t c memo united_states tax_court commissioner of internal revenue respondent ting cai petitioner v docket no filed date ting cai pro_se adam b landy thomas r mackinson and jason t scott for respondent memorandum findings_of_fact and opinion vasquez judge respondent determined deficiencies in petitioner’s federal_income_tax of dollar_figure and dollar_figure and accuracy-related_penalties of dollar_figure and dollar_figure for and respectively after concessions the issues for decision are whether petitioner is entitled to schedule c deductions claimed for tax_year sec_2013 and sec_2014 and liable for sec_6662 accuracy-related_penalties findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated by this reference petitioner resided in california when he filed his petition petitioner is a software designer he received an undergraduate degree in computer science from san jose state university and an m b a from houston baptist university petitioner worked as a data scientist for ebay inc from to at trial respondent argued that petitioner’ sec_2013 deductions claimed on schedule c profit or loss from business should be disallowed as startup expenses under sec_195 however neither of the two notices of deficiency mentions sec_195 and respondent failed to make these arguments in his answer or on brief accordingly we consider this issue conceded see 121_tc_308 holding that arguments not addressed on brief may be considered abandoned 119_tc_1 n unless otherwise indicated all section references are to the internal_revenue_code code in effect for the years at issue and all rule references are to the tax_court rules_of_practice and procedure in petitioner began developing field pricing software for gas station convenience stores petitioner solicited investments for his software courting one potential investor in particular jun ding petitioner discussed his company with mr ding during several meetings in locations such as california las vegas china and hawaii mr ding also introduced petitioner to other possible investors during these trips however mr ding decided not to invest in petitioner’s company additionally petitioner’s two potential customers found that the software did not fit their businesses in petitioner shifted his focus to educational software he designed new software that taught children how to program computers this software was a computer-based interactive learning tool that replaced the standard live-teaching software model in order to get a sense of the educational field and test his new software petitioner rented space from green apples education and offered free classes to its students many children signed up for the classes but petitioner found that his initial model was unsuccessful customers preferred a live-teaching model and the price of the software was too high thus in date petitioner changed his initial software model to a live-teaching model this new software was similar to a webinar his company hired local instructors and connected them with students via the internet petitioner also moved his office to san bruno california where the rent was less expensive and the location was more convenient for the local instructors he hired petitioner’s live-teaching model has increased his revenues significantly and he has started hiring instructors from across the country petitioner engaged shirley zhang a certified_public_accountant employed by nationwide tax and accounting servicing to prepare hi sec_2013 and sec_2014 federal_income_tax returns petitioner was referred to ms zhang by a friend and he provided her with relevant information regarding his business and expenses including bank and credit card statements ms zhang prepared schedules c for these returns on which petitioner claimed various deductions for and respondent issued petitioner notices of deficiency for both years disallowing several deductions in their entirety respondent’s disallowances are as follows expense travel office car and truck rent lease-other business property depreciation and sec_179 commissions and fees taxable_year amount dollar_figure big_number big_number big_number big_number big_number petitioner timely petitioned this court and a trial was held in san francisco california i burden_of_proof opinion as a general_rule the commissioner’s determination of a taxpayer’s liability in a notice_of_deficiency is presumed correct and the taxpayer bears the burden of proving that the determination is incorrect rule a 290_us_111 deductions are a matter of legislative grace and the taxpayer generally bears the burden of proving entitlement to any deduction claimed rule a 503_us_79 292_us_435 ii business_expense deductions sec_162 permits a taxpayer to deduct ordinary and necessary expenses paid_or_incurred in carrying_on_a_trade_or_business see 403_us_345 a trade_or_business expense is ordinary if it is normal or customary within a particular trade business or industry and it is necessary if it is appropriate and helpful for the development of the business 320_us_467 welch v helvering u s pincite a taxpayer must maintain adequate_records to substantiate the amounts of his income and entitlement to any deductions or credits claimed sec_6001 sec_1_6001-1 income_tax regs when a taxpayer establishes that she paid_or_incurred a deductible expense but does not establish the amount of the deduction sec_7491 provides that if in any court_proceeding a taxpayer introduces credible_evidence with respect to any factual issue relevant to ascertaining the liability of the taxpayer for any_tax imposed by subtit a or b and meets other prerequisites the secretary shall have the burden_of_proof with respect to that issue 116_tc_438 however petitioner has neither claimed nor shown that he satisfied the requirements of sec_7491 to shift the burden_of_proof to respondent accordingly petitioner bears the burden_of_proof see rule a we may estimate the amount allowable in certain circumstances cohan_rule 39_f2d_540 2d cir 85_tc_731 there must be sufficient evidence in the record however to permit us to conclude that a deductible expense was paid_or_incurred in at least the amount allowed 245_f2d_559 5th cir for certain kinds of business_expenses sec_274 overrides the cohan_rule see 50_tc_823 aff’d per curiam 412_f2d_201 2d cir sec_274 provides that no deduction is allowed with respect to travel entertainment or listed_property as defined in sec_280f unless the taxpayer substantiates by adequate_records or by sufficient evidence corroborating the taxpayer’s own statement the amount of expense or item the time and place of the travel entertainment or expense the business_purpose of the entertainment or expense and the business relationship to the taxpayer of the person or persons entertained a taxpayer satisfies the adequate_records test if he maintains an account book a diary a log a statement of expense trip sheets or similar records prepared at or near the time of the expenditures that show each element of each expenditure or use see sec_1_274-5t temporary income_tax regs fed reg date iii disallowed deductions for a travel_expenses petitioner claimed a travel expense deduction of dollar_figure for the record contains receipts for ga sec_4 and rental cars as well as air travel itineraries most of these expenses relate to his trips to las vegas and shanghai petitioner did not keep a travel log and his broad testimony that he traveled to recruit mr ding as an investor is insufficient to establish the business_purpose of each trip as required by sec_274 see olagunju v commissioner tcmemo_2012_ tax ct memo lexi sec_118 at holding the taxpayer’s broad testimony and receipts insufficient to establish the business_purpose of travel petitioner is not entitled to a travel expense deduction for b office expenses petitioner claimed a deduction of dollar_figure for office expenses for petitioner produced receipts and credit card statements to corroborate some of these expenses those documents in the record that were legible substantiate it is unclear whether petitioner submitted these receipts to substantiate his travel_expenses or car and truck expenses both of which are at issue dollar_figure of office expenses for and petitioner is entitled to a deduction in this amount for c car and truck expenses because automobiles are listed_property automobile expenses are also subject_to the strict substantiation requirements of sec_274 see sec_274 sec_280f petitioner claimed a deduction of dollar_figure for car and truck expenses for petitioner did not keep a mileage log for these expenses the record includes evidence of several expenditures that petitioner labeled gifts the cost of gifts may be an ordinary and necessary business_expense if the gifts are directly related to the taxpayer’s generation of business income brown v commissioner tcmemo_1984_120 petitioner bears the burden of proving to what extent the gift items contributed to his income see 21_tc_170 business gift deductions pursuant to sec_162 are restricted to dollar_figure per donee per taxable_year and require adequate substantiation under sec_274 sec_274 all of the expenses petitioner labeled gifts are over dollar_figure and have not been adequately substantiated under sec_274 therefore petitioner is not entitled to a deduction for these items petitioner submitted a credit card statement that shows a purchase from fry’s electronics labeled office supplies however we infer from petitioner’s testimony that this purchase was for computer equipment for which he also claimed a depreciation deduction for besides the matter of petitioner possibly claiming a double deduction the strict substantiation requirements of sec_274 also apply to deductions for computers and computer-related peripheral equipment sec_274 sec_280f petitioner has not established that this purchase was for computers and peripheral equipment excluded from listed_property by sec_280a and sec_280f as discussed infra iv b petitioner has not met the strict substantiation standards of sec_274 with regard to this purchase and is not entitled to a deduction for this amount while he did produce gas receipts a car loan statement and a spreadsheet with a total amount of miles driven and maintenance_expenses petitioner did not provide a business_purpose for these amounts therefore petitioner has not met the requirements of sec_274 for car and truck expenses and he is not entitled to a deduction for these expenses for iv disallowed deductions for a rent lease expenses petitioner claimed a deduction of dollar_figure for rent lease expenses for petitioner rented space from green apples education in cupertino california from may through date he credibly