitioner did not carry over to his gold mining activity this factor favors respondent a series of losses during the initial or startup stage of an activity may not necessarily be an indication that the activity is not engaged in for profit however where losses continue beyond a period that would customarily be necessary to bring the operation to profitable status such continued losses if not explainable as customary business risks or reverses may be indicative that the activity is not engaged in for profit a series of years in which net_income was realized would indicate that the activity 1s engaged in for profit sec_1_183-2 income_tax regs the profit loss history of petitioner’s gold mining activity for the years at issue is summarized as follows gold sales sch c expenses net_income loss_year reported reported from gold mining s dollar_figure dollar_figure big_number big_number big_number big_number big_number petitioner also reported a net_loss of dollar_figure for similarly petitioner did not make a net profit from his gold mining activity in or although at trial he did not know the exact amounts of his losses for those years thus in years of operations which do not include his prospecting years prior to petitioner has established only a string of losses with no indication of realizing any profit as this court has stated we recognize that gold mining is a risky business and also that if it is successful it will pay off well and that some people are willing to take the risk for the anticipated reward but where as here efforts had been made to mine this property for years according to the evidence without sufficient production to report any income from mining it would be a pipe dream to expect to make a profit without some change_in_circumstances and there is no evidence that changes were made that would materially increase production cannon v commissioner tcmemo_1990_148 affd 949_f2d_345 10th cir this factor favors respondent the amount of profits in relation to the amount of losses_incurred and in relation to the amount of the taxpayer’s investment and the value of the assets used in the activity may provide useful criteria in determining the taxpayer’s objective -- - an occasional small profit from the activity generating large losses or from an activity in which the taxpayer has made a large investment would not generally be determinative that the activity is engaged in for profit however substantial profit though only occasional would generally be indicative that an activity is engaged in for profit where the investment or losses are comparatively small moreover an opportunity to earn a substantial ultimate profit ina highly speculative venture is ordinarily sufficient to indicate that the activity is engaged in for profit even though losses or only occasional small profits are actually generated sec_1_183-2 income_tax regs in none of the years that petitioner carried on the activity did he ever realize a net profit the record demonstrates an activity generating large losses without even an occasional profit such evidence does not support the conclusion that the activity 1s engaged in for profit in addition the record does not reveal a an opportunity to earn a substantial ultimate profit in a highly speculative venture see id while gold mining is highly speculative petitioner presented no evidence of being able to achieve a substantial ultimate profit he did not change his methodology or consult experts to improve his profitability he believed it was simply a matter of having more time yet he could not devote more time to the activity because of his other gainful employment and he was not willing to give up his gainful employment to devote more time to gold mining petitioner therefore has not shown that a profit was attainable cf tinnell v commissioner tcmemo_2001_106 occasional profits factor favored the taxpayer’s position where objective facts supported his contention that a profit from a mining venture was attainable this factor favors respondent the fact that the taxpayer does not have substantial income or capital from sources other than the activity may indicate that an activity is engaged in for profit substantial income from sources other than the activity particularly if the losses from the activity generate substantial tax benefits may indicate that the activity is not engaged in for profit especially if there are personal or recreational elements involved sec_1 b income_tax regs petitioner supported himself during the years at issue with wages earned in his primary job as a deck engineer and hydraulic equipment operator his wage and unemployment income increased significantly during these years from dollar_figure in to dollar_figure in and dollar_figure in at the same time petitioner reported net losses of dollar_figure in dollar_figure in and dollar_figure in from his gold mining activity these losses in effect sheltered substantial amounts of petitioner’s salary and wage income this factor favors respondent - - the presence of personal motives in carrying on an activity may indicate that the activity is not engaged in for profit especially where there are recreational or personal elements involved sec_1_183-2 income_tax regs petitioner’s activity was risky laborious and time consuming it involved back-breaking work underwater diving for extended periods travel and hauling operating and maintaining heavy equipment although petitioner obviously derived some element of enjoyment from the activity the small element of personal pleasure did not outweigh the work element enjoyment is not prohibited in an activity engaged in for profit and suffering has never been made a prerequisite to deductibility 59_tc_312 this factor favors petitioner on this record the court holds that petitioner did not engage in the activity of gold mining during and with the bona_fide objective of making a profit within the intent and meaning of sec_183 accordingly petitioner is entitled to deductions related to the activity only as provided