t c memo united_states tax_court alvin victor bracey petitioner v commissioner of internal revenue respondent docket no filed date alvin victor bracey pro_se susan m pinner for respondent memorandum opinion gale judge respondent determined the following deficiencies in addition to and fraud penalties on petitioner's federal income taxes 1all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise continued deficiency dollar_figure big_number addition_to_tax sec_6651 fraud_penalty sec_6663 dollar_figure - - dollar_figure big_number year respondent also determined as an alternative to fraud that the underpayments for and are subject_to accuracy-related_penalties under sec_6662 and respondent has conceded the addition_to_tax under sec_6651 for and the fraud penalties and the parties have reached agreement with respect to each adjustment determined in the notice_of_deficiency however with certain exception sec_2 the parties dispute the applicability of the accuracy-related_penalties to the agreed adjustments thus the remaining issue for decision is whether petitioner is liable for accuracy-related_penalties under sec_6662 and with respect to the underpayment arising from certain of the agreed-upon adjustments continued indicated 2on brief respondent concedes that the sec_6662 penalty does not apply to the portion of the underpayment attributable to an adjustment involving petitioner's contributions to an individual_retirement_account and the portion of the underpayment attributable to adjustments involving schedule c mortgage interest_expenses respondent's position regarding the sec_6662 penalty with respect to the foregoing adjustments is not entirely clear to the extent respondent has not conceded these adjustments for purposes of sec_6662 we find on the basis of the record in this case that petitioner had reasonable_cause under sec_6664 with respect thereto some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference at the time the petition was filed petitioner resided in houston texas prior to and during the years in issue petitioner operated a wear lining business as a sole_proprietorship in which he developed and sold linings used in pneumatic handling systems that pulverize and transfer coal into coal-burning industrial boilers primarily in power plants petitioner visited customers in the north central and northeastern united_states to solicit orders for such wear linings arranged for their manufacture by a third party and subsequently supervised installation of the linings at a customer's plant the conduct of petitioner's business required extensive travel which petitioner estimated at big_number to big_number miles per year for recordkeeping in his wear lining business petitioner kept a copy of the invoices issued to a customer when an order was placed and then attached a copy of the check when payment was received on the invoice petitioner kept separate files for invoices awaiting payment and for paid invoices it was from these invoices that petitioner calculated the gross_receipts from the wear lining business reported on schedule c of his and returns he did not maintain any ledger or journal with respect to gross_receipts with respect to travel_expenses incurred in his wear lining business petitioner's recordkeeping consisted of a mileage log and a diary of appointments containing information regarding where he went with whom he spoke and the subject matter with respect to lodging petitioner did not have receipts to document his expenses instead he claimed lodging_expenses as a deduction for travel on his schedule c by using a per_diem estimate that he found in an internal_revenue_service publication in addition to the expenses_incurred in his wear lining business petitioner claimed schedule c deductions for expenses_incurred in connection with certain real_property acquisitions in florida sometime in petitioner acquired three properties in florida and had a house built on one of them with the intention of leaving the wear lining business and beginning a homebuilding business the remaining two lots were undeveloped when purchased by petitioner during the years in issue petitioner had the lots cleared and filled to meet elevations required by applicable flood laws and arranged for water service to one of them at some point in petitioner returned to the wear lining business and tried to rent the house in florida he obtained insurance coverage for the house based on its intended use as a rental property petitioner was not successful in finding a tenant in and eventually moved into the house himself on schedule c of his return petitioner deducted legal fees that he paid in connection with the purchase of the florida house on schedule c of his return petitioner deducted depreciation expense with respect to the house petitioner prepared and filed federal_income_tax returns for the years in issue without consulting an accountant or other tax professional we turn first to the applicability of the sec_6662 penalty we consider each agreed adjustment except as indicated supra note to determine whether the resulting portion of the underpayment is attributable to negligence or disregard of rules or regulations as provided in that section negligence for this purpose includes any failure to make a reasonable attempt to comply with the provisions of the internal_revenue_code and disregard includes any careless reckless or intentional disregard sec_6662 respondent's determination of an accuracy-related_penalty is presumptively correct and petitioner bears the burden of proving the determination wrong rule a 109_tc_235 103_tc_711 85_tc_934 58_tc_757 in deciding whether the accuracy-related_penalty for negligence applies the test is whether there was a lack of due care or a failure to act prudently under the circumstances hitchins v commissioner supra thus the taxpayer must show that he acted reasonably and prudently and exercised due care in choosing the treatment of the items in issue 925_f2d_348 9th cir affg 92_tc_1 neely v commissioner supra pincite the sec_6662 penalty shall not in any event be imposed with respect to any portion of an understatement as to which the taxpayer acted with reasonable_cause and in good_faith sec_6664 unreported gross_receipts in the notice_of_deficiency respondent determined that petitioner had unreported schedule c gross_receipts of dollar_figure in and dollar_figure in respondent now concedes that petitioner did not have any unreported gross_receipts in and the parties have stipulated that the unreported gross_receipts in were dollar_figure rather than dollar_figure citing sindik v commissioner tcmemo_1996_47 respondent contends that the underpayment arising from the unreported receipts is attributable to negligence because petitioner failed to keep adequate books_and_records in particular respondent argues that petitioner was negligent in keeping only invoices and in failing to maintain a ledger or journal in which he separately recorded information regarding his gross_receipts taxpayers are required to keep such records as are sufficient to establish the amount of gross_income required to be shown on the return sec_1_6001-1 income_tax regs the regulations further provide that negligence for purposes of sec_6662 and c includes any failure by the taxpayer to keep adequate books_and_records sec_1_6662-3 income_tax regs there is no requirement that a taxpayer maintain any specific type of ledger or journal so long as his overall recordkeeping is sufficient to establish the amount of his income petitioner's business required travel to such an extent that he essentially worked out of his automobile in the circumstances we are not persuaded that respondent's insistence on ledgers is realistic or appropriate petitioner's method of retaining his invoices in paid and unpaid categories was apparently adequate for as the parties have now stipulated that there was no underreporting of gross_receipts in that year as for petitioner failed to report dollar_figure of a total of dollar_figure in gross_receipts while the unreported amount is not inconsequential we are not persuaded that it constitutes either negligence which includes any failure to make a reasonable attempt to comply with the provisions of the internal_revenue_code or disregard of rules or regulations which includes any careless reckless or intentional disregard sec_6662 we believe that petitioner was making a reasonable though flawed attempt to keep track of his gross_receipts in the circumstances respondent's reliance on sindik v commissioner supra is misplaced the taxpayer in that case kept no records at all which we found was a failure to make any reasonable attempt to comply and therefore negligent here we find that the underpayment arising from the unreported gross_receipts in is not subject_to the accuracy-related_penalty provided in sec_6662 lodging_expenses in the notice_of_deficiency respondent completely disallowed petitioner's claimed travel_expenses for his wear lining business in the amounts of dollar_figure and dollar_figure for and respectively respondent now concedes that the claimed amounts are allowable except to the extent of lodging_expenses of dollar_figure in and dollar_figure in respondent argues for the negligence_penalty because petitioner failed to substantiate the lodging_expenses as required by sec_274 the parties' dispute centers on