testified that his rent in cupertino was dollar_figure per month and produced monthly invoices from green apples education for these amounts in date petitioner also began renting an office in san bruno california at dollar_figure per month with a discounted first month’s rent of dollar_figure petitioner substantiated these amounts with an account ledger from the san bruno property management company on the basis of petitioner’s credible testimony we are satisfied that his rental of both spaces was ordinary and necessary for his software development business thus petitioner is entitled to a rent expense deduction of dollar_figure for b depreciation and sec_179 expenses sec_167 allows a taxpayer a depreciation deduction for the exhaustion wear_and_tear or obsolescence of property used in the taxpayer’s trade_or_business or of property_held_for_the_production_of_income sec_179 allows a taxpayer a deduction for the cost of certain types of property for the year they are placed_in_service sec_179 property includes sec_1245 property which is acquired by purchase for use in the active_conduct_of_a_trade_or_business that is either tangible_property to which sec_168 applies or computer_software sec_179 to substantiate entitlement to a depreciation deduction a taxpayer must show that the property was used in a trade_or_business or other profit-oriented activity and must establish the property’s depreciable basis by substantiating the property’s cost useful_life and any previously allowable_depreciation 105_tc_324 the heightened substantiation requirements of sec_274 must also be met for proving the business use of certain assets including listed_property see eg mears v petitioner did not explain the disparity between the dollar_figure of substantiated rent lease expenses and the dollar_figure he claimed on hi sec_2014 schedule c commissioner tcmemo_2013_52 at considering sec_274 requirements with respect to applicable sec_167 deductions singh v commissioner tcmemo_2009_36 tax ct memo lexi sec_35 at considering sec_274 requirements with respect to an applicable sec_179 deduction computer and computer-related peripheral equipment generally are listed_property sec_274 sec_280f petitioner claimed a deduction of dollar_figure for depreciation and sec_179 expenses for at trial petitioner testified that this deduction was for equipment and that most of the equipment was computers purchased at fry’s electronics however petitioner testified that he did not have any receipts for the purchase of this equipment he produced a credit card statement showing one purchase at fry’s electronics but it bears no details about items purchased or the time and place of the equipment’s use because petitioner has failed to satisfy the heightened substantiation requirements of sec_274 we sustain respondent’s disallowance of his claimed deduction for depreciation and sec_179 expenses c commissions and fees petitioner claimed a deduction of dollar_figure for commissions and fees for petitioner did not present any evidence of commissions and fees paid in therefore he is not entitled to this deduction v accuracy-related_penalties next we address whether petitioner is liable for accuracy-related_penalties pursuant to sec_6662 and b a taxpayer may be liable for a penalty of on the portion of an underpayment_of_tax attributable to negligence or disregard of rules or regulations however a taxpayer is not liable for the accuracy-related_penalty if there was reasonable_cause for the underpayment and the taxpayer acted in good_faith sec_6664 sec_1_6664-4 income_tax regs the term negligence includes any failure to make a reasonable attempt to comply with the provisions of the code and disregard includes any careless reckless or intentional disregard of rules or regulations sec_6662 sec_1_6662-3 and income_tax regs a disregard of rules or regulations is careless if the taxpayer does not exercise reasonable diligence in determining the correctness of a return position that is contrary to a rule_or_regulation sec_1_6662-3 income_tax regs a disregard is reckless if the taxpayer makes little or no effort to determine whether a rule_or_regulation exists under circumstances which demonstrate a substantial deviation from the standard of while petitioner did not address his liability for the accuracy-related_penalty in his petition we find that this issue was tried by consent see rule b conduct that a reasonable person would observe id a disregard is intentional if the taxpayer knows of the rule_or_regulation that is disregarded id the commissioner has the burden of production with respect to the accuracy-related_penalty sec_7491 to meet this burden the commissioner must produce sufficient evidence indicating that it is appropriate to impose the penalty see higbee v commissioner t c pincite the commissioner’s burden of production under sec_7491 includes establishing compliance with the supervisory approval requirement of sec_6751 graev v commissioner t c ___ ___ slip op pincite date supplementing and overruling in part t c ___ date see also 851_f3d_190 2d cir citing higbee v commissioner t c pincite aff’g in part rev’g in part tcmemo_2015_42 once the commissioner meets his burden of production the taxpayer must come forward with persuasive evidence that the commissioner’s determination is incorrect rule a see higbee v commissioner t c pincite the taxpayer may meet her burden by proving that she acted with reasonable_cause and in good_faith sec_6751 requires written supervisory approval of the initial determination of certain penalties with respect to the underpayment see sec_6664 see also higbee v commissioner t c pincite sec_1_6664-4 income_tax regs the decision as to whether the taxpayer acted with reasonable_cause and in good_faith depends upon all the pertinent facts and circumstances sec_1_6664-4 income_tax regs generally the most important factor is the extent of the taxpayer’s effort to assess her proper tax_liability humphrey farrington mcclain p c v commissioner tcmemo_2013_23 sec_1_6664-4 income_tax regs good_faith reliance on the advice of an independent competent professional as to the tax treatment of an item may constitute reasonable_cause 115_tc_43 aff’d 299_f3d_221 3d cir sec_1_6664-4 income_tax regs see estate of ralph robinson v commissioner tcmemo_2010_168 tax ct memo lexis at see also 469_us_241 this court has stated that reasonable_cause and good_faith are present where the record establishes by a preponderance of evidence that the taxpayer reasonably believes that the professional upon whom the reliance is placed is a competent tax adviser who has sufficient expertise to justify reliance the taxpayer provides necessary and accurate information to the adviser and the taxpayer actually relies in good_faith on the adviser’s judgment neonatology assocs p a v commissioner t c pincite assuming without finding that respondent has met his burden of production in the instant case we nevertheless conclude that petitioner carried his burden with respect to reasonable_cause and good faithdollar_figure it is clear from the record that petitioner has no background in taxation while petitioner has an m b a his experience and knowledge lie in software design petitioner therefore acted prudently in securing the services of ms zhang his return preparer given the professional quality and completeness of petitioner’s tax returns we are satisfied that petitioner’s reliance on ms zhang was justified furthermore petitioner established that he provided ms zhang with necessary and accurate information finally petitioner’s testimony establishes that he relied upon his return preparer in good_faith in sum the record as a whole establishes that petitioner made a good-faith effort to assess his proper tax_liability and reasonably relied on the advice of his return preparer we therefore hold that petitioner is not liable for the accuracy- related penalties because we hold that petitioner acted in good_faith and with reasonable_cause we need not decide whether respondent carried his burden of production under sec_7491 in reaching all of our holdings herein we have considered all arguments made by the parties and to the extent not mentioned above we find them to be irrelevant or without merit decision will be entered under rule


tcmemo_1995_476 united_states tax_court charles p dewitt petitioner v commissioner of internal revenue respondent docket no filed date charles p dewitt pro_se donald r gilliland for respondent memorandum opinion scott judge this case is before us on respondent's motion for judgment on the pleadings respondent determined deficiencies in petitioner's federal income taxes and additions to tax for the calendar years to in the amounts as follows additions to tax_year deficiency sec_6651 sec_6654 dollar_figure big_number big_number big_number big_number big_number dollar_figure big_number dollar_figure all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated in the notice_of_deficiency respondent determined that petitioner failed to file a federal_income_tax return for any of the years here involved the income determined as received by petitioner was primarily self-employment_income for the years and and wage income for the other years petitioner placed in issue in his petition all the deficiencies and additions to tax determined by respondent and claimed an overpayment of dollar_figure in the petition petitioner states that he disagrees with the deficiencies determined because as a result of the adoption of the 16th amendment to the u s constitution the income_tax is an indirect_tax indirect taxes are never upon property money or otherwise but only upon taxable activities all income received by petitioner during tax years arose from sources other than taxable activities all the above is claimed in accordance with but not limited to c f_r sec_39 b -1 a see attached copy - -3 there is no other statement of facts or assignment of errors in the petition respondent in her answer to the petition denied all allegations respondent affirmatively alleged that petitioner's position was frivolous that petitioner had unreasonably failed to pursue administrative remedies before commencing this case and therefore is liable for a penalty under sec_6673 attached to the answer were copies of letters sent by petitioner to respondent's agents during the course of the investigation of his tax_liabilities which show that petitioner failed to cooperate with respondent's agents in the conduct of the investigation on alleged constitutional grounds petitioner attached a document to his reply to respondent's affirmative allegations in her answer called memorandum of law in