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 b04 plr-144921-08 date date re -------------------------------- re -------------------------------- legend decedent -------------------------------------- spouse --------------------------- trust ----------------------------------------------------------------------------- ------------------------------------------ date ------------------------- date -------------------- date ------------------- executor --------------------------- attorney --------------------------- dear ------------- this letter responds to a letter from your authorized representative dated date requesting an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to make a qualified_terminable_interest_property qtip_election under sec_2056 and to make a reverse_qtip_election under sec_2652 of the internal_revenue_code the facts and representations submitted are summarized as follows on date decedent created a revocable_trust trust that became irrevocable at decedent’s death decedent died testate on date survived by spouse on date the executor filed decedent’s form_706 united_states estate and generation-skipping_transfer_tax return on schedule m all of decedent’s property plr-144921-08 passing_to_spouse was reported no qtip_election was made or deemed to be made with respect to any property attorney prepared decedent’s form_706 you now request an extension of time to make the qtip_election under sec_2056 and to make a reverse_qtip_election under sec_2652 with respect to trust law and analysis sec_2001 imposes a tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2056 provides that for purposes of the tax imposed by sec_2001 the value of the taxable_estate shall except as limited by sec_2056 be determined by deducting from the value of the gross_estate an amount equal to the value of any interest in property which passes or has passed_from_the_decedent to the surviving_spouse but only to the extent that such interest is included in determining the value of the gross_estate sec_2056 provides that in the case of qualified_terminable_interest_property for purposes of sec_2056 such property shall be treated as passing to the surviving_spouse and for purposes of sec_2056 no part of such property shall be treated as passing to any person other than the surviving_spouse sec_2056 defines the term qualified_terminable_interest_property as property i which passes from the decedent ii in which the surviving_spouse has a qualifying_income_interest_for_life as defined in sec_2056 and iii to which an election under sec_2056 applies sec_2056 provides that an election under sec_2056 with respect to any property shall be made by the executor on the return of tax imposed by sec_2001 such an election once made shall be irrevocable sec_20_2056_b_-7 of the estate_tax regulations provides that in general the election referred to in sec_2056 and v is made on the return of tax imposed by sec_2001 or sec_2101 for purposes of this paragraph the term return of tax imposed by sec_2001 means the last estate_tax_return filed by the executor on or before the due_date of the return including extensions or if a timely return is not filed the first estate_tax_return filed by the executor after the due_date plr-144921-08 sec_2601 imposes a tax on every generation-skipping_transfer within the meaning of subchapter_b a generation-skipping_transfer is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2602 provides that the amount of the gst tax is determined by multiplying the taxable_amount by the applicable_rate sec_2641 provides that the term applicable_rate means with respect to any gst transfer the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer under ' a the inclusion_ratio with respect to any property transferred in a generation-skipping_transfer is generally defined as the excess of over the applicable_fraction the applicable_fraction as defined in sec_2642 is a fraction the numerator of which is the amount of gst_exemption under sec_2631 allocated to the trust or to property transferred in a direct_skip and the denominator is the value of the property transferred to the trust or involved in the direct_skip sec_2631 as in effect for decedents dying after date provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable sec_2632 provides that any allocation by an individual of his or her gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual's estate determined with regard to extensions regardless of whether such a return is required to be filed sec_2632 provides that in general any portion of an individual's gst_exemption which has not been allocated within the time prescribed by sec_2632 shall be deemed to be allocated as follows a first to property which is the subject of a direct_skip occurring at such individual's death and b second to trusts with respect to which such individual is the transferor and from which a taxable_distribution or a taxable_termination might occur at or after such individual's death sec_2652 provides that for purposes of chapter the term transferor means a in the case of any property subject_to the tax imposed by chapter the decedent and b in the case of any property subject_to the tax imposed by chapter the donor an individual shall be treated as transferring any property with respect to which such individual is the transferor sec_2652 provides in pertinent part that in the case of any trust with respect to which a deduction is allowed to the decedent under sec_2056 the estate of the decedent may elect to treat all of the property in such trust for gst tax purposes plr-144921-08 as if the election to be treated as qualified_terminable_interest_property had not been made reverse_qtip_election sec_26_2652-2 of the generation-skipping_transfer_tax regulations provides in part that a reverse_qtip_election is not effective unless it is made with respect to all of the property in the trust to which the qtip_election applies sec_26_2652-2 provides that an election under sec_2652 is made on the return on which the qtip_election is made sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than 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 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the 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 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer failed to make the election because of intervening events beyond the taxpayer’s control based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore decedent’s executor is granted an extension of time until sixty days from the date of this letter to make a qtip_election with respect to trust in addition we rule that an extension of time to make a reverse_qtip_election with respect to trust is granted until sixty days from the date of this letter the elections should be made on a supplemental form_706 filed with the internal_revenue_service center cincinnati oh a copy of this letter should be attached to the form 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 except as specifically ruled herein we express or imply no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code plr-144921-08 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely curtis g wilson associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division release number release date date date contact person identification_number uil code contact number employer_identification_number form required to be filed tax years dear this is our final_determination that you do not qualify for exemption from federal_income_tax as an organization described in internal_revenue_code sec_501 recently we sent you a letter in response to your application that proposed an adverse determination the letter explained the facts law and rationale and gave you days to file a protest since we did not receive a protest within the requisite days the proposed adverse determination is now final because you do not qualify for exemption as an organization described in code sec_501 donors may not deduct contributions to you under code sec_170 you must file federal_income_tax returns on the form and for the years listed above within days of this letter unless you request an extension of time to file instructions and do not send them to this office penalty file the returns in accordance with their failure_to_file the returns timely may result in a we will make this letter and our proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions instructions in notice action if you agree with our deletions you do not need to take any further if you disagree with our proposed deletions follow the in accordance with code sec_6104 we will notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed adverse letter you should contact your state officials if you have any questions about how this determination may affect your state responsibilities and requirements if you have any questions about this letter please contact the person whose name and telephone number are shown in the heading of this letter federal_income_tax status and responsibilities please contact irs customer service pincite-829-1040 or the irs customer service number for businesses the irs customer service number for people with hearing impairments is if you have any questions about your sincerely robert choi director exempt_organizations rulings agreements enclosure notice redacted proposed adverse determination_letter redacted final adverse determination_letter tax_exempt_and_government_entities_division date date department of the treasury internal_revenue_service washington d c contact person identification_number contact number fax number