petitioner's failure to produce receipts for his claimed lodging_expenses petitioner testified credibly that he maintained a diary of his business travel in which he recorded his appointments including time place substance of the discussion and follow-up petitioner concedes however that he did not use actual receipts to calculate the lodging_expenses claimed but instead used a per_diem amount that he obtained from an irs publication we take judicial_notice of irs publication your federal_income_tax which the agency published for use in preparing returns in a section specifically devoted to the records required to support deductions for business travel the publication states documentary_evidence documentary_evidence is required to support all lodging_expenses however see per_diem_allowance or reimbursement earlier while traveling away from home irs pub ch pincite the parenthetical refers the reader to that portion of the publication where a procedure for accounting for expenses including lodging_expenses on the basis of a per_diem amount rather than actual expenditures is explained while it is true that as a self-employed_individual petitioner was not eligible to use the per_diem method the publication is not exceedingly clear on this point and we accept that petitioner could have misunderstood this based on the language quoted above we note in this regard that in the most recent version of publication your federal_income_tax of which we also take judicial_notice the section on documentary_evidence has been substantially revised to make clearer the limited circumstances in which the per_diem method may be used for lodging_expenses documentary_evidence you generally must have documentary_evidence such as receipts canceled checks or bills to support your expenses however this evidence is not needed if any of the following apply you have meals or lodging_expenses while traveling away from home for which you account to your employer under an accountable_plan and you use a per_diem_allowance method that includes meals and or lodging irs pub ch pincite sec_1_6664-4 income_tax regs as effective for the years in issue provides that reasonable_cause for purposes of the accuracy-related_penalties includes an honest misunderstanding of fact or law that is reasonable in light of the experience knowledge and education of the taxpayer in these circumstances we believe that petitioner's use of a per_diem method to calculate his lodging_expenses was an honest misunderstanding constituting reasonable_cause under sec_6664 thus the underpayments arising from the disallowed travel_expenses are not subject_to accuracy-related_penalties under sec_6662 or employee benefit program petitioner has conceded that he is not entitled to a dollar_figure deduction claimed on schedule c of his return for employee benefit programs respondent contends that the amount represents petitioner's medical_expenses that were not deductible on schedule a because they did not exceed percent of adjusted_gross_income see sec_213 and asserts that a sec_6662 penalty is appropriate because the deduction had no basis in law or fact petitioner offered no explanation or argument with respect to the deduction or the penalty on this record we find that the underpayment arising from this disallowed deduction is subject_to the accuracy-related_penalty under sec_6662 interest_expense on schedule c of his return petitioner claimed interest_expenses of dollar_figure for mortgage and dollar_figure for other with respect to the first amount petitioner now concedes that it is not allowable as a deduction in petitioner admitted that this interest was paid_by him in and offered by way of explanation that he did not have his bank statement available in time to claim the amount on his return and so he claimed it on his return we find this constitutes disregard of rules or regulations within the meaning of sec_6662 with respect to other interest of dollar_figure the parties have stipulated that petitioner is not entitled to any deduction on schedule c for other interest but instead is entitled to a mortgage interest_deduction of dollar_figure on schedule a of his return petitioner has offered no explanation for the dollar_figure in claimed interest to which he now concedes he is not entitled in the absence of any substantiation for this amount we find that the underpayment arising from its disallowance is attributable to negligence sec_1_6662-3 income_tax regs legal expenses petitioner claimed dollar_figure in legal expenses in schedule c of his return to which the parties now stipulate he was not entitled the amount represents legal fees petitioner paid in connection with the purchase of a house in florida as part of his efforts to commence a homebuilding business petitioner now concedes that the amounts should have been capitalized and added to the basis of the house petitioner did not seek any professional advice with respect to taking the deduction we believe in any event that the rules with respect to the treatment of legal fees incurred in connection with the purchase of real_estate are relatively simple and clear thus we do not find reasonable_cause for the error under sec_6664 on this record we sustain respondent's determination that the underpayment arising from this disallowed deduction is subject_to an accuracy-related_penalty under sec_6662 depreciation petitioner claimed dollar_figure of depreciation on schedule c of his return to which the parties now stipulate he was not entitled the amount represents depreciation claimed with respect to the house petitioner purchased in florida in petitioner held the house throughout attempted to rent it and obtained insurance designed to provide coverage for a rental he was unsuccessful in renting the house and eventually moved into it himself although the record does not disclose when respondent asserts that it was negligent for petitioner to depreciate a house that he never rented and into which he eventually moved we think petitioner's negligence depends upon whether given the circumstances he reasonably believed that the property was depreciable sec_167 allows a depreciation deduction only if the property is either used in a trade_or_business or held_for_the_production_of_income the phrase held_for_the_production_of_income includes the expectation of gain from the disposition of property as well as recurring income such as rent 47_tc_120 in light of petitioner's other real_estate activities in florida we believe he originally acquired and held the house with the expectation of realizing gain upon its disposition we conclude that petitioner reasonably believed that the house was depreciable therefore he had reasonable_cause and acted in good_faith and the underpayment arising from the disallowed depreciation is not attributable to negligence sec_6662 sec_6664 see rezazadeh v commissioner tcmemo_1996_245 affd without published opinion 132_f3d_36 7th cir miscellaneous expenses the following chart lists various additional expenses claimed by petitioner on schedule c for and that were challenged by respondent the second column shows the amount to which the parties have stipulated that petitioner is entitled the third column shows the amounts originally claimed by petitioner on his returns and the fourth column shows the difference ie the amount petitioner claimed to which he now concedes he is not entitled expense stipulated claimed difference dollar_figure taxes big_number taxes utilities big_number miscellaneou sec_1 big_number dollar_figure big_number big_number big_number dollar_figure big_number big_number 1aggregate figure for legal fees utilities insurance and rent with respect to all amounts in the fourth column respondent contends on brief that there was no substantiation petitioner has offered no explanation with respect to the amounts he concedes were claimed improperly in the absence of any substantiation for these amounts we find that the underpayment arising from their disallowance is attributable to negligence sec_1_6662-3 income_tax regs substantial_understatement of tax alternatively respondent determined that the accuracy- related penalty applies due to a substantial_understatement_of_income_tax pursuant to sec_6662 sec_6662 provides that a substantial_understatement occurs when the understatement_of_tax exceeds the greater of dollar_figure or percent of the amount of tax required to be shown on the return generally the understatement is the amount of tax required to be shown on the return over the amount of tax imposed which is shown on the return reduced by that portion of the understatement attributable to i the tax treatment of an item for which there was substantial_authority or ii an item with respect to which the relevant facts affecting its treatment were adequately disclosed on the return or in a statement attached thereto sec_6662 and b petitioner has not provided any authority for the positions taken on his returns petitioner argues for relief from penalties because he made full disclosure when audited of all the facts and circumstances surrounding the various entries on his return petitioner misunderstands and does not meet the requirement of sec_6662 which is that disclosures be on the return or a statement attached thereto petitioner made no such disclosure see sec_1 a income_tax regs accordingly there is no reduction in the understatement the question of whether there is a substantial_understatement_of_income_tax thus depends upon the amount of the understatement which will be addressed in the rule computation the understatement shall not include any portion of the underpayment for which we have herein found there was reasonable_cause under sec_6664 we have considered all other arguments made by petitioner and found them to be either irrelevant or without merit to reflect the foregoing and concessions decision will be entered under rule


