t c memo united_states tax_court friscia construction incorporated et al petitioners v commissioner of internal revenue respondent docket nos filed date michael j friscia an officer for petitioner in docket no michael j friscia and michelle r friscia pro_se in docket no michael j friscia pro_se in docket no patricia pierce davis and claire r mckenzie for respondent memorandum opinion ‘cases of the following petitioners are consolidated herewith michael j and michelle r friscia docket no and michael j friscia docket no laro judge these cases were consolidated for purposes of trial briefing and opinion respondent determined deficiencies in additions to and penalties on petitioners’ federal_income_tax as follows michael j and michelle r friscia docket no accuracy-related_penalty year deficiency sec_6662 a dollar_figure dollar_figure michael j friscia docket no addition_to_tax and penalty year deficiency sec_6651 a sec_6662 a dollar_figure dollar_figure dollar_figure friscia construction inc docket no fiscal_year addition_to_tax and penalty ended deficiency sec_6651 a sec_6662 a dollar_figure dollar_figure dollar_figure unless otherwise indicated section references are to the internal_revenue_code in effect for the years in issue and rule references are to the tax_court rules_of_practice and procedure hereinafter all dollar amounts are rounded to the nearest dollar after concessions the issues for decision are whether michael and michelle friscia the friscias had unreported income of dollar_figure for we hold that they had unreported income of dollar_figure - whether michael j friscia michael friscia had unreported income of dollar_figure for we hold that he had unreported income of dollar_figure whether the friscias and michael friscia are liable for self-employment_tax on the unreported income for and respectively we hold that they are whether the friscias and michael friscia are liable for the accuracy-related_penalty under sec_6662 for the and taxable years we hold that they are whether michael friscia is liable for the addition_to_tax for failure_to_file timely under sec_6651 we hold that he is whether deductions and costs of goods sold claimed by friscia construction inc friscia construction in excess of dollar_figure have been substantiated and are allowable we hold that for the taxable_year ended date friscia construction had gross_receipts of dollar_figure and allowable deductions and costs of goods sold in the total amount of dollar_figure whether friscia construction is liable for the accuracy-related_penalty under sec_6662 we hold that it is whether friscia construction is liable for the addition_to_tax for failure_to_file timely under sec_6651 we hold that it is q4e- to facilitate disposition of these issues we shall first make general findings_of_fact and then combine our findings and opinion with respect to each issue general findings_of_fact some of the facts and certain documents have been stipulated pursuant to rule the parties’ stipulations are incorporated herein by reference and are found accordingly at the time of the filing of the petitions herein michael and michelle friscia resided in lockport illinois and the principal_place_of_business of friscia construction was also lockport illinois during and michael friscia was an officer and employee of friscia construction a company founded by his father michael friscia began working full time for friscia construction after graduating from high school in michael friscia and his brother became the officers of friscia construction upon their father's death in friscia construction is in the business of commercial construction and home remodeling michael friscia worked for the company as a carpenter and handled all of the company’s banking bill paying and paperwork including preparation of estimates and proposals and filing tax returns in addition michael friscia performed construction services for his own clients through his s_corporation mik mic ine mik mic - - during michelle friscia was employed as a registered nurse through mid-1994 michelle friscia also operated a business selling household products through an amway distributorship in the friscias’ neighborhood suffered a flood the friscias assert that as a result of the flood most of the records substantiating income and expenses for the years at issue were destroyed including friscia construction’s invoices and accounts_receivable and the records from the amway business petitioners did not reconstruct these records but did produce certain substantiating documents such as bank statements canceled checks check registers and deposit slips issue the friscias’ taxable_income the friscias filed a joint federal_income_tax return upon audit the friscias were unable to produce detailed records of their income as a result respondent employed the bank_deposits method of proof respondent determined that the friscias had gross deposits of dollar_figure in after concessions respondent asserts that dollar_figure of this amount is unreported income gross_income is all income from whatever source derived sec 6l1 a this text is construed broadly to include all accessions to wealth clearly realized and over which the taxpayers have complete dominion 348_us_426 30_f3d_1077 9th cir taxpayers are required to maintain adequate_records of income see sec_6001 in the absence of adequate books_and_records the commissioner may reconstruct a taxpayer's income by any reasonable method that clearly reflects income see sec_446 360_us_446 54_tc_1121 the bank_deposits method is an accepted method of income reconstruction when a taxpayer has inadequate books_and_records and large_bank deposits see dibleo v commissioner 96_tc_858 affd 959_f2d_16 2d cir 94_tc_654 bank_deposits are prima facie evidence of income see 102_tc_632 the taxpayer has the burden of proving that the bank_deposits came from a nontaxable source see rule a clayton v commissioner supra pincite 64_tc_651 affd 566_f2d_2 6th cir sproul v commissioner tcmemo_1995_207 the bank_deposits method assumes that all money deposited into a taxpayer's bank account during a given period constitutes taxable_income but the government must take into account any nontaxable source or deductible expense of which - it has knowledge see clayton v commissioner supra pincite dileo v commissioner supra pincite respondent’s bank deposit analysis encompassed an examination of seven different joint bank accounts owned by the friscias we review respondent’s determination as follows the account the friscias deposited dollar_figure into a bank account numbered the account in and earned interest thereupon of dollar_figure the friscias concede that these deposits are income accordingly dollar_figure of the deposits and interest in the account represents income taxable to the friscias in the account the friscias deposited dollar_figure into a bank account numbered the account in the friscias concede that this figure represents gross_receipts from michelle friscia’s amway distributorship however the friscias contend that this figure should be offset by various claimed deductions all of which respondent has denied respondent asserts that the friscias’ testimony and canceled checks fail to substantiate that any expenses were incurred in operating the amway business we disagree the amway distributorship system is well known to respondent and this court see eg 90_tc_960 affd without published opinion 899_f2d_18 9th cir nissley v commissioner tcmemo_2000_178 theisen v commissioner tcmemo_1997_539 rubin v commissioner tcmemo_1989_290 alcala v commissioner tcmemo_1984_664 in most of these cases we found that the expenses of operating the distributorship at issue were so great in comparison to the revenue generated that the distributor lacked a true profit_motive here by contrast respondent asserts that michelle friscia’s amway distributorship was exceptionally profitable in that it generated dollar_figure in proceeds with no expenses we find this implausible especially in light of the friscias’ decision to discontinue the distributorship in the friscias used the account as a business account for the amway distributorship and the transactions therein reflect the items of income and expense for the amway business michelle friscia admitted that after discontinuing the business in mid- she began to pay personal expenses out of the account however she was able to identify legitimate business expenditures through her testimony and the bank records the friscias made payments totaling dollar_figure to upline distributors and to amway in we find that these payments represented dollar_figure in deductible sales commissions and costs of goods sold ’ 7on the basis of michelle friscia’s testimony we find that dollar_figure of the amway products purchased in were for the friscias’ personal household use - accordingly we hold that the friscias’ net_income in from the amway distributorship was dollar_figure dollar_figure - dollar_figure the account the friscias deposited dollar_figure into a bank account numbered the account in the friscias concede that these deposits were wages received by michael friscia from friscia construction in the account the friscias deposited dollar_figure into a bank acccount numbered the account in and earned interest thereupon of dollar_figure respondent concedes that the friscias made dollar_figure in nontaxable transfers into this account the friscias presented no evidence concerning the source of the remaining dollar_figure in deposits accordingly dollar_figure of the deposits and interest in the account represents income taxable to the friscias in the account the friscias deposited dollar_figure into a bank account numbered the account in the friscias have provided no explanation for the source of these deposits accordingly the full dollar_figure in deposits represents income taxable to the friscias in the account the friscias deposited dollar_figure into a bank account numbered the account in respondent concedes that - the friscias made dollar_figure in nontaxable transfers into this account the record reflects that the friscias made additional nontaxable deposits into the account of dollar_figure which were amway sales proceeds received by the friscias in these proceeds are properly allocable to the friscias’ return see 158_f2d_859 7th cir payments made by check to a cash_basis taxpayer are includable in income in the year the check is received not the year it is deposited affg 5_tc_1283 the friscias also claim that dollar_figure of the payments received from friscia construction in and deposited into the account were reimbursements for expenditures paid_by the friscias on behalf of the company these include a dollar_figure reimbursement for a christmas party and a dollar_figure reimbursement for a computer the friscias have failed to establish that these expenses were incurred on the company’s behalf thus these amounts are includable in the friscias’ income for accordingly dollar_figure of the deposits in the account represents income taxable to the friscias in spetitioners claim an additional nontaxable transfer in the amount of dollar_figure from account this contention is unsupported as there is no document in the record reflecting an account the account the friscias deposited dollar_figure in a bank account numbered the account in respondent concedes that these were proceeds from a nontaxable loan summary of income in sum the deposits into the friscias’ seven bank accounts in reflect the following amounts of income taxable to the friscias in account income dollar_figure big_number big_number big_number big_number - - total big_number the friscias reported gross_receipts of dollar_figure in as follows wages less withholding’ dollar_figure interest schedule c receipts big_number other income big_number schedule d sale rental income big_number mik mic proceeds’ big_number total big_number ‘the amount withheld is netted from wages because these amounts would not have been deposited into the friscias’ accounts respondent concedes that the friscias reported dollar_figure in proceeds from michael friscia’s construction business on the mik mic income_tax returns in -- accordingly we hold that the friscias underreported their income for by dollar_figure dollar_figure - dollar_figure ’ issue michael friscia’s taxable_income michael friscia filed his tax_return on date claiming married filing separate status again using the bank_deposits method of proof respondent determined that michael friscia made bank_deposits in of dollar_figure all of which respondent determined is reportable as income after concessions respondent asserts that dollar_figure of this amount is unreported income respondent’s determination was based on an analysis of five bank accounts which we review as follows the and accounts in michael friscia made total deposits of dollar_figure dollar_figure and dollar_figure respectively into the and acounts michael friscia provided no nontaxable source for any of these deposits however these accounts were all joint accounts in the names of michael friscia and michelle friscia therefore this holding conflicts with respondent’s request for admission no which was deemed admitted by reason of the friscias’ failure to serve and file a response to respondent’s requests for admission within days see rule that admission stated the total of petitioners’ unreported income for the taxable_year was at least dollar_figure respondent made no mention of admission no at trial or in his posttrial brief and has made numerous concessions that conflict with the admission under these circumstances we conclude that respondent has voluntarily withdrawn request for admission no only one-half of the unexplained deposits constitutes an item_of_gross_income to michael friscia see van eck v commissioner tcmemo_1995_570 accordingly dollar_figure of the deposits into these accounts represents income to michael friscia in the account michael friscia deposited dollar_figure into the account in michael friscia concedes that this entire amount represents wages he earned from friscia construction in and is reportable by him as income the account michael friscia deposited dollar_figure into the account in respondent concedes that michael friscia made dollar_figure in nontaxable transfers into this account michael friscia has established that the following additional deposits into the account are not taxable to him i dollar_figure in wages earned by michelle friscia and ii dollar_figure in nontaxable proceeds from the sale of a truck inherited from his father michael friscia concedes that he deposited dollar_figure in proceeds from his mik mic business and wages from friscia corporation into the account one-half of the remaining dollar_figure or dollar_figure in unexplained deposits is taxable to michael friscia because of his joint interest in the account see id accordingly dollar_figure of the deposits into the account represents income to michael friscia for summary of income in sum we find that michael friscia had the following amounts of income in account income dollar_figure big_number big_number total big_number we further find that michael friscia reported gross_receipts of dollar_figure in as follows interest dollar_figure rental income big_number mik mic proceeds’ big_number total big_number ‘unlike for respondent contests the amount michael friscia testified he reported on the mik mic returns in respondent provides no explanation for this inconsistency we find michael friscia's testimony as to the amounts reported on the mik mic returns to be equally credible as to both and accordingly we hold that michael friscia underreported his income for by dollar_figure dollar_figure - dollar_figure issue self-employment_tax for and in the notice_of_deficiency respondent determined that the friscias and michael friscia are liable for self-employment taxes for the amounts underreported in and respectively the friscias fail to offer any evidence or analysis of this issue and so fail to meet their burden_of_proof accordingly we hold that the amounts underreported represent income from self-employment - - subject_to self-employment_tax under sec_1401 and that the friscias may deduct one-half of the self-employment_tax paid under sec_164 issue negligence accuracy-related_penalty for and sec_6662 imposes a penalty in an amount equal to percent of the underpayment_of_tax attributable to one or more of the items set forth in sec_6662 sec_6662 b applies an accuracy-related_penalty to the portion of an underpayment attributable to negligence or disregard of rules or regulations the friscias bear the burden of proving that respondent’s determination is erroneous see rule a 56_tc_248 negligence includes any failure to make a reasonable attempt to comply with the internal_revenue_code see sec_6662 such negligence may be excused if it is found that the taxpayer acted with reasonable_cause and in good_faith with respect to the underpayments see id reliance on professional advice alone is not an absolute defense to negligence but rather a factor to be considered see froehlich v commissioner tcmemo_1996_487 in order for reliance on professional advice to excuse a taxpayer from the negligence_penalty the taxpayer must show that the professional had the expertise and the knowledge of the pertinent facts to provide competent advice on the subject matter see 39_f3d_402 2d cir affg tcmemo_1993_480 89_tc_849 affd 904_f2d_1011 5th cir affd 501_us_868 kozlowski v commissioner tcmemo_1993_430 affd without published opinion 70_f3d_1279 9th cir the friscias underreported their income for by dollar_figure and michael friscia underreported his income for by dollar_figure though their returns were prepared by an accountant the friscias did not present any evidence to show that the underreporting was due to any act of their accountant or reliance upon his advice