employer_identification_number dear we have considered your application_for recognition of exemption from federal_income_tax under internal_revenue_code sec_501 based on the information provided we have concluded that you do not qualify for exemption under code sec_501 the basis for our conclusion is set forth below facts you were formed as a non-profit corporation and have requested classification as an organization organized and operated exclusively for charitable scientific or other exempt purposes under sec_501 and sec_509 of the code your bylaws state that your purpose is to promote direct marketing of farm products and handcrafted goods to operate a farmer's market you provide booths at an open-air market for local producers of farm products and handcrafted goods booths at the market are provided only to members membership is available for anyone who sells locally grown farm products and similar goods such as flowers and artisan crafts there is no membership fee but members are charged rent for space in the market these rent charges account for over of your revenue all of your directors are members and vendors at the market most of your activity is devoted to promotion and marketing of the open-air market and you devote of your expenses to advertising the rest of your expenses are allocated for operation of the market such as rent insurance supplies and professional fees when asked to describe your activities you detailed your promotional activities and stated that such activities are very important for maintaining consumer traffic throughout our market season your rules cover the obligations of vendors to clean up their assigned areas ensure health codes are followed and conform to the market's operating hours law sec_501 of the code provides for the exemption of organizations organized and operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes or to foster national or international amateur sports competition or for the prevention of cruelty to children or animals no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 of the income_tax regulations provides that an organization will be it engages primarily regarded as operated exclusively for one or more exempt purposes only if in activities that accomplish one or more of such exempt purposes specified in sec_501 of the code however an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 of the regulations states that an organization is not operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest it cannot operate for the benefit of specific individuals including those who created it revrul_69_175 1969_1_cb_149 describes an organization created to provide bus transportation for school children to a tax-exempt private school the organization was formed by the parents of pupils attending the school the organization provided transportation to and from the school for those children whose parents belonged to the organization parents were required to pay an initial family fee and an additional annual charge for each child the organization's income approximately equaled the expenses involved in its operations the internal_revenue_service determined that w hen a group of individuals associate to provide a cooperative service for themselves they are serving a private interest revrul_71_395 1971_2_cb_223 holds that a cooperative art gallery formed and operated by a group of artists for the purpose of exhibiting and selling their works does not qualify for exemption under sec_501 of the code the irs concluded that the cooperative gallery served the private purposes of its members even though the exhibition and sales of paintings were also educational in some respects in 326_us_279 the supreme court held that the presence of a single non-exempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes the court found that the trade_association had an underlying commercial motive that distinguished its educational program from that carried out by a university in 92_tc_1053 the court held that an organization operating a school to train individuals for careers as political campaign professionals but that could not establish that it operated on a nonpartisan basis did not exclusively serve purposes described in sec_501 of the code because it served private interests more than incidentally the court found that the organization was created and funded by persons affiliated with a one political_party and that most of the organization's graduates worked in campaigns for the party's candidates the court concluded that the organization conducted its activities to benefit the party's candidates and entities although the candidates and entities benefited were not organization insiders the court stated that the conferral of benefits on disinterested persons who are not members of a charitable_class may cause an organization to serve a private interest within the meaning of sec_1_501_c_3_-1 of the regulations in 46_tc_47 the court considered a collective organization created to dredge waterways the majority of the funds for this activity came from owners of property adjacent to the waterways the court found that the primary beneficiaries were the adjacent property owners any benefit to the general_public because these dredged waterways would be a safe_harbor for boats during a storm was secondary therefore the organization was not exempt because of the significant private benefit provided analysis based on our analysis of the information you submitted during the application process and in light of the applicable law we have determined that you do not operate exclusively for any of the purposes described in sec_501 of the code an organization is not exempt from taxation merely because its operations are not conducted to produce a profit the organization must operate exclusively for one or more of the purposes described in sec_501 of the code and the applicable regulations section c -1 d ii of the regulations requires an organization to show that it is not organized or operated for private interests in order to be exempt under sec_501 of the code when a group of individuals associate to provide a service for themselves they are serving a private interest see revrul_69_175 revrul_71_395 ginsburg v commissioner your primary activities are providing a location for members to sell goods and promotion of their sales activity ninety percent of your funding comes from those same individuals all of your directors are vendors at the market and personally benefit from your operation these facts demonstrate that you provide a substantial private benefit to your members in addition the presence of a single substantial non-exempt purpose will prevent the grant of tax- exemption see better business bureau of washington d c inc v united_states there is no indication that your organization engages in educational economic development charitable or other exempt_activities the operation of the market for the benefit of your members is a substantial part of your activities and therefore prevents the grant of tax-exempt status conclusion based on the information submitted we conclude that your organization does not meet the operational_test for exemption under sec_501 of the code you are operating for the mutual benefit of your members and in a manner indistinguishable from commercial entities therefore you do not serve a public interest as required by sec_1_501_c_3_-1 of the regulations accordingly you do not qualify for exemption as an organization described in sec_501 of the code and you must file federal_income_tax returns you have the right to file a protest if you believe this determination is incorrect to protest you must submit a statement of your views and fully explain your reasoning you must submit the statement signed by one of your officers within days from the date of this letter we will consider your statement and decide if the information affects our determination your protest statement should be accompanied by the following declaration under penalties of perjury declare that have examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all the relevant facts and such facts are true correct and complete you also have a right to request a conference to discuss your protest this request should be made when you file your protest statement an attorney certified_public_accountant or an individual enrolled to practice before the internal_revenue_service may represent you want representation during the conference procedures you must file a proper power_of_attorney form_2848 power_of_attorney and declaration of representative if you have not already done so and power_of_attorney all forms and publications mentioned in this letter can be found at www irs gov forms and publications for more information about representation see publication practice_before_the_irs if you if you do not file a protest within days you will not be able to file a suit for declaratory_judgment in court because the internal_revenue_service irs will consider the failure to protest as a failure to exhaust available administrative remedies code sec_7428 provides in part that a declaratory_judgment or decree shall not be issued in any proceeding unless the tax_court the united_states court of federal claims or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted all of the administrative remedies available to it within the irs if if you do not intend to protest this determination you do not need to take any further action we do not hear from you within days we will issue a final adverse determination_letter that letter will provide information about filing tax returns and other matters please send your protest statement form_2848 and any supporting documents to this address internal_revenue_service constitution ave n w washington dc if you may also fax your statement using the fax number shown in the heading of this letter you fax your statement please call the person identified in the heading of this letter to confirm that he or she received your fax if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely robert choi director exempt_organizations rulings agreements