t c summary opinion united_states tax_court david and ludmila klet petitioners v commissioner of internal revenue respondent docket no 4486-04s filed date david and ludmila klet pro sese mindy s meigs for respondent pajak special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority this case is before the court on respondent’s motion for summary_judgment under rule this proceeding arises from a petition for judicial review filed in response to a notice_of_determination concerning collection action s under sec_6320 and or sent to petitioners some of the facts in this case have been stipulated and are so found petitioners resided in los angeles california at the time they filed their petition petitioners received an extension to file their form_1040 u s individual_income_tax_return return to date petitioners then filed their return late on date petitioners received an extension to date and date to file their and returns respectively petitioners then filed the tax returns late on date and date respectively petitioners received an extension to file their return to date petitioners then filed their tax_return late on date as stated petitioners timely filed extensions in which to file their returns for and the four years petitioners then filed late joint returns for these four years they failed to pay all of the liabilities reported on the returns respondent assessed the reported liabilities along with additions to tax and interest for the respective years on date petitioners filed a bankruptcy petition under chapter of the united_states bankruptcy code in california on date the internal_revenue_service filed a proof_of_claim in petitioners’ bankruptcy proceeding which included dollar_figure in income_tax liabilities plus interest for the four years on date petitioners’ bankruptcy proceeding was converted from a chapter to a chapter bankruptcy proceeding on date the bankruptcy court entered an order of discharge in the petitioners’ bankruptcy case on date respondent filed a notice_of_federal_tax_lien with the los angeles county recorder’s office in connection with petitioners’ unpaid income_tax liabilities for the four years on date respondent issued to petitioners a notice_of_federal_tax_lien filing and your right to a hearing under sec_6320 the notice which advised petitioners that a notice_of_federal_tax_lien has been filed with respect to their unpaid income_tax liabilities for the four years and that petitioners were entitled to a hearing on date petitioners timely filed form request for collection_due_process_hearing in their request petitioners claimed that the tax_liabilities for the four years were discharged in the bankruptcy proceeding on date a face-to-face conference was held between an appeals officer and petitioners during the hearing petitioners said that all the money owed to the internal_revenue_service was discharged with their other debts in a bankruptcy proceeding on date respondent issued to petitioners a notice_of_determination concerning collection action s under sec_6320 and or notice_of_determination with respect to petitioners’ income_tax liabilities for the four years on date petitioners filed a petition with this court based on the notice_of_determination the petition was filed as a petition for lien or levy action under sec_6320 or sec_6330 petitioners challenge their liabilities for the years in issue only on the ground that the liabilities were discharged by the bankruptcy court rule a allows a party to move for a summary adjudication in the moving party’s favor upon all or any part of the legal issues in controversy rule b directs that a decision on such a motion shall be rendered if the pleadings answers to interrogatories depositions admissions and any other acceptable materials together with the affidavits if any show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law the moving party bears the burden of demonstrating that no genuine issue of material fact exists and that he or she is entitled to judgment as a matter of law 98_tc_518 affd 17_f3d_965 7th cir facts are viewed in the light most favorable to the nonmoving party id however where a motion for summary_judgment has been properly made and supported by the moving party the opposing party may not rest upon mere allegations or denials contained in that party’s pleadings but must by affidavits or otherwise set forth specific facts showing that there is a genuine issue for trial rule d sec_6321 imposes a lien in favor of the united_states upon all property and rights to property of a taxpayer where there exists a failure to pay any_tax liability after demand for payment the lien generally arises at the time assessment is made sec_6322 the secretary must notify in writing the person described in sec_6321 of the filing of a notice of lien under sec_6323 sec_6320 the notice required by sec_6320 must advise the taxpayer of the opportunity for administrative review of the matter in the form of a hearing before the internal_revenue_service office of appeals sec_6320 and c grant a taxpayer who so requests the right to a fair hearing before an impartial appeals officer generally to be conducted in accordance with the procedures described in sec_6330 sec_6330 addresses the matters to be considered at the hearing as relevant here a taxpayer may challenge the appropriateness of the commissioner’s collection actions and submit offers of collection alternatives sec_6330 and iii the taxpayer may also raise challenges to the existence or amount of the underlying tax_liability if the taxpayer did not receive a statutory_notice_of_deficiency for the liability or did not otherwise have an opportunity to dispute the tax_liability sec_6330 once the appeals officer has issued a determination regarding the disputed collection action the taxpayer may seek judicial review in the tax_court or if the tax_court lacks jurisdiction in the matter in a u s district_court sec_6330 where the validity of the underlying tax_liability is properly at issue the court will review the matter on a de novo basis however where the validity of the underlying tax_liability is not properly at issue the court will review the commissioner’s administrative determination for abuse_of_discretion 114_tc_604 the tax_court has jurisdiction in a lien proceeding instituted under sec_6330 to determine whether a petitioner’s unpaid liabilities were discharged in bankruptcy 120_tc_114 in this case petitioners’ only challenge with respect to the collection notice is a claim that the bankruptcy court had discharged their liabilities the date discharge order generally releases the petitioners from all dischargeable debts a debts dischargeable under u s c section b debts alleged to be excepted from discharge under clauses and of u s c section a and other debts the bankruptcy court further determined to be discharged the supreme court has stated in 535_us_43 that a discharge under the bankruptcy code does not extinguish certain tax_liabilities for which a return was due within years before the filing of an individual debtor’s petition u s c a a a a i or to put it another way an income_tax is a nondischargeable priority claim against the estate if it relates to a tax_return whose due_date including extensions was less than years before the commencement of the bankruptcy case u s c sec_507 as previously noted petitioners filed a bankruptcy petition on date the and tax_liabilities are nondischargeable because they relate to tax returns the due_date of which including extensions was less than years from the date the bankruptcy petition was filed u s c secs a and a a the tax_liability is non- dischargeable because it relates to a tax_return the due_date of which including extensions was for a date after the date on which the bankruptcy petition was filed id the notice_of_determination included findings that all applicable statutory and administrative procedures were met that for the taxes to be discharged the due_date of a return including extensions must be years before the filing of the bankruptcy that the due_date of each of petitioners’ returns for the four years including extensions was less than years before the filing of their bankruptcy petition that petitioners paid the liabilities for and in full but failed to meet the criteria for an offer_in_compromise and that the notice of lien was appropriate petitioners have not raised any other challenges to the appropriateness of the collection action or any collection alternatives a petition for review of a collection action must clearly specify the errors alleged to have been committed in the notice_of_determination any issue not raised in the assignments of error is deemed to be conceded by petitioners rule b 117_tc_183 there was no abuse_of_discretion with respect to the issuance of the notice_of_determination we conclude that the bankruptcy court did not specifically determine that the petitioners’ unpaid federal tax_liabilities were discharged by the bankruptcy proceeding or were dischargeable debts under the bankruptcy code the court has considered the pleadings and other materials in the record and concludes that there is no genuine justiciable issue of material fact regarding the collection matters in this case the court will grant respondent’s motion for summary_judgment except with respect to and for which petitioners satisfied their liabilities in full and which we assume respondent will issue a certificate of release pursuant to sec_6325 reviewed and adopted as the report of the small_tax_case division to reflect to foregoing an appropriate order and decision will be entered


