internal_revenue_service number release date date cc el gl br3 dl-108541-99 uilc memorandum for los angeles district_counsel from attn joseph h park lawrence h schattner chief branch general litigation subject request for advice on tax_advice privilege in sec_7525 this chief_counsel_advice is in response to your date memorandum received by the office_of_chief_counsel general litigation on date chief_counsel_advice is not binding on examination or appeals and is not a final case determination chief_counsel_advice issued to examination or appeals is advisory only and does not resolve the service’s position on an issue or provide the final basis for closing a case this document is not to be relied on or otherwise cited as precedent issue whether the tax_advice privilege which under the plain terms of sec_7525 is not applicable in criminal tax matters or proceedings effectively applies in such criminal matters or proceedings where the subject communications occurred during or with respect to earlier civil matters or proceedings conclusion the plain terms of sec_7525 provide that the tax_advice privilege is not applicable in criminal tax matters or proceedings this statutory exception contains no limitations or conditions and the legislative_history further indicates that none should apply therefore the tax_advice privilege is not applicable in criminal tax matters or proceedings even if a subject communication originated in the context of a civil matter or proceeding gl br3-dl-108541-99 facts although sec_7525 clearly states on its face that the tax_advice privilege is not applicable to criminal tax matters or proceedings tax practitioners are beginning to argue that there are situations where the privilege applies in the criminal context specifically some tax practitioners are arguing that communications between them and their clients during or with respect to a civil investigation are protected communications they argue that such communications are privileged from disclosure in any later criminal tax matter or proceeding in effect these tax practitioners are attempting to boot-strap the privilege into criminal tax matters or proceedings discussion sec_7525 establishes a limited tax_advice privilege sec_7525 was added by section a of the internal_revenue_service restructuring and reform act of p l and is applicable to communications made on or after date sec_7525 establishes the general_rule as follows with respect to tax_advice the same common_law protections of confidentiality which apply to a communication between a taxpayer and an attorney shall also apply to a communication between a taxpayer and any federally_authorized_tax_practitioner to the extent the communication would be considered a privileged_communication if it were between a taxpayer and an attorney sec_7525 plainly limits the context in which the privilege can be asserted to noncriminal tax matters or proceedings the statute provides as follows paragraph sec_7525 may only be asserted in- a any noncriminal tax matter before the internal_revenue_service and b any noncriminal tax proceeding in federal court brought by or against the united_states to date there are no reported cases interpreting sec_7525 or addressing the specific issue presented likewise the legislative_history does not directly address the specific issue presented the text of the various legislative reports closely follow the language of the statute the senate committee report s rep no reprinted in standard federal tax reporter cch para big_number states gl br3-dl-108541-99 the privilege of confidentiality may be asserted in any noncriminal tax proceeding before the irs as well as in noncriminal tax proceedings in the federal courts where the irs is a party to the proceeding the senate committee report also reiterates this point the privilege granted by the provision may only be asserted in noncriminal tax proceedings before the irs and in the federal courts with regard to such noncriminal tax matters in proceedings where the irs is a party id the conference committee report h_r conf_rep no reprinted in standard federal tax reporter cch para big_number contains similar language the conference agreement also clarifies that the privilege created by this provision may be asserted in non-criminal tax proceedings before the irs and in the federal courts with regard to a noncriminal tax proceeding where the united_states is a party in sum both the plain language of the statute and the legislative_history are clear the tax_advice privilege may not be asserted in criminal proceedings moreover the law does not support tax practitioners’ creative efforts to fashion an exception to the plain statutory rule that the tax_advice privilege does not apply in criminal tax matters or proceedings it is well established that under the common_law no privilege attaches to transactions between a client and a federally_authorized_tax_practitioner including an accountant and such person is competent to testify to communications between himself and his client in both civil and criminal proceedings 465_us_805 409_us_322 see privileged communications between accountant and client alr4th sec_2 supp see generally am jur 2d accountants sec_15 supp it is also well established that statutes in derogation of common_law must be strictly construed 406_f2d_1219 7th cir see 372_f2d_97 6th cir statutes in derogation of common_law must be construed narrowly the courts have repeatedly held that changes in common_law effected by statute must be clearly evidenced therein see eg 709_f2d_1088 6th cir 426_f2d_118 9th cir 358_f2d_421 3d cir no statute is to be construed as altering common_law further than its words clearly import united_states v mead supra even where a statute clearly expresses the intention to abrogate common_law the scope of common_law will be altered no further than is necessary to give effect to the language of the statute united_states v tilleraas supra gl br3-dl-108541-99 in the instant case sec_7525 clearly indicates that the tax_advice privilege may not be asserted in criminal tax matters or proceedings neither the statute nor the legislative_history indicates in any way that exceptions to this rule should be permitted or that the privilege could effectively apply in a criminal proceeding if it stemmed from communications in the context of civil actions given that sec_7525 is in derogation of the common_law it must be strictly and narrowly construed based upon its plain terms the scope of the common_law rule should not be altered any more than is necessary to implement the statute here it is not necessary to extend the privilege to criminal proceedings when the communications originated in the context of civil actions to implement the statute although the statute extends the common_law protections inherent in the attorney client privilege to tax_advice communications between a taxpayer and a federally_authorized_tax_practitioner it is clear that this extension is not absolute the limitations in subparagraph two are clear and should be upheld without qualification to effectuate the intent of the statute in the absence of clear legislative intent to allow the bootstrapping of the privilege the privilege should not be assertable in a criminal tax matter or proceeding regardless of where or in what context the tax_advice communication originated case development hazards and other considerations we believe the argument of tax petitioners that the tax_advice privilege may be bootstrapped in some criminal tax matters or proceedings has no support in the statute or the legislative_history the plain language of the sec_7525 and the accompanying legislative_history clearly state that the privilege is not applicable in criminal proceedings well established principles of statutory construction support the service’s position that the privilege should not be extended beyond the plain language of the statute in the absence of clear and explicit legislative intent


t c memo united_states tax_court california marine cleaning inc petitioner v commissioner of internal revenue respondent docket no filed date william p shannahan for petitioner christine v olsen for respondent memorandum opinion colvin judge this matter is before the court on petitioner’s motion for litigation and administrative costs under section and rule respondent concedes that petitioner substantially prevailed exhausted its administrative remedies meets the net_worth requirements and did not unreasonably protract the administrative or court proceedings sec_7430 and c a i and ii the remaining issues for decision are whether respondent’s position in the underlying proceeding was substantially justified we hold that it was not whether a special factor as defined in sec_7430 was present in this case which would justify an award of attorney's_fees higher than dollar_figure per hour we hold that no special factor was present section references are to the internal_revenue_code in effect for the years in issue references to sec_7430 are to that section as amended by sec_1551 of the tax_reform_act_of_1986 publaw_99_514 100_stat_2752 effective for proceedings commenced after date and by sec a of the technical_and_miscellaneous_revenue_act_of_1988 publaw_100_647 102_stat_3743 effective with respect to proceedings commenced after date sec_7430 was further amended by the taxpayer bill of right sec_2 publaw_104_168 110_stat_1463 effective with respect to proceedings commenced after date the amendments to that section shifted to the commissioner the burden of proving that the position_of_the_united_states was substantially justified sec_7430 and changed the hourly rate for attorney's_fees to dollar_figure sec_7430 a judicial proceeding is commenced in this court with the filing of a petition rule a petitioner filed its petition on date accordingly the amendments to sec_7430 apply here see 108_tc_430 rule references are to the tax_court rules_of_practice and procedure whether the number of hours billed by petitioner's counsel and accountant and petitioner's other litigation costs were reasonable we hold that they were to the extent set out below the parties submitted memoranda and affidavits supporting their positions we decide the motion on the basis of those memoranda and affidavits neither party requested a hearing we conclude that a hearing is not necessary to decide this motion rule a a petitioner background petitioner is a corporation the principal_place_of_business of which was in san diego california during the years in issue and when it filed its petition petitioner reports its income using the cash_method_of_accounting petitioner is in the business of cleaning military and civilian ships b petitioner's and tax returns petitioner timely filed u s corporate_income_tax returns forms for its tax years ending on date and on which it reported the following petitioner's and fiscal years ended on sept fy fy fy gross_receipts compensation of officers salaries and wages repairs rents taxes interest contributions depreciation pensions profit- sharing plans other deduction sec_1 unappropriated retained earnings dollar_figure big_number 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 big_number big_number big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number petitioner's other deductions included expenses for subcontractors materials_and_supplies equipment rental chemical analysis waste disposal trucks insurance travel office legal and accounting services permits telephone and utilities petitioner paid no dividends and had no inventory in fiscal years and c the audit and respondent's determination in respondent audited petitioner's and fiscal years fy the record does not indicate who respondent talked to or what documents respondent saw during the audit on date respondent notified petitioner pursuant to sec_534 that