in sec_183 respondent is sustained on the principal issue the second issue is whether petitioner is entitled to a deduction of any expenses_incurred in connection with his gold mining activity in the case of an activity_not_engaged_in_for_profit sec_183 allows a deduction for expenses that are otherwise deductible without regard to whether the activity --- - is engaged in for profit sec_183 allows a deduction for expenses that would be deductible only if the activity were engaged in for profit but only to the extent that the total gross_income derived from the activity exceeds the deductions allowed by sec_183 b as noted earlier petitioner reported gross_sales of gold of dollar_figure dollar_figure and dollar_figure respectively for each of the years at issue under sec_183 petitioner is entitled to deduct expenses up to the amount of his gross_sales even though the activity was not engaged in for profit in the notice_of_deficiency respondent disallowed all the expenses claimed on schedule c of petitioner’s return for each of the years in guestion for lack of substantiation petitioner was not allowed deductions equal to the gross_receipts he reported for each of the years in question although as noted earlier petitioner’s books_and_records did not satisfy the recordkeeping requirements of the code the court is nevertheless satisfied on this record that petitioner incurred expenses equal to the gross_sales he reported for the years in guestion on the basis of 39_f2d_540 2d cir petitioner is allowed deductions of dollar_figure dollar_figure and dollar_figure with respect to his gold mining activity for and respectively -- - the third issue is whether petitioner is liable for the addition_to_tax under sec_6651 for failure_to_file a timely return for sec_6651 provides for an addition_to_tax if a tax_return is not filed timely unless the taxpayer establishes that the failure_to_file did not result from willful neglect and that the failure_to_file was due to reasonable_cause willful neglect has been construed to mean a conscious intentional failure or reckless indifference 469_us_241 reasonable_cause_generally requires a taxpayer to demonstrate that he or she exercised ordinary business care or prudence sec_301_6651-1 proced admin regs petitioner’s tax_return was signed on date and received by respondent on date that return was thus filed more than year after its due_date of date petitioner presented no evidence of reasonable_cause or the lack of willful neglect for the late filing of his return respondent is sustained on this issue the final issue is whether petitioner is liable for accuracy-related_penalties for the years and sec_6662 provides for an accuracy-related_penalty egual to percent of any portion of an underpayment_of_tax required to be shown on the return that is attributable to the taxpayer’s negligence or disregard of rules or regulations sec - - a and b negligence consists of any failure to make a reasonable attempt to comply with the provisions of the internal_revenue_code and disregard consists of any careless reckless or intentional disregard sec_6662 the courts have refined the code definition of negligence as a lack of due care or failure to do what a reasonable and prudent person would do under similar circumstances 925_f2d_348 9th cir affg t cc an exception to the sec_6662 penalty applies when the taxpayer demonstrates there was reasonable_cause for the underpayment and the taxpayer acted in good_faith with respect to the underpayment sec_6664 whether the taxpayer acted with reasonable_cause and in good_faith is determined by the relevant facts and circumstances see stubblefield v commissioner tcmemo_1996_537 citing 104_tc_352 sec_1_6664-4 income_tax regs the most important factor is the extent of the taxpayer’s effort to assess the proper tax_liability stubblefield v commissioner supra citing beard v commissioner t c memo sec_1_6664-4 income_tax regs under sec_1_6664-4 income_tax regs circumstances that may indicate reasonable_cause and good_faith include an honest misunderstanding of fact or law that is reasonable in light of all the facts and circumstances including -- - the experience knowledge and education of the taxpayer moreover a taxpayer is generally charged with knowledge of the law 99_tc_202 although a taxpayer is not subject_to the addition_to_tax for negligence where the taxpayer makes honest mistakes in complex matters the taxpayer must take reasonable steps to determine the law and to comply with it id the court holds that petitioner acted negligently with respect to the underpayment in this case ‘ negligence’ includes any failure by the taxpayer to keep adequate books_and_records or to substantiate items properly sec_1_6662-3 income_tax regs petitioner failed to keep adequate books_and_records in light of his filing history and the conclusions with respect to the gold mining activity it is clear that petitioner made no honest attempt to determine the correctness of his deductions respondent is sustained on this issue reviewed and adopted as the report of the small_tax_case division decision will be entered under rule