t c summary opinion united_states tax_court lucrezia iona canaday petitioner v commissioner of internal revenue respondent docket no 162-15s l filed date lucrezia iona canaday pro_se elizabeth c mourges for respondent summary opinion gerber judge this case is subject_to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to unless otherwise indicated all section references are to the internal_revenue_code in effect at all relevant times and all rule references are to the tax continued 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 the petition was filed in response to a notice_of_determination concerning collection action s under sec_6320 and or notice_of_determination pursuant to sec_6330 petitioner seeks review of respondent’s determination to proceed with the levy relating to her income_tax_liability this matter is before the court on respondent’s motion for summary_judgment motion pursuant to rule respondent contends that no genuine issue exists as to any material fact and that the determination to collect petitioner’s income_tax_liability by levy should be sustained petitioner has not responded to the motion despite an order from this court instructing her to do so background at the time the petition was filed petitioner resided in maryland on her federal_income_tax return filed date petitioner claimed a first- time homebuyer credit refundable_credit respondent audited the return and on date petitioner filed an amended_return for her tax_year in continued court rules_of_practice and procedure on date the court ordered petitioner to file a response on or before date she did not do so which she did not claim the refundable_credit on the basis of the amended_return respondent issued a notice_and_demand for additional tax in petitioner submitted a request for audit_reconsideration concerning the refundable_credit respondent disallowed petitioner’s request in respondent sent petitioner a letter final notice_of_intent_to_levy and notice of your right to a hearing dated date advising her that respondent intended to levy to collect the unpaid tax_liability interest and penalty and that she could request a hearing with the internal_revenue_service office of appeals appeals petitioner submitted a timely form request for a collection_due_process or equivalent_hearing on date in which she contested the underlying liability on date appeals mailed petitioner a letter acknowledging receipt of her form and scheduling a telephone hearing for date appeals’ letter noted that only payment arrangements would be discussed during the hearing because petitioner’s request for audit_reconsideration constituted a prior opportunity to dispute the underlying liability a telephone hearing was held with respondent’s settlement officer on date as had been scheduled petitioner attempted to dispute the underlying liability during the telephone hearing but was advised that her request for audit_reconsideration had been fully disallowed and that if she was not interested in collection alternatives the settlement officer would have no alternative but to sustain the proposed levy on date appeals issued the notice_of_determination sustaining respondent’s notice_of_intent_to_levy petitioner filed a timely petition with this court requesting review of respondent’s determination discussion summary_judgment is intended to expedite litigation and to avoid unnecessary and expensive trials 61_tc_861 summary_judgment may be granted where the pleadings and other materials show that there is no genuine dispute as to any material fact and that a decision may be rendered as a matter of law rule b see schlosser v commissioner tcmemo_2007_298 tax ct memo lexis at aff’d 287_fedappx_169 3d cir the burden is on the moving party to demonstrate that no genuine dispute as to any material fact remains and that she is entitled to judgment as a matter of law 116_tc_73 in all cases the evidence is viewed in the light most favorable to the nonmoving party 100_tc_32 however the nonmoving party is required to go beyond the pleadings and by her own affidavits or by the ‘depositions answers to interrogatories and admissions on file ’ designate ‘specific facts showing that there is a genuine issue for trial ’ 477_us_317 see also 119_tc_157 115_tc_554 sec_6331 provides that if any person liable to pay any_tax neglects or refuses to pay such tax within days after notice_and_demand for payment then the secretary is authorized to collect such tax by levy upon the person’s property sec_6331 provides that at least days before enforcing collection by way of a levy on the person’s property the secretary is obliged to provide the person with a final notice_of_intent_to_levy including notice of the administrative appeals available to the person if a taxpayer requests a hearing in response to a notice_of_intent_to_levy she may raise at that hearing any relevant issue relating to the unpaid tax or the proposed levy sec_6330 relevant issues include possible alternative means of collection such as an installment_agreement sec_6330 a taxpayer may challenge the underlying liability if the taxpayer did not receive a statutory_notice_of_deficiency or did not otherwise have an opportunity to dispute the liability sec_6330 if the underlying liability is not at issue the court reviews the notice_of_determination to decide whether there was an abuse_of_discretion 414_f3d_144 1st cir 130_tc_44 114_tc_176 the determination of appeals must take into consideration the verification that the requirements of applicable law and administrative procedure have been met issues raised by the taxpayer and whether any proposed collection action balances the need for the efficient collection_of_taxes with the legitimate concern of the person that any collection be no more intrusive than necessary sec_6330 see 117_tc_183 petitioner’s tax_return was audited and in response she filed an amended return in which she did not claim the refundable_credit on the basis of petitioner’s amended_return respondent reversed the refundable_credit and made notice_and_demand on petitioner for payment of the resulting liability petitioner later requested audit_reconsideration for the refundable_credit respondent denied petitioner relief the refundable_credit was not reinstated respondent sought to collect the outstanding tax_liability by levy and petitioner again attempted to raise the merits of the underlying liability for the tax_year presumably the refundable_credit petitioner did not raise any other issue with respect to the proposed collection action because respondent believed that petitioner had had an opportunity to dispute the merits of the underlying tax_liability the settlement officer denied petitioner an opportunity to dispute the liability at the appeals collection hearing although petitioner did contest the merits of the underlying liability before the collection hearing she was not allowed a prior opportunity to contest the liability before appeals in 128_tc_48 n this court considered sec_6330 and noted that we read sec_6330 to allow a taxpayer who has had neither a conference with appeals nor an opportunity for a conference with appeals to raise the underlying liability in a collection review proceeding before appeals and this court petitioner has not had a prior opportunity to challenge her underlying liability within the meaning of sec_6330 and therefore respondent’s motion must be denied we accordingly hold that the determination to proceed with collection was an abuse of the settlement officer’s discretion and remand this proceeding so that petitioner can be afforded the opportunity to contest the merits of her underlying tax_liability to reflect the foregoing an appropriate order will be issued denying respondent’s motion and remanding this matter for consideration of the underlying liability