respondent intended to issue a notice_of_deficiency determining that petitioner is liable for the accumulated_earnings_tax under sec_531 for fy and petitioner had days to file a sec_534 statement sec_534 sec_1_534-2 income_tax regs on date respondent sent a notice_of_deficiency to petitioner in it respondent determined that petitioner had deficiencies in income_tax including accumulated_earnings_tax of dollar_figure for fy dollar_figure for fy and dollar_figure for fy respondent determined that petitioner had accumulated_taxable_income of dollar_figure in fy dollar_figure in fy and dollar_figure in fy respondent determined petitioner's accumulated earning sec_4 as of the close of the prior year as follows accrual basis dollar_figure dollar_figure dollar_figure accounts_receivable big_number big_number big_number tax_refund receivable big_number big_number accounts_payable big_number big_number big_number deferred taxes big_number big_number big_number income taxes payable big_number cash_basis big_number big_number big_number respondent computed petitioner's accumulated earnings credit5 in the notice_of_deficiency as follows a corporation's accumulated earnings are the earnings it accumulates rather than distributes see 393_us_297 the accumulated_earnings_credit is generally the amount of continued computation of accumulated_earnings_credit minimum credit less accumulated earnings as of close of prior year allowable minimum credit sec_535 current_earnings_and_profits retained for reasonable needs of business sec_535 less deduction for ltcg sec_535 allowable credit sec_535 dollar_figure dollar_figure dollar_figure big_number big_number big_number -0- -0- -- -0- -- -- respondent's only explanation for determining that petitioner was liable for accumulated_earnings_tax was that petitioner was formed_or_availed_of for the purpose of its shareholders avoiding income_tax respondent did not state the basis for determining that petitioner had no reasonable needs to retain earnings for the years at issue the notice_of_deficiency contained no bardahl6 computation or other analysis of petitioner's need for working_capital respondent issued the notice_of_deficiency before continued the taxpayer's earnings_and_profits for the taxable_year that is retained for the reasonable_needs_of_the_business sec_535 the accumulated_earnings_credit is subtracted from the taxpayer's taxable_income in calculating accumulated_taxable_income sec_535 a bardahl computation is an estimate of a taxpayer's working_capital needs based on its business needs for one operating cycle bardahl manufacturing corp v commissioner tcmemo_1965_200 petitioner filed a sec_534 statement or requested an appeals_office conference d petitioner's sec_534 statement on date petitioner filed a timely sec_534 statement identifying the grounds on which it relied to establish that it did not unreasonably accumulate earnings petitioner asserted that it had grounds to accumulate earnings to provide a reserve for federal_income_tax and interest to provide working_capital to expand to additional port cities to replace equipment to provide loans to customers or suppliers to meet competition to provide insurance to provide a litigation reserve to prepare for unsettled business conditions to make pension and profit sharing plan contributions and to respond to the possible loss of its principal customer the u s navy petitioner filed its petition in this case on date on date this case was calendared for trial at the date session of this court at san diego california on date respondent filed a motion for a ruling that petitioner's sec_534 statement was insufficient to shift the burden_of_proof to respondent on date we held that petitioner's sec_534 statement did not contain enough facts to shift the burden_of_proof to respondent e postpetition conferences petitioner's case was assigned to an appeals officer sometime after petitioner filed its petition respondent's revenue_agent bruce zaer zaer met with petitioner's counsel on may and date to discuss petitioner's case at the july meeting petitioner's counsel told zaer that petitioner had erroneously reported earnings_and_profits on an accrual basis rather than on a cash_basis on its tax_return as a result of the error petitioner erroneously included accounts_receivable of about dollar_figure in accumulated earnings petitioner reported on its return that its accumulated earnings were dollar_figure while in fact they were only about dollar_figure around date petitioner's accountant prepared a corrected analysis of petitioner's accumulated_taxable_income for fy to he concluded that petitioner had accumulated_taxable_income of dollar_figure for fy dollar_figure for fy and dollar_figure for fy respondent's appeals officer reviewed the accountant's analysis and agreed with it on date respondent conceded the accumulated_earnings_tax issue f settlement of the case at the calendar call on date the parties announced that they had reached a basis of settlement the in his corrected analysis petitioner's accountant concluded that petitioner's accumulated earnings for fiscal_year were about dollar_figure parties stipulated that petitioner had deficiencies in income_tax of dollar_figure for fy dollar_figure for fy and dollar_figure for fy that petitioner is not liable for accumulated_earnings_tax for those years and that petitioner is not liable for additions to tax for those years g petitioner's litigation costs petitioner filed a motion for an award of litigation and administrative costs on date petitioner incurred attorney's_fees and other costs for services performed in this matter from date to date as follows date of services fee attorney hours costs june june 28-july july 20-aug aug nov dec dollar_figure big_number big_number big_number big_number jan jan apr big_number apr 28-may big_number may 27-june big_number june 26-july july 30-aug aug 26-sept big_number big_number sept 29-oct nov big_number nov 26-dec big_number total -- -- -- dollar_figure -- -- -- -- -- -- -- -- -- -- -- -- -- dollar_figure date of services fee accountant hours date- date dollar_figure discussion a motion for litigation and administrative costs introduction generally a taxpayer who has substantially prevailed in a tax_court proceeding may be awarded reasonable administrative and litigation costs sec_7430 c to be entitled to an award the taxpayer must exhaust administrative remedies sec_7430 respondent concedes that petitioner meets this requirement substantially prevail with respect to the amount in controversy sec_7430 respondent concedes that petitioner meets this requirement be an individual whose net_worth did not exceed dollar_figure million or an owner of an unincorporated business or any partnership corporation etc the net_worth of which did not exceed dollar_figure million when the petition was filed sec_7430 u s c sec d b respondent concedes that petitioner meets this requirement this requirement does not apply to an award for reasonable_administrative_costs sec_7430 show that the taxpayer did not unreasonably protract the proceedings sec_7430 respondent concedes that petitioner meets this requirement establish that the amounts of costs and attorney's_fees claimed by the taxpayer are reasonable sec_7430 c and respondent disputes the number of hours of legal services claimed by petitioner petitioner also claimed that it was entitled to more than dollar_figure per hour adjusted for inflation respondent disputes that contention for proceedings beginning after date the taxpayer is not entitled to an award for reasonable administrative and litigation costs if the commissioner shows that the position_of_the_united_states in the action was substantially justified sec_7430 respondent bears the burden of proving that respondent's position was substantially justified id respondent contends that respondent has made this showing b position_of_the_united_states and substantially justified standard position_of_the_united_states the commissioner takes a position in an administrative_proceeding as of the earlier of the date the taxpayer receives an internal_revenue_service irs appeals decision or the commissioner sends the notice_of_deficiency sec_7430 respondent's position in the administrative_proceeding was established on date when the notice_of_deficiency was sent the position taken by the united_states for purposes of an award of litigation costs is the position_of_the_united_states in a judicial proceeding sec_7430 respondent took a position in the judicial proceeding in this case on date when respondent's answer was filed see huffman v commissioner 978_f2d_1139 9th cir affg in part revg in part and remanding tcmemo_1991_144 substantially justified standard the parties dispute whether respondent's position in the administrative and judicial proceedings was substantially justified the commissioner's position is substantially justified if that position could satisfy a reasonable person 487_us_552 900_f2d_655 3d cir affg in part and revg in part on other grounds 92_tc_510 106_tc_76 100_tc_457 affd on this issue revd in part and remanded on other issues 43_f3d_172 5th cir to be substantially justified the commissioner's position must have a reasonable basis in both law and fact pierce v underwood supra 748_f2d_1011 5th cir powers v commissioner supra for a position to be substantially justified there must be substantial evidence to support it pierce v underwood supra pincite powers v commissioner supra pincite the fact that the commissioner eventually loses or concedes a case does not establish that a taxpayer is entitled to an award of reasonable litigation and administrative costs 991_f2d_359 7th cir 975_f2d_1150 5th cir 92_tc_760 however it is a factor to be considered 931_f2d_1044 5th cir powers v commissioner supra pincite c whether respondent's position in the notice_of_deficiency was substantially justified background--accumulated earnings tax a taxpayer is liable for accumulated_earnings_tax if it is formed_or_availed_of to avoid income_tax for its shareholders by permitting earnings_and_profits to accumulate instead of being divided or distributed sec_532 90_tc_1 however the accumulated_earnings_tax does not apply if a corporation lacks the proscribed purpose 101_tc_397 28_tc_153 affd 251_f2d_278 7th cir basis in fact a whether facts known by respondent provide a basis in fact respondent argues that respondent's position was substantially justified on the basis of the following information which respondent knew or reasonably believed when respondent sent the notice_of_deficiency a petitioner was in the business of cleaning ships b petitioner was a cash_basis taxpayer c petitioner reported unappropriated retained earnings_of dollar_figure for fy dollar_figure for fy and dollar_figure for fy d petitioner reported gross_receipts or sales of dollar_figure for fy dollar_figure for fy and dollar_figure for fy e petitioner reported total deductions of dollar_figure for fy dollar_figure for fy and dollar_figure for fy f petitioner paid no dividends in fy and and g petitioner had no inventory in fy and these facts do not provide a basis in fact for respondent’s position that petitioner intended to avoid tax for its shareholders sec_1_533-1 income_tax regs lists factors to be considered in deciding whether a corporation intended to avoid income_tax of its shareholders including dealings between the corporation and its shareholders for the personal benefit of the shareholders for example personal loans corporate investment of undistributed assets in unrelated businesses or investments and the corporation's dividend history respondent has not shown that respondent had any reason to believe that there were dealings between petitioner and its shareholders for their personal benefit or that petitioner had invested in unrelated businesses respondent