which he argued that the income_tax was an excise_tax that was applicable only to income that arose from taxable activities and that none of his activities were taxable activities this case is set for trial on the calendar of this court in birmingham alabama commencing date on date respondent filed a motion for judgment on the pleadings in which she asked that the court hold that no ground assigned in the petition raised any factual issue with respect to the correctness of the determination in the notice_of_deficiency but petitioner merely alleged fictitious constitutional issues which had been determined contrary to petitioner's position in a number - -4 of cases respondent stated that since claims comparable to those made by petitioner had been rejected by this court and other courts that this case be decided in her favor on the pleadings in the motion respondent also requests the court to award damages to the united_states in an appropriate amount under sec_6673 by order dated date petitioner was given until date to reply to respondent's motion for judgment on the pleadings in the order giving petitioner until date to respond to respondent's motion the court pointed out that this court and other courts had rejected arguments similar to petitioner's arguments and that if petitioner responded without satisfactorily showing any distinction between the allegations he now makes and those uniformly rejected by this and other courts as frivolous respondent's motion would be granted and the deficiencies and additions to tax as set forth in the notice_of_deficiency would be determined against petitioner the order directed petitioner to file an amended petition if he contended there were any factual errors in respondent's computation of his tax_liability for any year here in issue the order also directed petitioner to state the reasons if any why this court should not award damages to the united_states under sec_6673 based on the fact that this case was instituted primarily for delay and that petitioner's position in the case is frivolous or groundless - -5 petitioner on date in his response to respondent's motion for judgment on the pleadings apparently recognizes that in 661_f2d_71 5th cir affg tcmemo_1981_122 the court_of_appeals affirmed our holding that a taxpayer's argument that the income_tax is a direct_tax that must be apportioned among the several states which is similar to the argument petitioner makes in this case was without merit in view of the provisions of the sixteenth_amendment to the constitution he states in his response to respondent's motion that our prior holdings and those of courts of appeals do not mean that this court is not bound by decisions of the u s supreme court and that the holdings of the supreme court of the united_states in 240_us_103 and 240_us_1 support his position petitioner cites 972_f2d_723 6th cir in support of his position the gaumer case cited by petitioner was an appeal by a defendant from a conviction for willful failure_to_file income_tax returns the court_of_appeals reversed the conviction and directed a new trial since it found error in the ruling of the trial judge that materials which the defendant testified he had read and believed supported his position that he was not required to file income_tax returns were not admitted in evidence relying on 498_us_192 the court stated in united_states v gaumer supra pincite - -6 in the case at bar mr gaumer testified that his study of defendant's exhibit a--a book that purports to tell the reader w hy you are not legally required to file tax returns --led him to do further research to verify the author's claims that people like himself had no such obligation this research led him to exhibits b through e consisting of photocopies of 240_us_1 36_sct_236 60_led_493 220_us_107 31_sct_342 55_led_389 240_us_103 36_sct_278 60_led_546 and pages of the congressional record of date gaumer testified that he learned from brushaber and the congressional record excerpt that income taxes are excise_taxes as a legal matter the exhibits do not validate mr gaumer's views as a factual matter however we think a jury might have discerned a nexus between these materials and mr gaumer's stated belief that he was not required to file income_tax returns brushaber and the congressional record excerpt do indeed state that for constitutional purposes the income_tax is an excise_tax this statement is reiterated in stanton and flint discusses the scope of the term excise_tax in a way that could conceivably be thought to provide some comfort to a person in defendant gaumer's station mr gaumer should therefore have been allowed to present the contents of the exhibits to the jury to the extent that the material was relevant clearly the case of united_states v gaumer supra does not support petitioner's position in the present case since it is stated therein that the cases of stanton v baltic mining co supra and brushaber v union pac r r supra on which petitioner relies in the instant case as a legal matter do not validate the views that a taxpayer is not required to file income_tax returns because an income_tax is an excise_tax the court's holding merely was that the evidence should have been permitted to be introduced in connection with the issue of whether the - -7 defendant's failure_to_file returns was willful which was a necessary element of proof in that criminal case in 791_f2d_68 7th cir affg an order of this court granting summary_judgment in favor of respondent in a case similar to this case cited by respondent in her motion for judgment on the pleadings the court specifically held that the arguments made by the taxpayer that the sixteenth_amendment authorizes only excise_taxes and excise_taxes will be imposed only on government granted privileges were tired arguments that were frivolous in 756_f2d_38 6th cir affg tcmemo_1983_473 also cited by respondent in her motion for judgment on the pleadings the court_of_appeals in disposing of a taxpayer's argument that the supreme court had held that an income_tax is an excise_tax which can only be assessed against those either licensed or incorporated stated this argument is baseless in brushaber 240_us_1 the court found the income_tax law to be constitutional the court also noted that in pollock 158_us_601 it had previously found the taxing of income from professions trades employments or vocations to be constitutional in the form of an excise_tax in light of the sixteenth_amendment however all taxation of income from whatever source derived was found to be constitutional in brushaber a multitude of cases following brushaber have held that the type of revenues and receipts earned by appellant a substantial farmer constitute taxable_income under the internal_revenue_code martin v commissioner supra pincite - -8 since petitioner has raised only frivolous legal issues in his petition which as a matter of law do not sustain his position the respondent's motion for judgment on the pleadings is properly taken rule 82_tc_403 respondent in her answer in this case affirmatively asserted the application to this case of sec_6673 in view of the facts that respondent's motion cited cases holding a position identical to that taken in this case is frivolous the order of this court dated date also cited cases holding positions similar to the position taken by petitioner in the instant case to be frivolous the order of this court dated date stated that if petitioner did not elect to amend his petition to allege factual disagreements with respondent's determination respondent's motion would be granted and the order dated date stated that if petitioner did not elect to amend his petition he should state his reasons if any why this court should not award damages to the united_states under sec_6673 on the grounds that this case was instituted primarily for delay and that petitioner's position in the case is frivolous or groundless we conclude that a penalty under sec_6673 should be determined against petitioner petitioner in his response to respondent's motion for judgment on the pleadings stated no reason why this court should not award damages to the united_states under sec_6673 - -9 on the grounds that this case was instituted primarily for delay and that petitioner's position in the case is frivolous or groundless except the argument that the income_tax is an excise_tax which is not applicable to his income the court therefore determines that respondent's motion for judgment on the pleadings is granted the court further holds that petitioner is required to pay to the united_states a penalty of dollar_figure under the provisions of sec_6673 an order granting respondent's motion for judgment on the pleadings will be entered and decision will be entered for respondent in accordance with the determination in the notice_of_deficiency and the penalty determined herein


t c summary opinion united_states tax_court elsie r garza petitioner v commissioner of internal revenue respondent docket no 5149-06s filed date elsie r garza pro_se chong s hong and daniel w layton for respondent couvillion special_trial_judge this case was heard pursuant to sec_7463 in effect when the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority 1unless otherwise indicated subsequent section references are to the internal_revenue_code as amended and all rule references are to the tax_court rules_of_practice and procedure respondent determined deficiencies of dollar_figure and dollar_figure in petitioner’s federal income taxes for taxable_year sec_2002 and respectively petitioner does not challenge these deficiencies this case involves petitioner’s election to seek relief from joint_and_several_liability for federal income taxes for and under sec_6015 c or f respondent determined that petitioner is not entitled to relief under any of the aforementioned subsections of sec_6015 the sole issue for decision is whether petitioner is entitled to relief under sec_6015 c or f for taxable_year sec_2002 and some of the facts were stipulated those facts with the annexed exhibits are so found and are made part hereof petitioner’s legal residence at the time the petition was filed was fresno california 2prior to filing the petition in this case petitioner participated in a case in which the court decided that she and her spouse were liable for deficiencies in taxes for see garza v commissioner t c summary opinion petitioner meaningfully participated in that proceeding and did not seek relief under sec_6015 at that time accordingly the court granted respondent’s motion for partial summary_judgment in this case since the judicial doctrine_of res_judicata