the friscias contend that the accuracy-related_penalty should not apply because their records were destroyed ina flood we have found as a fact that the friscias underreported their income the friscias have admitted that at least a portion of the underreported amount stems from their own negligence such as deducting personal expenses as amway business_expenses the friscias’ failure of proof as to the remaining amounts of underreported income provides no basis for a finding of reasonable_cause accordingly we find that the friscias and michael friscia are liable for the accuracy-related_penalty for and respectively issue michael friscia’s sec_6651 addition_to_tax respondent determined an addition_to_tax under sec_6651 for michael friscia’s taxable_year asserting that michael friscia failed to file a timely return in order to avoid this addition_to_tax michael friscia must prove that the failure was due to reasonable_cause and not willful neglect see sec_6651 rule a 469_us_241 harris v commissioner tcmemo_1998_332 michael friscia received an extension of time to file his tax_return which extended the due_date for filing his tax_return to date he did not file his tax_return until date there is no evidence in the record with respect to why michael friscia's tax_return was filed late or whether reasonable_cause existed michael friscia argues on brief that the loss of his business records in the flood caused the delay in filing his return implicit in michael friscia’s argument is that he needed the extra time to reconstruct the lost records however the friscias made no attempt to reconstruct any of the lost records at that time thus the same records that were available to michael friscia on date when his return was due were available to him on date when he filed his return moreover we have held that the loss of records in an involuntary -- - action does not relieve taxpayers of their duty to file a timely return see chamberlin v commissioner tcmemo_2000_50 accordingly we hold that michael friscia is liable for the sec_6651 addition_to_tax with respect to the net amount of tax due on his tax_return issue friscia construction’s allowable deductions respondent’s notice_of_deficiency denied all of friscia contruction’s costs of goods sold and deductions for the taxable_year ended date the taxable_year on brief respondent concedes that friscia construction is entitled to costs of goods sold and deductions of dollar_figure friscia construction claimed costs of goods sold on its taxable_year corporate tax_return of dollar_figure along with the following deductions accounting dollar_figure truck expense big_number misc dues equipment rental union dues big_number insurance big_number office postage telephone big_number utilities big_number supply big_number bank charge sec_132 promo license total deductions big_number on the basis of michael friscia’s testimony the canceled checks and banking records we are convinced that friscia construction was conducting a legitimate construction business and necessarily had a variety of expenses in connection with such operations which would be allowable as deductions herein friscia construction was thus entitled to some amount_of_deductions under sec_162 in connection with the business see 39_f2d_540 2d cir michael friscia provided specific testimony at trial about the company’s construction projects for the year and we find a majority of the claimed expenses to be consistent with these activities upon our detailed review of the record we find that friscia construction is entitled to costs of goods sold and deductions for the taxable_year as follows costs of goods sold dollar_figure wages big_number license sec_220 advertising accounting truck maintenance gas big_number supplie sec_198 dues big_number insurance big_number office expense telephone legal fees big_number bank charge sec_132 vehicle depreciation big_number total big_number ‘the deduction for wages reflects a concession by respondent to which petitioner agrees - friscia construction reported gross_receipts for the taxable_year of dollar_figure which respondent has not challenged however this figure included amway sales of dollar_figure which we previously allocated to michelle friscia’s amway distributorship for the friscias’ taxable_year accordingly we find friscia construction’s gross_receipts for the taxable_year to be dollar_figure taking the above into account friscia construction had a net profit of dollar_figure dollar_figure - dollar_figure for the taxable_year representing a profit margin of percent respondent conceded on brief that friscia construction’s profit margin was between and percent our determination is in the high range of respondent’s concession but the record does not support a lower margin friscia construction reported a loss for the taxable_year of dollar_figure accordingly we hold that friscia construction underreported its income by dollar_figure issue friscia construction’s negligence accuracy-related_penalty respondent determined a negligence accuracy-related_penalty under sec_6662 for friscia construction’s taxable_year the record does not show that the company was not negligent or the existence of reasonable_cause though fricia construction’s return was prepared by an accountant there was no testimony at trial that the company relied upon its accountant’s --- - advice with respect to claiming any of the disallowed costs of goods sold or deductions accordingly we sustain respondent’s determination on the applicability of this penalty issue friscia construction’s sec_6651 addition_to_tax friscia construction filed a form_1120 u s_corporation income_tax return for the taxable_year the return on date as extended the due_date for friscia construction’s return was date respondent determined an addition_to_tax under sec_6651 asserting that friscia construction failed to file a timely return and that it did not show that its failure was due to reasonable_cause michael friscia testified that he did not know why the return was filed late there is no evidence in the record that friscia construction had reasonable_cause for filing the return late accordingly we hold that friscia construction is liable for an addition_to_tax under sec_6651 a we have considered all arguments by both parties for holdings contrary to those which we reach herein and to the extent not discussed above have found those arguments to be irrelevant or without merit to reflect the foregoing and concessions decisions will be entered under rule


t c summary opinion united_states tax_court cynthia ward petitioner v commissioner of internal revenue respondent docket no 7076-10s filed date cynthia ward pro_se frank w louis for respondent ruwe judge the petition in this case was filed pursuant to the provisions of section of the internal_revenue_code pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case 1unless otherwise indicated all section references are to the internal_revenue_code as amended and all rule references are to the tax_court rules_of_practice and procedure this case is before the court on respondent’s motion to dismiss for lack of jurisdiction as to and motion to dismiss on ground of mootness as to background petitioner resided in new york at the time she filed the petition on date petitioner filed an imperfect petition with this court on date petitioner filed an amended petition that appears to contest her tax_liabilities for taxable years and attached to her amended petition were copies of a notice_of_determination concerning collection action s under sec_6320 and or notice_of_determination for dated date and copies of notices of deficiency for and dated date in respondent’s motion pertaining to respondent requests that this case be dismissed on the ground that no notice_of_determination as authorized and required by sec_6330 to form the basis for a petition to this court has been sent to petitioner for nor has respondent made any other determination with respect to petitioner’s taxable_year that would confer jurisdiction on this court in respondent’s motion pertaining to respondent requests that this case be dismissed as moot insofar as it pertains to review of a collection action for because after the filing of the petition the tax_liability for taxable_year was paid in full and the proposed levy is no longer necessary on date petitioner filed separate objections to respondent’s motions both of petitioner’s objections dispute the deficiencies and or underlying tax_liabilities for taxable years and jurisdiction discussion in a case seeking the redetermination of a deficiency pursuant to sec_6213 the jurisdiction of the court depends on the taxpayer’s timely filing a petition rule c 78_tc_215 sec_6213 provides that the petition must be filed with the court within days after the notice_of_deficiency is mailed the court’s jurisdiction to review certain collection activity by the internal_revenue_service under sec_6320 and