knew that petitioner did not pay dividends in the years in issue but cites no authority that the absence of dividends in isolation triggers liability for accumulated_earnings_tax the record does not show what respondent did or learned about petitioner during the audit of this case petitioner's returns suggest that petitioner had a significant ongoing business petitioner's returns do not provide a basis in fact for respondent's position that petitioner was formed_or_availed_of for the proscribed purpose respondent does not claim to have had any information about the merits of the case other than petitioner's returns before adopting the position at issue here see powers v commissioner supra pincite it has been held that the government does not have a reasonable basis in both fact and law if it does not diligently investigate a case 797_f2d_1454 8th cir award for litigation costs granted where commissioner did not diligently investigate which of several persons was liable for tax of an employer under sec_6672 powers v commissioner supra pincite respondent lacked a basis in fact for determining that petitioner was liable for the accumulated_earnings_tax because respondent apparently had no facts about petitioner's business plans and did not show whether the case was diligently investigated b petitioner's error in reporting accounts_receivable petitioner erroneously included accounts_receivable of dollar_figure in accumulated earnings on its tax_return for respondent contends that petitioner's error led respondent to determine that petitioner was liable for the accumulated_earnings_tax respondent contends that if petitioner had reviewed its books_and_records earlier it might have been possible to avoid the determination or resolve the issue earlier we disagree respondent did not explain why the determination that petitioner was liable for accumulated_earnings_tax was substantially justified eg that petitioner accumulated income with the purpose of avoiding shareholder taxes even if petitioner had retained earnings_of dollar_figure in fy dollar_figure in fy and dollar_figure in fy c whether events occurring after respondent took the position provide a basis in fact for respondent's position respondent argues that respondent's position is substantially justified because of events occurring after that position was taken that is after the notice_of_deficiency was issued for example respondent argues that respondent was substantially justified because respondent promptly settled the accumulated_earnings_tax issue soon after petitioner told respondent about petitioner's error and respondent's position had a basis in fact because petitioner's sec_534 statement was insufficient to shift the burden_of_proof to respondent we disagree respondent must have a basis in fact when respondent issues the notice_of_deficiency powers v commissioner t c pincite kingston v commissioner tcmemo_1998_119 grimland v commissioner tcmemo_1993_ see pierce v underwood u s pincite we do not consider events occurring after respondent's position was adopted such as respondent's prompt concession or petitioner's failure to allege specific facts in its sec_534 statement in deciding whether that position was substantially justified powers v commissioner supra pincite conclusion respondent has not shown that respondent had a basis in fact for the position that petitioner unreasonably accumulated earnings for fy and when respondent sent the notice_of_deficiency or filed the answer the substantially justified standard requires that the government's position have a reasonable basis in both law and fact pierce v underwood supra pincite we need not decide whether respondent had a basis in law because respondent did not have a basis in fact thus we hold that respondent's position was not substantially justified when respondent sent the notice_of_deficiency and filed the answer and that petitioner is entitled to an award under sec_7430 for its reasonable administrative and litigation costs d reasonable administrative and litigation costs petitioner seeks an award for its attorney's_fees of dollar_figure miscellaneous costs of dollar_figure and accountant's_fees of dollar_figure we must decide whether the number of hours billed the rate at which those hours were billed and the miscellaneous costs are reasonable as claimed by petitioner applicable hourly rate for attorney's_fees petitioner's attorney william shannahan shannahan billed at an hourly rate of dollar_figure for his work in this case respondent objects to our basing an award for litigation costs on shannahan's rate to the extent it exceeds dollar_figure sec_7430 limits the hourly rate for attorney's_fees to dollar_figure increased by the cost of living and other special factors the cost of living increase is rounded to the nearest multiple of dollar_figure sec_7430 the allowable fee for services dollar_figure indexed from to is dollar_figure human v commissioner tcmemo_1998_65 thus shannahan's allowable fee for is dollar_figure whether a special factor is present we next decide whether a special factor is present that justifies an award of attorney's_fees at a rate higher than dollar_figure per hour sec_7430 petitioner contends that the issues involved in this case were very complex and that petitioner's counsel's expertise warrants an award of fees at a rate higher than dollar_figure we disagree the prevailing hourly rate in an area and the fact that no attorney would have performed the work for dollar_figure an hour are not special factors under sec_7430 109_tc_227 93_tc_256 affd in part revd in part and remanded on other issues 936_f2d_736 2d cir see 487_us_552 tax expertise of a taxpayer’s lawyer alone is not a special factor under sec_7430 cassuto v commissioner f 2d pincite see 919_f2d_1044 5th cir cozean v commissioner supra pincite we conclude that petitioner has not shown that any special factor is present which warrants an increase in the dollar_figure maximum hourly rate amounts of reasonable administrative and litigation costs we next decide whether the amounts of petitioner's administrative and litigation costs were reasonable reasonable costs include a administrative fees or similar charges imposed by the irs b reasonable expenses of expert witnesses c reasonable costs of studies analyses engineering reports tests or projects that are necessary to prepare the taxpayer's case and d reasonable fees paid_or_incurred for the services of attorneys sec_7430 and petitioner bears the burden of proving that these costs are reasonable rule e a attorney's_fees petitioner seeks attorney's_fees based on hours billed by its counsel respondent argues that petitioner's counsel's invoices do not show the number of hours he spent for each activity he performed for petitioner and that they contain billings for some services that do not relate to petitioner petitioner submitted a revised affidavit from shannahan in an attempt to show the number of hours he spent working on this case we agree with respondent in part shannahan billed hours to prepare the tax_court petition for petitioner's shareholder to prepare s_corporation elections to write letters to the california franchise tax board and to finalize a will that work was not related to this case we do not award fees for these hours bode v united_states supra pincite8 shannahan billed hours for services related to this case we find this to be reasonable thus we award petitioner attorney's_fees of dollar_figure hours at dollar_figure per hour b accountant's_fees petitioner's accountant billed hours at dollar_figure per hour to analyze accounts_receivable earnings_and_profits accumulated earnings petitioner’s bardahl computation petitioner's cash deposit journal relating to dividends and rent expenses and to meet and correspond with petitioner and petitioner's counsel respondent contends that some of the accountant's activities are unrelated to petitioner's accumulated_earnings_tax issue we agree with respondent in part petitioner's accountant billed hours to analyze rent expenses and to return minutes book to attorney these services were apparently not related to this case we do not award fees for these hours bode v united_states supra pincite8 petitioner's accountant billed hours for services related to this case we find this to be reasonable we award petitioner accountant's_fees of dollar_figure hours at dollar_figure per hour petitioner also seeks reimbursement of dollar_figure for other costs dollar_figure for the filing fee and dollar_figure for registered mail and postage respondent does not contend that these costs were unreasonable we treat this as respondent's concession that these costs were reasonable thus we award petitioner attorney's_fees in the amount of dollar_figure accountant's_fees of dollar_figure and costs in the amount of dollar_figure an appropriate order will be issued and decision will be entered


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 uil dollar_figure number info release date conex-149919-08 -------------------------- ---------------------------------- ------------------------ dear ----------------- i am responding to your letters to senator richard durbin and senator barack obama they wrote to us on your behalf and asked us to reply directly to you you asked why employees who terminate employment cannot receive any of the balance remaining on their transit reimbursement accounts as taxable compensation the law excludes qualified_transportation fringes from gross_income sec_132 of the internal_revenue_code the code the term qualified_transportation_fringe refers to any of the following that an employer provides to an employee transportation in a commuter_highway_vehicle in connection with travel between the employee’s residence and place of employment any transit_pass qualified_parking qualified_transportation_fringe also includes cash reimbursement for any of the above mentioned benefits sec_132 of the code the income_tax regulations the regulations allow an employer to provide qualified_transportation fringes to employees either as a benefit provided in addition to an employee’s regular compensation or under a compensation reduction agreement sec_1_132-9 q a-11 in these agreements an employee agrees to contribute pre-tax earnings into an account which he or she can use to pay for qualified_transportation fringes once the employee elects to convert a portion of pre-tax earnings into a tax-free qualified_transportation_fringe benefit the treatment cannot be reversed sec_1_132-9 q a-14 d participation in a compensation reduction agreement for the provision of qualified_transportation_fringe_benefits is completely voluntary however once the employee has agreed to reduce his or her compensation to pay for commuting expenses the conex-149919-08 employee is no longer entitled to receive that compensation instead the employee is entitled to receive nontaxable qualified_transportation_fringe_benefits if an employee has a choice between cash compensation or an employer-provided benefit the law treats the benefit as provided directly by the employer rather than purchased by the employee with the amount of the compensation reduction it is this treatment that allows the value of the benefit to be excluded from income for tax purposes if the employee could choose to receive the benefit at any time in the form of cash rather than qualified_transportation_fringe_benefits then the employee would be treated as constructively receiving the benefits as compensation and would be taxed on the full value i hope this information is helpful if we can assist you further please contact -------------------- identification_number ------------- at ----- ------------- sincerely nancy marks associate chief_counsel division counsel tax exempt government entites cc the honorable richard durbin attention ------------------- the honorable barack obama attention --------------------- 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 the honorable richard durbin united_states senate washington dc attention ------------------- dear senator durbin i am responding to your letter of date on behalf of your constituent ------ -------------------- she wrote about the termination of transit benefits as you requested i responded directly to ----------------- i am enclosing a copy of my response i hope this information is helpful if you need further assistance please call me at ---- - ------------ or -------------------- at ----- ------------- sincerely enclosure nancy marks associate chief_counsel division counsel tax exempt government entities