bars petitioner from requesting sec_6015 relief for the years at issue in the prior proceeding sec_6015 huynh v commissioner tcmemo_2006_180 where a requesting spouse meaningfully participated in a prior proceeding did not seek sec_6015 relief at that time and that proceeding’s decision has become final the requesting spouse is barred from seeking relief for the years at issue in the prior proceeding during the years at issue petitioner was married to mario o garza mr garza petitioner and mr garza have been married for nearly years they physically separated on date when they were evicted from their home petitioner has resided with her mother since the eviction mr garza moved in with his father sometime in october or date although she lived apart from him petitioner frequently received mail including tax information addressed to mr garza accordingly mr garza went to petitioner’s mother’s house nearly daily to pick up his mail petitioner visited mr garza at least two to three times a week at his father’s house thus petitioner and mr garza remained married and maintained contact with each other after their eviction and physical separation petitioner was employed during the years at issue by aetna insurance co processing medical claims though technically retired since mr garza continued to receive nonemployee compensation from renewed life_insurance policies renewal income he had sold while he was employed as an independent insurance agent by american income life_insurance co ailic 3as an agent for ailic mr garza sold insurance policies and earned a commission for each sale ailic advanced him anticipated commissions and paid for certain expenses he incurred these amounts were added to mr garza’s outstanding account balances due to ailic during the time he worked for ailic these advances and expenses amounted to almost dollar_figure during the years at issue all commissions coming to and creditable to mr garza were applied to his outstanding account continued on a joint federal_income_tax return for petitioner and mr garza claimed an overpayment_of_tax in the amount of dollar_figure the return did not include insurance renewal payments in the amount of dollar_figure received by mr garza and a dollar_figure annuity distribution petitioner received that year on date a notice_of_deficiency was issued to petitioner and mr garza in which respondent determined a deficiency of dollar_figure in federal_income_tax for based on the failure to include these items of income on their return neither petitioner nor mr garza petitioned this court in response to the notice_of_deficiency on their joint federal_income_tax return for petitioner and mr garza reported a tax due of dollar_figure the return did not include renewal income in the amount of dollar_figure that had been received by mr garza on date a notice_of_deficiency was issued to petitioner and mr garza in which respondent determined a deficiency of dollar_figure based on the omitted income neither petitioner nor mr garza petitioned this court in response to the notice_of_deficiency the relationship later soured between petitioner and mr garza after a series of altercations they legally_separated sometime in date petitioner obtained a temporary restraining order against mr garza on date and filed for divorce on date the superior court of continued balances owed to ailic california county of fresno granted petitioner a protective_order on date petitioner was still involved in divorce proceedings at the time of trial in this case petitioner filed a form_8857 request for innocent spouse relief on date claiming that the omitted items of income for and were mr garza’s income and that he refused to include these items of income on the returns on a form innocent spouse statement mr garza claimed that petitioner knew of the omitted items of income for the years at issue on date respondent issued separate final notices for and to petitioner determining that she was not entitled to relief from joint_and_several_liability under sec_6015 c or f because she had actual knowledge and reason to know of the omitted income that gave rise to the deficiencies petitioner alleges in her petition that she is entitled to relief from joint_and_several_liability under sec_6015 because mr garza concealed from her the insurance renewal income that gave rise to the tax_liabilities pursuant to rule and 115_tc_118 respondent served mr garza with notice of this proceeding and his right to intervene 4in the stipulation of settled issues petitioner conceded her liability for the tax due on a dollar_figure annuity distribution she received in taxable_year he did not file a notice of intervention and did not appear or participate in the trial of this case a taxpayer may petition this court for review of the commissioner’s determination denying relief under sec_6015 sec_6015 the petition was filed timely in response to the final notices that denied petitioner’s request for sec_6015 relief from her income_tax liabilities for the years at issue thus the court has jurisdiction to review the commissioner’s denial of sec_6015 relief for and generally married taxpayers may elect to file a federal_income_tax return jointly sec_6013 each spouse filing a joint_return is jointly and severally liable for the accuracy of the return and the entire tax due sec_6013 under certain circumstances however sec_6015 provides relief from joint liability sec_6015 applies to any liability for tax arising after date and to any liability for tax arising on or before date remaining unpaid as of such date internal_revenue_service restructuring and reform act of publaw_105_206 112_stat_740 in general terms there are three avenues of relief under sec_6015 sec_6015 provides relief with respect to certain erroneous items on the return sec_6015 provides for a separation of liability for separated taxpayers and sec_6015 more broadly confers on the secretary discretion to grant equitable relief for taxpayers who otherwise do not qualify for relief under either subsection b or c a prerequisite for relief under sec_6015 or c is the existence of an understatement_of_tax or a tax_deficiency sec_6015 c 120_tc_62 except as otherwise provided in sec_6015 the requesting spouse bears the burden of proving that each requirement of sec_6015 has been satisfied rule a 119_tc_306 affd 101_fedappx_34 6th cir under sec_6015 the court may grant a taxpayer full or apportioned relief from joint_and_several_liability for an understatement_of_tax on a joint_return if among other requirements the taxpayer establishes that she did not know and had no reason to know that the other spouse understated that spouse’s tax_liability on the return sec_6015 where a spouse seeking relief has actual knowledge of the underlying transaction that produced the omitted income innocent spouse relief is denied 115_tc_183 affd 282_f3d_326 5th cir the requesting spouse has reason to know of the understatement of 5neither respondent nor petitioner disputes that in this case the requirements of subpars a b and e of sec_6015 have been satisfied the dispute is solely as to whether petitioner meets the requirements of subpars c and d of sec_6015 tax if she knew every fact necessary to determine the legal consequences of the income or if such facts are reasonably within her reach ignorance of the attendant tax consequences is not a defense 292_f3d_800 d c cir affg tcmemo_2000_332 887_f2d_959 9th cir 57_tc_732 in the instant case the court finds that petitioner knew or had reason to know of the understatements of tax at the time the returns for and were filed the court is satisfied that petitioner was aware that mr garza received renewal income during the years at issue petitioner admitted in her testimony that she was aware that mr garza received renewal income in because she discussed with him the receipt of such income when she received in the mail a form 1099-misc miscellaneous income from ailic for that year additionally mr garza’s receipt of renewal income as well as the tax consequences arising therefrom were the subject of an audit examination conducted by agents of respondent sometime in for taxable years at trial when asked whether she participated in the audit examination petitioner testified yes that’s when i got my education on what was going on moreover petitioner admitted on her form questionnaire for requesting spouse that she questioned mr garza about the renewal income he received during the years at issue and was told not to worry about it petitioner’s basis for requesting relief is that since she was told not to worry about the income reported on the forms misc for and ie the insurance renewal income she was not aware and had no reason to know of the understatements of tax for the years at issue even if a spouse requesting relief under sec_6015 does not have actual knowledge of the item giving rise to an understatement that spouse may nonetheless have reason to know of the understatement a requesting spouse has reason to know of an understatement if a reasonably prudent person with knowledge of the facts possessed by the person claiming relief should have been alerted to the possibility of a substantial_understatement 93_tc_355 a spouse requesting relief under sec_6015 has a duty_of inquiry 114_tc_276 respondent argues that petitioner had reason to know that mr garza received renewal income in and notwithstanding her lack of a business background the court is not convinced that petitioner’s failure to inquire was reasonable mr garza’s unreported renewal income was the only matter discussed during the audit examination of taxable years a reasonably prudent taxpayer should have been alerted to the possibility that despite retiring from ailic in mr garza continued to annually receive renewal income when customers renewed life_insurance policies he had sold them for these reasons petitioner is not entitled to relief under sec_6015 sec_6015 affords proportionate relief to the requesting spouse through allocation of the tax items to the responsible_party generally this avenue of relief allows a spouse to elect to be treated as if a separate_return had been filed rowe v commissioner tcmemo_2001_325 to be eligible for relief under sec_6015 the requesting spouse must no longer be married to be legally_separated from or have lived at least months apart from the individual with whom the tax_return was filed sec_6015 relief under sec_6015 is not available however to a taxpayer if it is shown that the taxpayer had actual knowledge when signing the return of any item giving rise to the deficiency sec_6015 as previously discussed petitioner was in divorce proceedings and was