sec_6330 depends on the issuance of a valid notice_of_determination and the filing of a timely petition for review 124_tc_36 117_tc_122 114_tc_492 notices of deficiency the amended petition included attached copies of notices of deficiency for and each dated date the last date to petition the court with respect to either notice_of_deficiency would have been date the petition was filed more than months after the issuance of the notices of deficiency accordingly the court lacks jurisdiction in this case as to petitioner’s taxable years and insofar as the petition relates to the notices of deficiency issued on date notice_of_determination the record establishes that no notice_of_determination as authorized by sec_6320 and or d has been issued to petitioner with respect to the taxable_year accordingly this court lacks jurisdiction to review any collection activity for that year respondent’s appeals_office issued to petitioner a notice_of_determination dated date for petitioner’s unpaid tax_liability for taxable_year a copy of that notice_of_determination was attached to the amended petition although the petition is timely with regard to the notice_of_determination for taxable_year overpayment credits were subsequently applied to petitioner’s account eliminating any balance due for as stated in respondent’s motion pertaining to and as demonstrated by the attached form_4340 certificate of assessments payments and other specified matters provided as an exhibit the tax_liability for the taxable_year has been fully paid when there is no unpaid liability for a year upon which a collection action could be based a proceeding filed in this court pursuant to sec_6330 is moot 126_tc_1 accordingly the petition in this case insofar as it relates to the review of a collection action for taxable_year is moot to reflect the foregoing an appropriate order and order of dismissal will be entered


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 corp plr-139285-14 date february legend parent date date date x company official tax professional dear --------------------- ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ------------------------ --------------------------- --------------------------- ---------------------------- ----------------------------------------------------------------------------------- ------ ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- ---------------------------------------------------------- ------------------------- this letter responds to a letter dated date submitted on behalf of parent requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election in particular parent is requesting an extension of time for the consolidated_group of which parent is the common parent to elect an extended carryback period the election for a consolidated_net_operating_loss cnol the material information submitted for consideration is summarized below plr-139285-14 parent is the common parent of a consolidated_group the parent group parent group incurred a cnol in the taxable_year ending date the year cnol parent seeks to carry back the year cnol x years to its taxable_year ending on date under sec_172 of the internal_revenue_code parent was required to file the election in order to carry back the year cnol to its taxable_year ending on date and to obtain the benefit of sec_56 the election was due on date but for various reasons a valid election was not filed after the due_date for the election it was discovered that the election had not been filed subsequently this request was submitted under sec_301_9100-3 for an extension of time to file the election parent has represented that it is not seeking to alter a return position for which an accuracy related penalty has been or could be imposed under sec_6662 at the time parent requested relief taking into account any qualified_amended_return filed within the meaning of sec_1_6664-2 and for which the new return position requires or permits a regulatory election for which relief is requested sec_172 generally permits a taxpayer to carry back a net_operating_loss nol to each of the taxable years preceding the taxable_year of the nol sec_172 permits a taxpayer to elect to carry back an applicable net_operating_loss applicable nol to each of the or taxable years preceding the taxable_year of the applicable nol in lieu of the 2-year period provided by sec_172 sec_172 provides that an applicable nol is the taxpayer’s nol for a taxable_year ending after date and beginning before date sec_172 provides that the election under sec_172 shall be made by the due_date including extension of time for filing the return for the taxpayer’s last taxable_year beginning in the election is irrevocable and in general may be made only with respect to one taxable_year sec_1502 provides that the secretary shall prescribe such regulations as he may deem necessary in order that the tax_liability of any affiliated_group_of_corporations making a consolidated_return and of each corporation in the group both during and after the period of affiliation may be returned determined computed assessed collected and adjusted in such manner as clearly to reflect the income_tax_liability and the various factors necessary for the determination of such liability and in order to prevent avoidance of such tax_liability in carrying out the preceding sentence the secretary may prescribe rules that are different from the provisions of chapter that would apply if such corporations filed separate returns plr-139285-14 sec_1_1502-21 of the income_tax regulations provides that losses taken into account in determining a cnol may be carried to other taxable years whether consolidated or separate only under paragraph b of sec_1_1502-21 sec_1_1502-21 provides that nol carryovers and carrybacks to a taxable_year are determined under the principles of sec_172 and sec_1_1502-21 sec_1_1502-21t as in effect for the year at issue provided that a consolidated_group could elect an extended carryback period pursuant to sec_172 with regard to a cnol arising in a taxable_year ending after date and beginning before date revproc_2009_52 2009_49_irb_744 provides when and how a taxpayer may make an election under sec_172 sec_4 of revproc_2009_52 provides that the common parent of a consolidated_group makes the election for the group sec_4 and of revproc_2009_52 permit the election to be made for consolidated taxpayers by attaching a statement to the original or amended consolidated_return for the taxable_year of the applicable cnol by attaching a statement to the taxpayer’s amended consolidated_return applying the applicable cnol to the carryback_year or by attaching a statement to a claim for a tentative_carryback_adjustment on form_1139 corporation application_for tentative refund sec_4 b and b of revproc_2009_52 require the election regardless of the manner in which made to be filed no later than the due_date including extensions for filing the return for the taxpayer’s last taxable_year beginning in under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 requests for relief under sec_301_9100-3 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 that granting relief will not prejudice the interests of the government sec_301_9100-3 the election by a consolidated_group to extend the carryback period under sec_172 for a cnol is a regulatory election therefore the commissioner has discretionary authority under sec_301_9100-3 to grant an extension of time for parent to file the election provided parent establishes to the satisfaction of the commissioner that it acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government plr-139285-14 information affidavits and representations submitted by parent company official and tax professional explain the circumstances that resulted in the failure to timely file a valid election the information establishes that parent reasonably relied on a qualified_tax professional who failed to make or advise parent to make the election and that the request for relief was filed before the failure to timely make the election was discovered by the internal_revenue_service see sec_301_9100-3 and v based on the facts and information submitted including the affidavits submitted and the representations made we conclude that parent has shown it acted reasonably and in good_faith that the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and that granting relief will not prejudice the interests of the government accordingly provided that and to the extent that the parent group qualifies substantively to file the election we grant an extension of time under sec_301_9100-3 until ninety days from the date on this letter for parent to file the election this letter does not extend the period of time described in sec_6511 by which a taxpayer is required to file a claim for credit or refund of an overpayment_of_tax parent may file the election under sec_172 to carry back the year cnol to its taxable_year ending on