t c summary opinion united_states tax_court charles wendell harkey sr and barbara anne harkey petitioners commissioner of internal revenue respondent v docket no 18187-02s filed date charles wendell harkey sr pro_se nancy e hooten for respondent armen special_trial_judge this case was heard pursuant to the provisions of sec_6330 and sec_7463 of the internal_revenue_code in effect at the time that the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority unless otherwise indicated subsequent references to sections other than sec_6330 and sec_6320 are to the internal_revenue_code_of_1986 as amended or in effect for and respondent issued to petitioners a notice_of_determination concerning collections action s under sec_6320 and or for unpaid federal income taxes and related liabilities for the taxable years and in the amounts per collection notices dated date of dollar_figure and dollar_figure respectively the issues for decision are whether petitioners are liable for the unpaid federal income taxes reported on their and delinquent income_tax returns we hold that they are whether petitioners are liable for a additions to tax under sec_6651 for failure to timely file their and income_tax returns b additions to tax under sec_6651 for failure to timely pay the unpaid tax reported on their and income_tax returns c an addition_to_tax under sec_6654 for failure to pay estimated_tax in and d interest in respect of their unpaid income_tax and related liabilities for the taxable years and we hold that they are whether respondent abused his discretion in determining that the levy action against petitioners may proceed we hold that he did not background some of the facts have been stipulated and they are so found petitioners resided in atlanta georgia at the time that their petition was filed with the court a petitioners’ liability for on or before date petitioners filed form_4868 extension of time to file u s individual_income_tax_return and were granted an automatic 4-month extension of time to file their federal_income_tax return for however petitioners did not file their form_1040 u s individual_income_tax_return until date some months after the due_date as extended see sec_6072 a on their income_tax return petitioners reported total_tax of dollar_figure total payments of dollar_figure and amount owed of dollar_figure petitioners did not enclose payment with their return of any part of the liability reported thereon on date respondent assessed against petitioners income_tax in the amount of dollar_figure an addition_to_tax under sec_6651 for failure to timely file in the amount of dollar_figure an addition_to_tax under sec_6651 for failure to timely pay in the amount of dollar_figure and interest in the amount of dollar_figure on that same day respondent sent petitioners a notice of balance due informing them that they had a liability for and requesting that they pay it petitioners failed to do so other than as mentioned in the following paragraph on date and date respondent applied overpayment credits from petitioners’ account for the taxable_year in the amounts of dollar_figure and dollar_figure respectively to petitioners’ outstanding liability for subsequently on date respondent posted another dollar_figure payment to petitioners’ account for other than the foregoing no credits or payments have been made to petitioners’ account for b petitioners’ liability for on date petitioners filed form_1040 for some months after its due_date see sec_6072 on their income_tax return petitioners reported total_tax of dollar_figure total payments of dollar_figure and amount owed of dollar_figure petitioners did not enclose payment with their return of any part of the liability reported thereon on date respondent assessed against petitioners income_tax in the amount of dollar_figure an addition_to_tax under sec_6654 for failure to pay estimated_tax in the amount of dollar_figure an addition_to_tax under sec_6651 for failure to timely file in the amount of dollar_figure an addition_to_tax under sec_6651 for failure to timely pay in the amount of dollar_figure and interest in the amount of dollar_figure also on july the amount owed included dollar_figure for estimated_tax penalty respondent sent petitioners a notice of balance due informing them that they had a liability for and requesting that they pay it petitioners have made no payments to their account for c collection-related matters at the administrative level on date respondent sent petitioners a final notice notice_of_intent_to_levy and notice of your right to a hearing in respect of their outstanding tax_liabilities for and on date petitioners filed with respondent form request for a collection_due_process_hearing the request stated only that i have never recieved sic notice of this tax on date an administrative hearing was conducted by respondent’s appeals_office in atlanta georgia at the administrative hearing petitioners repeated their assertion that they had not received any notice that there was tax due for either or petitioners also stated that they did not have any income_tax_liability for either of those years also discussed at the administrative hearing was an installment_agreement such collection alternative did not prove to be feasible however because as explained by the appeals officer in his case memo petitioners reserved the right to dispute the tax for the and tax_year s on date respondent sent petitioners a notice_of_determination concerning collection action s under sec_6320 and or notice_of_determination with regard to their tax_liabilities for and in the notice_of_determination the appeals_office stated that respondent’s determination to proceed with collection by way of levy should be sustained d petitioners’ petition on date petitioners filed a petition for lien or levy action under code sec_6320 or sec_6330 the petition in the petition petitioners allege as follows we claim we do not owe these taxes upon several requests to the internal_revenue_service they were unable to support their claim to notice_of_deficiency with any documentation other than a transcript my accountant has disposed of these records as well as barbara and myself the petitioners e pretrial developments after this case had been calendared for trial respondent filed a motion for summary_judgment the motion in the motion respondent alleged that the sole issue presented in this case is whether petitioners are precluded from challenging the liability they asserted on their originally filed returns in a collection_due_process_hearing relying on sec_6330 respondent took the position that petitioners were precluded as a matter of law from challenging the liabilities reported by them on their and returns respondent attached to his motion inter alia copies of petitioners’ federal_income_tax returns for and and a form_4340 certificate of assessments payments and other specified matters