t c memo united_states tax_court win h emert petitioner v commissioner of internal revenue respondent docket no filed date david m kirsch for petitioner steven walker for respondent supplemental memorandum opinion vasquez judge the controversy before us arises out of on date the court issued its opinion on the merits t c memo which we incorporate herein we sustained respondent's determination that the method_of_accounting used by petitioner's wholly owned s_corporation aet did not clearly reflect income and aei must change its method_of_accounting from the cash_method to the accrual_method for its tax years ending on date and the court directed that decisions will be entered under rule our prior opinion regarded two consolidated cases only the computation for docket no is at issue herein differing computations filed pursuant to rule respondent's computation contained a sec_481 adjustment for aei's taxable_year petitioner's computation did not petitioner objects to this adjustment ’ rule is the mechanism whereby the court is enabled to enter a decision for the dollar amounts owed resulting from the disposition of issues involved in a case where those amounts cannot readily be determined see 79_tc_933 rule c provides c limit on argument any argument under this rule will be confined strictly to consideration of the correct computation of the deficiency liability or overpayment resulting from the findings and conclusions made by the court and no argument will be heard upon or consideration given to the issues or matters disposed of by the court's findings and conclusions or to any new issues this rule is not to be regarded as affording an opportunity for retrial or reconsideration we have stated time and again that a rule proceeding may not be used to raise a new issue see 91_tc_265 affd 875_f2d_377 2d cir cloes v commissioner supra purely mathematically generated computational items however are proper for tt all rule references are to the tax_court rules_of_practice and procedure and all section references are to the internal_revenue_code in effect for the years in issue petitioner has no objection to respondent's computation for afi's taxable_year consideration in rule proceedings see home group inc v commissioner supra pincite petitioner contends that a sec_481 adjustment is improper in this case petitioner argues that the first mention of sec_481 in this case was in respondent's brief therefore sec_481 is a new issue and it is inappropriate for consideration in a rule computation respondent counters that the sec_481 adjustment is not a new issue it is a mathematical or mechanical adjustment that is patent from the statute respondent argues that once respondent raised the issue of change in the method_of_accounting it automatically triggered a sec_481 adjustment sec_481 provides that in order to prevent income from escaping taxation due to a change in the method_of_accounting the commissioner may make an adjustment by including the omitted income in the year_of_change see 343_f2d_568 5th cir sec_481 applies only if there is a change in the method_of_accounting see id sec_481 includes a change in the accounting treatment of a material_item as well as a change from one overall system of accounting to another as from the cash_method to the accrual_method see id 78_tc_705 sec_481 is applicable herein because respondent has determined and we have sustained a change in method_of_accounting see hitachi sales corp of am v commissioner tcmemo_1994_159 supplemented by tcmemo_1995_84 tf there has been a change in method_of_accounting then sec_481 comes into operation and adjustments necessary to prevent an omission of taxable_income must be made primo pants co v commissioner supra pincite emphasis added once the commissioner changes the taxpayer's method_of_accounting in regard to inventories that change_of_accounting_method triggers the adjustments of sec_481 if any amounts are omitted from taxable_income because of a change in method_of_accounting then sec_481 mandates adjustments to prevent these omissions id pincite emphasis added where the statutory notice and pleadings are sufficient to raise the issue of change in accounting_method the application of sec_481 is patent see sec_481 primo pants co v commissioner supra hitachi sales corp of am v commissioner supra here the statutory notice raised the issue of change in accounting_method therefore sec_481 was triggered ’ see the statutory notice contained the following language your gross_income has been increased because of a change in accounting_method from the cash_basis to accrual_method our recent court-reviewed opinion in shea v commissioner t c __ is distinguishable from the case at bar in shea we rejected the commissioner's argument that the commissioner's basis was implicit in the notice_of_deficiency and held that the notice_of_deficiency failed to continued primo pants co v commissioner supra hitachi sales corp of am v commissioner supra accordingly we hold that a sec_481 adjustment is a proper matter for rule consideration to reflect the foregoing an appropriate order will be issued continued describe the basis on which the commissioner relied to support the commissioner's deficiency determination see also sec_7522 in the case at bar however sec_481 is more than implicit in the notice it is patent


internal_revenue_service number release date index number ------------------------------ --------------------------------- -------------------------------------- ------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------- id no ------------- telephone number --------------------- refer reply to cc psi plr-129733-08 date date ------------------------------------ x -------------------------------------------------- country date ------------------------------- dear --------------- -------------- ---------------------- this responds to a letter dated date submitted on behalf of x requesting that the service grant x an extension of time under sec_301_9100-3 of the procedure and administration regulations to make an entity classification election the information submitted states that x was formed under the laws of country x represents that x is a foreign_entity eligible to be treated as a disregarded_entity however no timely election was made to elect to treat x as a disregarded_entity effective date 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 a business_entity is any entity recognized for federal tax purposes that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the internal_revenue_code sec_301_7701-3 provides guidance on the classification of a foreign_entity for federal_income_tax purposes generally a foreign eligible_entity is treated as an association_taxable_as_a_corporation if all members have limited_liability unless the entity makes an election to be treated otherwise if the foreign eligible_entity has only one owner it may elect to be treated as a disregarded_entity pursuant to the rules in sec_301_7701-3 plr-129733-08 sec_301_7701-3 provides that to elect to be classified other than as provided in sec_301_7701-3 an eligible_entity must file form_8832 with the designated service_center and that an entity classification election must be filed on form_8832 and can be effective up to seventy-five days prior to the date the form is filed or up to twelve months after the date on which the form 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 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin 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 representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center and elect to be treated as a disregarded_entity effective date a copy of this letter should be attached to the form_8832 a copy is enclosed for that purpose except as expressly provided herein we express or imply no opinion concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter 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 plr-129733-08 in accordance with a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representatives sincerely curt g wilson associate chief_counsel office of associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number ------------------------------------- --------------------------------------------------- ---------------------- -------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------- id no ------------- telephone number --------------------- refer reply to cc psi plr-106459-09 date date ---------------------------------------------------- trust -------------------------------------------------- a ------------------------- --------------------------------------------------- year year date charity ------- ------- ------------------ --------------------------------------- dear -------------------- this responds to a letter dated date submitted on behalf of trust requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to make an election under sec_642 of the internal_revenue_code for its year taxable_year the information submitted states that a the grantor of trust died on date trust provides for bequests to charity upon a’s death on the income_tax