legally_separated from mr garza in date however as noted above petitioner not only had reason to know of the understatements at the time the returns were signed but she also had actual knowledge of the items giving rise to the deficiencies because petitioner had actual knowledge of the renewal income she is precluded from claiming relief under sec_6015 petitioner may be considered for relief under sec_6015 where there is an unpaid tax or deficiency for which she is not eligible for relief under sec_6015 or c sec_6015 sec_6015 provides that a taxpayer may be relieved from joint_and_several_liability if it is determined after considering all the facts and circumstances that it is inequitable to hold the taxpayer liable for the unpaid tax or deficiency the commissioner has prescribed guidelines that are considered in determining whether it is inequitable to hold a requesting spouse liable for all or part of the liability for any unpaid tax or deficiency revproc_2003_61 sec_4 2003_2_cb_297 sets forth seven threshold conditions that the requesting spouse must satisfy before the commissioner will consider a request for relief under sec_6015 respondent agrees that petitioner has satisfied the threshold conditions where as here the requesting spouse satisfies the threshold conditions revproc_2003_61 sec_4 c b 6rev proc 2000_1_cb_447 was superseded by revproc_2003_61 2003_2_cb_296 and is effective as to requests for relief filed on or after date and also is effective for requests for relief pending on date as to which no preliminary determination_letter had been issued as of that date petitioner’s application_for relief was submitted after date on date accordingly the guidelines found in revproc_2003_61 supra are applicable in this case pincite lists factors to be evaluated for requests for relief under sec_6015 for spouses who filed a joint_return and do not qualify for relief under revproc_2003_61 sec_4 c b pincite revproc_2003_61 sec_4 a offers a nonexclusive list of factors to be considered including marital status economic hardship no knowledge or reason to know of the item giving rise to the deficiency whether the nonrequesting spouse had a legal_obligation to pay the liability whether the requesting spouse benefited significantly from the item giving rise to the deficiency and whether the requesting spouse has made a good_faith attempt to comply with the tax laws in subsequent years the court considers these factors in determining whether equitable relief under sec_6015 should be provided to petitioner the court reviews the commissioner’s denial of sec_6015 relief under an abuse_of_discretion standard butler v commissioner supra pincite the court defers to the commissioner’s determination unless it is arbitrary capricious or without sound basis in fact 118_tc_106 affd 353_f3d_1181 10th cir 7petitioner seeks relief from the understatements of tax attributable to omitted renewal income from and because revproc_2003_61 sec_4 considers circumstances where equitable relief may be granted for underpayments of tax petitioner does not qualify for relief under sec_4 petitioner bears the burden of proving that there was an abuse_of_discretion abelein v commissioner tcmemo_2004_274 in the case of an income_tax_liability that arises from a deficiency as exists in this case a finding that the requesting spouse had actual knowledge of the item giving rise to the deficiency is an extremely strong factor weighing against relief revproc_2003_61 sec_4 a iii b thus petitioner must establish that she did not know about mr garza’s renewal income during and as discussed earlier petitioner had actual knowledge of mr garza’s renewal income in the audit examination the sole issue was mr garza’s receipt of renewal income in taxable years petitioner was present during the audit examination and testified that the audit examiner made her aware that mr garza even though retired continued to receive renewal income from ailic further petitioner does not dispute that the forms 1099-misc for mr garza’s renewal income for the years at issue were sent directly to her at her mother’s address petitioner testified that mr garza checked the mail at her mother’s address while petitioner was working and took the forms 1099-misc without her knowledge on her form however petitioner stated that she inquired many times about the omitted renewal income and was told not to worry about it the court finds that petitioner had actual knowledge of the items giving rise to the deficiencies petitioner’s actual knowledge is a strong factor weighing against relief which can be overcome only if the factors in favor of equitable relief are particularly compelling petitioner contended at trial that she would experience economic hardship if she were forced to pay the tax_liabilities for the years at issue a taxpayer might experience economic hardship if he or she is unable to pay basic reasonable living_expenses sec_301_6343-1 proced admin regs it is the taxpayer’s burden to show both that the expenses qualify and that they are reasonable monsour v commissioner tcmemo_2004_190 despite her assertion that paying the tax_liabilities would cause her to experience economic hardship petitioner provided no evidence at trial that she would be unable to pay basic living_expenses if she were held liable for the deficiencies as noted earlier petitioner was and remains gainfully_employed the court fails to see and petitioner has not established that she would suffer economic hardship if her request for relief were denied this factor weighs against granting relief to petitioner on the basis of the facts and circumstances in this case including the factors set forth in revproc_2003_61 supra the 8rev proc sec_4 a iii c provides factors to consider in determining whether the requesting spouse had reason to know of the item giving rise to the deficiency because the court is convinced that petitioner had actual knowledge of the omitted items of income consideration of these factors is superfluous court concludes that there was no abuse_of_discretion in denying petitioner’s request for relief under sec_6015 c or f for taxable_year sec_2002 and to the extent not addressed herein other considerations are without merit or unnecessary to address the court therefore sustains respondent’s determination that petitioner is not entitled to relief from joint liability pursuant to sec_6015 c or f for taxable_year sec_2002 or reviewed and adopted as the report of the small_tax_case division decision will be entered for respondent


t c memo united_states tax_court reliable credit association inc petitioner v commissioner of internal revenue respondent docket no filed date neale e creamer for petitioner shirley m francis for respondent memorandum findings_of_fact and opinion dawson judge this case was assigned to special_trial_judge carleton d powell pursuant to the provisions of sec_7443a and rule sec_180 sec_181 and sec_183 the court agrees with unless otherwise indicated section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure and adopts the opinion of the special_trial_judge that is set forth below opinion of the special_trial_judge powell special_trial_judge this case is before the court on petitioner's motion as supplemented for an award of reasonable_litigation_costs pursuant to sec_7430 the only issues presented are whether respondent's position was substantially justified and whether if not the claimed litigation costs are reasonable in amount findings_of_fact reliable credit association inc reliable or petitioner is a corporation engaged in the business of purchasing existing notes and other contract receivables at a discount thereby realizing income over the life of the notes or receivables in the form of interest and upon maturity or collection equal to the discount at the time the petition was filed reliable's principal office was located in portland oregon respondent audited petitioner's and tax returns and issued a notice_of_deficiency to petitioner in the notice_of_deficiency respondent determined that for the taxable_year sec_2 petitioner does not request an award of reasonable_administrative_costs see sec_7430 respondent does not dispute that petitioner satisfies the remaining elements of a claim for reasonable_litigation_costs and petitioner was liable for deficiencies in the respective amounts of dollar_figure and dollar_figure and accuracy- related penalties under sec_6662 in the respective amounts of dollar_figure and dollar_figure essentially respondent's determinations were based on two contentions petitioner's method_of_accounting did not clearly reflect income and as a result various items of interest and discount income were understated and petitioner failed to substantiate deductions for bad_debts rental expenses and depreciation with regard to the first contention respondent determined that petitioner's books_and_records were inadequate to establish the amount of petitioner's gross_income petitioner timely filed a petition with this court subsequently petitioner hired milton d mittelstedt mittelstedt a certified_public_accountant with deloitte touche llp to assist in the litigation mittelstedt apparently did not attempt to reconcile petitioner's income from its accounting_records rather he prepared net_worth analyses a net_worth analysis is a reconstruction of a taxpayer's taxable_income based on changes of net_worth from the beginning to the end of a taxable_period these analyses became the basis of a settlement that was reached between petitioner and respondent's appeals officer for services rendered between date and date totaling hours mittelstedt charged petitioner dollar_figure this case was calendared for trial on date and was reported settled at the calendar call the parties entered into a closing_agreement signed by petitioner on date this agreement provided that the dispute would be resolved by using an indirect method of determining taxable_income because petitioner's records were inadequate to determine the amount of unearned discount income from various deferred income accounts and the amount of bad_debts from the various bad_debt accounts and that in subsequent years petitioner would maintain records sufficient to allow its tax_return to be audited on a line-by-line basis as the appropriate rules and regulations may require on date the parties filed a stipulation with this court providing that petitioner was liable for deficiencies in income taxes for the taxable years and in the amounts of dollar_figure and dollar_figure respectively the stipulation further provided that petitioner was not liable for the sec_6662 penalties for either year the motion for