department of the treasury_department of the treasury internal_revenue_service internal_revenue_service washington d c washington d c date number release date cc dom it a tl-n-8003-97 uilc internal_revenue_service national_office significant service_center advice memorandum for associate district_counsel salt lake city cc wr rmd slc from acting assistant chief_counsel income_tax accounting cc dom it a subject significant service_center advice questions on proper processing of the philippine scheme this responds to your request for significant advice dated date in connection with several questions posed by the the ogden service_center related to processing of certain returns that incorrectly claim refunds of social_security payments pursuant to the u s -philippines tax_treaty issues a number of such returns were placed in a freeze status because of possible criminal investigation and prosecution once the decision has been made not to pursue the matter criminally how should such returns be processed with respect to ongoing processing of returns claiming refunds on this basis do the documents that are filed qualify as returns and may a deficiency be assessed using the math error procedures conclusions the processing of similar returns was discussed in a series of prior service_center advisories the office_of_chief_counsel has recently reconsidered the general question in conjunction with the headquarters criminal investigation function and has reaffirmed the conclusions of those advisories in connection with processing the present temporary backlog of inventory cases for which the assessment limitations_period has expired or will shortly expire should be tl-n-8003-97 processed using claim disallowance procedures as an ongoing matter however such cases should be processed within the assessment limitations_period following deficiency rather than claim disallowance procedures in order to preserve the taxpayer’s option to contest deficiencies in tax_court generally the documents in question appear to satisfy the requirements for a return even though they may be filed on the wrong form or lack a valid taxpayer_identification_number we question whether the situations you have identified constitute mathematical or clerical errors within the meaning of sec_6213 however personnel in the examination function at the ogden service_center have indicated that the volume of these returns is such that they can process them using normal deficiency procedures so there is no need at present to consider whether some of these returns could be processed using math error authority facts although the exact fact patterns vary generally the returns in question involve claims for refund of withholding under sec_871 and sec_1441 on social_security_benefits paid to taxpayers in the philippines such refunds are not allowable under the u s -philippines tax_treaty returns claiming refunds under this scheme originate with return preparers in the philippines some of the preparers who file invalid refund claims use form 1040nr generally such returns are processed at the philadelphia service_center using guidelines in the internal_revenue_manual ogden service_center personnel believe the instructions used by the philadelphia service_center adequately deal with the processing of such claims that are filed on form 1040nr however some of the preparers using this scheme file returns on form_1040 1040a or 1040x and these may be received and processed at other service centers such as ogden in addition as a result of investigations by the criminal_investigation_division at the ogden service_center an inventory of such cases accumulated some of which were approaching or had passed the assessment limitation period expiration date your questions concern returns as to which the criminal_investigation_division has decided it will not pursue criminal prosecution typical of the type of returns still being received and processed at the ogden service_center is a form 1040a that shows the following entries line 13a social_security_benefits 13b taxable_amount 29a total federal_income_tax withheld 29d total_payment sec_30 amount overpaid big_number -0- big_number big_number big_number tl-n-8003-97 amount to be refunded big_number the other lines are blank or contain zeroes thus the only income shown is social_security_benefits and the return is essentially requesting a refund of the tax withheld under sec_1441 some returns are filed without a valid taxpayer_identification_number discussion in a series of advisories this office considered the proper treatment of returns claiming improper refunds that had been collected in connection with possible criminal prosecution see acknowledged significant service_center advice date date date clarifying and superseding sca this office has recently reconsidered the issues raised in these memoranda and has generally confirmed their conclusions in particular with respect to the processing of the temporary current backlog of cases we have advised the director of investigations tax_refund fraud that we do not recommend the issuance of notices of deficiency when because the limitations_period for assessment has expired or will shortly expire the issuance of such notices would not be timely however the service has the authority to refuse to allow a refund_or_credit -- even without assessment -- of any amount collected within the period of limitations on assessment on the grounds that there is no true overpayment as required by sec_6402 see 284_us_281 notices of claim disallowance should be issued in such cases in order to advise the taxpayer of the disallowance and the right to contest the matter in a refund forum and to provide finality by triggering the running of the limitations_period under sec_6532 see sca issue with respect to cases in which the assessment limitations_period is open however while the service has instituted refund holds or freezes in appropriate cases the service has not used the authority of lewis v reynolds to substitute claim disallowance procedures for normal deficiency procedures with respect to refunds or credits claimed on original returns -- since to do so would deprive taxpayers of their right to contest deficiencies in tax_court as an alternative to bringing a suit_for_refund thus even though no refund is made normal assessment procedures -- including the mathematical_or_clerical_error procedures and the issuance of a notice_of_deficiency if necessary -- should be followed see sca issues unlike the situations considered in these previous advisories which involved claims for refund of wage withholding or the earned_income_credit the present cases involve claims for refund of amounts that were withheld pursuant to sec_1441 tl-n-8003-97 however the same conclusions apply as in the case of wage withholding for example a taxpayer whose liability is satisfied by withholding at source under sec_1441 but who files a return asserting a liability of zero still has a deficiency within the meaning of sec_6211 even though the withholding is not refunded this is because a deficiency is generally based on an understatement_of_tax rather than an underpayment_of_tax and as in the case of wage withholding under sec_31 the credit for withholding at source on nonresident_aliens under sec_33 is ignored under sec_6211 in defining a deficiency thus for example a taxpayer who is liable for dollar_figure of tax under sec_871 and who files a return incorrectly reporting no liability and requesting a dollar_figure refund has a deficiency of dollar_figure -- the difference between the correct_tax and the tax_shown_on_the_return -- regardless of whether the dollar_figure sec_33 credit is actually refunded a status as a return generally the commissioner has the authority to require taxpayers to file their returns on the correct form however a document may qualify as a return so long as it meets certain requirements see 321_us_219 309_us_304 293_us_172 in 82_tc_766 aff'd 793_f2d_139 6th cir the court summarized the relevant supreme court case law as follows first there must be sufficient data to calculate tax_liability second the document must purport to be a return third there must be an honest and reasonable attempt to satisfy the requirements of the tax law and fourth the taxpayer must execute the return under penalties of perjury in the present cases neither the fact that the taxpayer filed on a form other than form 1040nr nor the fact that the primary taxpayer_identification_number may be missing or invalid would prevent the document from qualifying as a return under the case law however we agree with your conclusion that the service_center can send correspondence to these taxpayers advising them that the service cannot process the return they filed until they furnish a valid taxpayer_identification_number in these philippines scheme cases the problem is an understatement_of_tax not an overstatement of the withholding credit consequently the service’s authority under sec_6201 to assess overstated prepayment_credits including the credit for amounts withheld at the source without following deficiency procedures is not relevant in some of these situations there may be information indicating that the taxpayer did not sign the return for discussion of this factor see sca issue tl-n-8003-97 b math error procedures given that these cases will normally be handled through assessment following deficiency procedures you have asked whether the expedited math error assessment procedure may be used sec_6213 a generally bars the assessment or collection of a deficiency until after notice_of_deficiency has been mailed to the taxpayer and the taxpayer has had an opportunity to contest the deficiency in tax_court sec_6213 however provides an exception to these restrictions for an assessment of tax on account of a mathematical_or_clerical_error in such a case notice is sent to the taxpayer and the taxpayer may request abatement within days this expedited procedure is only available with respect to the specific mathematical or clerical errors defined in sec_6213 when taxpayer files a form 1040nr form_1040 form 1040a or other document similar to the form described above it may be clear from the face of the return that the taxpayer whose address is in the philippines does not qualify for a refund of 30-percent withholding on the taxpayer's social_security_benefits depending on the particular document in question it may be possible that the taxpayer's error falls within one of the listed types in sec_6213 generally however the error appears to be a substantive one in the nature of an unallowable item -- as a legal matter under the internal_revenue_code and the u s -philippines income_tax treaty the taxpayer simply does not qualify for the refund -- an error that must be corrected through the deficiency procedures rather than a mathematical_or_clerical_error -- an inconsistent entry omitted schedule or other similar mistake -- as to which assessment using the math error procedures is appropriate in a telephone conversation with personnel at the service_center they indicated that the current volume of these returns is such that there is no need at present to consider whether some of these returns could be processed using math error authority if that situation changes we would be happy to reconsider the question if you have any further questions please call sandy irving or catherine prohofsky at acting assistant chief_counsel income_tax accounting by michael d finley chief branch