date on form 1120x amended u s_corporation income_tax return for the taxable_year ending date according to the procedures set forth in revproc_2009_52 a copy of this letter must be attached to the form 1120x if parent files form 1120x electronically parent may satisfy the requirement of attaching a copy of this letter by attaching a statement to the parent group’s amended_return that provides the date and control number plr-139285-14 of this letter_ruling the above extension of time is conditioned on the parent group’s tax_liability if any not being lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money we express no opinion as to the parent group’s tax_liability for the years involved a determination thereof will be made by the director’s office upon audit of the income_tax returns involved except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any item discussed or referenced in this letter in particular we express no opinion with respect to whether parent qualifies substantively to make the election in addition we express no opinion as to the tax effects or consequences of filing the election late under the provisions of any other section of the internal_revenue_code or regulations or as to the tax treatment of any conditions existing at the time of or resulting from filing the election late that are not specifically set forth in this letter for purposes of granting relief under sec_301_9100-3 we relied on certain statements and representations made under penalty of perjury by parent company plr-139285-14 official and tax professional the director however should verify all essential facts in addition notwithstanding that an extension is granted under sec_301_9100-3 to file the election any penalties and interest that would otherwise be applicable continue to apply 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 pursuant to the power_of_attorney on file in this office copies of this letter are being sent to your authorized representatives sincerely ____________________________ ken cohen senior technician reviewer branch office of associate chief_counsel corporate


t c memo united_states tax_court bstate of evelyn m mcmorris deceased jerry d mcmorris personal representative petitioner v commissioner of internal revenue respondent docket no filed date kevin l brown and leslie r kehl for petitioner robert a varra for respondent memorandum opinion cohen chief_judge respondent determined a deficiency in the federal estate_tax of the estate of evelyn m mcmorris the estate in the amount of dollar_figure by amendment to the answer respondent asserts an increased deficiency in the amount of dollar_figure after concessions the issue for decision is whether the estate is entitled to deductions for the portion of a federal_income_tax liability to be refunded due to a reduction in reported income and the corresponding portion of a state_income_tax liability for which a refund has yet to be requested this case was submitted fully stipulated under rule unless otherwise indicated all section references are to the internal_revenue_code as in effect as of the date of decedent's death and all rule references are to the tax_court rules_of_practice and procedure the stipulated facts are incorporated herein by this reference background evelyn m mcmorris decedent died on date a resident of colorado the personal representative decedent's son jerry d mcmorris jerry mcmorris was a resident of colorado at the time the petition was filed in this case donn d mcmorris decedent's husband mr mcmorris died on date on date decedent was declared incompetent due to irreversible advanced alzheimer's disease and jerry mcmorris was appointed as conservator for her estate in partial_distribution of decedent's interest in her husband's estate shares of stock in n w transport services inc nw were distributed to the estate of evelyn m mcmorris protected person on date decedent through jerry mcmorris as her conservator entered into an agreement with nw through jerry mcmorris as president to redeem the shares of nw stock in exchange for dollar_figure payable over months with interest pincite percent the federal estate_tax_return the estate_tax_return for decedent's_estate was filed on date the estate_tax_return reflected deductions for decedent's federal and colorado income_tax liabilities of dollar_figure and dollar_figure respectively decedent's federal_income_tax return for the federal_income_tax return was filed timely on or before date the federal_income_tax return reflected an income_tax_liability of dollar_figure which amount was paid with the return decedent's colorado income_tax return for also was filed timely on or before date and reflected an income_tax_liability of dollar_figure which was paid with the return a large part of the income reported on decedent's income_tax returns resulted from gains on the redemptions of nw stock that were passed through to decedent's income_tax returns from the fiduciary income_tax return for mr mcmorris's estate for the fiscal_year ended date the nw stock had been included on mr mcmorris' estate_tax_return at an appraised value of dollar_figure per share accordingly decedent's basis in the nw stock was determined using the value of dollar_figure per share and substantial gain resulted after examination of decedent's_estate tax_return respondent determined that the amounts allowable as deductions for decedent's federal and colorado income_tax liabilities were dollar_figure and dollar_figure respectively respondent issued a notice_of_deficiency on date petitioner does not contest these adjustments having conceded all issues raised in the notice_of_deficiency in date the parties in the case of estate of donn d mcmorris v commissioner docket no reached a basis for settlement that provided for an increase in the value of the nw stock included in mr mcmorris' estate to dollar_figure per share the increase in the value of the nw stock created a deficiency in the estate_taxes for mr mcmorris' estate the increase in value of the nw stock also increased decedent's basis in the nw stock thereby eliminating the income attributable to the redemptions of the nw stock a protective claim_for_refund relating to the fiduciary income_tax return of mr mcmorris' estate for the fiscal_year ended date had been filed on date on or about date an amended fiduciary income_tax return was filed on date an amended federal_income_tax return was filed for decedent claiming a refund of dollar_figure in settling the case of estate of donn d mcmorris v commissioner supra the parties and petitioner agreed that the overpayments of tax claimed on the amended fiduciary income_tax return and decedent's amended income_tax return as finally adjusted would be used to offset the deficiency in estate_tax in that case based on the above-described adjustments in estate of donn d mcmorris v commissioner supra decedent's amended federal_income_tax return reflected a loss from the redemption of the nw stock rather than the gain previously reported and certain dividend income previously reported was eliminated a refund of dollar_figure of decedent's federal income taxes was approved by respondent due to the large amount of the refund it was subject_to review by the joint_committee on taxation petitioner's refund claim was reported to the joint_committee on date the 30-day period for review passed without objection as of date the closing of the record in this case neither an amended colorado income_tax return nor a protective claim_for_refund had been filed with the colorado department of revenue respondent's amended answer requests an increased deficiency in estate_tax based on a reduction of the amounts claimed as debts of decedent for federal and colorado income taxes discussion sec_2053 provides that the value of the taxable_estate shall be determined by deducting from the value of the gross_estate such amounts for claims against the estate as are allowable by the laws of the jurisdiction under which the estate is being administered the amounts that may be deducted as claims against a decedent's_estate are such only as represent personal obligations of the decedent existing at the time of his death whether or not then matured and interest thereon which had accrued at the time of death only claims enforceable against the decedent's_estate may be deducted sec_20_2053-4 estate_tax regs unpaid income taxes whether or not determined as of the date of death are deductible if they are on income properly includable in an income_tax return of the decedent for a period before his or her death see 12_bta_1353 sec_20_2053-6 estate_tax regs deduction for federal_income_tax liability respondent's position is that the estate_tax deduction for petitioner's federal_income_tax liability should be limited to the amount ultimately determined to be due petitioner's position is that the reported income_tax_liability except as modified by respondent's determination