department of the treasury internal_revenue_service p o box irs cincinnati oh number release date uil dear date date employer id number contact personiid number contact telephone number form you must file tax years this letter is our final_determination that you don’t qualify for tax-exempt status under sec_501 of the internal_revenue_code the code recently we sent you a proposed adverse determination in response to your application the proposed adverse determination explained the facts law and basis for our conclusion and it gave you days to file a protest because we didn’t receive a protest within the required days the proposed determination is now final because you don’t qualify as a tax-exempt_organization under sec_501 of the code donors can’t deduct contributions to you under sec_170 of the code you must file federal_income_tax returns for the tax years listed at the top of this letter using the required form also listed at the top of this letter within days of this letter unless you request an extension of time to file we’ll make this final adverse determination_letter and the proposed adverse determination_letter available for public inspection as required under sec_6110 of the code after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions follow the instructions in the notice on how to notify us if you agree with our deletions you don’t need to take any further action we'll also notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed determination_letter under sec_6104 of the code you should contact your state officials if you have questions about how this determination will affect your state responsibilities and requirements letter rev catalog number 47632s if you have questions about this letter you can contact the person listed at the top of this letter if you have questions about your federal_income_tax status and responsibilities call our customer service number pincite-829-1040 tty for deaf or hard of hearing or customer service for businesses pincite-829-4933 sincerely stephen a martin director exempt_organizations rulings and agreements enclosures notice redacted letter proposed adverse determination under sec_501 c redacted letter final adverse determination under sec_501 - no protest letter rev catalog number 47632s department of the treasury internal_revenue_service cincinnati oh legend c year d date e political_party dear date date employer id number contact person id number contact telephone number contact fax number vil we considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code the code based on the information provided we determined that you don’t qualify for exemption under sec_501 of the code this letter explains the basis for our conclusion please keep it for your records issues do you qualify for exemption under sec_501 of the code no for the reasons stated below facts you are an unincorporated association and assert that you were originally formed around c but you did not provide a copy of your original organizing document however you provided a copy of your amended bylaws that were signed and dated on d your amended bylaws state that your purpose is e e e e to encourage effective political activity to educate your members and to inform and be informed about the issues facing society to encourage the development of qualified women candidates for public_office and the participation of women in all phases of governmental activity and to encourage participation in activities which enhance the community the environment and which will increase the development of and the community at large your bylaws further state that you will be active in the general municipal and special elections on behalf of such candidates who have been nominated either by primary_election nominating convention or substituted nomination your purpose is to encourage and to help women take a more vital role in the electoral process not to publicly endorse candidates in primary elections you will encourage effective political leadership by educating your members and being informed about issues facing society your bylaws further state that your officers and members shall be active voters of the e political_party the required sec_501 language regarding your purpose and dissolution is not included when asked about possible political activities eluded to in your bylaws you asserted that you are a charitable_organization you provided examples of some of the charitable work you do such as making donations to other charities you also said that you do not endorse any candidates and you invite all candidates to speak to your membership according to your bylaws your officers and members must be members of the e political_party despite this fact you said that you do not support any political_candidate or political_party you provided an amendment to your bylaws which states that you have formed cluster groups to reach all registered e women of your city throughout the metropolitan area the cluster groups will be comprised of registered e women from all wards and divisions the purpose of the cluster groups is to encourage all registered e women in your city to take an active part in political issues facing society and the e party to gain a better understanding of the political issues and process of the e party the amendment was brief and only discussed the idea of cluster groups later you provided another an amendment to your bylaws which states that you do not support or endorse any political candidates it is noteworthy that you again did not provide a full copy of your amended bylaws rather you submitted an attachment to the original bylaws which didn’t say that it was amending any particular section of the original it also didn’t remove references to potential political activities from the first copy of the bylaws you submitted despite two written requests you did not provide a copy of your original organizing document also despite multiple requests potentially disqualifying language was not removed from your bylaws and the required sec_501 language was not added regarding the purpose and dissolution law sec_501 of the code provides for the recognition of exemption of organizations that are organized and operated exclusively for religious charitable or other purposes as specified in the statute no part of the net_earnings may inure to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 states that in order to be exempt as an organization described in sec_501 of the code an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt sec_1_501_c_3_-1 provides that an organization is organized exclusively for one or more exempt purposes only if its articles of organization a limit the purposes of such organization to one or more exempt purposes and b do not expressly empower the organization engage otherwise than as an insubstantial part of its activities in activities that in themselves are not in furtherance of one or more exempt purposes sec_1_501_c_3_-1 holds that an organization is not organized exclusively for one or more exempt purposes unless its assets are dedicated to an exempt_purpose an organization’s assets will be letter rev catalog number 47630w considered dedicated to an exempt_purpose for example if upon dissolution such assets would by reason of a provision in the organization’s articles or operation of law be distributed for one or more exempt purposes revproc_2018_5 2018_1_irb_233 sec_3 states that a determination_letter or ruling on exempt status is issued based solely upon the facts and representations contained in the administrative record the applicant is responsible for the accuracy of any factual representations contained in the application section and its predecessors provides that a favorable determination_letter or ruling will be issued to an organization only if its application and supporting documents establish that it meets the particular requirements of the section under which exemption from federal_income_tax is claimed in 372_fsupp_770 e d cal the court concluded that one seeking a tax exemption has the burden of establishing his right to a tax-exempt status pius xii academy inc v commissioner tcmemo_1982_97 affd 711_f2d_1058 6th cir provides that an organization must establish through the administrative record that it operates as an exempt_organization denial of exemption may be based solely upon failure to provide information describing in adequate detail how the operational_test will be met in 82_tc_215 the administrative record did not demonstrate that the organization would operate exclusively in furtherance of an exempt_purpose therefore denial of organization’s request for tax-exempt status was reasonable 70_fedclaims_782 was an action for declaratory_judgment that the petitioner brought to challenge the denial of his application_for exempt status the court in finding that the actual purposes displayed in the administrative record supported the service’s denial stated it is well- accepted that in initial qualification cases such as this gaps in the administrative record are resolved against the applicant the court noted that if the petitioner had evidence that contradicted these findings it should have submitted it as part of the administrative process the court also highlighted the principle that exemptions from income_tax are matters of legislative grace ohio disability association v commissioner t c memo states denial is justified because responses to requests for additional information failed to supplement the initial application or clarify purposes and activities and generalizations did not provide sufficient detail to determine that the organization would be operated exclusively for exempt purposes application of law a ruling on exempt status is based solely on facts and representations in the administrative file you have not provided supporting documentation to establish you meet the requirements of sec_501 of the code sec_501 sets forth two main tests for qualification for exempt status as stated in sec_1_501_c_3_-1 an organization must be both organized and operated exclusively for purposes described in sec_501 you did not provide a copy of your initial organizing document your amended bylaws do not limit your purpose to one or more exempt purposes or dedicate your assets to an exempt_purpose upon your dissolution as a result you have not satisfied the organizational_test described in sec_1 c - b gi and sec_1_501_c_3_-1 letter rev catalog number 47630w you did not provide us with a copy of your initial organizing document the subsequent copy of your amended organizing documents did not limit the purposes of your organization to one or more exempt purposes or indicate that your assets are dedicated to an exempt_purpose therefore there is not sufficient documentation to establish that you are exempt from taxation as required by sec_501 of the code and revproc_2018_5 as in universal life church you have the burden of establishing that you qualify for tax exemption in pius xii academy inc la verdad and new dynamics foundation it was established that an organization must establish through its administrative