litigation costs was subsequently filed opinion general principles--substantially justified sec_7430 subject_to certain limitations not relevant here generally allows a taxpayer that files a petition in this court to recover reasonable_litigation_costs incurred with respect to the determination of any_tax or penalty provided the taxpayer is the prevailing_party to be considered a prevailing_party a taxpayer must establish inter alia that the position_of_the_united_states was not substantially justified sec_7430 the fact that the commissioner ultimately concedes all or part of a case is not sufficient to establish that the commissioner's position was unreasonable in an administrative or civil tax proceeding 92_tc_760 89_tc_79 affd in congress amended sec_7430 by replacing the term unreasonable with the phrase not substantially justified tax_reform_act_of_1986 publaw_99_514 100_stat_2752 this change was effected to conform sec_7430 more closely with the equal_access_to_justice_act eaja u s c sec h conf rept pincite 1986_3_cb_1 in the context of the eaja the supreme court has interpreted the phrase not substantially justified to mean justified to a degree that could satisfy a reasonable person 487_us_552 this court has consistently held that the substantially justified standard is not a departure from the reasonableness standard see eg 89_tc_79 affd 861_f2d_131 5th cir 861_f2d_131 5th cir furthermore it is generally considered reasonable for the commissioner to require a taxpayer to substantiate income and deductions and the commissioner typically will not be held liable for costs under sec_7430 for taking a position that requires a taxpayer to show that such requirements have been met see amann v commissioner tcmemo_1993_542 affd without published opinion 40_f3d_1235 1st cir chiaffarano v commissioner tcmemo_1992_614 the parties' contentions petitioner sets forth various arguments in support of the contention that respondent's position was not substantially justified the gravamens of petitioner's contention are respondent conceded the majority of the deficiencies respondent failed to employ certain standard auditing procedures that would have enabled respondent to easily ascertain the correct amount of the taxable_income and petitioner offered to settle the case prior to the issuance of the notice_of_deficiency for roughly the same amount as ultimately stipulated respondent's primary contention is that petitioner's books_and_records were inadequate and as a result respondent's determination was substantially justified specifically respondent contends that the records petitioner maintained were insufficient to establish the amount of petitioner's gross_income petitioner does not dispute this point in reply however petitioner contends that this contention evidences the commissioner's continued obsession that each line item_of_gross_income must be known with certainty rather than concentrating her attention on taxable_income the quantity on which the tax is actually calculated we note initially that sec_63 defines taxable_income as gross_income minus allowable deductions thus gross_income is the starting point for the computation of taxable_income in addition our tax system is based on self-assessment 362_us_145 as a result the code and the regulations contain various record keeping requirements sec_6001 requires that every person liable for any_tax imposed by this title shall keep such records render such statements make such returns and comply with such rules and regulations as the secretary may from time to time prescribe sec_1_6001-1 income_tax regs provides that any person subject_to tax under subtitle a of the code shall keep such permanent books of account or records as are sufficient to establish the amount of gross_income deductions credits or other matters required to be shown by such person in any return of such tax while the requirements of sec_1_6001-1 income_tax regs are connected with the term or in this context we interpret or in the conjunctive rather than disjunctive cf 351_us_570 interpreting or in the conjunctive 43_f3d_794 3d cir holding that context is determinative of whether the term or is used in the conjunctive or disjunctive it is not open to question that taxpayers must keep records sufficient to establish the amount of income received deductions claimed as well as the amount of any credit rather than records that establish just one of the three see eg 24_tc_280 affd 235_f2d_879 4th cir rao v commissioner tcmemo_1996_500 wynn v commissioner tcmemo_1996_415 baker v commissioner tcmemo_1994_283 mitchell v commissioner tcmemo_1968_137 affd 416_f2d_101 7th cir in the absence of adequate books_and_records the commissioner may determine the existence and amount of a taxpayer's income by any method that clearly reflects income sec_446 40_tc_373 the commissioner may use any reasonable method dilando v commissioner tcmemo_1975_243 no particular method is required since circumstances will vary in individual cases harbin v commissioner supra pincite further the commissioner is not required to make estimations or ferret out every possible itemized_deduction 74_tc_1160 affd in part and revd and remanded in part on other grounds 692_f2d_587 9th cir petitioner does not directly attack the method_of_accounting that respondent used in determining its income and deductions and we have not been informed as to that methodology rather petitioner asserts that a taxpayer is not required to substantiate its gross_income provided taxable_income can be determined with reasonable accuracy given the definition of taxable_income and the recordkeeping requirements we disagree and conclude that petitioner was required to keep records sufficient to establish the amount of its gross_income 96_tc_858 affd 959_f2d_16 2d cir accordingly we find petitioner's argument that respondent's position was not substantially justified is fatally flawed see amann v commissioner tcmemo_1993_542 affd without published opinion 40_f3d_1235 1st cir chiaffarano v commissioner tcmemo_1992_614 petitioner makes other arguments most of which rely to some extent on the premise that petitioner was not required to keep records sufficient to establish the amount of its gross_income and for that reason they lack merit a few of these arguments however deserve some further discussion petitioner asserts that respondent's settlement of the case largely in petitioner's favor and for an amount roughly equal to an offer made by petitioner during audit establishes that respondent's position was not substantially justified we disagree as stated previously the settlement of a case in petitioner's favor is not determinative of whether respondent's position is substantially justified we find this particularly true in cases where the issue is substantiation of gross_income and deductions in reaching this conclusion we note that this case does not involve a situation where the commissioner continued to litigate the issue long after the taxpayer had provided the net_worth analyses here despite petitioner's apparent failure to keep adequate_records respondent settled the case accepting an indirect method of verifying taxable_income proposed by petitioner on condition that petitioner would change its method_of_accounting in such circumstances we believe that respondent's refusal of petitioner's settlement offers little weight in determining whether respondent's position was substantially justified in this regard while petitioner may have substantially prevailed the agreed deficiency is hardly de_minimis petitioner also argues that respondent should be estopped from challenging the adequacy of petitioner's records because respondent failed to raise the issue in a prior audit this argument is not well taken it is well established that the commissioner's failure to challenge a taxpayer's treatment of an item in an earlier year does not preclude an examination of the correctness of the treatment of that item in a later year 353_us_180 66_tc_761 affd 574_f2d_1332 5th cir lastly petitioner claims respondent failed to employ certain standard auditing procedures that would have enabled respondent to easily ascertain the correct amount of the deficiencies while as mentioned above petitioner does not directly attack respondent's method for determining gross_income and deductions petitioner contends that respondent was required to make net_worth analyses similar to that prepared by mittelstedt leaving aside the fact that this supposedly simple endeavor cost petitioner almost dollar_figure in accounting fees petitioner has not cited and we are not aware of any authority that requires the commissioner to employ particular auditing procedures in particular situations in sum when the taxpayer has defaulted in its task of supplying adequate_records the taxpayer is not in a position to be hypercritical of the commissioner's labor 394_f2d_366 5th cir affg tcmemo_1966_81 since we have found that respondent's position was substantially justified and therefore petitioner is not entitled to recover litigation costs there is no reason to determine whether the costs claimed are reasonable to reflect the above and the stipulation of the parties an appropriate order and decision will be entered petitioner has cited provisions of the internal_revenue_manual however such provisions are not mandatory and do not confer any rights upon taxpayers 671_f2d_963 6th cir