for each of the years in issue shortly before trial petitioners filed a response to respondent’s motion in their response petitioner charles wendell harkey alleged in part as follows i do not owe these taxes but have no supporting documents the irs has not presented me with any documents from the last ten years showing me that they have tried to collect which translates into i don’t owe these taxes and that this is harassment i have appealed this collection on that basis and will present this as my case on my court date of date when this case was called from the calendar at the trial session the court advised the parties that under the circumstances then extant the court was not inclined to rule on respondent’s motion and that the case would therefore proceed to trial the following day when this case was called for trial the parties tendered and the court filed a stipulation of facts attached to which were the same exhibits that accompanied respondent’s motion discussion at trial petitioners raised issues that arguably went beyond the scope of the issues defined in the petition cf rule b however respondent did not object accordingly we all rule references are to the tax_court rules_of_practice and procedure regard such issues as having been tried by consent and they shall be treated as if they had been raised in the petition see rule b a petitioners’ liability for unpaid taxes for the sake of convenience we shall assume without prejudice that petitioners may challenge the existence or amount of their underlying tax_liability for each of the years in issue petitioners’ challenge however is to no avail because at trial petitioners failed to introduce any evidence whatsoever that their tax_liabilities were other than what they themselves reported on their and federal_income_tax returns in addition the fact that petitioners or their accountant may have disposed of all of their records for and does not in any way absolve petitioners from liability for the income taxes that they themselves reported on their and federal_income_tax returns if petitioners disposed of all of their records before their liabilities were satisfied then petitioners have no one to blame but themselves if it was their accountant who did so then petitioners should look to him it is also no excuse to profess that i have never recieved sic notice of this tax after all the liabilities at issue are nothing other than the liabilities reported by petitioners themselves on their and delinquent income_tax returns finally we observe that the period of limitations on collection of petitioners’ outstanding liabilities for and has not expired sec_6502 accordingly the fact that respondent may not have taken collection action against petitioners immediately after assessment of the liabilities in issue is of no moment b petitioners’ liability for additions to tax and interest we turn now to what we understand to be petitioners’ contention that the court should review respondent’s failure to abate additions to tax penalties and interest with respect to and initially it should be recalled that petitioners filed their income_tax return some months late and did not enclose payment with their return of any part of the liability reported thereon consequently respondent assessed against petitioners an addition_to_tax under sec_6651 for failure to timely file and an addition_to_tax under sec_6651 for failure to timely pay similarly petitioners filed their income_tax return some months late did not enclose payment with their return of any part of the liability reported thereon and reported liability for an estimated_tax penalty consequently respondent assessed against petitioners an addition_to_tax under sec_6651 for failure to timely file an addition_to_tax under sec_6651 for failure to timely pay and an addition_to_tax under sec_6654 for failure to pay estimated_tax the record does not demonstrate that petitioners raised at the administrative hearing an issue concerning respondent’s failure to abate additions to tax we do not therefore consider any such issue see 120_tc_114 assuming without prejudice that petitioners did raise such an issue this court lacks jurisdiction to review petitioners’ request that we review any such failure id pincite n insofar as interest is concerned the record does not demonstrate that petitioners raised at the administrative hearing an issue concerning respondent’s failure to abate interest we do not therefore consider any such issue id pincite assuming without prejudice that petitioners did raise such an issue and that we have jurisdiction to consider it see id pincite n we conclude that petitioners have failed to prove that respondent abused his discretion in failing to abate interest indeed petitioners failed to establish any error or delay attributable to one of respondent’s officers’ or employees’ being erroneous or dilatory in performing a ministerial_act at trial petitioners made no effort to show that their failure to timely file or that their failure to timely pay was attributable to reasonable_cause and not willful neglect nor did petitioners make any effort to show that their failure to pay estimated_tax was statutorily excused similarly petitioners raised no issue regarding the computation of any of the additions to tax requiring the abatement of interest with respect to the taxable_year or see sec_6404 the fact that respondent assigned another dln document_locator_number to each of petitioners’ returns a few months after those returns were filed in apparently because they were balance-due returns does not by any stretch of the imagination satisfy petitioners’ burden_of_proof c did respondent abuse his discretion at the administrative hearing there was discussion concerning a possible installment_payment agreement petitioners however were not willing to enter into such an agreement because they continued to dispute their underlying liabilities for and for that same reason respondent was not willing to offer an installment_payment agreement