record that it meets the requirements for exemption because you failed to provide sufficient details in your initial application and the additional documentation you provided did not meet the statutory and regulatory requirements for exemption you have not established that you meet the requirements for exemption under sec_501 of the code as provided in new dynamics foundation any gaps in the administrative record will be resolved against the applicant similarly in ohio disability association the court found that even when additional information was provided but it contained generalizations and failed to clarify purposes denial is justified you did not provide supplemental information therefore we are unable to determine that you qualify for exemption conclusion based on the information submitted you have failed to establish that you are organized exclusively for exempt purposes within the meaning of sec_501 of the code and the related_income tax regulations therefore based on the administrative record you fail to qualify for exemption under sec_501 if you don’t agree you have a right to file a protest if you don’t agree with our proposed adverse determination to do so you must send a statement to us within days of the date of this letter the statement must include e e e e e e your name address employer_identification_number ein and a daytime phone number acopy of this letter highlighting the findings you disagree with anexplanation of why you disagree including any supporting documents the law or authority if any you are relying on the signature of an officer director trustee or other official who is authorized to sign for the organization or your authorized representative one of the following declarations for an officer director trustee or other official who is authorized to sign for the organization under penalties of perjury i declare that i examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete letter rev catalog number 47630w for authorized representatives under penalties of perjury i declare that i prepared this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete your representative attorney certified_public_accountant or other individual enrolled to practice_before_the_irs must file a form_2848 power_of_attorney and declaration of representative with us if he or she hasn't already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney we’ll review your protest statement and decide if you provided a basis for us to reconsider our determination if so we'll continue to process your case considering the information you provided if you haven’t provided a basis for reconsideration we'll forward your case to the office of appeals and notify you you can find more information about the role of the appeals_office in publication how to appeal an irs decision on tax- exempt status if you don’t file a protest within days you can’t seek a declaratory_judgment in court at a later date because the law requires that you use the irs administrative process first sec_7428 of the code where to send your protest please send your protest statement form_2848 if needed and any supporting documents to the applicable address u s mail street address for delivery service internal_revenue_service eo determinations quality assurance room p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street room cincinnati oh you can also fax your statement and supporting documents to the fax number listed at the top of this letter if you fax your statement please contact the person listed at the top of this letter to confirm that he or she received it if you agree if you agree with our proposed adverse determination you don’t need to do anything if we don’t hear from you within days we'll issue a final adverse determination_letter that letter will provide information on your income_tax filing_requirements letter rev catalog number 47630w you can find all forms and publications mentioned in this letter on our website at www irs gov formspubs if you have questions you can contact the person listed at the top of this letter sincerely stephen a martin director exempt_organizations rulings and agreements enclosure publication letter rev catalog number 47630w


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division 'jun uniform issue list legend decedent a individual taxpayer c individual d iraw annuity z financial_institution court dear this is in response to your request dated february i i as supplemented by correspondence dated january august august date1 date1 and february in which you request rulings under sec_401 a and of the internal_revenue_code the code related to the disposition of the assets of an ira of decedent a the following facts and representations have been submitted under penalties of perjury in support of the rulings requested decedent a was the owner of ira w individual was a long-time friend of decedent a taxpayer c was the former wife of decedent a within ira w decedent a purchased annuity z decedent a had originally designated individual as the primary beneficiary of ira w and annuity z additionally pursuant to a divorce judgment decedent a was required to maintain taxpayer cas the beneficiary of a percentage of some of the funds used to fund iraw after decedent a underwent a major surgery individual d began to partly live at decedent a's residence to care for his medical needs decedent a later changed the beneficiary designation for annuity z to for individual d decedent a died on date at age after his required_beginning_date individual and taxpayer c filed suit in the court challenging the beneficiary designation of individual d resulting in the freezing of all of the assets of ira w including the undistributed assets of annuity z during the course of the litigation financial_institution which issued annuity z requested that it be allowed to pay the assets from annuity z into the court for the court to hold pending the outcome of the litigation pursuant to an order of the court the assets from annuity z were eventually transferred from financial_institution to ira w on date a stipuration of settlement was signed by individual taxpayer c and individual d and approved by the court whereby individual d released any claims to any undistributed assets of ira w including annuity z prior to the date stipulation of settlement individual d had not disclaimed entitlement to ira w or annuity z after the stipulation was signed you represent that there were delays getting final waivers from individual d as well as the need to make a final allocation determination between individual and taxpayer c it was determined that taxpayer c was entitled to a portion of the proceeds of annuity z while the litigation was still ongoing and until the allocation between individual band taxpayer c was determined you represent that required minimum distributions were not able to be made to taxpayer c for and while awaiting the outcome of this ruling_request taxpayer c received required_minimum_distribution payments for and based on the facts and representations you request the following rulings that the internal_revenue_service the service allow taxpayer c to begin taking her required minimum distributions for ira w which contains the proceeds of annuity r - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - z in the year in which this ruling_request is granted rather than in which is the year after decedent a's death that the service waive the excise_tax under sec_4974 of the code for taxpayer c for failure to take the required minimum distributions for and for ira w which contains the proceeds of annuity z and that taxpayer c may receive required minimum distributions from the proceeds of annuity z based upon individual d's life expectancy with respect to your first and second rulings sec_401 a a of the code provides that a_trust shall not constitute a qualified_trust under the code unless the plan provides that the entire_interest of each employee i ii will be distributed to such employee not later than the required_beginning_date or will be distributed beginning not later than the required_beginning_date over the life of such employee or over the lives of such employee and a designated_beneficiary or over a period not extending beyond the life expectancy of such employee or the life expectancy of such employee and a designated_beneficiary sec_401 a b i of the code provides that a_trust shall not constitute a qualified_trust under the code unless the plan provides that if the distribution of the employee's interest has begun in accordance with sec_401 a a ii and the employee dies before his entire_interest has been distributed to him the remaining portion of such interest will be distributed at least as rapidly as under the method being used under sec_401 a a ii as of the date of death sec_408 and b of the code provides that rules similar to the rules of sec_401 a of the code shall apply to distributions from an ira sec_4974 of the code provides that if the amount distributed during the taxable_year of the payee under any qualified_retirement_plan defined under such section to include iras is less than 'the required_minimum_distribution under sec_401 a a and b of the code for such taxable_year a tax equal to of the amount by which such required_minimum_distribution exceeds the actual amount distributed during the taxable_year is imposed and paid_by the payee sec_4974 of the code provides in part that if the taxpayer establishes that the failure to distribute the required_minimum_distribution during any taxable_year was due to reasonable error and reasonable steps are being taken to remedy the shortfall the secretary may waive the excise_tax imposed by sec_4974 of the code for the taxable_year you have represented that because litigation was still ongoing and there were further delays in getting final waivers and in determining the allocation between individual and taxpayer c the required minimum distributions were not able to be made to taxpayer c for and and less than the full amount of required minimum distributions was made in therefore with respect to your first and second ruling requests we conclude that i ii iii pursuant to sec_4974 of the code it was due to a reasonable error that required minimum distributions were not made to taxpayer c for and related to ira w pursuant to sec_4974 of the code reasonable steps to remedy the shortfall would be for taxpayer c to take the shortfall in required minimum distributions for and related to ira w by the end of2014 and assuming taxpayer c does take the shortfall in required minimum distributions for and related to ira w by the end of the service hereby waives the excise_tax imposed on taxpayer c under sec_4974 for the shortfall in those years related to ira w we note that generally a taxpayer may apply for a waiver of the tax imposed under sec_4974 by completing irs form_5329 and attaching it to his or her tax_return taxpayer c should include a copy of this letter_ruling with her form_5329 with respect to your third ruling_request as stated above sec_401 a a ii a b i a and b of the code provide for the required minimum distributions rules for iras if distribution of the ira owner's interest has begun and the ira owner has died before his entire_interest has been distributed sec_401 a e of the code provides that the term designated_beneficiary means any individual designated as a beneficiary by the employee sec_1 a -4 of the final income_tax regulations regulations q a-1 provides that a designated_beneficiary is an individual designated under the plan either by the terms of the plan or by an affirmative election by the employee specifying the beneficiary who is entitled to a portion of the plan's benefit contingent on the participant's death or other specified event the fact that an employee's interest under the plan passes to a certain individual