return filed for trust for year a charitable deduction was claimed for amounts set_aside from trust's gross_income for charity in year the amounts set_aside for charity in year were actually distributed to charity an election under sec_642 however was not filed for trust for the year taxable_year sec_642 provides that in the case of an estate_or_trust there shall be allowed as a deduction in computing its taxable_income any amount of the gross_income without limitation which pursuant to the terms of the governing instrument is during the taxable_year paid for a purpose specified in sec_170 if a charitable_contribution is paid after the close of such taxable_year and on or before the last day of the taxable_year following the close of such taxable_year then the trustee or administrator may elect to treat such contribution as paid during such taxable_year the election shall be made at such time and in such manner as the secretary prescribes by regulation plr-106459-09 sec_1_642_c_-1 of the income_tax regulations provides that the election under sec_642 shall be made not later than the time including extensions thereof prescribed by law for filing the federal_income_tax return for the succeeding taxable_year sec_1_642_c_-1 provides that the election shall be made by filing with the income_tax return or amended_return for the taxable_year in which the contribution is treated as paid a statement which i states the name and address of the fiduciary ii identifies the estate_or_trust for which the fiduciary is acting iii indicates that the fiduciary is making an election under sec_642 in respect of contributions treated as paid during such taxable_year iv gives the name and address of each organization to which any contribution is paid and v states the amount of each contribution and date of actual payment or if applicable the total amount of contributions paid to each organization during the succeeding taxable_year to be treated as paid in the preceding_taxable_year 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 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin 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 on the information submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result trust is granted an extension of time for days from the date of this letter to file elections under sec_642 for trust's year and year taxable years the amended returns must be plr-106459-09 filed within the day period with the service_center where trust files its returns a copy of this letter should be attached to the amended returns except as expressly provided herein we express or imply no opinion concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter 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 a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representatives sincerely curt g wilson associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc


t c memo united_states tax_court talmadge and reatha swanagan petitioners v commissioner of internal revenue respondent talmadge swanagan petitioner v commissioner of internal revenue respondent docket nos filed date wanda kamphuis zatopa for petitioners jennifer l nuding for respondent memorandum opinion laro judge petitioners move the court under sec_7430 to award them dollar_figure in attorney’s fees and dollar_figure in court costs respondent objects thereto arguing petitioners did not exhaust their administrative remedies respondent’s position in this proceeding was substantially justified petitioners generally have not established that they paid the reguested costs and some of the requested costs are unreasonable we ordered the parties to file with the court a joint statement setting forth the disputed and undisputed facts relevant to the subject motion following our receipt of that statement we now decide whether we shall grant the motion we shall deny it unless otherwise indicated section references are to the internal_revenue_code in effect for the relevant years and rule references are to the tax_court rules_of_practice and procedure background’ petitioners were husband and wife during the subject years and they resided in maywood illinois when we filed their petitions they filed a federal_income_tax return using the filing_status of married filing joint_return talmadge swanagan petitioner filed a federal_income_tax return using the filing_status of married filing separate_return ' we have found the facts set forth herein from the parties’ statement of undisputed facts although the parties have listed on that statement some disputed facts we need not resolve the parties disagreements as to those disputed facts the undisputed facts set forth a sufficient foundation on which we may and do decide petitioners’ motion respondent through his district_director commenced an audit of petitioners’ and taxable years about date in connection therewith the district_director requested certain information petitioners ultimately provided some but not all of this information to the district_director the district_director concluded the audit on date proposing certain upward adjustments to petitioners’ income on that date the district_director also mailed to petitioners two 30-day letters one for and one for listing proposed upward adjustments of dollar_figure and dollar_figure to the respective years’ income the 30-day_letter invited petitioners to request an administrative appeals_conference to discuss these proposed adjustments providing if you wish a conference with the regional_office of appeals appeals you must let us know within days the 30-day_letter explained the procedures for requesting a conference with appeals petitioners never requested a conference with appeals for either year nor did they ever deliver to respondent a written protest as to the district director’s conclusions set forth in the 30-day letters on date respondent issued the notices of deficiency to petitioners as to respondent determined that petitioners were liable for a dollar_figure deficiency anda dollar_figure accuracy-related_penalty under sec_6662 as to respondent determined that petitioner was liable for a dollar_figure deficiency and a dollar_figure accuracy-related_penalty under sec_6662 petitioners retained ms zatopa on or about date to serve as their representative as to the subject years two months later petitioners and ms zatopa signed an agreement in which petitioners agreed to pay ms zatopa dollar_figure an hour in connection with this proceeding the agreement also provided tf attorney ms zatopa is successful in overturning parts or all of the commissioner’s decisions attorney will seek to recover attorney’s fees if and where permitted under the internal_revenue_code at the rate of dollar_figure per hour from the internal_revenue_service on date ms zatopa petitioned the court on behalf of petitioners to redetermine the determinations reflected in the notices of deficiency respondent transferred the case to appeals approximately months later and appeals settled the case with petitioners after receiving from them additional information respondent conceded all items for and all but a dollar_figure deficiency for petitioner paid ms zatopa dollar_figure hours times dollar_figure an hour for her work on this case discussion we may grant petitioners’ motion if they meet all of the statutory regquirements for an award of litigation costs see sec_7430 and c see also rule e 94_tc_708 88_tc_492 the parties dispute the four requirements noted above we focus on the first of those requirements namely that a taxpayer must exhaust administrative remedies available within the internal_revenue_service before petitioning this court with respect to the underlying year see sec_7430 we conclude that petitioners have not met this requirement petitioners never requested a conference with appeals as to either or although such a conference was available sec_301_7430-1 proced admin regs provides that where a conference with appeals is available administrative remedies are exhausted only when the taxpayer participated in a conference with appeals before petitioning this court or requested such a conference as applicable herein by filing a written protest with respondent and had its request denied we hold that petitioners do not qualify for an award of litigation costs under sec_7430 cf patel v commissioner tcmemo_1998_306 jacoby v commissioner tcmemo_1997_384 burke v commissioner tcmemo_1997_127 in so holding we reject summarily petitioners’ argument that they need not have met the regulatory requirements of sec_301_7430-1 proceed admin regs in order to recover litigation costs because the 30-day_letter was silent as to this requirement we have considered all other arguments for a contrary holding and find those arguments to be irrelevant or without merit to reflect the foregoing an appropriate order will be issued and decisions will be entered in accordance with the parties’ settlement