in the notice_of_deficiency should be allowed in full unreduced by the refund approved in the decision in this case turns on whether we should consider the postdeath adjustment in petitioner's income_tax_liability due to the change in valuation of the nw stock the supreme court in 279_us_151 stated that the estate so far as may be is settled as of the date of the testator's death this principle is followed in cases involving the valuation of a claim that is valid and fully enforceable on the date of a decedent's death see 108_tc_412 supplemented by 110_tc_12 in cases where the decedent's creditor has only a potential unmatured contingent or contested claim that requires further action before it becomes a fixed obligation of the estate postdeath events warrant consideration id where a claim is disputed contingent or uncertain as of the date of a decedent's death the estate is not entitled to a deduction until the claim is resolved and it is determined what amount if any will be paid id we have held that a claim that is valid and enforceable at the date of a decedent's death must remain enforceable in order for the estate to deduct the claim technical claims that disappear in the light of subsequent circumstances should not be allowed thus postdeath events must be taken into consideration in determining the enforceability of a claim that a creditor fails to make and preserve within the time allowed by local law see 60_tc_465 affd 492_f2d_796 5th cir petitioner argues that the income_tax_liability that was timely paid was a valid and enforceable claim on the date of decedent's death and therefore postdeath events are not to be considered petitioner cites 680_f2d_1248 9th cir for its holding that as a matter of law when claims are for sums certain and are legally enforceable as of the date of death post-death events are not relevant in computing the permissible deduction that case involved lien claims against property owned by the decedent at the time of the decedent's death the water users' association to which the money was owed had no authority to settle its claims for less than the full amount and the executrix had no legal or factual arguments to support a challenge after the estate return was filed the association's bylaws were amended to authorize it to settle outstanding claims the court_of_appeals for the ninth circuit declined to follow cases like estate of hagmann v commissioner supra and applied the ithaca trust principle enunciated supra p the court_of_appeals made it clear that the date of death was the critical reference point in testing whether a claim was enforceable petitioner also cites 88_tc_769 revd 856_f2d_1158 8th cir which involved a deduction for income_tax where a refund had occurred due to a change in legislation years after the decedent's death the decedent's reported income_tax_liability previously had been increased in accordance with a supreme court opinion decided years after the decedent's death and an increased estate_tax deduction for that liability had been allowed the parties did not contest these adjustments the legislation negated the effect of the supreme court decision this court reasoned that the legislative change was not foreseeable and that the claim for income_tax had been paid in accordance with the law in effect as of the date of death we held that the estate was entitled to deduct as a claim against the estate the income_tax paid unreduced by the refund the court_of_appeals for the bighth circuit reversed holding that the effect of the legislation was retroactive and that no deduction was allowable for the refunded tax this case is unlike estate of sachs v commissioner supra which dealt with a change in income_tax resulting from retroactive legislation not with the adjustment otherwise resulting from the examination of the income_tax and estate_tax returns also the holding in propstra v united_states supra cited by petitioner applies where claims are for sums certain as of the date of death the amount of tax reported on a federal_income_tax return may be challenged by the commissioner until the applicable_period of limitations has expired see sec_6501 similarly the taxpayer may request a refund and if denied pursue judicial remedies see sec_6511 sec_6512 sec_6532 sec_7422 the amount of tax reported if contested remains contingent until a -- - decision is reached see broadhead trust v commissioner tcmemo_1972_196 in the instant case petitioner filed an amended federal_income_tax return requesting a refund the request stemmed from the agreement of the parties as to the increased value of the nw stock included in mr mcmorris' estate which value became the basis of the nw stock redeemed from decedent because the amount of income_tax was challenged in that fashion it is appropriate that we consider postdeath events when determining the deduction_for_estate_tax purposes respondent has approved petitioner's refund request that portion of the federal_income_tax liability that is to be refunded is no longer a valid and enforceable claim against the estate accordingly we hold that the amount of the deduction for petitioner's federal_income_tax liability is reduced by the amount of the refund cf 37_tc_394 affd 320_f2d_638 9th cir deduction for transferee_liability reduced by amount recovered from transferor husband's estate upon receipt of refund sec_20_2053-6 estate_tax regs deduction for colorado income_tax_liability an individual's liability for colorado income_tax is based on federal taxable_income with certain adjustments see colo rev stat sec see id sec a colorado taxpayer required to report changes in federal taxable_income due to final_determination by the commissioner or to taxpayer's filing amended federal return respondent's position is that the deduction for the colorado income_tax_liability should be limited to the amount of the state tax on income properly includable in decedent's colorado return which would reflect the adjustment in decedent's income for federal_income_tax purposes petitioner's position is that the entire amount of the colorado income_tax_liability as paid should be allowed as a deduction because the liability was valid and enforceable as of the date of decedent's death thereby precluding consideration of postdeath events in the alternative petitioner argues that even if postdeath events are considered respondent has not established that a refund of colorado tax would be granted the same analysis and result apply to the colorado income_tax claim as apply to the federal tax_liability colorado statutes provide for assessment of deficiencies and for claims for refunds where either the federal or colorado income_tax return is challenged the colorado income_tax may be subject_to change see colo rev stat sec postdeath events are thus relevant to determining whether the claim is enforceable under the applicable_period of limitations a refund of colorado income_tax is available or would have been available to petitioner after the correct federal tax_liability was determined as of date the closing of the record in this case petitioner had not filed a protective claim with the state of colorado or an amended colorado income_tax return section a of the colorado revised statutes provides that in the case of income_tax the taxpayer must file any claim_for_refund_or_credit for any year not later than one year after the expiration of the time provided for filing a claim_for_refund of federal_income_tax including any extensions of the period by agreement between the taxpayer and the federal taxing authorities but nothing in this subsection shall be construed to shorten the period for filing claims provided by section f xk k section f of the colorado revised statutes provides notwithstanding any provision of law the statute_of_limitations relating to claims for refund_or_credit for any year shall not expire prior to the expiration of the time within which a deficiency for such year could be assessed generally a deficiency in colorado income_tax can be assessed until year after the date of expiration of the period for assessing deficiencies in federal_income_tax including any extensions of the period by agreement between the taxpayer and the internal_revenue_service see colo rev stat sec the claim_for_refund of federal_income_tax must be filed within years from the time the return was filed or years from the time the tax was paid whichever is later see sec_6511 the expiration of the period for assessing deficiencies in federal_income_tax generally occur sec_3 years after the return was filed see sec_6501 petitioner filed decedent's original federal_income_tax return and her colorado return on or before date the taxes were paid with the returns although the parties' arguments focus on the period of assessing a deficiency the record contains no evidence of agreements or other actions that would have extended the period of assessment the period for filing a refund claim