under a will or otherwise under applicable state law does not make that individual a designated_beneficiary unless the individual is designated a beneficiary under the plan sec_1 a -4 of the regulations q a-4 a provides that in order to be a designated_beneficiary that beneficiary must be a beneficiary as of the date of the employee's death the designated_beneficiary will generally be determined based on the beneficiaries designated as of the date of death who remain beneficiaries as of september of the calendar_year following the calendar_year of death consequently any person who was a beneficiary as of the date of the employee's death but is not a beneficiary as of the september of the following calendar_year eg because the person receives the entire benefit to which the person is entitled before that september is not taken into account in determining the employee's designated_beneficiary for purposes of determining the distribution period for required minimum distributions after the employee's death accordingly if a person disclaims entitlement to the employee's benefit pursuant to a disclaimer that satisfies sec_2518 of the code by that september thereby allowing other beneficiaries to receive the benefit in lieu of that person the disclaiming person is not taken into account in determining the employee's designated_beneficiary sec_1 a -5 of the regulations q a-5 a provides that if an employee dies after distribution has begun generally on or after the employee's required_beginning_date in order to satisfy sec_401 a b i the applicable distribution period for the distribution calendar years after the distribution calendar_year containing employee's date of death is if the employee has a designated_beneficiary as of the date determined under sec_1 a -4 of the regulations q a-4 the longer of the remaining life expectancy of employee's designated_beneficiary or the remaining life expectancy of the employee sec_1_408-8 of the regulations q a-1 a provides that in order to satisfy sec_401 a of the code for purposes of determining required minimum distributions for iras the rules of sec_1 a -1 through a -9 of the regulations must be applied except as otherwise provided in sec_1_408-8 sec_1_408-8 of the regulations q a-9 provides in part that the required_minimum_distribution must be calculated separately for each ira you have represented that at the time of decedent a's death the beneficiary designation for annuity z was for individual d you have also represented that individual d did not disclaim her interest in the proceeds of annuity z until therefore with respect to your third ruling_request we conclude that since individual d did not disclaim her interest in the proceeds of annuity z prior to september of the year following decedent a's death individual d was the designated_beneficiary for annuity z solely for purposes of determining the distribution period for required minimum distributions after decedent a's death pursuant to sec_1 a -4 of the regulations q a-4 accordingly taxpayer c may receive minimum distributions related to her allocated proceeds of annuity z based upon the life expectancy of individual d 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_611 o k of the code provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this letter_ruling is being sent to your authorized representative if you wish to inquire about this ruling please contact at - please address all correspondence to se t ep ra t2 enclosures deleted copy of ruling letter notice of intention to disclose cc


t c memo united_states tax_court thomas a and maria m hagman petitioners v commissioner of internal revenue respondent docket no filed date thomas a hagman and maria m hagman pro sese mark a weiner for respondent memorandum findings_of_fact and opinion gerber judge respondent determined deficiencies in petitioners’ federal_income_tax and delinquency and negligence additions and penalty as follows additions to tax penalty year deficiency sec_6651 a sec_6653 sec_6662 dollar_figure dollar_figure dollar_figure --- --t --- dollar_figure unless otherwise indicated all section references are to the internal_revenue_code in effect for the years under consideration and all rule references are to this court’s rules_of_practice and procedure following concessions the issues for our consideration are whether petitioners are entitled to claim a short-term_capital_loss relating to a purported dollar_figure loan to grant maccoon for whether petitioners are entitled toa dollar_figure long-term_capital_loss for purported investments in buck sales for whether petitioners are entitled to dollar_figure' in bad_debt losses claimed for whether petitioners overstated their capital_gains by dollar_figure and whether petitioners are liable for the delinquency and negligence additions for and an accuracy-related_penalty for separate findings_of_fact and opinion are hereafter set forth with respect to each of the first four issues those portions of the stipulation of facts that pertain to a particular issue are incorporated by this reference in the findings_of_fact for the issue to which they relate petitioners claimed dollar_figure in deductions on their federal_income_tax return the entire amount of which was disallowed by respondent respondent has conceded that petitioners are entitled to deduct dollar_figure of expenses of the dollar_figure claimed dollar_figure was claimed as bad_debt losses petitioners presented no evidence with respect to the dollar_figure difference between dollar_figure and dollar_figure and thus we treat this as a concession by petitioners 38_tc_1011 i the maccoon note findings_of_fact petitioners thomas a and maria m hagman husband and wife resided in thousand oaks california at the time their petition was filed maria m hagman is a petitioner in this case because she joined in filing federal_income_tax returns with thomas a hagman mr hagman subsequent references to petitioner refer only to mr hagman petitioners’ and federal_income_tax returns were filed on date and date respectively mr hagman was employed as a bank manager for years in he left banking to pursue a career investing in real_estate in petitioner became aware of an opportunity to buy a 16-acre parcel of real_estate within the city limits of thousand oaks california the parcel was available for sale only if the seller could also sell the adjacent property petitioner lent dollar_figure to grant maccoon mr maccoon for the purpose of purchasing the adjacent parcel petitioner and mr maccoon had an agreement that petitioner would receive percent of mr maccoon’s profits on the sale of the adjacent land mr maccoon gave petitioner a 10-year unsecured note bearing percent interest the interest and principal were payable at maturity in mr maccoon made a dollar_figure principal payment on the note reducing the amount of the note to dollar_figure the following year mr maccoon sold the property for a dollar_figure profit but did not pay percent of the profit to petitioner in accord with the agreement in petitioner sued mr maccoon for the outstanding balance of the note and petitioner’s 25-percent share of the profits from the sale of the adjacent land dollar_figure petitioner and mr maccoon reached a settlement in the lawsuit mr maccoon was no longer obligated to pay the note following the settlement petitioner provided no other information regarding the settlement petitioners claimed a dollar_figure short-term_capital_loss attributable to the maccoon note on their return respondent disallowed the claimed capital_loss opinion we must decide whether petitioners are entitled to a non- business_bad_debt deduction on their return generally taxpayers may deduct the value of bona_fide debts owed to them that become worthless during the year sec_166 46_tc_751 affd 387_f2d_420 8th cir bona_fide debts generally arise from valid debtor- creditor relationships reflecting enforceable and unconditional obligations to repay fixed sums of money sec_1 166-l1 c income_tax regs sec_166 prescribes three ways in which deductions may be taken for worthless debts as an ordinary deduction during a taxable_year in which a business_bad_debt becomes completely worthless as an ordinary deduction when a business_bad_debt becomes partially worthless during the taxable_year but only to the extent worthless and as a short-term_capital_loss when a nonbusiness_bad_debt held by a taxpayer other - - than a corporation becomes completely worthless during the taxable_year sec_166 d respondent does not dispute that the maccoon note represented a bona_fide debt owed to petitioners both parties also agree that the obligation is a nonbussiness debt the parties dispute whether the note became worthless in petitioners claim that although mr maccoon was no longer obligated to pay petitioner on the note after the settlement the loss could not have been claimed until the maturity_date of the note respondent contends that the note became worthless if at all in the year that mr maccoon was no longer obligated to pay petitioner we agree with respondent at trial and on brief petitioners alleged that an internal_revenue_service appeals officer had informed them that they were unable to write off the bad_debt until the maturity of the note regardless of the disposition of the lawsuits even if such a statement had been made respondent would not be estopped from asserting that the debt became worthless in such a statement would constitute a statement of law and therefore one of the necessary elements for estoppel would not be present 67_tc_612 the fact that an obligation is not mature at the time a bad_debt deduction is claimed does not automatically prevent allowance of a bad_debt deduction under sec_166 sec_1 l c income_tax regs petitioners have failed to establish that the maccoon note became worthless in accordingly petitioners are not entitled to a sec_166 loss for it buck sales findings_of_fact in and early petitioner spent approximately dollar_figure as a result of his involvement with an entity known as buck sales petitioner spent approximately dollar_figure on travel lodging and food expenses for himself and six other individuals in addition petitioner spent dollar_figure on consulting fees and approximately dollar_figure on legal fees petitioners claimed these amounts on their return as a long-term_capital_loss respondent disallowed the dollar_figure long-term_capital_loss carryover on petitioners’ return opinion the next issue for our consideration is whether petitioners are entitled to a dollar_figure long-term_capital_loss relating to purported investments in buck sales petitioner argues that he spent approximately dollar_figure in and early investigating an investment opportunity in hong kong petitioner contends that such amounts are deductible as a long-term_capital_loss respondent contends that petitioners have failed to establish that any of the payments are associated with any particular investment or business we agree with respondent petitioner’s testimony concerning his involvement with buck sales was vague and unconvincing at the conclusion of his testimony it was not possible to understand the nature of petitioner’s relationship with buck sales or how the amounts spent by petitioner such as the legal or consulting fees related to a business or investment activity petitioner claims that these amounts are deductible because they involved the investigation of a possible investment opportunity sec_212 or permits a deduction for all ordinary and necessary expenses paid for the production_or_collection_of_income or maintenance_of_property_held_for_the_production_of_income however expenses deductible under sec_212 or must relate to income-producing property or property rights in which the taxpayer has an existing interest 20_tc_511 15_tc_642 affd per curiam 194_f2d_537 2d cir