as a collection alternative in rodriguez v commissioner tcmemo_2003_153 we held that it was not an abuse_of_discretion for the commissioner to decline to accept an offer_in_compromise as a collection alternative if the taxpayer had not filed all required income_tax returns indeed we stated the decision not to accept the offer_in_compromise submitted by petitioner on account of her failure_to_file all required returns was an entirely reasonable exercise of the commissioner’s discretion in administering the offer_in_compromise program id although the present case involves a potential installment_payment agreement and not an offer_in_compromise we think the deference shown in rodriguez v commissioner supra to the commissioner’s collection procedures applies equally to the present case specifically we do not think it is an abuse_of_discretion for the commissioner to decline to offer an installment_payment agreement to a taxpayer if the taxpayer continues to dispute the underlying liability after all an installment_payment agreement contemplates payment of an amount acknowledged as owed see internal_revenue_manual form 433-d installment_agreement see also sec_6159 sec_301_6159-1 proced admin regs in sum petitioners have failed to demonstrate that the proposed levy action is inappropriate that another collection alternative is more appropriate or that some other relevant issue adversely affects respondent’s proposed collection action respondent’s determination to proceed by levy with the collection of petitioners’ outstanding liabilities for and was not an abuse_of_discretion indeed it is hard to imagine that a taxpayer would even want to enter into an installment_payment agreement if the taxpayer not only disputed the underlying liability but wished to take that dispute to court d conclusion for the reasons discussed above respondent’s determination to proceed by levy with the collection of petitioners’ outstanding liabilities for and should be sustained and we so hold reviewed and adopted as the report of the small_tax_case division to give effect to the foregoing respondent’s motion for summary_judgment will be denied as moot and decision will be entered for respondent


internal_revenue_service department of the treasury number release date index nos washington dc person to contact telephone number refer reply to cc ita plr - date date dear this letter is in reference to form_1128 application to adopt change or retain a tax_year submitted on behalf of the taxpayer tin requesting permission to change its accounting_period for federal_income_tax purposes from a taxable_year ending december to a taxable_year ending september effective the taxpayer has requested that the form_1128 be considered timely filed under the authority contained in sec_301_9100-3 of the procedure and administration regulations the taxpayer’s form_1128 requesting this change was due on or before the information furnished indicates that the application was filed late because of an error or misunderstanding however a letter informing the internal_revenue_service of the taxpayer’s desire to make the change was filed within days after the due_date sec_1_442-1 of the income_tax regulations provides that in order to secure the commissioner's consent to a change in accounting_period the taxpayer must file an application generally on form_1128 with the commissioner within such time and in such manner as is provided in the administrative procedures published by the commissioner revproc_2002_37 2002_1_cb_1030 provides the exclusive procedures for certain corporations to obtain automatic approval to change their accounting_period under sec_442 of the internal_revenue_code and sec_1_442-1 section of revproc_2002_37 states that a form_1128 filed pursuant to this revenue_procedure will be considered timely filed for purposes of sec_1_442-1 only if it is filed on or before the due_date including extensions for filing the federal_income_tax return for the short_period required to effect such change sec_301_9100-3 provides that requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 automatic extensions must be made under the rules of sec_301_9100-3 requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government plr-117424-03 based on the facts and information submitted and the representations made it is held that the taxpayer has acted reasonably and in good_faith and the granting of relief will not prejudice the interests of the government accordingly the requirements of the regulations for the granting of relief have been satisfied and the taxpayer’s late filed form_1128 requesting permission to change to a tax_year ending september for the short_period to is considered timely filed the ruling contained in this letter is predicated upon facts and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the above material submitted in support of the request for a ruling verification of the factual information representations and other data may be required as a part of the examination process except as provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any item discussed or referenced in this letter specifically no opinion is expressed as to whether is the taxpayer is permitted to change to the tax_year requested in the subject form_1128 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent the taxpayer indicates that it timely filed its form_1120 for the short_period to with the appropriate service_center the taxpayer further indicates that it is filing the application under revproc_2002_37 accordingly we are forwarding the application along with a copy of this letter to the appropriate service_center for consideration pursuant to a power_of_attorney on file in this office a copy of this ruling will be sent to the taxpayer's designated representatives enclosed is a copy showing the deletions proposed to be made in the letter when it is disclosed under sec_6110 sincerely robert a berkovsky branch chief office of associate chief_counsel income_tax accounting enclosure