for federal_income_tax and that for assessing a deficiency in federal_income_tax both expire years after the date decedent's federal_income_tax return was filed thus the period in which a claim_for_refund of decedent's colorado income taxes could have been filed ran at least until date year later so far as the record reflects only petitioner's failure_to_file a claim_for_refund of colorado taxes prevented or prevents receipt of the refund moreover it is not clear that the refund of colorado taxes will never be paid or credited to petitioner petitioner filed the amended federal_income_tax return on date once the parties in estate of donn d mcmorris v commissioner docket no had reached the basis of settlement at that time the period in which to file a claim_for_refund of colorado income taxes was still open we recognize that in spite of the settlement agreement respondent did not approve petitioner's refund request until late in however nothing in the colorado tax statutes prevented petitioner from filing a claim_for_refund of colorado income taxes in advance of that approval indeed had petitioner filed such a refund claim petitioner would have preserved the right to sue for a refund pursuant to section a of the colorado revised statutes which provides no suit_for_refund may be commenced before the expiration of six months after the date of filing the claim_for_refund required under this section unless the executive director of the department of revenue renders a decision thereon within that time nor after the expiration of two years after the date of mailing of a notice of disallowance of the part of the claim to which the suit relates thus under the colorado statutes of limitations petitioner could have filed a timely claim_for_refund of that portion of colorado income_tax related to the reduction in federal taxable_income the calculation of colorado income_tax is dependent upon the amount of federal taxable_income and decedent's colorado income_tax would be reduced proportionately petitioner's unexplained failure to seek a refund of colorado income_tax does not prevent the correct determination of the amount of the claim we hold that the deduction for decedent's colorado income_tax -- - liability should be reduced to reflect the amount of colorado income_tax calculated using the decreased federal taxable_income to reflect petitioner's concessions the above holdings and additional administrative expenses decision will be entered under rule


internal_revenue_service department of the treasury number release date index number uil washington dc person to contact telephone number refer reply to cc tege eoeg eo2 plr-163640-01 date new fund department fund a fund b state state treasurer type a1 insurance coverage type a2 insurance coverage type b coverage c a c dd aaa bbb dear this letter is in response to your letter dated date requesting the following rulings new fund if established in accordance with the proposed_legislation you have attached will constitute an integral part of the state and therefore its income will be exempt from federal income_taxation the debt obligations issued by new fund will constitute obligations of a state or political_subdivision thereof within the meaning of sec_103 of the internal_revenue_code facts and representations the department is a political_subdivision of the state fund a was created by the state legislature as a response to the collapse of the property insurance market in the state in the aftermath of certain unprecedented natural disaster losses the level of insured losses led many insurance_companies to seek to withdraw from the state while other companies simply elected to non-renew existing property insurance policies as a result fund a was created to fill a void in the property insurance market and to serve as the insurer of last resort to augment the private insurance market as statutory successor to fund a new fund will continue to provide type a1 and type a2 insurance for applicants who are unable to procure insurance in the private insurance market fund b’s purpose is to provide state residents type b coverage when it is not available on the private insurance market and pay insureds’ claims when losses occur under the proposed_legislation fund b’s policies will be transferred on a c dd to new fund and shall become new fund’s policies under the proposed_legislation new fund and authorized insurers will also enter into c agreements for type b coverage where new fund and an authorized insurer are each solely responsible for a specified percentage of coverage of an eligible risk as set forth in a c agreement under the proposed_legislation new fund will be a corporation overseen by a multi- member board_of governors from diverse geographical areas of the state the governors shall be appointed by the state treasurer for three-year terms and serve at the pleasure of the state treasurer the state treasurer shall designate one of the appointees to be chair any board vacancy shall be filled by the state treasurer for the unexpired term of such board member the state treasurer shall appoint a technical advisory group to provide information and advice to the board_of governors in connection with the board’s duties the state treasurer will also engage the executive director and senior manager of new fund who also serve at the pleasure of the state treasurer the executive director will be responsible for employing new fund’s employees subject_to review and approval by the office of the state treasurer new fund will operate pursuant to a plan of operation approved by the department and will be subject_to the department’s continuous review the department may by order withdraw all or part of a plan if the department determines that conditions have changed since approval was granted and that the purposes of the plan require changes in the plan new fund will file with the department quarterly statements of financial condition an annual_statement of financial condition and audited financial statements new fund will also report monthly to the department on the types premium exposure and distribution by county of its policies in force and submit other reports required by the department to carry out its oversight meetings of new fund’s board_of governors and the board committees unless specifically exempted by law will be required by the proposed_legislation to be held in public and subject_to the state aaa law the records of new fund unless specifically exempted by law will be public records and open to the public for inspection and copying in accordance with bbb state statutes all revenues assets liabilities losses_and_expenses of new fund will be divided into three accounts covering type a1 policies type a2 policies and type b policies separate_accounts will be maintained as long as certain financial obligations of fund a and fund b are outstanding afterward new fund may utilize a single account for all revenues assets liabilities losses_and_expenses of new fund revenues assets liabilities losses_and_expenses not attributable to a particular account shall be prorated among the accounts new fund will set rates for type a1 policies which will be no less than the highest average rate of the top insurers within a given county rates for type b policies shall be actuarially sound and not competitive with approved rates charged by authorized insurers new fund will make a rate filing at least once a year but no more often than quarterly all insurers authorized to write subject lines of businesses in the state and all surplus lines insureds procuring subject lines of business in the state will be subject_to assessment to fund deficits incurred by new fund when new fund experiences a deficit in a plan_year that is not greater than of the aggregate statewide direct written premium for the subject lines of business for the prior calendar_year the entire deficit is collected through regular assessments regular assessments’ of authorized insurers and surplus lines insureds after verification by the department when new fund experiences a plan_year deficit greater than of the aggregate statewide written premium for the subject lines of business for the prior calendar_year the amount in excess of is collected through emergency assessments emergency assessments after verification by the department each insurer who is assessed may recoup its portion of any regular assessment directly from its policyholders none of the policyholders affected by regular assessments will be new fund policyholders and a large percentage of the policyholders affected by emergency assessments will not be new fund policyholders if new fund imposes regular assessments to fund a new fund deficit the proposed_legislation requires imposing a market equalization surcharge market equalization surcharge on new fund policyholders this provision generates additional revenue for new fund and provides additional financial strength these surcharges are in addition to any amounts necessary to fund the deficits of new fund the proposed_legislation also requires new fund to certify to the department its needs for annual assessments as to any particular calendar_year and for any interim assessments deemed necessary to sustain operations as to a particular year for purposes of the state corporate_income_tax new fund will be treated as a political_subdivision and exempt from tax the proposed_legislation provides that new fund’s premiums assessments investment_income and other revenues will be funds received for providing insurance coverage paying claims securing and repaying debt obligations and will not be considered taxes fees licenses or charges for services imposed by the legislature on individuals business or agencies outside of state government the proposed_legislation states the legislature intends that the tax exemptions provided new fund will better enable new fund to fulfill its public purposes the proposed_legislation also requires new fund to impose collect and retain the amount equal to the premium tax to augment its financial resources new fund may dissolve upon the department’s approval that the conditions giving rise to its establishment no longer exist upon dissolution all assets remaining after paying of the obligations will become property of the state law issue in general if income is earned by an enterprise that is an integral part of a state or a political_subdivision of a state that income is not taxable in the absence of specific statutory authorization to tax that income see revrul_87_2 1987_1_cb_18 sec_511 of the code gcm c b xiv-1 superseded by revrul_71_131 1971_1_cb_28 when a state conducts an enterprise through a separate_entity however the income of the entity may be excluded from gross_income under sec_115 in 308_fsupp_761 rev’d on other grounds 400_us_4 the state of maryland formed a corporation to insure the customer accounts of state chartered savings and loan associations under mssic’s charter the full faith and credit of the state was not pledged for mssic’s obligations only three of eleven directors were selected by state officials the district_court rejected mssic’s claim of intergovernmental tax immunity because the state made no financial contribution to mssic and had no present_interest in the income of mssic although the district_court was reversed on other grounds the supreme court agreed with the lower court’s analysis of the instrumentality and sec_115 issues the supreme court rejected mssic’s position that it is an instrumentality of the state and hence entitled to exemption from federal taxation under the doctrine_of intergovernmental immunity and under sec_115 of the code mssic u s pincite n in state of michigan and 40_f3d_817 6th cir rev’g 802_fsupp_120 w d mich the court held that the investment_income of the michigan education trust met was not subject_to current taxation under sec_11 of the code the court’s opinion is internally inconsistent because it concludes that met qualifies as a political_subdivision of the state of michigan id pincite that met is in a broad sense a municipal corporation id pincite and that met is in any event an integral part of the state of michigan id pincite moreover the court’s reliance on the factors listed in revrul_57_128 c b to reach its conclusion is misplaced the revenue_ruling applies to entities that are separate from a state the factors in the revenue_ruling do not determine whether an enterprise is considered to be a separate_entity or an integral part of the state nevertheless in determining whether an enterprise is an integral part of a state it is necessary to consider all of the facts and circumstances including the state’s degree of control_over the enterprise and the state’s financial commitment to the enterprise sec_301_7701-1 et seg of the procedure and administration regulations the so- called check-the-box_regulations support the position that an entity that is separate from a state or political_subdivision may still be an integral part of that state or political_subdivision sec_301_7701-1 provides in part that an entity formed under local law is not always recognized as a separate_entity for federal tax purposes for example an organization wholly owned by a state is not recognized as a separate_entity for federal tax purposes if it is an integral part of the state sec_301_7701-2 provides for purposes of this section and sec_301_7701-3 a business_entity is any entity recognized for federal tax purposes including an entity with a single owner that may be disregarded as an entity separate from its owner under sec_301_7701-3 that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the internal_revenue_code a business_entity with two or more members is classified for federal tax purposes as either corporation or a partnership a business_entity with only one owner is classified as a corporation or is disregarded if the entity is disregarded its activities are treated in the same manner as a sole_proprietorship branch or division of the owner sec_301_7701-2 provides in part for federal tax purposes the term corporation means - a business_entity organized under a federal or state statute or under a statute of a federally recognized indian_tribe if the statute describes or refers to the entity as incorporated or as a corporation body corporate or body politic an association as determined under sec_301_7701-3 a business_entity wholly owned by a state or any political_subdivision thereof thus the check-the-box_regulations indicate that even if new fund were classified as a separate_entity from the department it nevertheless could be treated as an integral part of the department if new fund so qualifies new fund under the proposed_legislation will be created for the public purpose of insuring the existence of an orderly market of types a1 and a2 insurance as well as type b insurance for state residents and businesses under the proposed_legislation new fund will be supervised and controlled by state treasurer who will appoint all of the members of the board_of governors and its executive director and general manager all of whom will serve at the state treasurer’s pleasure the proposed_legislation also explicitly provides that the executive director will employ new fund’s employees subject_to review and approval by the office of state treasurer new fund operations are subject under the statute to continuous review and supervision by the department new fund must receive approval for its plan of operation from the department and must file regular financial reports the rates new fund will be allowed to charge are specified in the proposed_legislation and the circumstances under which assessments to cover deficits can be made will be subject_to verification by the department all of new fund’s activities and its employees will be subject_to the supervision and control of the state treasurer under the proposed_legislation new fund will also collect an amount equal to the premium tax and will retain such amount to augment its resources accordingly the state will provide a substantial financial commitment under the proposed_legislation accordingly we have determined that if the proposed_legislation is enacted and new fund operates consistently with the legislation then new fund will constitute an integral part of the department a political_subdivision of the state and its income will be exempt from federal_income_tax issue sec_103 provides that except as provided in subsection b gross_income does not include interest on any state_or_local_bond sec_103 provides that the term state_or_local_bond means an obligation of a state or political_subdivision thereof treas reg sec_1_103-1 provides in pertinent part that obligations issued by or on behalf of any state_or_local_government unit by constituted authorities empowered to issue such obligations are the obligations of such unit for purposes of this section the term political_subdivision denotes any division of any state_or_local_government unit which is a municipal corporation or which has been delegated the right to exercise part of the sovereign power of the unit we have already determined that if the proposed_legislation is enacted and new fund operates consistently with the proposed_legislation that new fund will be an integral part of the department a political_subdivision of the state obligations issued by new fund will thus be obligations issued by or on behalf of the department and will constitute obligations of a state or political_subdivision within the meaning of sec_103 of the internal_revenue_code we are not ruling as to whether the interest of any specific obligation that may be issued by new fund will be exempt from taxation this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely elizabeth purcell chief exempt_organizations branch office of division counsel associate chief_counsel tax exempt government entities cc