petitioners have not shown that the expenditures petitioner made relate to income-producing property or property rights in which petitioner had an existing interest therefore these expenses are not deductible under sec_212 or sec_165 authorizes a deduction for losses_incurred by individuals and not_compensated_for_by_insurance_or_otherwise which are incurred in any transaction entered into for profit petitioner has not shown that the expenditures qualify for a deduction under sec_165 petitioner did not show whether he had a profit_motive with respect to the expenditures he also failed to show that he was involved in a transaction as that term is used in the statute in 52_tc_880 it was explained that the phrase ‘a --- - transaction entered into for profit’ surely means something more than the mere casual preliminary investigation of a prospective business or investment although petitioner expended capital he has failed to demonstrate what steps if any were taken beyond a preliminary investigation petitioner’s testimony on this subject was vague and to some extent incomprehensible accordingly petitioners are not entitled to a deduction under sec_165 see 40_tc_861 see also frank v commissioner supra til bad_debt losses findings_of_fact in the early 1980’s petitioner formed a partnership with albert j schara mr schara for the purpose of buying and selling real_estate over the course of their partnership petitioner made several loans to mr schara or to partnerships controlled by him when the partnership dissolved in mr schara had loans outstanding to petitioner totaling dollar_figure these loans were represented by three separate notes one note was given in exchange for two checks a dollar_figure check dated date and a dollar_figure check dated date made payable to schara development co although mr schara was personally liable for the entire debt another note was in the principal_amount of dollar_figure and dated date this note represented several separate payments from petitioner to t a investments a partnership that was controlled by mr schara two payments totaling dollar_figure were made on this note reducing --- - the outstanding balance to dollar_figure a third note was in the principal_amount of dollar_figure and dated date this note represented several separate payments from petitioner to nova image inc al schara was the president of nova image inc the partnership between petitioner and mr schara did not end amicably in date mr schara filed a complaint against petitioners in the superior court of california for dissolution_partnership accounting damages for repudiation of partnership conversion of partnership assets and breach of fiduciary duty in date petitioners filed a complaint against mr schara in the superior court of california for breach of fiduciary duty and breach of contract the two lawsuits lasted for several years and were ultimately abandoned by both parties petitioners claimed a dollar_figure business_bad_debt loss on their return the loss was disallowed by respondent opinion next we consider whether petitioners are entitled to dollar_figure in business bad_debts that were claimed on their return respondent contends that petitioners have failed to prove that these debts became worthless in and that the items in question are business bad_debts petitioners failed to show worthlessness and accordingly we need not address whether the items in question were business bad_debts sec_166 allows taxpayers to deduct the value of bona_fide debts that become worthless during the year millsap v commissioner t c pincite petitioners and mr schara the -- - debtor were involved in litigation over the dissolution of their partnership and the allocation of partnership debts and assets the litigation commenced in the year that petitioners claimed the debts became worthless and continued for several years thereafter the debts at issue in the litigation arose out of and were related to the partnership between petitioner and mr schara the amount of the unpaid notes was claimed by petitioners to be business bad_debts the uncertainty as to the outcome of that litigation is fatal to petitioners’ claim that the debts became worthless in see 29_tc_1039 see also birnbaum manaker p c v commissioner tcmemo_1993_485 accordingly petitioners are not entitled to the dollar_figure bad_debt deduction for iv capital_gains findings_of_fact petitioners’ federal_income_tax return reflected a dollar_figure profit from the sale of one of the buildings that was owned by the schara-hagman partnership at trial petitioners argued that they did not make a profit from the sale of the building in addition petitioners have not indicated whether the litigation between themselves and mr schara had ceased by date when petitioners filed their return - li - opinion petitioners’ return reflected a dollar_figure profit from the sale of one of the buildings owned by the schara-hagman partnership at trial petitioners argued that they had estimated the amount of profit from the sale when they filed their return and that ultimately no profit was ever realized from the sale of the building in addition petitioners claim that they made approximately dollar_figure in capital improvements to the building at issue which were never taken into account in calculating the amount of gain on their return petitioners claim that they made the capital improvements by paying workers in cash respondent contends that petitioners have failed to demonstrate how their return overstated their capital_gain we agree with respondent petitioners have not provided sufficient information to support a change to the dollar_figure capital_gain reported for petitioners have not provided calculations showing that these alleged capital improvements were not already taken into account in fact there was no showing as to how petitioners computed their capital_gains petitioners have not shown the adjusted_basis of the building or the proceeds received from the sale we also question why petitioners found it necessary to estimate the amount of profit from the sale of the building when they did not file their return until date petitioners have failed to establish that their return was inaccurate with respect to their capital_gains see rule a v penalties and additions to tax sec_6651 imposes an addition_to_tax for the failure_to_file timely a required return unless the failure is due to reasonable_cause and not due to willful neglect petitioners bear the burden of proving that their failure_to_file timely was due to reasonable_cause and not to willful neglect rule a petitioners filed their federal_income_tax return on date the return was required to be filed on or before date petitioners have not shown that their delinquent filing was due to reasonable_cause therefore they are liable for the sec_6651 addition_to_tax for as determined by respondent for the taxable_year sec_6653 and provides for an addition_to_tax equal to percent of the underpayment if any part of an underpayment is due to negligence for sec_6662 and b provides for an accuracy- related penalty equal to percent of the portion of the underpayment that is attributable to negligence or disregard of rules or regulations negligence is the lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances 85_tc_934 respondent’s determination of negligence is presumed to be correct and the taxpayer has the burden of proving that the determination is erroneous rule a therefore petitioners must show that they were not negligent i e that they made a reasonable attempt to comply with the provisions of the internal_revenue_code and that they were not careless reckless or in intentional disregard of the rules or regulations we sustain respondent’s determination in determining whether petitioners were negligent in the preparation of their return we take into account mr hagman’s years of business experience glenn v commissioner tcmemo_1995_399 affd without published opinion 103_f3d_129 6th cir petitioners’ explanation of the buck sales issue was vague and confusing and they have failed to show that they were not negligent with respect to their dollar_figure deduction for purported investments in buck sales because we have found that part of petitioners’ underpayment for was due to negligence the percent addition_to_tax provided in sec_6653 applies to the entire underpayment regardless of whether the balance of the underpayment was due to negligence petitioners conceded part of the underpayment for and also failed to address the question of negligence on those concessions with respect to the disputed issue for the bad_debt deduction petitioners claimed that the notes were worthless at a time when they were actively trying to collect on the notes in state court petitioners do not provide us with a satisfactory explanation of this inconsistency and are therefore liable for the sec_6662 accuracy-related_penalty with respect to this issue due to petitioners’ failure to present evidence or argument with respect to the conceded issues the entire underpayment is subject_to the sec_6662 penalty to reflect the foregoing decision will be entered under rule


t c summary opinion united_states tax_court leroy j klingaman petitioner v commissioner of internal revenue respondent docket no 19122-03s filed date leroy j klingaman pro_se miriam c dillard and sandra k reid for respondent panuthos chief 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 the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority unless otherwise indicated all subsequent section references are to the internal_revenue_code in effect at relevant times and all rule references are to the tax_court rules_of_practice and procedure respondent determined a deficiency of dollar_figure in petitioner’ sec_2001 federal_income_tax the issue for decision is whether petitioner’s gross_income includes unreported gambling winnings and social_security_benefits as determined by respondent background some of the facts have been stipulated and they are so found the stipulation of facts and the attached exhibits are incorporated by this reference at the time of filing the petition petitioner resided in leesburg florida in taxable_year petitioner was retired and received social_security_benefits of dollar_figure during the year petitioner and a companion traveled throughout the united_states to visit friends and members of petitioner’s family petitioner frequented various casinos to play the slot machines as a recreation during his travels third party information returns forms w-2g certain gambling winnings reflect that petitioner received the following gambling winnings in payor gambling winnings little river casino resort imperial palace of mississippi beau rivage resorts inc florida department of the lottery total dollar_figure big_number big_number big_number big_number petitioner had gambling_losses in in excess of his gambling winnings on his timely filed federal_income_tax return petitioner did not report any gambling winnings or social_security_benefits petitioner’ sec_2001 return reflects dollar_figure in adjusted_gross_income consisting of dollar_figure in pension payments dollar_figure in taxable interest dollar_figure of ordinary dividends and a capital_loss of dollar_figure petitioner claimed the applicable standard_deduction of dollar_figure in a notice_of_deficiency respondent determined that petitioner received dollar_figure in unreported gambling winnings and dollar_figure in unreported taxable social_security_benefits following a computational adjustment to petitioner’s adjusted_gross_income further respondent determined that petitioner is entitled to deduct gambling_losses of dollar_figure petitioner admits that he received additional gambling winnings of less than dollar_figure on several occasions that were not subject_to information reporting see sec a