j department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division mar og f004 uniform issue list tep ra get ep legend taxpayer a amount d amount e employer c employer m plan x plan z dear this is in response to your letter dated date as supplemented by correspondence dated date in which you requested a waiver of the 60-day rollover requirement contained in sec_402 of the internal_revenue_code the code the following facts and representations have been submitted under penalty of perjury in support of the ruling requested employer c maintained plan x a plan qualified within the meaning of code sec_401 which contains a code sec_401 cash_or_deferred_arrangement coda taxpayer a left employer c and received a distribution of amount d from plan x on date on date taxpayer a rolled over amount e a portion of amount d into plan z a plan qualified within the meaning of code sec_401 sponsored by employer m taxpayer a was subsequently informed by his financial advisor that the rollover of amount e was beyond the 60-day period allowed for a rollover taxpayer a represents that he was misinformed about the 60-day rule because of a prior timely rollover event in the prior event although he completed the rollover transaction within the required days he operated under the belief that the correct rollover period wa sec_90 days instead of days based on the facts and representations you request that the service waive the 60-day rollover requirement with respect to the distribution of amount e because the failure to waive such requirement would be against equity or good conscience with respect to your request to waive to day rollover requirement sec_402 of the code provides that except as otherwise provided in sec_402 any amount distributed out of an employees' trust described in sec_401 that is exempt from tax under sec_501 shall be taxable to the distributee in the taxable_year of the distributee in which distributed in the manner provided under sec_72 of the code relating to annuities sec_402 of the code provides rules governing rollovers of amounts from exempt trusts to eligible retirement plans including iras code sec_402 provides that except as provided in subparagraph b paragraph shall not apply to any transfer of a distribution made after the 60th day following the day on which the distributee received the property distributed sec_402 of the code provides that the secretary may waive the 60-day requirement under sec_402 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_402 of the code revproc_2003_16 2003_4_irb_359 provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_402 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented by taxpayer a demonstrates a mistake on the part of taxpayer a resulting from his misunderstanding about the 60-day rule thus the facts surrounding this request indicate that taxpayer a mistakenly believed that all of the rollover requirements including the timeliness requirement had been satisfied and that his mistake was reasonable therefore pursuant to sec_402 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount e thus taxpayer a is deemed to have made a timely rollover of amount e into plan z on date provided ail other requirements of sec_402 of the code were met with respect to said date transaction amount e will be considered a rollover_contribution to plan z satisfying the requirements of code sec_402 no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_61 k of the code provides that it may not be used or cited as precedent if you wish to inquire about this ruling please contact _at please address all correspondence to se t ep ra t3 sincerely yours a a ie cz said ad f frances v sloan managef ‘employee plans technical group ae aao avi enclosures deleted copy of ruling letter notice of intention to disclose


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 b01 plr-147790-06 date date --------------------------- ----------------------------- -------------------------------- ------------------------------------------------ legend legend a ---------------------------------------------------- b ---------------------------------------------------- c ---------------------------------------------------- d ---------------------------------------------------- trust state state dear ----------------------- a’s daughter b a’s stepdaughter c and a’s sister d by their authorized representative requesting rulings under sec_671 and sec_2501 of the internal_revenue_code facts ----------------------------------------- ------------- --------- this responds to a letter dated date submitted on behalf of a according to the information submitted a a resident of state proposes to plr-147790-06 execute trust which will be governed by the laws of state a state corporate trustee will be appointed as trustee article second paragraph of trust provides that during the lifetime of a any property that is directed to be held in accordance with the terms and conditions set forth in article second shall be held by the trustee in trust nevertheless in a separate trust for the following uses and purposes to manage invest and reinvest the same to collect the income thereof and to pay over or apply the net_income and principal thereof to such extent if any including the whole thereof and in such amounts and proportions including all to one to the exclusion of the others and at such time or times as a the power_of_appointment committee by unanimous agreement shall appoint or b a and one member of the power_of_appointment committee by unanimous agreement shall appoint to or for the benefit of such one or more members of the class consisting of a a’s spouse a’s sister d and a’s descendants including a’s daughter b and a’s stepdaughter c until the death of a any net_income which may be the whole of such income not so paid over or applied shall be accumulated and added to the principal of the trust at least annually and thereafter shall be held administered and disposed of as a part of the trust principal article second paragraph of trust provides that upon the death of a the principal of the trust under paragraph of article second as it is then constituted and any accrued accumulated and undistributed_income shall be transferred conveyed and paid over to such person or persons or organization or organizations other than a a’s estate a’s creditors and the creditors of a’s estate to such extent in such amounts or proportions and in such lawful interests or estates whether absolute or in trust as a may appoint by last will and testament by specific reference to this power a may at any time and from time to time during his life by a written acknowledged instrument delivered to the trustee release such power_of_appointment with respect to any or all of the property subject_to such power or may further limit the persons or entities in whose favor or the extent to which this power may be exercised in part by a the trust principal as it is then constituted together with any accrued accumulated and undistributed_income to the extent not effectively appointed by a shall upon a’s death be disposed of as follows if any descendant of a is then living such property shall be divided into a sufficient number of equal shares so that there shall be set_aside one such share for each child of a who is still living and one such share for the collective descendants who are then living of any child of a who is not then living from each such share so set_aside for the collective descendants who are then living of any child of a who is not then living there shall be set_aside per stirpital parts for such descendants each child who is then living for whom a share is set_aside and each descendant who is then living of a child of a who is not then living for whom a per stirpital part is set_aside is herein referred to as a primary beneficiary the share or if the power_of_appointment is for any reason not effectively exercised in whole or article fourth provides that any property which is directed to be disposed of in plr-147790-06 part of a share so set_aside for a primary beneficiary shall be held in a separate trust in accordance with the terms and conditions set forth in article third if no descendant of a is then living such property shall be disposed of in accordance with the terms and conditions set forth in article fourth accordance with the terms and conditions set forth in article fourth shall be transferred conveyed and paid over to such one or more members of the class consisting of i the then-living descendants of a’s parents and ii qualified charitable organizations as the trustee in the exercise of sole and absolute discretion shall select in such amounts and proportions including all to one to the exclusion of all others as the trustee in the exercise of sole and absolute discretion shall determine committee shall initially consist of b c and d at all times at least two persons who are beneficiaries under trust other than a a’s spouse or any successor spouse of a or who are parents or guardians of such beneficiaries if there are less than two adult beneficiaries shall be members of the power_of_appointment committee in the event that either b c or d shall die before the death of a a’s then eldest living descendant who is also a beneficiary under trust shall become the successor member of the power_of_appointment committee any member of the power_of_appointment committee shall exercise the power_of_appointment granted under article second only in a non-fiduciary capacity and shall manifest any exercise of the power_of_appointment granted under article second by an acknowledged instrument in writing delivered to the trustee article twelfth paragraph provides that the power_of_appointment article twelfth paragraph of trust provides that a’s stepdaughter c shall be treated as a child of a and as a descendant of a’s parents and the descendants of c shall be treated as the descendants of a and a’s parents ruling sec_671 provides that where it is specified in subpart e of part i of subchapter_j that the grantor or another person shall be treated as the owner of any portion of a_trust there shall then be included in computing the taxable_income and credits of the grantor or the other person those items of income deductions and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account under chapter in computing taxable_income or credits against the tax of an individual means any person having a substantial_beneficial_interest in the trust which would be adversely affected by the exercise or nonexercise of the power which he possesses respecting the trust sec_672 provides for purposes of subpart e the term adverse_party sec_673 provides that the grantor shall be treated as the owner of any sec_673 through specify the circumstances under which the grantor is plr-147790-06 treated as the owner of a portion of a_trust portion of a_trust in which the grantor has a reversionary_interest in either the corpus or the income therefrom if as of the inception of that portion of the trust the value of such interest exceed sec_5 percent of the value of such portion sec_674 provides in general that the grantor shall be treated as the owner of any portion of a_trust in respect of which the beneficial_enjoyment of the corpus or the income therefrom is subject_to a power of disposition exercisable by the grantor or a nonadverse_party or both without the approval or consent of any adverse_party sec_674 provides that sec_674 shall not apply to a power exercisable only by will other than a power in the grantor to appoint by will the income of the trust where the income is accumulated for such disposition by the grantor or may be so accumulated in the discretion of the grantor or a nonadverse_party or both without the approval or consent of any adverse_party any portion of a_trust if under the terms of the trust agreement or circumstances attendant to its operation