t c summary opinion united_states tax_court sanford m and sally kirshenbaum petitioners v commissioner of internal revenue respondent docket no 10498-o0s filed date sanford m kirshenbaum pro_se john aletta for respondent armen special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time that the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority ' unless otherwise indicated all subsequent section references are to the internal_revenue_code in effect for the taxable_year in issue and all rule references are to the tax_court rules_of_practice and procedure - respondent determined a deficiency in petitioners’ federal_income_tax for the taxable_year in the amount of dollar_figure and an accuracy-related_penalty under sec_6662 in the amount of dollar_figure after dismissal of petitioner sally kirshenbaum mrs kirshenbaum the issues for decision are as follows whether petitioner sanford m kirshenbaum petitioner received a taxable_distribution of dollar_figure from his individual_retirement_account ira we hold that he did whether petitioner received taxable social_security_benefits of dollar_figure we hold that he did whether petitioner is entitled to ira contribution deductions of dollar_figure we hold that he is not whether petitioner is liable for an accuracy-related_penalty under sec_6662 due to a substantial_understatement_of_income_tax we hold that he is an adjustment to the amount of petitioner’s itemized_deductions is a purely mechanical matter the resolution of which is dependent on our disposition of the disputed issues petitioner sally kirshenbaum did not appear at trial and did not execute the stipulation of facts accordingly the court will dismiss this action as to her rule b however decision will be entered against petitioner sally kirshenbaum consistent with the decision entered against petitioner sanford m kirshenbaum as to the deficiency in tax and the accuracy- related penalty background some of the facts have been stipulated and they are so found petitioners resided in cranston rhode island at the time that their petition was filed with the court a petitioner and his background petitioner was born on date and he turned in petitioner obtained a law degree from boston university law school and also obtained a masters of law in taxation in from the same university from through petitioner worked as an attorney in the collection litigation division for the office_of_chief_counsel in boston massachusetts thereafter petitioner became a sole practitioner practicing general law in the state of rhode island in petitioner was diagnosed with chronic depression for which he received medical treatment petitioner’s medical_condition adversely affected his professional responsibilities and therefore the rhode island supreme court placed petitioner on inactive status by order dated date due to his incapacity to continue to practice law see iddings v mcburney a 2d r i thereafter petitioner was unable to continue in the practice of law as a result petitioner began receiving payments from the social_security administration in which - - continued through the taxable_year in issue b petitioner’s investment strategy petitioner has maintained several iras with institutions such as fidelity investments as relevant herein in petitioner became dissatisfied with the 8-percent return on his ira deposits with fidelity investments and therefore petitioner orchestrated an arrangement between himself and marlene hope inc to get out of fidelity in order to increase his investment return at trial petitioner described his investment strategy as follows years back i had been doing some real_estate buying and selling and mortgaging i figured that’s the only place i can get a job and go back to work i came across what i thought was a good deal a single family house costing dollar_figure and i found a tenant a section 8' tenant who needed five bedrooms she would gladly occupy the house providing she got approval from the section people in providence this went through and ultimately i bought the house for dollar_figure i gave a dollar_figure deposit and the balance of dollar_figure or thereabouts was to come from fidelity i spoke to fidelity about withdrawing this money they said as long as it doesn’t come into your hands you could roll it over i didn’t want to pay taxes on some dollar_figure in the state i was in then have to pay taxes on it and then not have it for the future i relied on them the deal went through section is a reference to sec of the united_states housing authority act of ch 80_stat_888 as amended by the housing_and_community_development_act_of_1974 publaw_93_ sec a 88_stat_662 which is codified a sec_42 u s c sec 1437f generally section refers to assisted public housing --- - x the problem was where was i going to put it i knew i couldn’t put it in my own hands i didn’t want to put it back into a mutual_fund which was costing me money every year for fees and everything else i decided i would buy this house and rent it to this section woman t withdrew dollar_figure go it went from fidelity insurance to the corporate account of marlene hope inc i never touched any of that money it never went through my fingers at all marlene hope inc marlene hope inc mhi was created in the 1970s and subsegquently incorporated in the state of rhode island as a for- profit corporation petitioner’s daughter marlene hope kirshenbaum petitioner’s daughter is the president and sole shareholder of mhi mhi is engaged in the business of real_estate purchasing selling and development residential real_estate management and real_estate mortgaging mhi maintains its corporate funds in an account with first bank trust co mhi filed a form 1120-a u s_corporation short-form income_tax return for the taxable_year reporting total income of dollar_figure total deductions of we note that mhi’s business address and telephone number is the same as petitioner’s residential address and telephone number on his form_1040 petitioner claimed a dependency_exemption for marlene hope kirshenbaum who was born in and resides with him -- - dollar_figure and a zero tax_liability however mhi did not file an income_tax return for the taxable years and the investment_property on date mhi entered into a single multi family purchase and sales agreement with marianna laliberte seller to purchase a one-family cottage pincite veazie street providence rhode island veazie property for dollar_figure mhi placed a dollar_figure deposit towards the purchase_price and the parties scheduled the closing date for date pursuant to the veazie property purchase agreement petitioner directed fidelity investments to wire transfer a portion ie dollar_figure of one of his iras fidelity ira to mhi’s corporate bank account at first bank and trust co fidelity investments completed this transaction on date fidelity investments sent petitioner a form 1099-r distributions from pensions annuities retirement or profit-- sharing plans iras insurance contracts etc that reported a gross distribution of dollar_figure and a taxable_amount of dollar_figure on date mhi used petitioner’s fidelity ira distribution to pay the veazie property purchase_price balance of dollar_figure the seller conveyed title to the veazie property to petitioner does not suggest that fidelity investments mistakenly issued a form 1099-r that designated the fidelity ira transfer incorrectly as an ira distribution - mhi mhi maintains the veazie property as residential_rental_property for assisted public housing ’ the local housing authority pays mhi a monthly rent of dollar_figure housing payment the tenant also reimburses mhi directly for utility expenses at dollar_figure per month plus any excess_amount petitioner’s veazie property-ira arrangement at trial petitioner described his veazie property-ira arrangement as follows petitioner the housing payment was all designated as income from the section housing the housing payment was designated as an ira in my account the court how were you benefitting from this then petitioner i wasn’t the court well isn’t an eight percent return better than no return at all it sounds like you made a gift to your daughter or this corporation petitioner no no no it’s designated as a corporation that that money is mine eventually the court but you’re telling us that this arrangement was designed for your ultimate income security ’ the same section tenant has occupied the veazie property since mhi purchased it in the phrase veazie property-ira arrangement and its derivatives are intended only for narrative convenience to describe the form of the disputed transaction and does not connote the existence of an ira for federal_income_tax purposes --- - petitioner that was my ira designated as my ira the court okay now at some point or other presumably you would have need for your ira correct petitioner instead of drawing it out from fidelity i’m drawing it out from mhi petitioner in addition to the increase in money received because of the rent from fidelity if i was making eight percent i’m making ten or here plus there’s a good share that when that property is sold there will be a capital appreciation at least of dollar_figure so that was a good investment petitioner all i know is that it’s the agreement between petitioner and mhi designated in the corporate files and on that file that it’s my ira petitioner we don’t have a written_agreement if i set up something like this she would say okay you’re the father you do it but she has no legal_obligation to do anything that i say petitioner corroborates this description of the veazie property-ira arrangement in his letter to the internal_revenue_service dated date which stated in part as follows it was not pleased with the return i was getting from fidelity on the veazie street investment with a purchase_price of dollar_figure invested i with the rental income am making over per year in interest and have a good opportunity for capital_gains when the property is sold this certainly is a lot better than what i was getting at fidelity this whole transaction is recorded in the corporate records as an ira investment from me the dollar_figure difference between the purchase_price of dollar_figure and the dollar_figure transfer from fidelity is continued c petitioner’s form_1040 petitioner and