temporary income_tax regs fed reg date see also lyszkowski v commissioner tcmemo_1995_235 describing the information reporting requirements for slot machine jackpots affd without published opinion 79_f3d_1138 3d cir respondent’s determination of the deficiency was limited to the gambling winnings subject_to information reporting and petitioner’s other winnings are not at issue in this case discussion in general the commissioner’s determination set forth in a notice_of_deficiency is presumed correct and the taxpayer bears the burden of showing that the determination is in error rule a 290_us_111 however in certain circumstances if the taxpayer introduces credible_evidence with respect to any factual issue relevant to ascertaining the proper tax_liability sec_7491 places the burden_of_proof on the commissioner sec_7491 sec_7491 applies only if an individual taxpayer complies with substantiation requirements maintains all required records and cooperates with reasonable requests by the commissioner for witnesses information documents meetings and interviews sec_7491 in this case sec_7491 is inapplicable because petitioner did not introduce any credible_evidence with respect to the gambling winnings and social_security_benefits and failed to comply with the substantiation and recordkeeping requirements the burden_of_proof remains on petitioner to show that respondent’s determination is in error a gambling winnings and losses sec_61 provides that gross_income includes all income from whatever source derived unless excludable by a specific provision of the code no specific code section excludes gambling winnings from gross_income sec_165 permits a deduction for gambling_losses but only to the extent of gambling winnings petitioner concedes that he was paid the amount of gambling winnings reported by the various casinos petitioner’s only argument is that he owes tax on only a portion of the gambling winnings because he split them with his traveling companion as petitioner testified this lady friend of mine and i were traveling we went from one casino from another we figured out how much we could spend and so we’d spend that and we’d share it the winnings i just took the money and then i gave it to her petitioner did not identify by name the person with whom he purportedly split his gambling winnings and did not offer any proof that he split any of his gambling winnings further there is no evidence that a form w-2g was issued to petitioner’s companion and petitioner testified that his companion did not report any of the gambling winnings on her return given the lack of evidence to support petitioner’s claim that he split the gambling winnings we sustain since petitioner received forms w-2g we assume that petitioner filled out a form_5754 statement by person s receiving gambling winnings upon winning slot machine jackpots of dollar_figure or more a form_5754 not only is used to identify the winner of the jackpot but it may be used to report that the winnings are shared among a group of people given the circumstances of this case it seems reasonable to conclude that petitioner did not report on the form_5754 that he was splitting the winnings among others respondent’s determination that petitioner must include dollar_figure of gambling winnings in gross_income we further sustain respondent’s determination that petitioner is entitled to deduct gambling_losses of dollar_figure b social_security_benefits sec_86 taxes social_security_benefits pursuant to formula if the sum of the taxpayer’s adjusted_gross_income with modifications not relevant here and one-half of the social_security_benefits received during the year exceeds the applicable_base amount then a portion of the social_security_benefits is includable in gross_income sec_86 and b for the base_amount was dollar_figure for an unmarried taxpayer not filing a joint_return sec_86 once a taxpayer exceeds this base_amount threshold social_security_benefits are includable in income in an amount equal to the lesser_of one-half of the social_security_benefits received during the year or one-half of the amount by which the taxpayer’s modified_adjusted_gross_income plus one-half of the social_security_benefits received during the year exceeds the dollar_figure base_amount sec_86 an additional_amount of social_security_benefits may be includable the standard_deduction for is dollar_figure thus petitioner will receive some tax_benefit from an itemized_deduction of dollar_figure petitioner had no other itemized_deductions for in income under certain circumstances not applicable to this case sec_86 with the inclusion of dollar_figure in gambling winnings petitioner’s adjusted_gross_income is dollar_figure the sum of petitioner’s adjusted_gross_income of dollar_figure and one-half of petitioner’s social_security_benefits of dollar_figure exceeds the dollar_figure base_amount threshold by dollar_figure since the amount of social_security_benefits includable in income is equal to the lesser_of one-half of the social_security_benefits received of dollar_figure or one-half of the amount by which petitioner’s modified_adjusted_gross_income plus one-half of social_security_benefits received during the year exceeded the dollar_figure base_amount or dollar_figure one-half of dollar_figure rounded to the nearest whole dollar we sustain respondent’s determination that petitioner must include dollar_figure of social_security_benefits in gross_income reviewed and adopted as the report of the small_tax_case division to reflect the foregoing decision will be entered for respondent


t c memo united_states tax_court joseph m perry petitioner v commissioner of internal revenue respondent docket no filed date joseph m perry pro_se carmino j santaniello for respondent memorandum opinion colvin judge respondent determined that petitioner had a dollar_figure deficiency in income_tax for the sole issue for decision is whether part of the dollar_figure petitioner received in settlement of a tort action is prejudgment_interest and if so whether it is excludable from gross_income as damages for a personal injury under sec_104 we hold that dollar_figure dollar_figure percent of the dollar_figure payment was prejudgment_interest and is not excludable under sec_104 unless otherwise specified section references are to the internal_revenue_code in effect for the year in issue rule references are to the tax_court rules_of_practice and procedure the parties submitted this case fully stipulated under rule background a petitioner petitioner resided in north scituate rhode island when he filed his petition on date while petitioner was driving his motorcycle he was struck by a truck attempting to make an illegal u-turn the truck was owned by allied fence guardrail inc allied fence and driven by an allied fence employee petitioner suffered serious back injuries requiring more than years of physical therapy b the tort action judgment and interest petitioner was represented by john coughlin coughlin who filed a personal injury lawsuit on petitioner's behalf in the superior court of rhode island on date against allied fence and the employee driving the truck allied fence was represented by peter j comerford comerford and was insured by aetna life and casualty aetna on date a jury awarded petitioner dollar_figure in damages the clerk of the court added statutory prejudgment_interest of dollar_figure as required by r i gen laws section this totals dollar_figure the jury award of dollar_figure is dollar_figure percent of dollar_figure the statutory prejudgment_interest of dollar_figure is dollar_figure percent of dollar_figure c the settlement following the judgment allied fence moved for a remittitur or amendment of the verdict on comparative negligence or in the alternative for a new trial petitioner also filed a posttrial motion for an additur the trial_court denied these motions and ordered that the verdict in the full amount be entered forthwith the judgment entered on date for petitioner and against allied fence and its employee was for dollar_figure with interest as provided by law on date allied fence and its employee filed a notice of appeal with the rhode island supreme court following the judgment aetna agreed to pay petitioner dollar_figure rounded in exchange for a release and discharge of any and all past or future claims petitioner and coughlin signed the release on date the parties did not discuss tax consequences during the negotiation of the settlement the release did not state whether any of the dollar_figure was interest and the parties did not otherwise allocate any of the amount to interest on date the parties had filed a stipulation of dismissal with the trial_court the judgment entered on date was not an enforceable final judgment under rhode island law because it was voided by the parties' settlement and the stipulation of dismissal aetna paid dollar_figure to petitioner and coughlin on date aetna did not issue a form_1099 to petitioner or respondent regarding the payment coughlin paid himself dollar_figure for legal fees and costs and paid petitioner dollar_figure d petitioner's tax_return and respondent's determination petitioner timely filed his federal_income_tax return he did not report any of the dollar_figure and did not deduct any legal fees or costs related to the lawsuit respondent issued a notice_of_deficiency in which respondent determined that petitioner had failed to report interest_income of dollar_figure and had an income_tax deficiency of dollar_figure respondent allowed petitioner to deduct legal fees and costs of respondent concedes that prejudgment_interest was only dollar_figure dollar_figure under sec_212 the parties do not dispute this amount discussion petitioner contends that his entire settlement is excludable under sec_104 and that he did not receive prejudgment_interest because the parties did not allocate any amount to it and because the money he received was paid pursuant to an out-of- court settlement we disagree a taxpayer may exclude from income damages received whether by suit or agreement on account of personal injuries or sickness sec_104 however prejudgment_interest is not excludable from income under sec_104 154_f3d_1 1st cir affg tcmemo_1997_528 100_tc_124 affd without published opinion 25_f3d_1048 6th cir delaney v commissioner tcmemo_1995_378 affd 99_f3d_20 1st cir forest v commissioner tcmemo_1995_377 affd without published opinion 104_f3d_348 1st cir respondent's determination is presumed to be correct and petitioner bears the burden of proving otherwise rule a we must decide whether and if so to what extent the dollar_figure settlement petitioner received was prejudgment_interest and whether it is excludable from income under sec_104 in rozpad v commissioner supra the u s court_of_appeals for the first circuit the circuit in which this case is appealable approved the tax court's allocation of part of a settlement under rhode island law to prejudgment_interest where the parties had not allocated any amount to prejudgment_interest the allocation of prejudgment_interest in rozpad was calculated by applying a ratio based on the judgment of the state court to apportion the total settlement between prejudgment_interest added to the state court's tort damage award under r i gen laws section and compensatory_damages rozpad is indistinguishable from this case the clerk of the rhode island court calculated that the prejudgment_interest component of the jury award was dollar_figure under r i gen laws section which was dollar_figure percent of the total award applying the allocation formula in rozpad we conclude that dollar_figure ie dollar_figure percent of dollar_figure of the dollar_figure settlement was prejudgment_interest and is not excludable from income under sec_104 to reflect the foregoing decision will be entered under rule