t c summary opinion united_states tax_court lawrence l cole petitioner v commissioner of internal revenue respondent docket no 10022-13s filed date lawrence l cole pro_se kirsten e brimer for respondent summary opinion carluzzo special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not unless otherwise indicated section references are to the internal revenue continued reviewable by any other court and this opinion shall not be treated as precedent for any other case in a notice_of_deficiency dated date notice respondent determined a deficiency in and imposed an accuracy-related_penalty with respect to petitioner’ sec_2010 federal_income_tax the issues for decision are whether petitioner is entitled to various deductions claimed on schedule c profit or loss from business and liable for a sec_6662 accuracy-related_penalty background some of the facts have been stipulated and are so found at the time the petition was filed petitioner resided in california petitioner worked for united parcel service inc ups from to his wages from that employment totaled dollar_figure during while employed by ups in petitioner formed winning at life international llc winning a single-member limited_liability_company over the years petitioner offered electronic versions of various books for sale through continued code code of as amended in effect for the year in issue rule references are to the tax_court rules_of_practice and procedure the parties proceeded as though petitioner properly elected to treat winning as a sole_proprietorship for federal_income_tax purposes winning but because the schedule c included with petitioner’ sec_2010 federal_income_tax return shows no cost_of_goods_sold we assume that no books were sold by winning during the year in issue by that time winning had become what petitioner described at trial as a membership site we are not sure what that means but during the year in issue petitioner was hired through winning and was compensated for two or three speaking engagements although he claims that he attended and spoke at or events during that year petitioner maintained a separate checking account for winning business checking account he paid winning’s expenses by check from the business checking account and in cash petitioner hired castle bookkeeping services bookkeeping service to compile monthly profit and loss statements as well as a yearly profit and loss statement for winning using entries on the periodic statements from the business checking account with respect to the expenses reported on the profit and loss statements the bookkeeping service organized winning’s expenses according to various categories and to the extent the bookkeeping service was unsure as to how to categorize an expenditure it relied on petitioner’s explanation for the expense the profit and loss statements show whether the expense was paid_by check from the business checking account or in cash and the date the payee the category of the expense and the amount_paid but they show no additional information as to the business_purpose of the expense in preparation for trial petitioner prepared a schedule of winning’s expenses on which he included the date the payee the category of the expense the amount_paid and the business_purpose for each expense petitioner’ sec_2010 federal_income_tax return was prepared by a certified_public_accountant cpa and filed on date income and deductions attributable to winning are reported on a schedule c attached to that return and are based on the yearly profit and loss statement provided to the cpa by the bookkeeping service the schedule c for winning shows dollar_figure of gross_receipts and the following deductions expense legal and professional services dollar_figure office big_number travel big_number meals and entertainment other big_number petitioner’s return does not identify what specific expenses are included in the deduction for other expenses in the notice and as relevant respondent disallowed the deductions for legal and professional services travel meals and entertainment and other see supra note expenses and imposed a sec_6662 accuracy-related_penalty on several grounds including negligence or disregard of rules or regulations and a substantial_understatement_of_income_tax according to the notice respondent disallowed the deductions claimed on the schedule c because petitioner did not establish that the business_expense shown on his tax_return was paid_or_incurred during the taxable_year and that the expense was ordinary and necessary to his business other adjustments made in the notice are computational and need not be addressed i schedule c business_expenses discussion as we have observed in countless opinions deductions are a matter of legislative grace and the taxpayer bears the burden of proving entitlement to any claimed deduction rule a 503_us_79 292_us_435 a taxpayer claiming a deduction on a federal_income_tax return must demonstrate that the deduction is allowable pursuant to some statutory provision and must further substantiate that the expense to which the deduction relates has been paid petitioner does not claim that the provisions of sec_7491 apply here and we proceed as though they do not or incurred sec_6001 65_tc_87 aff’d per curiam 540_f2d_821 5th cir 43_tc_824 sec_1_6001-1 income_tax regs taxpayers may deduct ordinary and necessary expenses paid in connection with operating a trade_or_business sec_162 122_tc_305 to be ordinary the expense must be of a common or frequent occurrence in the type of business involved 308_us_488 to be necessary an expense must be appropriate and helpful to the taxpayer’s business 290_us_111 the expenditure must be directly connected with or pertaining to the taxpayer’s trade_or_business sec_1_162-1 income_tax regs on the other hand sec_262 generally disallows a deduction for personal living or family_expenses as a general_rule if a taxpayer provides sufficient evidence that the taxpayer has incurred a trade_or_business expense contemplated by sec_162 but is unable to adequately substantiate the amount the court may estimate the amount and allow a deduction to that extent 39_f2d_540 2d cir however in order for the court to estimate the amount of an expense there must be some basis upon which an estimate may be made 85_tc_731 otherwise any allowance would amount to unguided largesse 245_f2d_559 5th cir deductions for expenses attributable to travel including meals_and_lodging while away from home entertainment gifts and the use of listed_property as defined in sec_280f and including passenger automobiles and for the year in issue cellular telephones if otherwise allowable are subject_to strict rules of substantiation see sec_274 50_tc_823 aff’d per curiam 412_f2d_201 2d cir sec_1_274-5t temporary income_tax regs fed reg date with respect to deductions for these types of expenses sec_274 requires that the taxpayer substantiate either by adequate_records or by sufficient evidence corroborating the taxpayer’s own statement the amount of the expense the time and place the expense was incurred the business_purpose of the expense and in the case of an entertainment or gift expense the business relationship to the taxpayer of each expense incurred for listed_property expenses the taxpayer must establish the amount of business use and the amount of total use for such property see sec_1_274-5t temporary income_tax regs fed reg date substantiation by adequate_records requires the taxpayer to maintain an account book a diary a log a statement of expense trip sheets or a similar record prepared contemporaneously with the expenditure and documentary_evidence eg receipts or bills of certain expenditures sec_1_274-5 income_tax regs sec_1_274-5t temporary income_tax regs fed reg date substantiation by other_sufficient_evidence requires the production of corroborative evidence in support of the taxpayer’s statement specifically detailing the required elements sec_1_274-5t temporary income_tax regs fed reg date with these fundamental principles of federal income_taxation in mind we consider petitioner’s claims to the various deductions here in dispute a legal and professional expenses petitioner claimed a dollar_figure deduction for legal and professional fees on the schedule c for winning according to petitioner that amount represents expenses paid for web design and graphic design for winning according to respondent petitioner has not established that the expenses were paid or shown that these expenses were ordinary and necessary to petitioner’s public speaking business petitioner offered printouts of his web site as proof of the design expenses furthermore petitioner provided the yearly profit and loss statement and the schedule of expenses to substantiate the amount he expended on web design and graphic design under the circumstances we find that the costs of web design and graphic design were ordinary and necessary business_expenses see sec_162 after a careful review of the evidence and as best we can estimate from what has been submitted we find that petitioner is entitled to a dollar_figure deduction for legal and professional fees see cohan v commissioner f 2d pincite b travel_expenses petitioner claimed a dollar_figure deduction for travel_expenses on the schedule c for winning according to petitioner that amount represents expenses paid for traveling to conferences including airfare buses taxis and hotels as well as the cost of meals he incurred while traveling according to respondent petitioner has not established that the travel_expenses were paid or shown that they were ordinary and necessary to his public speaking business travel_expenses including meals_and_lodging while away from home if otherwise allowable are subject_to strict rules of substantiation see sec_274 petitioner acknowledges that dollar_figure of the travel_expenses was for meals he incurred while traveling sanford v commissioner t c pincite sec_1_274-5t temporary income_tax regs supra petitioner has not provided adequate substantiation to establish that he paid the travel_expenses see sec_274 sec_6001 sec_1_274-5 income_tax regs the yearly profit and loss statement the schedule of expenses and petitioner’s testimony regarding the travel_expenses in the absence of any substantiating documents such as receipts or business checking account records showing that the travel_expenses were paid are not sufficient to corroborate the expenses reported on those documents because petitioner has not satisfied the substantiation requirements of sec_274 we sustain respondent’s disallowance of the travel expense deductions he claimed c meals and entertainment_expenses petitioner claimed a dollar_figure deduction for meals and entertainment_expenses on the schedule c for winning according to petitioner the expenses he incurred for meals relate predominantly to meals he purchased while he was attending conferences according to respondent petitioner has not established that the meals expenses were paid or shown that these expenses were ordinary and necessary to petitioner’s public speaking business as noted above and as with travel_expenses expenses for meals and entertainment are also subject_to strict rules of substantiation see sec_274 sanford v commissioner t c pincite sec_1_274-5t temporary income_tax regs supra petitioner has not provided adequate substantiation to establish that he paid the meals expenses see sec_274 sec_6001 sec_1_274-5 income_tax regs the yearly profit and loss statement the schedule of expenses and petitioner’s testimony regarding the meals expenses in the absence of any substantiating documents such as receipts or business checking account records showing that the meals expenses were paid are not sufficient to corroborate the expenses reported on those documents moreover petitioner’s records with respect to the meals and entertainment_expenses appear to be internally contradictory and unreliable for those reasons we sustain respondent’s disallowance of the meals and entertainment_expense_deduction he claimed d other expenses petitioner’s return does not identify what specific expenses are included in the deduction for other expenses as best we can tell from the record the deduction for other expenses includes dollar_figure for accounting fees dollar_figure for automobile expenses dollar_figure for bank service charges dollar_figure for business meals not included in his travel or meals and entertainment_expenses dollar_figure for client development dollar_figure for computer and internet expenses dollar_figure for credit card fees dollar_figure for donations dollar_figure for dues and subscriptions dollar_figure for marketing dollar_figure for networking dollar_figure for outside services dollar_figure for postage and delivery dollar_figure for printing dollar_figure for professional development dollar_figure for telephone expenses and dollar_figure for training according to petitioner the other expenses represent expenses paid for ordinary and necessary business_expenses for winning according to respondent petitioner has not established that the expenses were paid or shown that these expenses were ordinary and necessary to petitioner’s public speaking business expenses subject_to sec_274 expenses for meals and entertainment and passenger automobiles are subject_to strict rules of substantiation see sec_274 sanford v commissioner t c pincite sec_1_274-5t temporary income_tax regs supra petitioner we consider all of the expenses reported on the yearly profit and loss statement other than those for legal and professional services office travel and meals and entertainment to fall into the category of other expenses consequently the yearly profit and loss statement shows other expenses of dollar_figure which we note exceeds the dollar_figure deduction for other expenses reported on the schedule c failed to substantiate expenses for automobiles and business meals in accordance with the strict rules of substantiation under sec_274 accordingly we sustain respondent’s disallowance of the other expenses to the extent it relates to the dollar_figure and dollar_figure deductions claimed for business meals and automobile expenses respectively expenses not subject_to sec_274 upon a review of the record we find that petitioner failed to establish that the following expenses were ordinary and necessary client development expenses related to attending a broadway musical with his speech coach and balloons and flowers for a client a donation to the leap foundation dues and subscriptions expenses related at least in part to petitioner’s gym membership networking expenses related largely to workout snacks for winning at life llc principal member to maintain a healthy and fit image from the stage and in print professional development expenses related to clothing purchases for a suit blazer and suit accessories and telephone expenses see sec_262 see also 30_tc_757 we further find that the following were ordinary and necessary business_expenses of winning accounting fees related to the bookkeeping service bank service charges for the business checking account computer and internet expenses related to winning’s web site and email address credit card fees marketing outside services related to consulting services provided to winning for videography and video editing postage and delivery printing and training see sec_162 after a careful review of the evidence and as best we can estimate from what has been submitted we find that petitioner is entitled to an dollar_figure deduction for these expenses see cohan v commissioner f 2d pincite ii sec_6662 accuracy-related_penalty lastly we consider whether petitioner is liable for a sec_6662 accuracy-related_penalty as relevant here sec_6662 imposes a penalty of of the portion of an underpayment_of_tax attributable to the taxpayer’s negligence or disregard of rules or regulations or substantial_understatement_of_income_tax sec_6662 and b and negligence includes any failure to make a reasonable attempt to comply with the provisions of the code including any failure to keep adequate books_and_records or to substantiate items properly see sec_6662 sec_1_6662-3 income_tax regs a substantial_understatement_of_income_tax includes an understatement of in this case the deficiency underpayment_of_tax and understatement_of_tax are all computed in the same manner see sec_6211 sec_6662 sec_6664 income_tax that exceeds the greater of of the tax required to be shown on the return or dollar_figure see sec_6662 sec_1_6662-4 income_tax regs respondent bears the burden of production with respect to the imposition of the sec_6662 accuracy-related_penalty see sec_7491 116_tc_438 petitioner failed to maintain adequate substantiating records for expenses underlying the deductions claimed on hi sec_2010 return that are subject_to the strict substantiation requirements of sec_274 as a result we find that respondent met his burden of production with respect to the negligence_penalty relating to the portion of the underpayment that is due to the disallowance of deductions for those expenses otherwise to the extent that the deficiency and correspondingly the underpayment and understatement of income_tax required to be shown on petitioner’ sec_2010 return exceeds dollar_figure we find that respondent has also met his burden of production with respect to the imposition of a sec_6662 accuracy-related_penalty the accuracy-related_penalty does not apply to any part of an underpayment_of_tax if it is shown that the taxpayer acted with reasonable_cause and in good_faith with respect to that portion sec_6664 the determination of whether a taxpayer acted 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 petitioner bears the burden of proving that he had reasonable_cause and acted in good_faith with respect to the underpayment see higbee v commissioner t c pincite reliance on professional advice will absolve the taxpayer if such reliance was reasonable and the taxpayer acted in good_faith sec_1_6664-4 income_tax regs under certain circumstances a taxpayer’s reliance upon professional advice may establish the taxpayer’s reasonable_cause and good_faith with respect to an underpayment_of_tax if the taxpayer establishes that the professional was provided with complete and accurate information an incorrect return was a result of the preparer’s mistakes and the taxpayer demonstrates good-faith reliance on a competent professional see 112_tc_317 aff’d without published opinion sub nom schutter v commissioner 242_f3d_390 10th cir see also 115_tc_43 aff’d 299_f3d_221 3d cir although his return was prepared by a paid income_tax_return_preparer the cpa prepared petitioner’s return using the yearly profit and loss statement provided to the cpa by the bookkeeping service apparently none of the source documents underlying the deductions such as the business checking account records were provided to the cpa because petitioner did not furnish to the cpa complete and accurate information he failed to establish that his reliance upon the cpa constitutes reasonable_cause and good_faith with respect to an underpayment_of_tax moreover petitioner has failed to explain his failure to substantiate the expenses underlying the disallowed schedule c deductions accordingly petitioner is liable for a sec_6662 accuracy-related_penalty on the amount of the redetermined deficiency to the extent that respondent has met his burden of production as discussed above to reflect the foregoing decision will be entered under rule


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-149878-09 date date legend us parent -------------------------------------------------------------------- ---------------------------------------------------------- ---------------------------------------- foreign parent foreign parent ------------------- -------------------------------- sub -------------------------------------------------------------------- -------------------------------------------- country a date a date b date c year note --------------------- -------------------------- ------------------- -------------------------- ------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- ------------------------------------ plr-149878-09 note credit facility r s t u v --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- ---------------------------------------------------------------------- -------------- ----- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- ---------------------------------------------------------------------- ---- ----- dear -------------- this letter responds to your date request for a ruling on behalf of us parent the information submitted for consideration is summarized below 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 summary of facts us parent is the common parent of an affiliated_group_of_corporations that files a consolidated united_states u s federal_income_tax return the us parent group on the basis of a calendar taxable_year using the accrual_method of accounting us parent is a wholly owned subsidiary of foreign parent a country a corporation foreign parent is a wholly owned subsidiary of foreign parent a publicly traded country a corporation foreign parent and foreign parent do not directly conduct any trade_or_business within the u s and do not file a u s federal_income_tax return prior to date a us parent was indebted to foreign parent in the amount of r dollars a significant portion of which was incurred to fund operations of a wholly owned us parent subsidiary sub on date a us parent transferred all of its sub stock to plr-149878-09 foreign parent in exchange for cash the payment of which was effectuated by the cancellation of us parent indebtedness to foreign parent the sub acquisition us parent’s remaining indebtedness to foreign parent included note and credit facility collectively the debt and note on date b foreign parent cancelled the debt in order to improve the financial position of us parent for country a tax purposes the debt was cancelled by foreign parent in exchange for s shares of us parent stock the shares the fair_market_value of which was intended to be approximately equal to the fair_market_value of the debt the transaction rescission transaction us parent intends to enter into an agreement the rescission agreement with foreign parent with respect to the transaction upon consummation the rescission pursuant to the rescission agreement on or before date c which is the last day of the taxable_year for us parent that includes the transaction i the cancellation of the debt as part of the transaction will be void ab initio and interest or other_payments will be paid accordingly and ii the shares will be cancelled following the rescission a the principal_amount of us parent’s indebtedness to foreign parent will be the same as it was immediately prior to the transaction and the amount of interest or other_payments payable and paid to foreign parent with respect to the debt will be the same as it would have been if the transaction had not occurred subsequent debt_cancellation following the rescission us parent intends to enter into an agreement with foreign parent pursuant to which i solely for country a tax reasons foreign parent will purchase a share of us parent the single share in exchange for cancellation of an amount of note and or note intended to be equal to the fair_market_value of the single share ii foreign parent will cancel t amount of debt under note and or note as a capital_contribution to us parent and iii the single share issued solely for country a tax reasons will be cancelled within u days of its issuance upon consummation the subsequent debt_cancellation the cancelled debt of which is the contribution debt representations a b at all times relevant hereto us parent has had and will have only one class of stock consisting of identical shares of common_stock aside from accounts_payable incurred in the ordinary course of business all of us parent’s material indebtedness is owed to foreign parent plr-149878-09 c d e f g h i j k l m the debt and the contribution debt qualify as debt for u s federal_income_tax purposes and have been and will be treated by foreign parent and us parent as debt of us parent for all u s federal_income_tax purposes the contribution debt relates to principal amounts and not accrued interest the contribution debt will have a positive fair_market_value at the time it is contributed to the capital of us parent prior to the transaction us parent had v shares of common_stock outstanding at all times relevant hereto all of these shares were owned by foreign parent the rescission will occur in the taxable years of us parent and foreign parent that include the transaction the intent and effect of the rescission is to restore in all material respects the legal and financial arrangements with respect to the debt and shares that would have existed had the transaction never occurred during year us parent will not pay or declare any actual or constructive dividends or make any other distributions with respect to any of its stock during the period beginning on the date the shares were issued and ending on the date of the rescission the issuance of the shares to foreign parent will have had no legal or material economic consequences to foreign parent or us parent neither us parent nor foreign parent is or will be bound by any legal_obligation regarding the subsequent debt_cancellation at or before the effective time of the rescission us parent and foreign parent will not effect the subsequent debt_cancellation at any time when us parent is insolvent within the meaning of sec_108 neither us parent foreign parent nor us parent group has taken or will take any material position for u s federal tax purposes that is inconsistent with the rescission rulings based solely on the facts submitted the representations made and the parties' restoration by date c of the relative positions they would have occupied if the transaction had not been consummated we rule as follows for u s federal_income_tax purposes the cancellation of the debt and issuance of the shares pursuant to the transaction shall be disregarded for u s federal_income_tax purposes rev_rul c b us parent’s transitory single share will be disregarded for u s federal_income_tax purposes us parent will be treated as having satisfied the contribution debt with an amount of money equal to foreign parent's adjusted_basis in the contribution plr-149878-09 debt for purposes of determining income of us parent from discharge_of_indebtedness sec_108 caveats except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed nor was any opinion requested regarding the u s federal_income_tax consequences relating to the sub acquisition procedural matters this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling sincerely alfred c bishop jr branch chief branch cc