mrs kirshenbaum filed a joint form_1040 u s individual_income_tax_return for petitioner listed his occupation as retired and mrs kirshenbaum listed her occupation as therapist ’ on the form_1040 petitioner reported the following items line wages salaries tips etc dollar_figure line 8a taxable interest dollar_figure line taxable refunds dollar_figure line capital_gain or loss big_number line 15a total ira_distributions dollar_figure line 15b taxable_amount line rental real_estate big_number line 20a social_security_benefits dollar_figure line 20b taxable_amount line other income dollar_figure line add lines through total income dollar_figure line ira deduction dollar_figure line self-employed health insurance deduction dollar_figure line add line sec_23 through 3la dollar_figure line subtract line from line adjusted_gross_income dollar_figure line itemized_deductions dollar_figure line subtract line from line dollar_figure line total number of exemptions dollar_figure line taxable_income line total_tax petitioner handwrote the word rollover next to the amount of dollar_figure dollar_figure petitioner handwrote the word disability next to the amount of continued an additional ira investment from me for the year at the time of trial mrs kirshenbaum wa sec_64 years old she has a masters degree in education and works as a full-time speech pathologist for the pawtucket public school system -- - petitioner attached to the form_1040 a form_w-2 wage and tax statement from the pawtucket public school system pawtucket school disclosing the payment of wages to mrs kirshenbaum in the amount of dollar_figure during the form_w-2 indicated that mrs kirshenbaum contributed to an ers and that she was an active_participant in a qualified_retirement_plan d respondent’s deficiency_notice in the notice_of_deficiency respondent determined that petitioner received a taxable ira distribution of dollar_figure on the basis that petitioner did not roll over his ira distribution respondent also determined that petitioner received taxable social_security_benefits of dollar_figure which was not disability_income in addition respondent determined that both petitioner and mrs kirshenbaum were not entitled to ira contribution deductions because they did not substantiate their ira deductions finally respondent determined that petitioners are liable for an accuracy-related_penalty due to a substantial_understatement_of_income_tax discussion in general the determinations of the commissioner in a notice_of_deficiency are presumed correct and the burden is on the taxpayer to show that the determinations are incorrect rule a 290_us_111 under ‘ ers stands for employee retirement_system sec_7491 however the burden_of_proof shifts to the commissioner if inter alia the taxpayer first introduces credible_evidence with respect to any factual issue relevant to ascertaining the taxpayer’s liability for income_tax ’ 116_tc_438 with respect to a taxpayer’s liability for any penalty however sec_7491 c places on the commissioner the burden of production a the ira distribution’ generally any amount_paid or distributed out of an ira is includable in the recipient’s gross_income as provided in sec_72 sec_408 sec_1_408-4 income_tax regs this rule does not apply however to any amount distributed from an ira to the individual for whose benefit the account is maintained if the entire amount is paid into an ira for the benefit of such individual not later than days after the distribution sec_408 110_tc_1 sec_1_408-4 b income_tax regs moreover revrul_78_406 1978_2_cb_157 provides that a transfer of a participant’s ira funds directly from one trustee sec_7491 is applicable to court proceedings arising in connection with examinations commencing after date see internal_revenue_service restructuring and reform act of publaw_105_206 sec a c 112_stat_685 we assume arguendo that the veazie property-ira arrangement is not a prohibited_transaction under sec_4975 despite its specious characteristics see sec_408 bank to another trustee bank is not a rollover_contribution because no such funds were paid or distributed to the participant and such funds are not within the direct control and use of the participant ’ see crow v commissioner tcmemo_2002_178 martin v commissioner tcmemo_1992_331 affd without published opinion 987_f2d_770 5th cir the revenue_ruling further states this conclusion would apply whether the bank trustee initiates or the ira participant directs the transfer of funds revrul_78_406 c b pincite in other words the revenue_ruling suggests that a trustee-to- trustee transfer is tax free to the ira owner without the need for the transfer to qualify as a rollover_contribution as relevant to the present case an ira is a_trust created or organized in the united_states for the exclusive benefit of an individual but only if the written governing instrument creating the trust meets certain statutory requirements sec_408 sec_1_408-2 income_tax regs see 77_tc_1096 affd 680_f2d_1388 5th cir sec_1_408-2 income_tax regs specifically provides in part that the instrument creating the trust must be in writing see phelan v united_states civil_action no 83-1997-z d c mass deposit of funds in bank not sufficient to constitute an i we note that although entitled to consideration revenue rulings are not precedent 381_us_68 ira because bank’s acknowledgment did not meet the statutory requirements of sec_408 in the petition petitioner states that the ira distribution is not taxable because the taxpayers’ demonstrated that they intended to hold and administer the property acquired by the rollover in such a manner as to comply with sec_408 a to the best of their ability at trial petitioner adamantly asserted that his fidelity ira was transferred directly to his veazie property-ira via a trustee-to-trustee transfer and therefore that the transfer was not taxable we need not and do not make a determination whether petitioner’s transaction was either a rollover_contribution or a trustee-to-trustee transfer because we conclude that petitioner’s veazie property--ira is not a valid ira within the meaning of sec_408 in the present case petitioner directed that his fidelity ira distribution be transferred to his veazie property-ira the record is replete with petitioner’s conclusory and self-serving testimony regarding the purported validity of his veazie property-ira however petitioner candidly admitted at trial that no such written_agreement regarding his veazie property-ira exists but that such a designation exists in mhi’s corporate ' sec_408 provides the trustee is a bank as defined in subsection n or such other person who demonstrates to the satisfaction of the secretary that the manner in which such other person will administer the trust will be consistent with the requirements of this section files petitioner’s purported designation however was not buttressed by any written documentation thus the lack of a written governing instrument creating petitioner’s purported veazie property-ira is fatal to his contention that he established an ira consistent with sec_408 the statute and regulations are clear that a written governing instrument is required to establish an ira and therefore without a written instrument petitioner’s purported veazie property-ira must fail to qualify as an ira pursuant to sec_408 a in view of the foregoing we hold that petitioner received a taxable ira distribution of dollar_figure therefore we sustain respondent’s determination on this issue b social_security_benefits sec_86 provides for the taxability of social_security_benefits pursuant to a statutory formula for tax purposes social_security disability benefits are treated in the same manner as other social_security_benefits sec_86 thomas v commissioner tcmemo_2001_120 thus if a taxpayer’s modified_adjusted_gross_income magi plus one-half of the we do not regard petitioner’s statements regarding the veazie property-ira as credible_evidence within the meaning of sec_7491 see 87_tc_74 see also sykes v commissioner t c memo accordingly we decide the issue before us without regard to the general burden-shifting rule_of sec_7491 -- - taxpayer’s social_security_benefits exceeds a certain base_amount or an adjusted_base_amount then a portion of the taxpayer’s social_security_benefits is includable in gross_income and subject_to federal_income_tax sec_86 through d the includable portion never exceeding percent varies according to a formula set forth in sec_86 as relevant in the present case for a joint_return the base_amount is dollar_figure and the adjusted_base_amount is dollar_figure sec_86 b and b petitioner contends that the payments he received from the social_security administration were nontaxable disability benefits on the other hand respondent contends in the notice_of_deficiency that we have no indication that the dollar_figure was disability_income from social_security we however need not decide whether petitioner’s social_security payments are properly characterized as disability benefits assuming arguendo that petitioner in fact received social_security disability benefits our analysis of whether such payments are includable in petitioner’s gross_income remains unchanged as stated above social_security disability benefits are treated the same as other social_security_benefits sec_86 thomas v commissioner ‘7 our decision on this issue does not depend on which party has the burden_of_proof we note in passing however that petitioner does not argue that sec_7491 places the burden_of_proof on the commissioner here supra accordingly because petitioner’s magi plus one-half of his