administrative control is exercisable primarily for the benefit of the grantor rather than the beneficiary of the trust portion of a_trust whether or not he is treated as such owner under any other provision of part i subchapter_j chapter where at any time the power to revest in the grantor title to such portion is exercisable by the grantor or a nonadverse_party or both sec_677 provides in general that the grantor shall be treated as the owner of any portion of a_trust whether or not he is treated as such owner under sec_674 whose income without the approval or consent of any adverse_party is or in the discretion of the grantor or a nonadverse_party or both may be distributed to the grantor or the grantor’s spouse held or accumulated for future distribution to the grantor or the grantor’s spouse or applied to the payment of premiums on policies of insurance on the life of the grantor or the grantor’s spouse examination of the trust reveals none of the circumstances that would cause a to be treated as the owner of any portion of the trust under sec_673 sec_674 sec_676 or sec_677 under sec_675 and applicable regulations the grantor is treated as the owner of sec_676 provides that the grantor shall be treated as the owner of any based solely on the facts and representations submitted we conclude an we further conclude that an examination of the trust reveals none of the circumstances that would cause administrative controls to be considered exercisable primarily for the benefit of a under sec_675 thus the circumstances attendant on the sec_2501 provides for the imposition of a gift_tax on the transfer of plr-147790-06 operation of the trust will determine whether a will be treated as the owner of any portion of the trust under sec_675 this is a question of fact the determination of which must be deferred until the federal_income_tax returns of the parties involved have been examined by the office with responsibility for such examination ruling sec_2 and property by gift sec_2511 provides that the gift_tax applies to a transfer by way of gift whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_25_2511-2 of the gift_tax regulations provides that a gift is complete as to any property with respect to which the donor so parted with dominion and control as to the leave the donor with no power to change the disposition of the property whether for the donor’s own benefit or for the benefit of another but if upon a transfer of property whether in trust or otherwise the donor reserves any power over its disposition the gift may be wholly incomplete or may be partially complete and partially incomplete depending upon all the facts in the particular case accordingly in every case of a transfer of property subject_to a reserved power the terms of the power must be examined and its scope determined sec_25_2511-2 provides an example where the donor transfers property in trust to pay the income to the donor or accumulate it in the discretion of the trustee and the donor retains a testamentary power to appoint the remainder among the donor’s descendants the regulation concludes that no portion of the transfer is a completed_gift however if the donor had not retained a testamentary_power_of_appointment but had instead provided that the remainder should go to x or his heirs the entire transfer would be a completed_gift change the beneficiaries of transferred property occurring otherwise than by death of the donor is regarded as the event which completes the gift and causes the gift_tax to apply see also 308_us_39 sec_2514 provides that in the case of a power_of_appointment created after date the exercise or release of the general_power_of_appointment shall be deemed a transfer of property by the individual possessing such power power exercisable in favor of the individual possessing the power the individual’s estate the individual’s creditors or the creditors of the individual’s estate sec_25_2511-2 provides that the relinquishment or termination of a power to sec_2514 provides that the term general_power_of_appointment means a sec_2514 provides that in the case of a power_of_appointment sec_25_2514-1 provides that a power_of_appointment is not a general sec_25_2514-3 provides that a co-holder of a power_of_appointment has plr-147790-06 power if by its terms it is exercisable only in favor of one or more designated persons or classes other than the possessor or his creditors or the possessor’s estate or the creditors of the estate created after date which is exercisable by the possessor only in conjunction with another person if the power is not exercisable by the possessor except in conjunction with a person having a substantial interest in the property subject_to the power which is adverse to the exercise of the power in favor of the possessor then the power is not a general_power_of_appointment for purposes of sec_2514 a person who after the death of the possessor may be possessed of a power_of_appointment with respect to the property subject_to the possessor’s power which he may exercise in his own favor shall be deemed as having an interest in the property and such interest shall be deemed adverse to such exercise of the possessor’s power no adverse_interest merely because of his joint possession of the power nor merely because he is a permissible appointee under a power however a coholder of a power is considered as having an adverse_interest where he may possess the power after the possessor's death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate thus for example if x y and z held a power jointly to appoint among a group of persons which includes themselves and if on the death of x the power will pass to y and z jointly then y and z are considered to have interests adverse to the exercise of the power in favor of x similarly if on y's death the power will pass to z z is considered to have an interest adverse to the exercise of the power in favor of y sec_25_2514-1 provides that the term power_of_appointment does not include the powers reserved by a donor to himself or herself however no provision of sec_2514 or the applicable regulations is to be construed as limiting the application of any other code section or provision of the regulations corpus and accumulated income to any persons other than a’s estate etc in view of this retained power a’s transfer of property to trust will not be a completed_gift subject_to federal gift_tax see sec_25_2511-2 in addition b c and d as members of the power_of_appointment committee have the power to distribute trust income and corpus to themselves however each member can only exercise the power to distribute the trust income and corpus with the consent of another member or with the consent of a therefore b’s power can only be exercised with the consent of c or d or with the consent of a c’s power can only be exercised with the consent of b or d or with the consent of a d’s power can only be in this case a has retained a limited testamentary power to appoint the trust plr-147790-06 exercised with the consent of b or c or with the consent of a further on the death of b c or d the deceased’s power will devolve to the surviving committee members and a jointly and a new committee member will be appointed therefore b c and d will not have a general_power_of_appointment by reason of the joint distribution power see sec_25_2514-3 accordingly during the period the power_of_appointment committee consists of b c and d they will not be treated as making a taxable gift if trust income or corpus is distributed to a under the terms of trust except as expressly provided herein no opinion is expressed or implied concerning the federal tax consequences of the facts described above under any other provision of the code this ruling is directed only to the taxpayer s 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 sincerely letter is being sent to the taxpayers’ authorized representative enclosures copy of this letter copy for sec_6110 purposes audrey w ellis senior counsel branch office of the associate chief_counsel passthroughs and special industries


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 b02 plr-123058-09 date september legend x ----------------------------- -------------------------------- y ---------------------------------------- -------------------------------- country -------------------------------------- date ---------------------- dear ------------------ this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations for x to file an entity classification election the information submitted states that x was formed under the laws of country on date x has been wholly owned by y since date x represents that x is a foreign_entity eligible to elect to be treated as a disregarded_entity for federal tax purposes however x did not timely file a form_8832 entity classification election electing to be treated as a disregarded_entity 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 elections are necessary only when an plr-123058-09 eligible_entity does not want to be classified under the default classification or when an eligible_entity chooses to change its classification sec_301_7701-3 provides that except for certain existing entities described in sec_301_7701-3 unless a foreign eligible_entity elects otherwise the entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single member that does not have limited_liability sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under sec_301 b by filing form_8832 with the appropriate service_center under sec_301_7701-3 this election will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified the date specified on form_8832 cannot be more than days prior to the date on which the election is filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than 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 provides that the term regulatory election includes an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make the election sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension 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 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government based solely on the information 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 a form_8832 with the appropriate service_center and elect to be treated as a disregarded_entity for federal tax purposes effective date a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the internal_revenue_code and the regulations thereunder plr-123058-09 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 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely curt g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes