tcmemo_1998_354 united_states tax_court sandy kay jones and clint joseph jones petitioners v commissioner of internal revenue respondent docket no filed date sandy kay jones and clint joseph jones pro sese jeremy l mcpherson for respondent memorandum findings_of_fact and opinion parr judge respondent determined a deficiency in and a penalty on the federal_income_tax for of sandy kay jones mrs jones and clint joseph jones petitioner as follows year deficiency dollar_figure accuracy-related_penalty sec_6662 dollar_figure all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated all dollar amounts are rounded to the nearest dollar unless otherwise indicated after concessions by the parties the issues for decision are whether the amounts reported by petitioners as royalties are gross_receipts from petitioners' trade_or_business we hold they are whether the net profit from petitioners' trade_or_business is subject_to self-employment_tax we hold it is findings_of_fact some of the facts have been stipulated and are so found the stipulated facts and accompanying exhibits are incorporated into our findings by this reference at the time the petition in in the notice_of_deficiency respondent disallowed for lack of substantiation deductions for the cost_of_goods_sold and several expenses of petitioners' business including returns and allowances commissions expense and additional schedule c expenses respondent concedes that petitioners paid the expenses disallowed in the notice_of_deficiency respondent further concedes that petitioners are not liable for the accuracy-related_penalty under sec_6662 the parties agree that if this court decides that the reported royalties are income subject_to self-employment_tax then petitioner's self-employment_tax liability is dollar_figure and petitioners are liable for a deficiency in that year of dollar_figure in light of these concessions and the parties' agreement a rule computation is necessary this case was filed petitioners resided in placerville california petitioner is a self-employed salesman and distributor for several multilevel marketing companies companies and has been engaged continuously in this activity since petitioner has sold products for many companies including omnitrition international inc herbalife biometrics nutrition express matol new vision and tmi international mrs jones has not been involved with petitioner's sales or distributor activities since the companies petitioner is involved with all have a similar multilevel marketing system the system under the system petitioner finds customers for a company's products and then recruits customers who are enthusiastic about the products as distributors to become a distributor the customer completes an application which petitioner supplies and mails it to the company on the application form petitioner's name is entered as the sponsor or up-line distributor for the applicant the distributors recruited by petitioner may repeat the process of finding customers and recruiting them as distributors the distributors recruited by petitioner are considered first-level distributors the distributors recruited by the first-level distributors are with reference to petitioner second-level distributors these lower level distributors are collectively referred to as petitioner's down-line distributors petitioner sells products directly to his customers at the regular retail price and he sells products to his distributors at a discounted price petitioner is paid a commission on the sales he makes directly to his customers and he is paid a commission called a royalty by the companies on the sales made by his first-level distributors once a distributor sells a certain dollar value of products the distributor becomes a breakaway distributor the breakaway distributor buys products directly from the company rather than from petitioner although the breakaway distributor is no longer under the supervision of petitioner and no longer purchases the company's products through petitioner petitioner receives royalty payments from the company on the purchases made by the breakaway distributor petitioner's first-level distributor who recruits a second- level distributor receives a royalty for all of the sales by that second-level distributor petitioner also receives a royalty for each sale by the second-level distributor the number of distributor levels below petitioner for which he the companies refer to these payments as royalties we use this word in describing the payments for convenience without accepting this categorization in a legal context 82_tc_128 the language used may indicate the form of the payment but does not control the character receives royalty payments depends upon the particular company for instance new vision pays royalties for six levels of down- line distributors and herbalife pays royalties for three levels petitioner receives substantially more income from royalty payments than he does from his direct sales in the year at issue petitioner reported a loss on the direct sales due to the costs of promoting his business promoting his business included developing distributors who would break away and generate royalty income for him for the year at issue petitioner reported the receipts from his direct sales dollar_figure on form_1040 schedule c profit or loss from business as gross_receipts from sales and claimed dollar_figure as business_expenses petitioner reported the royalty income he received dollar_figure on form_1040 schedule e supplemental income and loss and claimed dollar_figure as commissions expenses opinion respondent determined that the income petitioner received from the companies on the sales made by his down-line distributors is income from petitioner's trade_or_business and is subject_to self-employment_tax under sec_1401 petitioners assert that the royalty income is not earned_income nor income from petitioner's trade_or_business and is therefore not subject_to self-employment_tax respondent's determination is presumed correct and petitioners bear the burden of proving that respondent's determination is erroneous rule a 290_us_111 issue whether the amounts reported by petitioners as royalties are gross_receipts from petitioner's trade_or_business the instant case is almost identical factually to abraham v commissioner tcmemo_1988_412 in holding that the payment sec_3 to the taxpayer in abraham for sales made by his down-line distributors were self-employment_income this court focused on the activities the taxpayer performed in his business we found that the taxpayer realizing that his income was dependent upon the sales activities of his distributors devoted substantial time and energy to training and developing these individuals all of the taxpayer's activities which included providing the distributors with motivation and encouragement imparting to them his skills knowledge and experience with the products and counseling them on selecting successful recruits were conducted in an attempt to increase the productivity of the distributors at all levels therefore the fact that the taxpayer had no personal contact with the down-line distributors at the second and lower levels made no difference he devoted his time with the in abraham v commissioner tcmemo_1988_412 the multilevel-marketing companies used the terms bonus or commission payments to describe the commissions they paid the taxpayer for the sales made by his down-line distributors expectation that well-trained first-level distributors would develop successful second-level distributors who in turn were likely to develop third-level distributors petitioner argues that the facts of abraham v commissioner supra are different from the facts of the instant case petitioner testified that the multilevel-marketing industry has undergone a big transition since we decided abraham v commissioner supra according to petitioner the training and motivation of distributors is now done by the companies with video and conference calls petitioner however called no witnesses nor produced any other evidence to corroborate his testimony we cannot assume the testimony of absent witnesses would have been favorable to petitioner rather the normal inference is that it would have been unfavorable 47_tc_92 affd 392_f2d_409 5th cir 6_tc_1158 affd 162_f2d_513 10th cir furthermore we find that petitioner's own testimony does not support his argument that this case is distinguishable from abraham v commissioner supra petitioner testified that in the year at issue he sustained a loss on his own efforts to sell the companies' products but that he did so with a view of developing distributors who will break away and generate more income in a royalty petitioner spent a great amount of time effort and money on developing customers into distributors for example petitioner spent dollar_figure in placing newspaper advertisements and printing and distributing flyers to find new customers for the companies' products practically every day petitioner took people to lunch or dinner so they would become his friends because people tend to buy from their friends petitioner held meetings in his home and hotel rooms for customers and distributors who were not yet breakaway distributors to share product result stories and introduce the people to the products which he often provided as samples at no cost at every opportunity petitioner would propose to enthusiastic customers that they become distributors if enthusiastic customers agreed to become distributors petitioner provided them with application forms on which he was designated as the sponsor or up-line distributor petitioner has been regularly and continuously engaged in selling products for multilevel marketing companies since all of the multilevel marketing systems with which petitioner is involved include a royalty payment structure furthermore petitioner is involved in this business with the primary purpose petitioner reported that he spent dollar_figure on meals and entertainment in he took the deduction for this expense on form_1040 schedule c profit or loss from business of making a profit however it is clear from petitioners' return and petitioner's testimony that without the royalty payments petitioner had no honest objective of making a profit from this activity thus we conclude that recruiting and developing distributors is an integral part of petitioner's business see 480_us_23 petitioner also argues that as he has hundreds of down-line distributors who he has never met and who sell products over a broad geographical area the sales made by his breakaway distributors are earned_income to the companies not to him with respect to the payments from the lower-level distributors we can see no distinguishable difference between this case and at trial petitioner gave the following testimony in response to respondent's questions and your primary purpose was for income or profit from q the whole--the whole operation your sales and the down-line distributor sales that was your motive a well it's a little bit leading there counselor but basically-- q i'm entitled to lead a are you we can lead around here huh the court on cross-examination you can lead okay allright but yeah well obviously you know a my real motivation in life is to help people but to make a profit as i do it is not against my principles abraham v commissioner tcmemo_1988_412 despite petitioner's arguments to the contrary petitioner devoted his time and effort to increasing the productivity of the distributors at all levels it was his expectation that well- trained first-level distributors would develop successful lower level distributors who were likely to generate commission income for him during the year under consideration petitioner regularly and continuously engaged in selling the companies' products and especially recruiting distributors accordingly we find that the payments that petitioner received from the companies for sales made by the down-line distributors are gross_receipts from petitioner's trade_or_business issue whether the net profit from petitioners' trade_or_business is subject_to self-employment_tax sec_1401 imposes a tax on an individual's net_earnings_from_self-employment in general self-employment_income consists of the net_earnings derived by an individual from a trade_or_business carried on by him as a sole_proprietor or by a partnership of which he is a member sec_1_1401-1 income_tax regs the term net_earnings_from_self-employment is defined as the gross_income derived by an individual from any trade_or_business less any allowable deductions attributable to the trade_or_business sec_1402 the term trade_or_business when used with reference to self-employment_income or net_earnings_from_self-employment has the same meaning as when used in sec_162 relating to trade_or_business_expenses sec_1402 the supreme court has interpreted the trade_or_business terminology of sec_162 as follows the taxpayer must be involved in the activity with continuity and regularity and that taxpayer's primary purpose for engaging in the activity must be for income or profit commissioner v groetzinger supra pincite at trial petitioner argued that the payments were like dividends dividends on any share of stock are excluded from gross_income and deductions in computing net_income from self- employment sec_1402 the term dividend is defined for purposes of subtitle a6 as any distribution_of_property made by a corporation to its shareholders out of its earnings_and_profits accumulated after date or out of its earnings_and_profits of the taxable_year sec_316 petitioner did not claim to own shares of stock in any of the companies that made payments to him nor did he claim that the payments were made on account of anything other than the agreements he had with the companies to pay him a commission on the sales made by his down- line distributors sec_1401 and sec_1402 are contained in subtit a of the internal_revenue_code we therefore find that the payments petitioner received from the companies are not dividends excluded from self-employment_tax under sec_1402 petitioner also referred to the payments as royalties royalties are defined as payments received for the right to use intangible_property rights and that definition does not include payments for services 86_f3d_1526 9th cir defining royalties for the purposes of sec_512 affg in part and revg in part 103_tc_307 see also 94_tc_60 the regulations define royalties other than mineral oil or gas royalties for personal_holding_company purposes as amounts received for the privilege of using patents copyrights secret processes and formulas good will trade marks trade brands franchises and other like property revd 942_f2d_309 6th cir sec_1 b income_tax regs petitioner has not provided any persuasive evidence that the payments he received from the companies were for the right to use his intangible_property rights if any and not for services we do not need to resolve the question of whether the payments petitioner received from the companies are royalty payments to decide this case royalty payments unlike dividends are not specifically excepted from self-employment_tax by sec_1402 furthermore royalty payments received as self- employment income from a trade_or_business are subject_to self- employment_tax dacey v commissioner tcmemo_1992_187 hittleman v commissioner tcmemo_1990_325 affd without published opinion 945_f2d_409 9th cir langford v commissioner tcmemo_1988_300 affd without published opinion 881_f2d_1076 6th cir we have found that petitioner is in the trade_or_business of selling the companies' products and recruiting distributors and that the payments that petitioner received from the companies for sales made by his down-line distributors regardless of whether he had personal contact with them are gross_receipts from his trade_or_business therefore all such income is self-employment_income to petitioner which is subject_to self-employment_tax under sec_1401 for the foregoing reasons decision will be entered under rule


tcmemo_2007_100 united_states tax_court hubert w n chang petitioner v commissioner of internal revenue respondent docket no 12008-05l filed date hubert w n chang pro_se jonathan j ono for respondent memorandum opinion haines judge petitioner filed a petition with this court in response to a notice_of_determination concerning collection action s under sec_6320 and or notice_of_determination for through years at issue pursuant 1unless otherwise indicated all section references are to continued to sec_6330 petitioner seeks review of respondent’s determination the issue for decision is whether respondent’s determination that collection action could proceed for federal_income_tax liabilities for the years at issue was an abuse_of_discretion background the stipulation of facts and attached exhibits are incorporated herein by this reference petitioner resided in honolulu hawaii when he filed his petition petitioner did not file federal_income_tax returns for and and did not make estimated_tax payments for these years respondent filed substitutes for return on date for and on date respondent mailed petitioner three notices of deficiency determining income_tax deficiencies of dollar_figure dollar_figure and dollar_figure for respectively and additions to tax under sec_6651 continued the internal_revenue_code as amended and all rule references are to the tax_court rules_of_practice and procedure amounts are rounded to the nearest dollar on date this court’s order to show cause under rule f dated date was made absolute and the facts and evidence set forth in respondent’s proposed stipulation of facts attached as exhibit a to respondent’s motion for order to show cause under rule f filed on date were deemed stipulated pursuant to rule f for purposes of this case of dollar_figure dollar_figure dollar_figure for respectively and a of dollar_figure dollar_figure dollar_figure for respectively in response to respondent’s notices of deficiency petitioner filed a petition with this court in chang v commissioner docket no the court dismissed petitioner’s case for lack of prosecution and entered a decision on date which held that petitioner was liable for the income_tax deficiencies along with additions to tax for and on date respondent assessed the deficiencies along with additions to tax and interest for and petitioner also failed to file federal_income_tax returns for and and did not make estimated_tax payments for these years respondent filed substitutes for return on date for and and filed a substitute for return on date for on date respondent mailed petitioner three notices of deficiency determining income_tax deficiencies of dollar_figure dollar_figure and dollar_figure for respectively and additions to tax under sec_6651 of dollar_figure dollar_figure dollar_figure for respectively and a of dollar_figure dollar_figure dollar_figure for respectively on date respondent mailed petitioner a notice_of_deficiency determining an income_tax deficiency of dollar_figure and additions to tax under sec_6651 and sec_6654 of dollar_figure and dollar_figure respectively for petitioner received but did not file a petition with respect to the notices of deficiency for and respondent assessed the deficiencies along with additions to tax and interest for and on march may march and date respectively petitioner’s assessed tax_liabilities for through have not been fully paid on date respondent mailed petitioner a notice_of_federal_tax_lien filing and notice of your right to a hearing under sec_6320 notice_of_federal_tax_lien with respect to the years at issue on date petitioner submitted form request for a collection_due_process_hearing in which he argued the internal_revenue_service did not have the authority to file a lien and asserted other frivolous tax-protester arguments petitioner’s request did not address any alternative methods of collection on date a hearing was held by telephone between petitioner and respondent’s appeals_office on date appeals mailed petitioner a notice_of_determination sustaining the filing of the notice_of_federal_tax_lien the notice_of_determination stated in part the taxpayer has filed an appeal under he has appealed the filing of the notice_of_federal_tax_lien filed for the delinquent accounts the taxpayer has raised only frivolous issues in his appeals and in correspondence he submitted since he made his appeal he has not raised any non-frivolous issues all the legal and procedural requirements for the filing of the lien have been met the taxpayer has not made any non-frivolous arguments in his appeal he has declined our offer to discuss legitimate alternatives to the proposed lien filing action in response to the notice_of_determination petitioner timely filed his petition on date in which petitioner alleges the basis of my complaint is what i believe to be the lack of a valid summary record of assessment form 23-c assessment certificate pursuant to sec_301_6203-1 without a valid assessment there is no liability without a liability there can be no lien discussion where the validity of the underlying tax_liability is properly at issue the court will review the matter de novo 114_tc_604 114_tc_176 the underlying tax_liability is properly at issue if the taxpayer did not receive a statutory_notice_of_deficiency or otherwise have an opportunity to dispute the tax_liability sec_6330 see 118_tc_572 where the validity of the underlying tax_liability is not properly at issue the court will review the commissioner’s determination for abuse_of_discretion sego v commissioner supra pincite goza v commissioner supra pincite the abuse_of_discretion standard requires the court to decide whether respondent’s determination was arbitrary capricious or without sound basis in fact or law 112_tc_19 keller v commissioner tcmemo_2006_166 fowler v commissioner tcmemo_2004_163 petitioner received a notice_of_deficiency for each year at issue but filed a petition with this court only for and which resulted in a decision for respondent petitioner did not file a petition to redetermine the deficiency for or therefore petitioner cannot contest the validity of the underlying income_tax_liability for any of the years at issue and this court will review respondent’s determination for abuse_of_discretion because petitioner is barred from contesting his underlying liability for the years at issue he was permitted at the hearing only to raise other matters eg to challenge the appropriateness of the intended method of collection offer alternatives to collection or raise a spousal defense to collection see sec_6330 petitioner contends that before respondent may proceed with the lien action respondent must demonstrate that the underlying tax assessments for the years at issue were valid petitioner argues that respondent’s appeals_office failed to verify or prove that the assessments in question were valid inasmuch as respondent failed to produce form sec_23 c assessment certificate -- summary record of assessments for each year at issue although federal tax assessments are formally recorded on form_23 c this court has held that forms certificate of assessments payments and other specified matters are presumptive evidence on which respondent’s appeals_office may rely to verify that an assessment has been made against a person for purposes of sec_6320 and sec_6330 115_tc_35 where the taxpayer is provided with forms after the hearing and before trial and the taxpayer does not show any irregularity in the assessment procedure that would raise a question about the validity of the assessments the taxpayer is not prejudiced see 118_tc_162 in this case respondent provided to petitioner and this court forms for each year at issue reflecting the assessment of each tax_liability this court finds that the forms respondent prepared with respect to petitioner’s tax_liabilities for the years at issue establish respondent properly assessed those liabilities and that those liabilities remain unpaid petitioner has not shown any irregularity in respondent’s assessment procedures that raises a question about the validity of respondent’s assessments of those tax_liabilities throughout this case petitioner also presented tax-protester arguments including respondent has no jurisdiction over him the internal_revenue_service has not complied with the paperwork reduction act and respondent lacks authority to assert income_tax deficiencies petitioner’s assertions have been rejected by this court and other courts and we perceive no need to refute these arguments with somber reasoning and copious citation of precedent to do so might suggest that these arguments have some colorable merit 737_f2d_1417 5th cir see eg 127_tc_200 n rejecting as without merit the argument that the requirement to file a tax_return is in violation of the paperwork reduction act nunn v commissioner tcmemo_2002_250 rejecting as without merit the argument that the federal_income_tax is unconstitutional this court rejects petitioner’s tax-protester arguments as frivolous and without merit because petitioner did not raise a valid claim such as a spousal defense or an alternative means of collection such claims are deemed to be conceded see rule b petitioner’s arguments do not present justiciable issues they ignore established law and give no basis for his claim that respondent abused his discretion in sustaining the federal_tax_lien this court concludes that respondent’s determination to proceed with collection of the tax_liabilities assessed against petitioner for the years at issue was not an abuse_of_discretion in reaching these holdings the court has considered all arguments made and to the extent not mentioned concludes that they are moot irrelevant or without merit to reflect the foregoing decision will be entered for respondent


internal_revenue_service number release date index numbers ---------------------------------- --------- ------------------------------------ ------------------------ ----------------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-119413-08 date date legend x --------------------------------------------------- ------------------------------------------------------------- d1 country ------------------------- ---------------------- dear ------------------- this is in response to a letter dated date submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a disregarded_entity for federal tax purposes facts according to the information submitted x was formed on d1 under the laws of country x intended to be treated as a disregarded_entity for federal tax purposes effective d1 however x inadvertently failed to timely file form_8832 entity classification election to be treated as a disregarded_entity for federal tax purposes law and analysis sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with at least two members can elect to be classified as either an association or a partnership and an plr-119413-08 eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association if all members have limited_liability unless the entity makes an election to be treated otherwise a foreign eligible_entity with a single member having limited_liability may elect to be treated as a disregarded_entity pursuant to the rules of sec_301_7701-3 sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date the form is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards that the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides rules for requesting extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to make an election to be treated as a disregarded_entity for federal tax purposes effective d1 x should make the election by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the form except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter plr-119413-08 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely curt g wilson curt g wilson deputy associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


vu department of the treasury internal_revenue_service washington d c 04-of contact person id number telephone number op e-00 tr date jul employer_identification_number legend w x y z dear sir or madam this is in reply to your letter of date regarding a request by w for an extension under the provisions of sec_4943 of the intemal revenue code of the period within which a private_foundation normally is allowed to dispose_of excess business_assets acquired by gift you have been recognized as exempt under sec_501 of the code and are a private_foundation within the meaning of sec_509 in y a publicly traded company which z has contributed to you the majority of the assets you hold are shares of stock x z's mother established w a private_foundation which was also funded with stock in y in x contributed a large number of shares of stock in y to w as a result of this gift w's holdings in y exceeded the percent de_minimis amount of permitted holdings allowed by sec_4943 of the code pursuant to the provisions of sec_4943 of the code w had a year period from the date of the gift to dispose_of the shares of stock it held which were considered excess_business_holdings furthermore pursuant to the provisions of sec_53_4943-3 of the foundation and similar excise_tax regulations your holdings in y are included in determining whether w has excess_business_holdings because you are considered a disqualified_person for the purposes of sec_4943 and the percent de_minimis_rule the initial holding_period ended in the year however w had not successfully reduced its holdings to a permitted level therefore pursuant to the provisions of sec_4943 w requested an extension of the year period in your letter of date you have acknowledged that you are aware that w has not disposed of a sufficient number of shares of stock to enable it and all related private_foundations to come within a level of permitted holdings in addition you are aware of w’s current plan to dispose_of its excess_business_holdings and have agreed to the terms of this pian re sec_50i c of the code exempts from federal_income_tax organizations organized and operated exclusively for charitable or educational_purposes sec_509 of the code provides that unless specifically excepted a domestic or foreign organization described in sec_50i c is a private_foundation and subject_to the excise_taxes of chapter sec_4943 of the code imposes a tax on the excess_business_holdings of any private_foundation in a business_enterprise during any taxable_year sec_4943 of the code defines the term excess_business_holdings as meaning with respect to the holdings of any private_foundation in any business_enterprise the amount of stock or other interest in the enterprise which the foundation would have to dispose_of to a person other than a disqualified_person in order for the remaining holdings of the foundation in such enterprise to be permitted holdings sec_4943 of the code provides that the permitted holdings of any private_foundation in an incorporated business_enterprise are i percent of the voting_stock reduced by ii the percentage of the voting_stock owned by all disqualified persons sec_4943 provides that a private_foundation shall not be treated as having excess_business_holdings in any corporation in which it together with all other private_foundations which are described in sec_4946 owns not more than percent of the voting_stock and not more than percent in value of all outstanding shares of all classes of stock sec_4943 of the code provides that with certain exceptions not applicable here if after may there is a change in the holdings in a business_enterprise other than by purchase ie by gift or bequest by the private_foundation or by a disqualified_person which causes the private_foundation to have excess_business_holdings in such enterprise the interest of the foundation in such enterprise immediately after such change shall while held by the foundation be treated as held bya gisqualified person rather than by the foundation during the 5-year period beginning on the date of such change in holdings sec_4943 provides that the secretary may extend for an additional year period the period under subparagraph for disposing of excess_business_holdings in the case of an unusually large gift or bequest of diverse business holdings or holdings with complex corporate structures sec_53_4943-4 a of the foundation and similar excise_tax regulations provides that in general when the percentage of the holdings in a business_enterprise held by a private_foundation and all disqualified persons together or when the percentage of the holdings of a private_foundation alone in such business_enterprise deceases such holdings may not be increased sec_53_4943-3 of the regulations provide that a private_foundation is not treated as having excess_business_holdings in any incorporated business_enterprise in which it together with all other private_foundations described in sec_4946 actually or constructively owns not more than percent of the voting_stock and not more than percent in value of all outstanding shares of all classes fer re of stock if however the private_foundation together with all other private_foundations described in sec_4946 actually or constructively owns more than percent of either the voting_stock or the value of the outstanding shares of all classes of stock in any incorporated business_enterprise all the stock in such business_enterprise classified as excess_business_holdings under sec_4943 is treated as excess_business_holdings for purposes of this paragraph any stock owned by a private_foundation which is treated as held by a disqualified_person under sec_4943 or shall be treated as actually owned by the private_foundation sec_4946 provides that for the purposes of sec_4943 the term disqualified_person includes a private_foundation which is effectively controlled directly or indirectly by the same person or persons who contro the private_foundation in question or one where substantially_all of the contributions were made directly or indirectly by the same persons to include a substantial_contributor or a member of their family you recognized you have an interest in w's request for an extension because sec_53 b i of the regulations provides that your holdings in y are taken into consideration in determining whether w comes within the percent de_minimis holdings rule and similarly w's holdings are considered in determining your level of permitted holdings we have considered the plan presented by w to dispose_of its excess_business_holdings in y within one year from the end of the initial year period and have concluded that w can reasonably be expected to have successfully disposed of sufficient shares of stock in y to come within the percent de_minimis holdings level accordingly w has been granted an extension of one year within which to dispose_of the remaining shares of stock needed to permit both you and w to come within the percent de_minimis permitted holdings level failure to dispose_of sufficient shares of stock in y will place you and w in excess_business_holdings situations and subject_to the tax imposed by sec_4943 of the code this ruling is directed only to the organization that requested it sec_61 k of the code provides that it may not be used or cited as precedent because this letter could help resolve any questions about your exempt status you should keep it in your permanent records if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter sincerely signed gartand garsep garland a carter manager exempt_organizations technical group


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 1-plr-105917-02 date april legend x date date dear this responds to your letter dated date requesting relief under sec_1362 of the internal_revenue_code facts x was incorporated on date the shareholders of x intended that x be treated as an s_corporation effective on date but the election to be treated as an s_corporation was not timely filed accordingly x requests a ruling that it will be treated as an s_corporation effective date law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective sec_1362 provides in relevant part that if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made under sec_1362 however if an s election is made after the first two and one-half months plr-105917-02 of a corporation’s taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is filed sec_1362 provides that if no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply x did not file an election to be treated as an s_corporation under sec_1362 x has however established reasonable_cause for not making a timely s election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and the representations made and provided that x otherwise qualifies as an s_corporation we conclude that x will be treated as an s_corporation effective date within days from the date of this letter x should submit a properly completed form_2553 with a copy of this letter attached to the relevant service_center except as specifically set forth above no opinion is expressed or implied as to the federal tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed concerning whether x is in fact an s_corporation for federal tax purposes this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent s david r haglund sincerely david r haglund senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number ---------------------------------------- ------------------------ ------------------------------- --------------------------- --------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ---------------- telephone number ---------------------- refer reply to cc psi plr-132106-18 date date legend x ------------------------------------------- ---------------------------------------- a -------------------------------------------- ----------------------- b -------------------------------------------- ---------------------- c -------------------------------------------- ------------------ d -------------------------------------------- ----------------------------------------- e ------------------------------------------ ------------------------------------------------------------- f -------------------------------------------- ----------------------- ---------------------------- g -------------------------------------------- -------------------------------------------- date -------------------- date ---------------------- date -------------------- plr-132106-18 date ------------------ date ----------------- date ------------------- state -------------- dear ---------------- this letter responds to a letter dated date submitted on behalf of x by x's authorized representative requesting relief from an inadvertent invalid election and termination under sec_1362 of the internal_revenue_code code facts according to the information submitted x was formed on date as a corporation under the laws of state effective date x elected to be treated as an s_corporation x's shareholders consented to the s_corporation_election including a but the signature of a’s community_property spouse b was inadvertently omitted from the election both a and b represented that at all times since x’s s_corporation_election was filed on date all items of income gain loss deduction or credit were reported consistently with such election on all affected federal_income_tax returns in its submission x represented that it meets the criteria for and requested automatic relief under revproc_2004_35 for failing to include b’s signature with its s_corporation_election further as part of the estate_planning for c d was formed as a grantor_trust e was formed pursuant to the terms of d’s trust agreement and became a shareholder of x on date x represents that because d was a defective_grantor_trust all items of income gain loss deduction or credit of x were reported on c’s individual tax returns c died on date subsequent to date x requested relief under revproc_2003_43 for a late filed qualified_subchapter_s_trust qsst election for e the irs granted the relief on date unbeknownst to x e’s governing trust agreement provided for more than one income_beneficiary thereby causing e’s qsst election to be invalid x represents that because e’s qsst election was invalid e was an ineligible shareholder of x and caused an inadvertent termination of x’s s_corporation_election on date plr-132106-18 x represents that f as sole income_beneficiary of e reported e’s allocable share of income gain loss deduction or credit from date until date on date e transferred its x shares to g a permissible s_corporation shareholder x represents that the ineffectiveness of its s election and the circumstances resulting in the termination of x's s_corporation_election were inadvertent and were not motivated by tax_avoidance or retroactive tax planning additionally x represents that x and its shareholders have filed their federal_income_tax returns consistent with having a valid s_corporation_election in effect for x x and its shareholders agreed to make any adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary with respect to the period specified by sec_1362 law and analysis sec_1361 of the code provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 defines a small_business_corporation as a domestic_corporation which is not an ineligible_corporation and which does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than one class of stock sec_1361 provides that for the purposes of sec_1362 a_trust all of which is treated under title_26 subtitle a chapter subchapter_j part i subpart e of the united_states_code as owned by an individual who is a citizen or resident_of_the_united_states may be a shareholder of an s_corporation sec_1361 provides that in the case of a qualified_subchapter_s_trust with respect to which a beneficiary makes an election under sec_1361 the trust is treated as a_trust described in sec_1361 and for purposes of sec_678 the beneficiary of such trust shall be treated as the owner of that portion of the trust which consists of stock in an s_corporation with respect to which the election under sec_1361 is made sec_1361 defines the term qualified_subchapter_s_trust as a_trust all of the income within the meaning of b of which is distributed or required to be distributed currently to one individual who is a citizen or resident_of_the_united_states in addition the terms of the trust must require that i during the life of the current income_beneficiary there shall be only one income_beneficiary of the trust ii any corpus distributed during the life of the current income_beneficiary in the trust may be distributed only to such beneficiary iii the income_interest of the current income_beneficiary in the trust shall terminate on the earlier of such beneficiary's death or the plr-132106-18 termination of the trust and iv upon the termination of the trust during the life of the current income_beneficiary the trust shall distribute all of its assets to such beneficiary sec_1362 provides that except provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1361 provides that a beneficiary of a qualified_subchapter_s_trust or his legal_representative may elect to have sec_1361 apply an election under sec_1362 shall be made separately with respect to each corporation the stock of which is held by the trust sec_1362 provides that an election under sec_1362 is terminated whenever at any time on or after the first day of the first taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 provides that any termination under sec_1362 is effective on and after the date of cessation sec_1362 provides that if an election under sec_1362 by any corporation a was not effective for the tax_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under paragraph or of sec_1362 the secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the event resulting in the ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the required shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such ineffectiveness or termination the corporation shall be treated as an s_corporation during the period specified by the secretary conclusion based solely on the facts submitted and representations made we conclude x’s s_corporation_election was invalid because the original s_corporation_election failed to include the signature of a community_property spouse who was a shareholder solely pursuant to state community_property law even if x’s s election was valid we conclude that x's s_corporation_election terminated on date due to the failure of e being a permissible shareholder under sec_1361 and that the termination was inadvertent within the meaning of sec_1362 accordingly plr-132106-18 x will be treated as continuing to be an s_corporation from date and to date provided that its s_corporation_election was otherwise valid and was not otherwise terminated under sec_1362 such relief is conditioned on x filing a request for automatic relief for x’s invalid s election effective from date under revproc_2004_35 with the appropriate service_center within days from the date of this letter a copy of this letter should be attached to the request for automatic relief if x or its shareholders fail to seek automatic relief under revproc_2004_35 this ruling is null and void except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed or implied concerning the eligibility of x to be an s_corporation this ruling is directed only to the taxpayer who requested it according to sec_6110 this ruling may not be used or cited as precedent pursuant to the power_of_attorney on file with this office we are sending a copy of this letter to x's authorized representative sincerely __________________________ adrienne m mikolashek branch chief branch office of associate chief_counsel passthroughs special industries enclosures copy of letter copy of letter for sec_6110 purposes cc


t c memo united_states tax_court calpo hom dong architects inc petitioner v commissioner of internal revenue respondent docket no filed date richard todd luoma for petitioner christian a speck for respondent memorandum findings_of_fact and opinion haines judge respondent determined a deficiency of dollar_figure in petitioner’ sec_2002 federal corporate_income_tax the issue for decision is whether during petitioner was a qualified_personal_service_corporation as defined by sec_448 unless otherwise indicated all section references are to continued findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts the supplemental stipulation of facts and the attached exhibits are incorporated herein by this reference at the time it filed its petition petitioner’s principal_place_of_business was in sacramento california petitioner a corporation offers architectural services and other related_services to its clients in its promotional materials petitioner describes its services calpo hom dong architects ch d offers a full range of architectural services including master planning feasability studies design interior design space planning facilities management construction administration historic preservation and consulting services our widely diversified practice encompassing large scale planning projects to singular architectural projects affords us the latitude of a wide range of knowledge from which we can draw our thoughts our approach seeks a balanced weighing of elements that make up architecture design the organization of space and light structure systems and materials to carry out these services petitioner employs licensed architects unlicensed architects and nonarchitects continued the internal_revenue_code as amended and all rule references are to the tax_court rules_of_practice and procedure amounts are rounded to the nearest dollar during petitioner was owned percent by architects licensed to practice in the state of california petitioner timely filed a form_1120 u s_corporation income_tax return for identifying its business activity as architecture petitioner reported gross_receipts of dollar_figure cost_of_goods_sold of dollar_figure total income of dollar_figure total deductions of dollar_figure taxable_income of dollar_figure and total_tax of dollar_figure to calculate the total_tax petitioner used the graduated_tax rates generally applicable to corporations as provided in sec_11 on date respondent issued petitioner a notice_of_deficiency stating it is determined that for the taxable_year shown below calpo hom dong architects inc is a personal_service_corporation that is subject_to a special flat income_tax rate of the corporation is a qualified_personal_service_corporation because substantially_all of the corporation’s activities involve the performance of services in the fields of health law engineering architecture accounting actuarial science the performing arts or consulting and substantially_all of the stock of the corporation is held by employees performing services for the corporation retired employees employees’ or retired employees’ estates or persons acquiring stock by reason of an employees’ death using the flat 35-percent tax_rate applicable to qualified personal_service_corporations under sec_11 respondent determined a corrected tax_liability of dollar_figure and a deficiency of dollar_figure in petitioner’ sec_2002 federal corporate_income_tax in response to the notice_of_deficiency petitioner timely filed a petition with this court opinion i applicable code sections and regulations sec_11 imposes a tax on the taxable_income of every corporation sec_11 provides graduated_tax rates generally applicable to corporations however sec_11 provides notwithstanding paragraph the amount of the tax imposed by subsection a on the taxable_income of a qualified_personal_service_corporation as defined in sec_448 shall be equal to percent of the taxable_income a corporation is a qualified_personal_service_corporation if it meets both the function test and the ownership test of sec_448 see sec_1_448-1t temporary income_tax regs fed reg date under the function test substantially_all of the activities of the corporation must involve the performance of services in the fields of health law engineering architecture accounting actuarial science performing arts or consulting sec_448 emphasis added sec_1_448-1t temporary income_tax regs supra further describes the function test a corporation meets the function test if substantially_all the corporation’s activities for a taxable_year involve the performance of services in one or more of the following fields-- a health b law c engineering including surveying and mapping d architecture e accounting f actuarial science g performing arts or h consulting substantially_all of the activities of a corporation are involved in the performance of services in any field described in the preceding sentence a qualifying field only if percent or more of the time spent by employees of the corporation is devoted to the performance of services in a qualifying field emphasis added as relevant to this case a corporation meets the ownership test if substantially_all of the corporation’s stock by value is held directly or indirectly by employees performing services for the corporation in connection with activities involving a qualifying field sec_448 see also sec_1 1t e temporary income_tax regs fed reg date ii the parties’ positions petitioner asserts that during approximately percent of its activities involved the performance of services in the qualifying field of architecture petitioner asserts that the remaining percent of its activities involved the performance of nonarchitectural services petitioner concludes that because less than substantially_all less than percent of its activities were devoted to the performance of architectural services it was not a qualified_personal_service_corporation respondent argues that during petitioner was a qualified_personal_service_corporation respondent asserts that petitioner met the ownership test because petitioner was owned percent by employees who performed architectural services respondent also asserts that petitioner met the function test and advances two alternative arguments petitioner’s classification of architectural and nonarchitectural services is incorrect many of the nonarchitectural services are actually architectural services and more than percent of petitioner’s activities involved the performance of services in the qualifying field of architecture or even if petitioner’s classification is correct the nonarchitectural services are in the qualifying field of consulting and more than percent of petitioner’s activities involved the performance of services in the qualifying fields of architecture and consulting petitioner concedes that it meets the ownership test because it was owned percent by architects petitioner does not apparently petitioner concedes that it meets the ownership test only if the court concludes that only one qualifying field can be considered in applying the function test it is unclear why petitioner limits its concession in this manner nevertheless because we consider only one of the qualifying fields in determining petitioner failed to meet its continued dispute that its nonarchitectural services could be classified as consulting services for purposes of sec_448 however petitioner argues that when drafting sec_448 congress intended to limit the definition of a qualified_personal_service_corporation to a corporation where substantially_all activities were performed in only one of the qualifying fields petitioner does not cite any legislative_history to support its argument instead petitioner interprets the use of or which separates the final two qualifying fields in sec_448 to mean that only one qualifying field can be considered petitioner argues that to the extent the temporary regulations allow the qualifying fields to be combined a corporation meets the function test if substantially_all the corporation’s activities involve the performance of services in one or more of the following fields emphasis added the regulations are invalid we need not address whether petitioner’s classification of architectural and nonarchitectural services is correct nor do continued burden_of_proof see infra the condition on petitioner’s concession has been met petitioner’s classification of services is questionable for many reasons not the least of which is that some of the services petitioner now classifies as nonarchitectural services were identified as architectural services in its promotional materials any reference below to architectural services and nonarchitectural services does not constitute a finding by this continued we need to discuss the validity of sec_1_448-1t temporary income_tax regs supra assuming arguendo that petitioner’s classification of services is correct and that for a corporation to be a qualified_personal_service_corporation substantially_all of its activities must involve the performance of services in only one of the qualifying fields conclusions we explicitly decline to draw petitioner would still bear the burden of proving that less than substantially_all of its activities involved the performance of architectural services see rule a 290_us_111 as described below petitioner failed to meet its burden iii analysis to establish that less than substantially_all of its activities involved the performance of architectural services petitioner relies exclusively on monthly revenue summaries and a annual revenue summary the revenue summaries the revenue summaries purport to break down revenue petitioner received by specific types of services with each service classified a sec_3 continued court instead such references are used for the purpose of clarity in demonstrating that even if petitioner’s classification were accepted petitioner would still fail to meet its burden_of_proof under sec_7491 the burden_of_proof may shift to the commissioner in certain situations petitioner does not argue that the burden_of_proof shifts to respondent architectural or nonarchitectural petitioner concludes on the basis of the revenue summaries that of it sec_2002 revenue totaling dollar_figure dollar_figure was received for architectural services and dollar_figure was received for nonarchitectural services the fatal flaw in petitioner’s approach is that the revenue summaries measure the wrong data under the function test of sec_448 substantially_all of the activities must involve the performance of services in the fields of architecture emphasis added sec_1_448-1t temporary income_tax regs supra states substantially_all of the activities of a corporation are involved in the performance of services in any field only if percent or more of the time spent by employees of the corporation is devoted to the performance of services in a qualifying field emphasis added in other words the appropriate inquiry is whether petitioner’s employees devoted substantially_all of their time to the performance of architectural services the revenue summarie sec_5 petitioner’s architectural services included schematic design design development construction documents and bid negotiations construction document support and specialized architectural services petitioner’s nonarchitectural services included space planning space planning support price planning interior design construction administration specialized services and outside consulting we note that petitioner’s revenue summaries indicate total revenue of dollar_figure while it sec_2002 tax_return indicates gross_receipts of dollar_figure petitioner does not explain this discrepancy measure only the revenue received in they do not measure the amount of time petitioner’s employees devoted to the performance of architectural services petitioner apparently recognized this problem and attempted to establish a link between the revenue received and the time spent on the performance of architectural services one of petitioner’s architect-owners alan hom mr hom testified that the average hourly billing rate for architectural services was dollar_figure and the average hourly billing rate for nonarchitectural services was between dollar_figure and dollar_figure petitioner used the revenue summaries and mr hom’s testimony to extrapolate the approximate number of hours worked by petitioner’s employees in the performance of architectural and nonarchitectural services petitioner requested that the court find as fact for the number of hours spent on architectural services based on revenue for such services and the average hourly rate of dollar_figure was big_number for the number of hours spent on non-architectural services based on revenue for such services and the average hourly rate of dollar_figure to dollar_figure was big_number at dollar_figure per hour or big_number at dollar_figure per hour for based on hours spent on architectural services versus all time spent on all services petitioner’s architectural services represented when the average rate for non-architectural services is calculated at dollar_figure per hour and when the average rate for non-architectural services is calculated at dollar_figure per hour there are several problems with petitioner’s approach first other than mr hom’s testimony petitioner presented no evidence to establish average hourly rates mr hom did not refer to any specific documents to support his testimony and he appeared to be offering only rough estimates we give little weight to mr hom’s unsupported testimony even if mr hom’s estimates were reliable the estimates appear to be applicable only to projects where petitioner billed its clients at an hourly rate petitioner’s contracts demonstrate a variety of billing methods including fixed fees hourly fee agreements and hourly fee agreements with maximum total fees based on the usable square footage of the project mr hom testified that only to percent of the contracts billed for services at an hourly rate we do not believe that petitioner’s approach provides an accurate measure of the time petitioner’s employees devoted to the performance of architectural services particularly considering petitioner billed no more than half of its clients at an hourly rate even if mr hom’s estimates could be used to determine time spent regardless of the billing method the revenue summaries still would not provide an accurate measure of the time spent by petitioner’s employees during for example petitioner’s date revenue summary lists revenue from projects of the following project numbers appear on petitioner’s date revenue summary continued the projects projects do not appear on any of petitioner’s employees’ time sheets for date the mismatching of revenue and time spent is even clearer when comparing individual employees’ time sheets with the monthly revenue summaries according to frank bravo’s mr bravo’s time sheets mr bravo worked on projects during date between february and date petitioner received revenue from seven of mr bravo’s january projects but it received no revenue during from three of the projects according to karl chan’s mr chan’s time sheets mr chan worked on projects during date between march and date petitioner received revenue from of mr chan’s january projects but it received no revenue during from of the projects according to mr hom’s time sheets mr hom worked on projects during date between march and date petitioner received revenue from seven of mr hom’s january projects but it received no revenue during from nine of the projects this pattern is not limited to these employees nor is continued of the project numbers appearing on petitioner’s date revenue summary only the following project numbers appear on petitioner’s employees’ time sheets for date it limited to services performed in date these are only three examples that reflect a pattern of mismatching of revenue and time spent by nearly all of petitioner’s employees during all months of the conclusion is inescapable--petitioner’ sec_2002 revenues do not measure the time spent by petitioner’s employees during some of petitioner’ sec_2002 revenue was received for work done outside of and petitioner received no revenue during for some of the work done by its employees during finally petitioner’ sec_2002 revenue from nonarchitectural services included revenue from outside consulting mr hom testified that outside consulting included mechanical electrical engineers plumbing engineers that basically since we don’t have those engineers in-house we consult out for them in other words petitioner received revenue during for work done by people other than petitioner’s employees by including revenue from outside consulting petitioner measured time spent by nonemployees making petitioner’s estimation of time spent by its employees even more inaccurate for the above reasons we find that petitioner failed to prove that less than substantially_all of its activities were devoted to the performance of services in the qualifying field of architecture we sustain respondent’s determination that during petitioner was a qualified_personal_service_corporation under sec_448 thus subject_to a flat 35-percent tax_rate under sec_11 in reaching our holdings we have considered all arguments and contentions made and to the extent not mentioned above we conclude that they are moot irrelevant or without merit to reflect the foregoing decision will be entered for respondent


t c memo united_states tax_court michael r motsko petitioner and cheryl manns intervenor v commissioner of internal revenue respondent docket no filed date peter b brautigam and michael jungeris for petitioner cheryl manns pro_se julie l payne for respondent memorandum opinion holmes judge michael motsko is a skilled mechanic who runs a trucking company and repair shop in fairbanks alaska his estranged wife used to keep the books but she was less than honest in preparing their taxes and ended up serving time for signing false returns motsko has already won relief from joint liability for their taxes he now seeks relief for and background motsko graduated from high school in minnesota in and began working in construction he learned over time to run the heavy equipment used on major construction projects and in moved to alaska where he helped build the trans-alaska pipeline he has never taken a business course and only learned how to balance a checkbook in he met cheryl manns in and they married the next year they have two children a son who is now grown and a daughter still in high school who lives with motsko motsko and manns earned their living from two businesses that they cofounded the first changed names as it changed its line of work--starting out as independent excavating and then becoming evergreen construction before finally settling on its current name of evergreen trucking the last shift began when motsko bought a truck and lowboy a wheeled bed on which a driver places cargo to be hauled by the truck but the move was ill-timed the alaskan construction industry went into recession in the 1980s when oil prices collapsed and the trucking business followed evergreen’s business fizzled and unable to afford a driver motsko took over the driving himself in motsko and his wife formed a second business the hydraulics center it was a natural outlet for motsko’s growing skill as a heavy equipment mechanic it also gave the family an income when the construction industry went into its long annual