benefits exceeds the adjusted_base_amount a portion of his social_security_benefits is taxable see sec_86 c thus we sustain respondent’s determination on this issue c petitioner’s ira deductions as a preliminary matter we note that deductions are strictly a matter of legislative grace and a taxpayer bears the burden of proving his or her entitlement to the claimed deductions rule a see 292_us_435 290_us_111 cf sec_7491 taxpayers are required to maintain records sufficient to substantiate their claimed deductions see sec_6001 sec_1_6001-1 income_tax regs generally a taxpayer is entitled to a deduction for qualified retirement contributions sec_219 sec_1 l a income_tax regs as relevant herein sec_219 defines a qualified_retirement_contribution as any amount_paid in cash for the taxable_year by or on behalf of an individual to an individual_retirement_plan for such individual’s benefit ’ because petitioner has not established that he fully complied with the substantiation requirements of sec_7491 a a we decide the issue before us without regard to sec_7491 sec_7701 defines an individual_retirement_plan as an individual_retirement_account described in sec_408 and continued also as relevant to the present case the maximum allowable deduction in any taxable_year for a married individual is dollar_figure sec_219 the amount of the deduction however may be limited where the taxpayer or the taxpayer’s spouse was for any part of the taxable_year an active_participant in a qualified_retirement_plan sec_219 a petitioner contends that he and mrs kirshenbaum each contributed dollar_figure to an existing traditional_ira for petitioner further claims that he is entitled to an ira deduction even if mrs kirshenbaum is covered by the pawtucket school’s pension_plan because mrs kirshenbaum does not have any vested rights in her pension_plan in addition petitioner steadfastly claims that he is entitled to an ira deduction whether it’s from a rollover or from out of pocket however there is no evidence to support petitioner’s contention that he or mrs kirshenbaum made qualified retirement contributions in other than his unsubstantiated allegations at trial petitioner testified that he contributed to an existing ira but he could not clearly articulate whether such contribution was made to fidelity investments another ira account or some other gualified retirement account most importantly petitioner did not provide any substantiating continued as an individual_retirement_annuity described in sec_408 see 77_tc_1096 -- - records of his purported ira contribution nor did he demonstrate that he maintained such records the same may be said regarding any ira that mrs kirshenbaum may have maintained we conclude that petitioner failed to substantiate the making of any qualified ira contribution pursuant to sec_219 and therefore is not entitled to ira contribution deductions thus we sustain respondent’s determination on this issue d accuracy--related penalty as previously mentioned sec_7491 places on the commissioner the burden of production with respect to a taxpayer’s liability for any penalty however the taxpayer still has the burden of proving that the commissioner’s determination of the accuracy-related_penalty is erroneous rule a 503_us_79 290_us_111 116_tc_438 bur corp v commissioner 67_tc_111 36_tc_170 moreover in evaluating evidence the court is not bound to accept as gospel the unverified and undocumented testimony of a taxpayer 87_tc_74 65_tc_87 affd we hold that respondent satisfied the burden of production under sec_7491 because the record shows that petitioner failed to include certain items in income and claimed deductions to which he was not entitled 116_tc_438 - - per curiam 540_f2d_821 5th cir as relevant herein sec_6662 imposes an accuracy- related penalty equal to 20-percent of an underpayment that is due to a substantial_understatement_of_income_tax see sec_6662 and b an individual substantially understates his or her income_tax when the reported tax is understated by the greater of 10-percent of the tax required to be shown on the return or dollar_figure sec_6662 a tax is not understated to the extent that the treatment of the item is based on substantial_authority or relevant facts are adequately disclosed in the return or in a statement attached to the return and there is a reasonable basis for the tax treatment of such item by the taxpayer sec_6662 b moreover the accuracy-related_penalty does not apply with respect to any portion of an underpayment if it is shown that there was reasonable_cause for such portion and that the taxpayer acted in good_faith with respect to such portion sec_6664 the determination of whether a taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all the pertinent facts and circumstances sec_1_6664-4 income_tax regs the most important factor is the extent of the taxpayer’s effort to assess the taxpayer’s proper tax_liability for such year id petitioner reported zero tax on his return the amount - - reguired to be shown on the return was dollar_figure therefore petitioner understated his income_tax in an amount greater than dollar_figure or 10-percent of the tax required to be shown on his return petitioner did not present any evidence or make any showing as to why respondent’s penalty determination is in error petitioner contends that he is not liable for the accuracy- related penalty because he had a reasonable basis for the tax items at issue and because he relied on the advice of a representative of fidelity investments given petitioner’s legal education and experience petitioner did not have a reasonable basis for the tax items at issue especially in the absence of substantiating records moreover petitioner’s purported reliance on a financial representative was not reasonable nor prudent see sec_1_6662-4 income_tax regs the facts and circumstances of this case support the imposition of an accuracy-related_penalty under sec_6662 a and b accordingly we sustain respondent’s determination on this issue be conclusion we have considered all of the other arguments made by the parties and to the extent that we have not specifically addressed them we conclude they are without merit --- - reviewed and adopted as the report of the small_tax_case division to reflect the foregoing order of dismissal as to sally kirshenbaum and decision will be entered for respondent


office_of_chief_counsel internal_revenue_service memorandum number release date cc ita b02 peford postf-109423-14 uilc date june to ------------------- attorney ----------- group small_business self-employed from norma rotunno senior technician reviewer branch income_tax accounting third party communication none date of communication not applicable subject tax treatment of investment theft losses this chief_counsel_advice responds to your request for assistance dated date this advice may not be used or cited as precedent issues whether an investor investor who transferred money to the principals of ------------------- -------------------------------------------------------------------------- to invest with ------------------------ ---------------------------------------------------------------------------------------------------------------- is entitled to the safe_harbor treatment for theft losses under revproc_2009_20 as modified by revproc_2011_58 conclusions investor is eligible for the safe_harbor treatment under revproc_2009_20 as modified by revproc_2011_58 subject_to subsequent recovery_of amounts if any by investor facts most of the following facts are in addition to those already provided in your request for advice ------------------------------------------------------------- -------------------------------------------- postf-109423-14 -------------------------------------------- ----------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------- ------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --- -- ----------------------------------------------------------------------------------------------- ------------- --------------- ----------------------------------------------------------------------------------------------------- -------------------------------------------------------------- in ------ investor an individual taxpayer transferred money to --as an investment the proceeds of which were purportedly used to purchase --------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -- ------- investor has asserted that she is entitled to claim a theft_loss under revproc_2009_20 as modified by revproc_2011_58 similar to investors that invested directly with ------- in exchange for investor’s funds investor did not receive a -------------------------------------- --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------persons who transferred money to ---to invest in - --------had a ----------------------------------------with ---- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- 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--------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------- ----------owned operated and managed ---------until ------------------------------------------ bankruptcy proceedings were commenced against -------------------------------- -------------- --------------------------was created in the bankruptcy proceedings and the plan_of_reorganization treated the investors as ---------------------- of ----- you have indicated that ------------------------------------------------------------- ------------------------------------- filed a civil complaint against ----------------------------------- alleging the following -------violations -------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------- ------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------ -------------------- ------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------ ---------- ------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ in ------ the ---------------------------------------------------------- --------------------ruled in favor of the --------on all counts and ordered -----------------------------------against each of the -------- --------------------------------------------------------------------------------------------------found that the investments promoted by ---------------------------- this conclusion was based on the postf-109423-14 following findings the investors invested money in ------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -------------------- this finding was based on evidence of ------------------------------------------ -------------------------------------------------------------------------------------------------------------------- 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--------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------------------ -------------------------------------------------------------------------------------------------------------------------------------------- postf-109423-14 --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ---------------------------------------------- law and analysis sec_165 of the internal_revenue_code code allows a deduction for losses sustained during the taxable_year and not_compensated_for_by_insurance_or_otherwise a loss from criminal_fraud or embezzlement in a transaction entered into for profit is a theft_loss under sec_165 see revrul_2009_9 2009_14_irb_735 revproc_2009_20 - the service and the treasury_department issued revproc_2009_20 which provides an optional safe_harbor for taxpayers who experience losses in certain criminally fraudulent investment arrangements or so-called ponzi schemes the procedure provides investors with uniform and simplified methods for determining the timing and amount of a theft_loss deduction revproc_2009_20 allows a qualified investor to take a theft_loss deduction for a qualified loss resulting from a specified fraudulent arrangement see sec_4 of revproc_2009_20 a qualified investor is defined in the procedure as a u_s_person that generally qualifies to deduct theft losses under sec_165 and sec_1 that did not have actual knowledge of the fraudulent nature of the investment arrangement prior to it becoming known to the general_public provided the u_s_person transferred cash or property to a specified fraudulent arrangement section dollar_figure of revproc_2009_20 in addition sec_4 provides that a qualified investor does not include a person that invested solely in a fund or other entity separate from the investor for federal_income_tax purposes that invested in the specified fraudulent arrangement and that the fund or entity itself may be a qualified investor within the scope of the revenue_procedure the procedure defines a qualified loss as a loss resulting from a specified fraudulent arrangement in which as a result of the conduct that caused the loss the lead figure or lead figures of the scheme is criminally charged under state or federal_law with the commission of fraud embezzlement or a similar crime that if proven would meet the definition of theft for purposes of sec_165 section dollar_figure of revproc_2009_20 the procedure provides that a qualified investor may deduct the theft_loss in the discovery year generally defined as the year in which the criminal charge is filed sections dollar_figure and of revproc_2009_20 sec_4 of the revenue_procedure contains additional requirements with respect to the type of criminal charge whether an admission by the lead figure is alleged and the appointment of a receiver or trustee with respect to the fraudulent arrangement or assets of the arrangement being frozen postf-109423-14 revproc_2011_58 the service recognized that the deaths of lead figures in certain ponzi schemes prevented government authorities from charging them with criminal theft in these cases qualified investors would have been unable to meet the definition of a qualified loss in revproc_2009_20 solely due to the death of the lead figure therefore the service and treasury issued revproc_2011_58 to address those cases revproc_2011_58 modified the definition of a qualified loss in revproc_2009_20 to include the situation in which the lead figure or an associated entity involved in the specified fraudulent arrangement was the subject of one or more civil complaints or similar documents such as a notice or order instituting administrative proceedings or other document the internal_revenue_service designates filed by a state or federal governmental entity with a court or in an administrative agency enforcement proceeding and all of the following requirements are satisfied a the civil complaint or similar documents together allege facts that comprise substantially_all of the elements of a specified fraudulent arrangement conducted by the lead figure b the death of the lead figure precludes a criminal charge by indictment information or criminal complaint against that lead figure and c a receiver or trustee was appointed with respect to the arrangement or the assets of the arrangement were frozen section dollar_figure of revproc_2011_58 in addition the procedure modified the definition of discovery year in section dollar_figure of revproc_2009_20 to include the later of either the year in which the civil complaint or similar document which alleges facts that comprise substantially_all the elements of a specified fraudulent arrangement is filed or the year in which the lead figure dies section dollar_figure of revproc_2011_58 postf-109423-14 the restatement third of agency defines agency as the fiduciary relationship tha t arises when one person a ‘principal’ manifests assent to another person an ‘agent’ that the agent shall act on the principal's behalf and subject_to the principal's control and the agent manifests assent or otherwise consents so to act in huff the tax_court found that an agency relationship is created when by mutual consent either implied or expressed one party ie the agent agrees to act on behalf of the other ie the principal and be subject_to the principal's control losses --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- accordingly because ---------------------were found to be ------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -----------for federal tax purposes because ----------------------------------------------------------- -----------------------------------------------------------------------------the realized with respect to investments ------------are properly attributable to investor and not --------------- ------------- ----------------------------------------------------------------------------------------------------- should properly be viewed as agents of investor because ---------------------------------------- -----------------------------------------------------------------------------------------------------------were acting on behalf of and --------------------------to investor in addition -------------------------- ------------ which sets forth that --------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ---------------having chosen their form as agents of investor and --------------------------------- --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------may not participate in the realized losses which are properly attributable to investor investor should be viewed as transferring cash or property to the ---------specified fraudulent arrangement and --------------------------------should be viewed as acting as agents of investor ------------ ------------------------------------- consistent with their chosen form as set forth in --------------- --------------------------------and the conclusions of law reached ------------------and ------------- ------- restatement third of agency dollar_figure restatement 138_tc_258 see 132_f2d_753 1st cir --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- postf-109423-14 revproc_2009_20 indicates however that a qualified investor does not include a person that invested solely in a fund or other entity separate from the investor for federal_income_tax purposes that invested in the specified fraudulent arrangement in such a case the fund or entity itself may be a qualified investor within the scope of the revenue_procedure this provision would allow equity owners in pass-through entities to claim losses allocable to them as owners of the pass-through entity this provision was not intended to preclude investors who would otherwise qualify for a theft_loss under the revenue_procedure from recognizing such loss this provision should not apply here because attributing the loss to --- will not result in the loss being allocated to investor---------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------- thus investor is the qualified investor for purposes of revproc_2009_20 case development hazards and other considerations this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call if you have any further questions --------------------------------------------------------------------- by contrast and consistent with huff and the restatement the analysis in this memorandum looks at the relationship between --------------------- and investor in analyzing whether investor is entitled to a federal tax theft_loss under revproc_2009_20 as modified by revproc_2011_58