hibernation from the beginning of their relationship manns had taken care of all of motsko’s finances and this continued when they started their businesses manns handled all the paperwork wrote the checks and helped their accountants prepare the tax returns while motsko did the excavating drove the truck and made the repairs manns also wrote almost all the checks for the family bills if motsko needed some money he would occasionally borrow the appropriate checkbook to pay for a specific service such as a doctor’s appointment or a part needed by one of the businesses but before he took the checkbook he would generally clear it with manns to make sure that they had enough money in the right account we specifically find manns never deliberately lied to him about anything having to do with their money and that motsko had access to all of their financial records we also find however that he did not ask her many questions and never reviewed their financial records as far as he knew she paid all their bills on time and we believe him when he testified that it was proof enough for him that no vendor had ever refused to do business with them because of nonpayment motsko might however have noticed something that was quite unusual had he dug into those records--manns unbeknownst to him had drawn up and filed an agreement establishing herself and her brother as partners of the hydraulics center business according to this agreement manns had a interest and her brother the remainder and although the hydraulics center was a partnership between manns and her brother the business license on file with the state of alaska was in her name only motsko in other words seemed to own no part of the business where he worked to add to his troubles he was also at least partially responsible for loans he and manns took out to run the hydraulics center because manns drew up the paperwork for these loans and motsko signed them without looking too closely around the irs began auditing motsko and manns’s returns manns let motsko know about this however she said that it was common for businesses to be audited and that it was nothing to worry about this case proved to be an exception manns it seems had never filed a tax_return she finally prepared and filed one--which motsko signed--in date this return reported taxes and penalties due of dollar_figure while motsko was aware of the audit he was not overly concerned by it and assumed that manns would pay the taxes just like she would any other bill in motsko began having serious back pain and so evergreen’s truck and lowboy sat idle for weeks at a time he decided to sell them because of their carrying cost and he negotiated the selling_price of dollar_figure the truck and lowboy were completely depreciated so nearly the entire sale proceeds would be taxable_income but motsko and manns did not set_aside a reserve one reason for their failure is that the sale proceeds might have been earmarked for settling a lawsuit brought against motsko for reasons unknown by a man named jerry sadler motsko and manns settled that suit in for dollar_figure but whether the money came from a loan or from the cash realized by the lowboy sale is unclear it is also possible that money from the sale went toward construction on the hydraulics center property then their troubles snowballed in date manns was indicted on counts of making and subscribing false income_tax returns for tax years and and through in may she pleaded guilty to five of these counts and promised to pay all back taxes penalties and interest in september she also filed a sentencing statement saying that she accepted full responsibility for her actions motsko was never at any time implicated in her crimes but the criminal investigation did not cause them to change their usual distribution of responsibilities and with the criminal case hanging over her manns had not taken the time to prepare their tax_return when she did finally prepare and file it in date the return reported taxes and penalties due of dollar_figure by then she had already pleaded guilty and been sentenced and motsko had by then read her letter accepting responsibility for her actions but even then he still relied on her to run the finances in answering his lawyer’s question about whether he was aware of the amount of tax due when he signed the return motsko testified yes i remember when i signed the taxes that you know i remember being it was a big sum and what i do remember is i asked cheryl about it and cheryl says she says well i’ve got a check in she said i’m going to be incarcerated she said so i can’t do nothing about it until i get back and that’s where it - it’s it that’s where it was the and returns were never audited and the commissioner accepted them as filed the irs started a collection action against motsko and manns in date and filed liens against their assets in date in date motsko filed for innocent spouse relief for and after the commissioner denied it motsko petitioned this court to review the commissioner’s decision the case was tried in alaska where motsko resided when he filed his petition manns intervened believing that motsko should remain liable with her for the unpaid and taxes discussion a married couple can choose to file their federal tax returns jointly sec_6013 if they do both are responsible for the return’s accuracy and both are jointly and severally liable for the entire tax due sec_6013 114_tc_276 this can lead to harsh results and so sec_6015 lets a spouse ask for relief from joint_and_several_liability on three grounds sec_6015 lets a spouse seek relief if he can show that he neither knew nor had reason to know of an understatement on the return sec_6015 lets divorced or separated spouses split their tax_liability both these provisions however require that the liability in question arise from a deficiency meaning that a couple has underreported their taxable_income in tax years through manns did understate their joint income motsko knew nothing about it and the commissioner granted him relief for those years under sec_6015 tax years and are a different story for those years there was no deficiency--the problem motsko faced was that part of the tax due went unpaid that left him able to seek relief only under sec_6015 because that section allows relief where it is inequitable to hold the individual liable for any unpaid tax or any deficiency or any portion of either unless otherwise indicated all section references are to the internal_revenue_code as in effect for the year at issue sec_6015 the commissioner has issued revenue procedures to guide the exercise of his discretion and revproc_2000_ was the one in effect when motsko asked for relief revproc_2000_15 2000_1_cb_447 we routinely refer to that revenue_procedure when we review what the commissioner did see eg 120_tc_137 118_tc_106 affd 353_f3d_1181 10th cir though we have also considered other factors 122_tc_32 appeal docketed no 9th cir we begin by noting that motsko has the burden_of_proof 119_tc_306 affd 101_fedappx_34 6th cir this means that he must show that the commissioner’s denial of relief was arbitrary capricious or without sound basis in fact jonson t c pincite butler t c pincite we have however ruled that the commissioner’s determination to deny relief under sec_6015 is subject_to de novo review ewing v commissioner t c pincite the commissioner’s continuing disagreement with ewing made him argue in this case that we should limit motsko to the evidence that was before the appeals officer who denied his relief ewing binds us though so we considered evidence that motsko presented for the first time at trial we begin our analysis with the revenue procedure’s list of conditions that a person trying to win innocent spouse relief under sec_6015 must show these include proof that he filed a joint_return did not qualify for relief under sec_6015 or c and did not fraudulently transfer property to anyone to avoid paying taxes revproc_2000_15 sec_4 2000_1_cb_448 both manns and the commissioner admit that motsko meets all these conditions we next see if motsko qualifies for the safe_harbor under section dollar_figure of the revenue_procedure revproc_2000_15 sec_4 2000_1_cb_448 the safe_harbor has three conditions and if motsko shows that he met them he would ordinarily get relief one of the three however is that he did not know when he signed the returns that the tax_liability would not be paid to prove this motsko must show that when he signed the joint_return he neither knew or had reason to know that tax reported on each of the returns would not be paid and that it was reasonable for him to believe that manns would pay the reported tax for the year id we find that motsko did not actually know in when he signed the return that the tax would not be paid but we do find he had reason to believe it wouldn’t be motsko is right to say his wife had paid all of their reported taxes in the past but by he knew that their returns for several years were being audited he also knew that he was signing the return more than a year late this was enough to trigger his duty_of inquiry because a reasonable person in his position would have gotten suspicious that manns was no longer behaving as expected see feldman v commissioner tcmemo_2003_201 affd 152_fedappx_622 9th cir knowledge of an ex-spouse’s deteriorating mental condition should have caused the taxpayer to inquire into whether his ex-spouse had paid their taxes instead of taking a closer look at what was going on however motsko continued to have nothing to do with the finances this was not reasonable by the time he signed the return we find that he actually knew that the tax would not be paid manns had already been indicted on counts of tax_evasion and pleaded guilty to of them he knew that she was on her way to jail and he testified that she had told him that there was nothing that she could do about the taxes due on the return until after she was released see kleinman v commissioner tcmemo_1994_19 wife charged with knowledge after husband indicted this leaves the balancing test--eight factors to consider in deciding whether relief would be equitable revproc_2000_ sec_4 c b pincite these factors are not the only ones that the commissioner and we can look at but they are where we start revproc_2000_15 sec_4 c b pincite ewing t c pincite those about which the parties agree are in italics weighs for relief neutral no knowledge economic hardship no significant benefit2 later compliance with federal tax laws no divorce decree liability attributable to non-requesting spouse nonrequesting spouse responsible for tax under divorce decree separated or divorced abuse present still married no abuse present weighs against relief knowledge no economic hardship significant benefit no later compliance with federal tax laws liability attributable to petitioner petitioner responsible for tax under divorce decree we address each factor that the parties disagree about knowledge as discussed above motsko either knew or had reason to know that the and taxes would not be paid this factor weighs against relief revproc_2000_15 sec_4 c b pincite does not state that the absence of a significant benefit will weigh in a petitioner’s favor but only that a significant benefit will weigh against relief nonetheless we decided in ewing t c pincite and other cases cited that the absence of a significant benefit should be a positive factor for petitioners economic hardship we must figure out whether motsko will suffer economic hardship if his request for relief is not granted the revenue_procedure refers us to the regulation in sec_301_6343-1 proced admin regs which defines economic hardship as the inability to pay reasonable basic living_expenses if taxes were paid instead in motsko’s case those taxes and penalties total over dollar_figure as for his living_expenses sec_301_6343-1 proced admin regs directs us to consider such factors as the cost of living in alaska how much of motsko’s property is exempt from levy his earning ability and any extraordinary circumstances motsko reported on a collection information statement for wage earners an irs form submitted in support of his request for relief that his monthly wages were dollar_figure and that his monthly expenses including about dollar_figure a month for his daughter’s hockey programs were dollar_figure leaving him with a monthly deficit of dollar_figure the current allowable living_expenses for a two- motsko listed his monthly expenses food clothing and misc housing and utilities transportation health care taxes income and fica other expenses total living_expenses dollar_figure big_number big_number big_number big_number motsko gave no evidence to the revenue_agent to corroborate his income or expenses but under ewing we considered the evidence he presented at trial anyway person household in alaska at motsko’s stated level of income according to the commissioner’s guidelines is dollar_figure motsko also has many assets that he could likely sell without undue_hardship he has dollar_figure in cash or cash equivalents plus dollar_figure of equity in his house and an additional dollar_figure of equity in an adjacent lot he has an unencumbered harley davidson motorcycle and a small all-terrain vehicle what looks to be either an understatement of income or overstatement of expenses when combined with these assets leads us to find that motsko would not suffer economic hardship should we deny his request for relief these assets were tied up in the divorce proceedings between motsko and manns when the case was tried that does not render them valueless without some showing by motsko that he would have no hope of regaining control_over them significant benefit the question here is whether motsko significantly benefited--beyond normal support--from the underpayment of the and taxes the couple owed taxes of dollar_figure on agi of dollar_figure the high cost of living in alaska and the absence of any suggestion that motsko’s standard of living increased leads us to conclude that he did not http www irs gov businesses small article id html these assets include cash on hand personal savings and checking accounts and other investments significantly benefit beyond normal support in in the couple owed taxes of dollar_figure on adjusted_gross_income of dollar_figure most of this income came from the sale of the lowboy and truck whether the proceeds of that sale went to settle the sadler lawsuit or to construction on the hydraulics center is not clear if the money went to settle the lawsuit motsko certainly benefited by being relieved of that debt if it went to the hydraulics center he may not have received any significant benefit if manns’s paperwork actually deprived him of any interest in that business yet even with his equity in the hydraulics center in dispute he admitted that the center was at the very least a main source of his income our decision on this factor for therefore flows from the burden of proof--motsko had it and he didn't show where the money went so we find that he did not prove that he received no significant benefit attribution for the total agi reported was dollar_figure the revenue_agent attributed of this amount or dollar_figure to motsko’s work in evergreen trucking which the agent deemed to be motsko’s schedule c business for the couple reported total agi of dollar_figure this included dollar_figure from evergreen trucking’s sale of the truck and lowboy and another dollar_figure from evergreen trucking this gave motsko in the agent’s estimation the couple’s taxable_income was dollar_figure making their tax assessed dollar_figure however the motskos had paid withholding and excess fica of dollar_figure making their overall tax due for dollar_figure of the total income for the year even though motsko argues that he never saw a penny from the lowboy sale the agent seems to have concluded that motsko earned all revenue coming from evergreen trucking and manns earned everything that come from the hydraulics center this is questionable--the couple seemed to divide the labor in both businesses fairly equally even though we acknowledge that motsko may just be an employee of the hydraulics center instead of a partner the fact remains that the revenue_agent attributed all the income from the hydraulics center to manns neither of the parties provided us with evidence to rebut the revenue agent’s conclusion what we do know however is that at least part of the taxes due can be attributed to the income-producing activities of motsko thus this factor weighs against relief payment responsibility motsko and manns did not have a final divorce decree when the case was tried so this factor is neutral other factors motsko also urges us to consider manns’s sole responsibility for the tax crimes stemming from their returns as a positive factor while we encourage all taxpayers to avoid indictment we also think doing so should be presumed rather than rewarded as a positive factor in seeking innocent spouse relief in ewing we did state that failure to participate in any wrongdoing --at least when that wrongdoing was concealed from the continued when the table is reset to reflect our findings it looks like this weighs for relief neutral no significant benefit--1993 separated or divorced later compliance with federal tax laws no divorce decree no abuse present weighs against relief knowledge no economic hardship significant benefit --1996 liability attributable to petitioner the final tally--even for the more favorable year 1993--is two factors weighing toward relief three neutral and four weighing against we agree with the commissioner that motsko and manns’s separation and motsko’s lack of significant benefit in are outweighed by the three negative factors knowledge economic hardship and attribution present--especially since knowledge or reason to know that a tax would be unpaid is an extremely strong factor weighing against relief rev_proc continued spouse asking for relief--could be a positive factor ewing t c pincite but the wrongdoing in ewing was underpaying the taxes not filing feloniously false returns and manns’s crimes did not affect the two tax years litigated in this case sec_4 c b pincite we therefore conclude that the commissioner did not abuse his discretion in denying motsko relief from joint_and_several_liability for tax years and decision will be entered for respondent


internal_revenue_service number release date index number --------------------------------------------------- --------------------------- ---------------------------------------------------- ----------- ------------------------------------------ department of the treasury washington dc person to contact --------------------------- id no -------------- telephone number ---------------------- refer reply to cc psi b03 - plr-107986-13 date date legend x ---------------------------------------------------- ------------------------------------------------------- y ---------------------------------------------------- ----------------------------------------------- z ---------------------------------------------------- --------------------------------------------------------------------- country d1 -------- ------------------- dear ---------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting a ruling under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations that x be granted an extension of time to file an election to be classified as a partnership under sec_301_7701-3 facts the information submitted states that x was formed on d1 as a limitada under the laws of country x’s default classification is an association_taxable_as_a_corporation because all members have limited_liability as of d1 x had more than one member including y z is the general_partner of y x intended to elect to be treated as a partnership for federal tax purposes effective d1 however a form_8832 entity plr-107986-13 classification election electing to be treated as a partnership effective d1 was not timely filed law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 under sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership sec_301_7701-3 provides that unless an entity elects otherwise a foreign eligible_entity is an association if all members have limited_liability sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided in sec_301_7701-3 or to change its classification by filing a form_8832 with the service_center designated on the form_8832 sec_301_7701-3 provides that an election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no date is specified on the election form the effective date specified on form_8832 cannot be more than days prior to the date on which the election is filed and cannot be more than months after the date on which the election is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government plr-107986-13 conclusion based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file form_8832 with the appropriate service_center and elect to be classified as a partnership for federal tax purposes effective d1 a copy of this letter should be attached to the form_8832 except as specifically set forth above no opinion is expressed or implied concerning the federal tax consequences of the transaction described above under any other provision of the code specifically no opinion is expressed or implied as to whether x is otherwise eligible to make the election this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file with this office we are sending a copy of this letter to x’s authorized representative sincerely associate chief_counsel passthroughs special industries by ___________________________________ james a quinn senior counsel branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes