renald eichler petitioner v commissioner of internal revenue respondent docket no 725-12l filed date after r assessed trust fund recovery penalties against him p requested a partial pay installment_agreement before p’s request had been input into the irs computer system or acted upon r sent p letters cp final notice-notice of intent to levy and notice of your right to a hearing p timely requested a collection_due_process cdp hearing renewing his request for an installment_agreement and asserting that the letters cp should be withdrawn as invalid pursuant eichler v commissioner to sec_6331 which prohibits the irs from making a levy while an offer for an installment_agreement is pending during the cdp hearing r’s settlement officer conditioned acceptance of an installment_agreement on p’s making an dollar_figure downpayment p declined this proposal as resulting in economic hardship r’s final_determination sustained the pro- posed levy on the ground that p had declined r’s proposed installment_agreement it rejected p’s request that the letters cp be withdrawn as invalid held sec_6331 did not preclude r from issuing the letters cp after p sub- mitted his offer for an installment_agreement held further r’s determination not to rescind the letters cp was not an abuse_of_discretion under relevant provisions of the internal_revenue_manual held further because the record does not allow for meaningful review of r’s determination regarding the appropriateness of the dollar_figure downpayment as a condition of an installment_agreement this case will be remanded for further proceedings mark harrington westlake for petitioner john r bampfield for respondent opinion thornton chief_judge petitioner seeks review pursuant to sec_6330 of respondent’s determination sustaining a proposed levy this case is before us on the parties’ cross- motions for summary_judgment background the record reveals or the parties do not dispute the fol- lowing when he filed his petition petitioner lived in tennessee on date respondent assessed against him these sec_6672 trust fund recovery penalties dollar_figure for the fourth quarter of dollar_figure for the first quarter of and dollar_figure for the second quarter of by letter dated date petitioner’s representative mark harrington westlake sent to the internal revenue service’s irs service_center in atlanta georgia a letter requesting among other things a partial payment install- 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_court rules_of_practice and procedure all monetary amounts are rounded to the nearest dollar united_states tax_court reports ment agreement of dollar_figure per month for the three quarters previously mentioned as well as the fourth quarter of this letter was accompanied by a completed and signed form 433-a collection information statement for wage earners and self-employed individuals and supporting financial documentation on date respondent received petitioner’s request pursuant to internal_revenue_manual irm pt date the irs collection_division is required to input certain codes- tc ac for install- ment agreement requests not immediately approved and tc ac for requests immediately approved-into the irs computer system within hours of receiving an install- ment agreement request if it meets certain requirements although petitioner’s request met these requirements the irs collection_division failed to input any code until date when the tc ac code was input in the meantime on date respondent had sent to petitioner three letters cp final notice-notice of intent to levy and notice of your right to a hearing notices of intent to levy with respect to petitioner’s unpaid trust fund recovery penalties for the last quarter of and first two quarters of on date the irs service_center in atlanta georgia sent petitioner a letter in response to the install- ment agreement request stating we have not resolved this matter because we haven’t completed all the processing necessary for a complete response however we will contact you again within days with our reply you don’t need to do anything further now on this matter we’ve delayed sending you further notices while we research this matter if you receive or have received additional notices please contact us the record does not show why petitioner’s date letter took days to reach respondent the notices of intent to levy referenced publication the irs col- lection process publication explains among other things that the irs is prohibited from levying against a taxpayer’s property while an install- ment agreement request is being considered eichler v commissioner this date letter erroneously stated that it was in reference to petitioner’s federal_income_tax rather than the trust fund recovery penalties at issue in this case on date the office of appeals appeals received a timely form request for a collection_due_process or equivalent_hearing from petitioner indicating the fol- lowing reason for his request i previously submitted form 433-a with supporting documentation and a request for an installment_agreement copy attached the final notice cp was issued prematurely i request that the final notice be withdrawn and that the installment_payment agreement i requested be implemented in the alternative i request an in person hearing in nashville tn by cover letter accompanying the form petitioner asserted that the notices of intent to levy should be with- drawn pursuant to sec_6331 and irm pt date on date an irs settlement officer suzanne magee so magee notified petitioner that she was in receipt of his request for an appeals hearing and that she had scheduled an in-person conference for date on date mr westlake sent so magee a letter asserting that petitioner’s installment_agreement request had been submitted and was pending when the notices of intent to levy had been issued mr westlake requested that the notices be rescinded he also stated please note that since the prior form 433-a was submitted the tax- payers have become obligated for two additional court ordered payments on judgments moreover they continue to receive dunning notices from many of the unsecured creditors shown on the exhibit to the form 433-a i am hopeful that my correspondence to those creditors will per- suade them that filing further lawsuits will be futile dr renald eichler i sec_76 years of age and dr priscilla eichler i sec_71 years of age they have lived in their home since the current indebtedness against the home ie dollar_figure was incurred in an effort to prop up the non-profit educational corporation for which both of them worked those efforts were unsuccessful the non-profit corporation itself lost its assets in foreclosure i believe that it may have attempted a reorganization before it closed we had originally requested a partial payment installment_agreement in the amount of dollar_figure per month however the taxpayers’ financial situa- united_states tax_court reports tion has deteriorated and accordingly we are now requesting that the accounts be designated currently not collectible mr westlake also submitted with the letter a completed form 433-a and supporting financial documentation the form 433-a reflected total gross monthly income of dollar_figure of which dollar_figure was attributable to petitioner and dollar_figure was attributable to his wife the form 433-a reported monthly expenses of dollar_figure including the following expense food clothing misc housing and utilities vehicle operating costs health insurance-humana out-of-pocket healthcare costs court-ordered payments taxes income and fica amount dollar_figure big_number the form 433-a also reported debts of approximately dollar_figure on credit cards and store accounts and judgments on date so magee conducted an in-person con- ference with petitioner petitioner’s wife and mr westlake at the hearing mr westlake once again argued that the notices of intent to levy had been issued prematurely because petitioner had submitted an installment_agreement offer that was pending when the notices were issued so magee deter- mined that the issuance of the notices of intent to levy was not premature and that these notices should not be rescinded after discussing potential collection alternatives so magee requested additional supporting documentation on date petitioner provided the requested supporting documentation to so magee by cover letter mr westlake renewed his objection that the notices of intent to levy had been issued prematurely and that they should be rescinded he also requested a dollar_figure-per-month installment_agreement as a collection alternative to the proposed levy on date after reviewing petitioner’s docu- mentation so magee phoned mr westlake and left him a voicemail message requesting certain bank statements to substantiate some of petitioner’s expenses and indicating that the notices of intent to levy would not be rescinded petitioner’s wife is not a party to this proceeding eichler v commissioner on date mr westlake provided the requested bank statements to so magee a joint bank account peti- tioner shared with his wife showed a balance of dollar_figure as of date mr westlake again renewed his request for a dollar_figure-per-month installment_agreement and rescission of the notices of intent to levy so magee reviewed petitioner’s form 433-a and sup- porting financial documentation she concluded that an appropriate collection alternative would be an installment_agreement of dollar_figure per month for one year increasing to dollar_figure per month in date provided that petitioner also submitted with his installment_agreement a downpayment of dollar_figure on date so magee called mr westlake to confirm receipt of the additional financial documentation she also communicated to mr westlake her proposed install- ment agreement collection alternative to the proposed levy by letter dated date mr westlake agreed to so magee’s proposal that petitioner pay dollar_figure per month increasing to dollar_figure per month in date he dis- agreed however that petitioner should be required to make an dollar_figure downpayment stating please refer to my prior correspondence explaining that dollar_figure had originally been borrowed from family members i have since confirmed that the funds were loaned to mrs eichler by her sister repay- ment of that loan would fully deplete the savings account he also indicated that if so magee was unable or unwilling to accept the proposed dollar_figure per month installment_agreement with an automatic twelve month increase but without the initial dollar_figure payment and with the rescission of the notices of intent to levy please issue your final determina- tion on date appeals issued to petitioner a notice_of_determination concerning collection action s under sec- tion and or notice in the notice appeals sus- tained the proposed levy the notice stated that under cur- rent procedures the notice_of_intent_to_levy is deemed valid and will not be rescinded even when there is a pending installment_agreement the notice also stated based on the financial information provided during the hearing process appeals determined the appropriate collection resolution to be an installment_agreement with down payment of dollar_figure united_states tax_court reports then dollar_figure per month for months to increase to dollar_figure per month thereafter the down payment is your percentage share of a joint savings account with your wife a summary_judgment standard discussion summary_judgment is intended to expedite litigation and avoid unnecessary and expensive trials fla peach corp v commissioner 90_tc_678 summary_judgment may be granted where there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law rule b the moving party bears the burden of showing that there is no genuine dispute as to any material fact and factual inferences will be read in a manner most favorable to the party opposing summary_judgment see id 98_tc_518 aff ’d 17_f3d_965 7th cir b statutory framework 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 that person’s property sec_6330 requires the secretary to send writ- ten notice to the person of that person’s right to request an appeals hearing before a levy is made if an appeals hearing is requested the appeals officer must at the hearing verify that the requirements of any applicable law or administra- tive procedure have been met sec_6330 c sec_6330 prescribes the matters that a person may raise at the appeals hearing including spousal defenses challenges to the appropriateness of the commissioner’s intended collec- tion action and possible alternative means of collection including offers-in-compromise oic and installment agree- ments the existence or amount of the underlying tax_liability may also be contested but only if the person did not receive a notice_of_deficiency or did not otherwise have an opportunity to dispute the tax_liability sec_6330 see also 114_tc_604 eichler v commissioner c standard of review petitioner has not challenged his underlying tax_liabilities we review respondent’s determination for abuse_of_discretion asking whether it was arbitrary capricious or without sound basis in fact or law see eg 125_tc_301 aff ’d 469_f3d_27 1st cir sego v commissioner t c pincite d whether respondent’s determination not to rescind the notices of intent to levy was an abuse_of_discretion petitioner argues that respondent abused his discretion in refusing to rescind the notices of intent to levy he argues that sec_6331 precludes the irs from issuing a notice_of_intent_to_levy while an installment_agreement offer is pending although sec_6331 grants the secretary authority to levy upon a taxpayer’s property or rights to property various subsections of sec_6331 prohibit the secretary from lev- ying under certain circumstances see sec_6331 g i j k sec_6331 provides installment agreements -no levy may be made under sub- section a on the property or rights to property of any person with respect to any unpaid tax- a during the period that an offer by such person for an installment_agreement under sec_6159 for payment of such unpaid tax is pending with the secretary and b if such offer is rejected by the secretary during the days thereafter and if an appeal of such rejection is filed within such days during the period that such appeal is pending by its terms this statute bars the irs while a taxpayer’s offer for an agreement request is pending from making a levy it does not bar the irs from issuing notices of intent to levy accord united_states v austin no 09-10405-rwz the notice_of_determination does not expressly reflect any determina- tion as to whether petitioner’s installment_agreement offer was in fact pending when the irs issued the notices of intent to levy rather the notice_of_determination proceeds upon the premise that a notice_of_intent_to_levy is valid and will not be rescinded even when there is a pending installment_agreement in this proceeding respondent argues for the first time that the installment_agreement was not pending when the notices of intent were issued in support of this argument respondent points to the date letter from the irs service_center in atlanta which stated continued united_states tax_court reports wl at n d mass date aff ’d 526_fedappx_2 1st cir politte v united_states no 07cv1950 jls cab wl at s d cal date see also 411_f3d_621 6th cir holding that sec_6331 and j which provides similarly to sec_6331 that no levy may be made before the irs has taken certain actions do not bar the irs from issuing notices of intent to levy before taking these actions 325_fsupp2d_1064 c d cal same the regulations expressly provide that while levy is prohibited t he irs may take actions other than levy to protect the interests of the government sec_301 b proced admin regs a notice_of_intent_to_levy is an action other than a levy to protect the interests of the government unlike a levy it is merely preliminary to a collection action rather than a collection action barred by sec_6331 see politte wl at that we haven’t completed all the processing necessary for a complete re- sponse it is unclear from the record to what extent this delay in proc- essing petitioner’s installment_agreement offer was attributable to the irs’ failure to input the offer into its computer system until date in any event because we decide the issue of the effect of sec_6331 in respondent’s favor even if we assume as apparently did appeals that peti- tioner’s offer was pending when the irs issued the notices of intent to levy it is unnecessary to consider respondent’s argument raised for the first time in this proceeding cf antioco v commissioner tcmemo_2013_35 declining to uphold a notice_of_determination on grounds other than those relied upon in the notice citing 332_us_194 and 318_us_80 jones v com- missioner tcmemo_2012_274 same salahuddin v commissioner tcmemo_2012_141 same we are mindful that in tucker v commissioner tcmemo_2011_67 upholding appeals’ rejection of an oic aff ’d 676_f3d_1129 d c cir in the background section of the opinion a footnote indicated that the irs had withdrawn a notice_of_intent_to_levy that it had issued after the taxpayer had submitted an oic by way of explanation the footnote stated sec_6331 provides for a restraint on levy while an oic is pending and the issuance of the notice_of_levy violated that restriction id slip op pincite n this dictum however did not represent a holding or a predicate to any holding in tucker as made explicit in the same foot- note the issuance of that first levy notice and its subsequent with- drawal was not part of the cdp hearing or determination and is not part of the cdp appeal at issue here id accordingly the dictum in tucker concerning sec_6331 does not control this case eichler v commissioner accordingly under the regulations consistent with the plain language of the statute the irs was not prohibited from issuing the notices of intent to levy after petitioner submitted his offer for an installment_agreement petitioner also argues that respondent should have rescinded the notices of intent to levy pursuant to irm pt and irm pt in the first instance we observe that provisions of the irm do not carry the force and effect of law or confer rights on taxpayers see e g 447_f3d_706 9th cir aff ’g tcmemo_2004_13 in any event we conclude that respondent did not abuse his discretion in applying these provisions irm pt appears in the part of the irm that provides information and guidance to revenue officers in the collection process it directs the irs collection_division to rescind notices of intent to levy in certain circumstances one of which is when a notice_of_intent_to_levy is issued while levy action is prohibited and the taxpayer timely requests an appeals hearing by contrast irm pt date states that appeals should not rescind a notice_of_intent_to_levy that was issued during the pendency of an installment_agreement even where levy is prohibited peti- tioner argues that these two provisions are inconsistent and that we should treat irm pt as controlling we disagree the irm is not necessarily inconsistent in directing the collection_division and appeals to take different actions so magee did not abuse her discretion in following the irm provisions directed to and applicable to appeals of which she was a part in sum we hold that respondent did not abuse his discre- tion in declining to rescind the notices of intent to levy e respondent’s determination requiring petitioner to make an dollar_figure downpayment as a condition of his install- ment agreement petitioner also argues that respondent abused his discre- tion in determining that petitioner should make an dollar_figure downpayment as a condition of his installment_agreement petitioner does not take issue with so magee’s determination requiring installment payments of dollar_figure per month for one year followed by payments continued united_states tax_court reports petitioner argues that having to make the dollar_figure down pay- ment would cause economic hardship for him and his wife sec_6159 authorizes the secretary to enter into an installment_agreement upon determining that the proposed installment_agreement would facilitate full or partial collec- tion of the tax_liability recognizing that the secretary has the discretion to accept or reject any proposed installment_agreement see sec_301_6159-1 proced admin regs the court gives due deference to the secretary’s deter- mination see marascalco v commissioner tcmemo_2010_130 aff ’d 420_fedappx_423 5th cir the irm describes procedures the irs uses in determining whether a proposed installment_agreement facilitates the collection of an unpaid tax_liability these procedures require taxpayers to liquidate assets in order to qualify for an installment_agreement in the absence of special cir- cumstances such as old age ill health or economic hardship see irm pt and date during petitioner’s appeals hearing mr westlake asserted repeatedly that petitioner and his wife were elderly and had limited financial resources and that making the dollar_figure down- payment would pose an undue economic hardship for them additionally mr westlake asserted that the funds in the joint bank account did not actually belong to petitioner we find no indication in the record that so magee expressly considered these issues because the record does not allow for meaningful review in this regard and there is a genuine dispute of material fact we will deny the parties’ cross-motions for summary judg- ment and remand this case for appeals to clarify the basis for so magee’s determination with regard to the appropriate- ness of requiring the disputed downpayment in the light of the concerns petitioner raised see 131_tc_197 upon remand appeals shall consider any new collection alternative that petitioner may wish to propose taking into account any changed cir- cumstances and other_relevant_factors of dollar_figure per month thereafter eichler v commissioner to reflect the foregoing an appropriate order will be issued f


t c summary opinion united_states tax_court ronald michael and lorraine elizabeth skalko petitioners v commissioner of internal revenue respondent docket no 10958-05s filed date ronald michael and lorraine elizabeth skalko pro_se brenda fitzgerald for respondent wells 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 1unless otherwise indicated all rule references are to the tax_court rules_of_practice and procedure and all subsequent section references are to the internal_revenue_code as in effect for the years in issue decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case respondent determined deficiencies in petitioners’ income taxes and penalties as follows penalty year deficiency dollar_figure sec_6662 dollar_figure big_number dollar_figure big_number dollar_figure the issues we must decide are whether petitioners are liable for deficiencies in taxable_year sec_2001 sec_2002 and where the deficiencies arose in part from deductions petitioners claimed on schedule c profit or loss from business whether petitioners properly reported the gross_receipts of their businesses whether petitioners may claim a dependency_exemption deduction for their daughter for whether petitioners properly reported an early distribution from a qualified_pension or retirement_plan and whether petitioners are liable for sec_6662 accuracy-related_penalties for negligent failure to accurately report income or for substantial understatements of income_tax background some 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 petitioners resided in georgia during and petitioner ronald skalko petitioner operated two businesses as sole proprietorships the first business was a party equipment rental and bartending service conducted under the name pourmasters the second business was a newspaper delivery service newspaper delivery for part of the year mr skalko also worked full time as a seasonal employee of the internal_revenue_service car and truck expenses petitioner did not maintain contemporaneous mileage logs for car and truck expenses for pourmasters and newspaper delivery petitioner provided a noncontemporaneous log for pourmasters and newspaper delivery for on schedule c for pourmasters petitioners claimed car and truck expense deductions of dollar_figure for dollar_figure for and dollar_figure for of which respondent allowed in the notice_of_deficiency the following dollar_figure for dollar_figure for and dollar_figure for on schedule c for newspaper delivery petitioners claimed car and truck expense deductions of dollar_figure for and dollar_figure for of which respondent allowed in the notice_of_deficiency the following dollar_figure for and dollar_figure for depreciation expenses for petitioners deducted dollar_figure in depreciation expenses for pourmasters the documents petitioners provided to respondent reported expenses of dollar_figure of that amount in the notice_of_deficiency respondent disallowed dollar_figure paid to purchase a refrigerator during and allowed dollar_figure of the remaining depreciation expense deductions claimed legal expenses for petitioners deducted dollar_figure in legal expenses for pourmasters in petitioners paid dollar_figure to j william morse an attorney to defend mr skalko against charges of driving under the influence of intoxicants possessing an open container and failing to maintain his lane while driving in the notice_of_deficiency respondent disallowed all of petitioners’ claimed legal expense deductions itemized_deductions for employee business_expenses for petitioners claimed deductions of dollar_figure in employee business_expenses and in the notice_of_deficiency respondent allowed dollar_figure of the amounts claimed for petitioners deducted dollar_figure in employee business_expenses for mrs skalko and dollar_figure for mr skalko and of these amounts in the notice_of_deficiency respondent allowed dollar_figure for language training expenses and dollar_figure for meal and entertainment_expenses for mrs skalko for petitioners deducted dollar_figure in employee business_expenses for mrs skalko and dollar_figure for mr skalko and of those amounts in the notice_of_deficiency respondent allowed dollar_figure in employee business_expenses for mrs skalko wages during petitioners’ older son was a full-time_student at the university of denver also during petitioners’ younger son was years old and was a high school student petitioners claimed that they employed both of their sons in newspaper delivery for petitioners deducted payments they claim they paid their older son of dollar_figure per week for weeks for a total of dollar_figure additionally for petitioners claimed deductions for payments they claim they made to their younger son of dollar_figure per week for weeks for a total of dollar_figure petitioner claims that he delivered newspapers for the remaining weeks of petitioners failed to keep contemporaneous_records of the days on which their sons delivered newspapers as well as of any payments made to their sons during in the notice_of_deficiency respondent disallowed all of the deductions claimed for wages paid to petitioners’ sons gross_receipts for petitioners’ records indicate that petitioners’ gross_receipts from pourmasters were dollar_figure however petitioners reported only dollar_figure of gross_income in the notice_of_deficiency respondent adjusted petitioners’ gross_receipts to include an additional dollar_figure other expenses for and petitioners claimed other expense deductions for pourmasters specifically for petitioners deducted dollar_figure for telephone expenses dollar_figure in cleaning expenses dollar_figure in postage expenses and dollar_figure in supplies in the notice_of_deficiency respondent disallowed dollar_figure of the cell phone expense deduction and allowed the remaining expense deductions claimed for for petitioners deducted dollar_figure in telephone expenses dollar_figure in cleaning expenses dollar_figure in postage expenses dollar_figure in supply expenses and dollar_figure in periodical expenses in the notice_of_deficiency respondent disallowed dollar_figure of the telephone expense deduction and dollar_figure of the periodical expense deduction and allowed the remaining expense deductions claimed for for petitioners claimed deductions of dollar_figure in telephone expenses dollar_figure in cleaning expenses dollar_figure in postage expenses dollar_figure in periodical expenses and dollar_figure in supply 2although respondent intended in the notice_of_deficiency that dollar_figure in expense deductions claimed for taxable_year should be disallowed for pourmasters the notice_of_deficiency determined only a dollar_figure adjustment respondent did not subsequently move to increase the deficiency accordingly expenses in the notice_of_deficiency respondent disallowed dollar_figure of the telephone expense deduction and dollar_figure of the periodical expense deduction and allowed the remaining expense deductions interest_expenses for and petitioners claimed deductions for interest_expenses charged on credit cards they used for both personal and business_expenses for petitioners deducted dollar_figure in interest_expenses for pourmasters also for petitioners deducted dollar_figure in interest_expenses for pourmasters in the notice_of_deficiency respondent disallowed all of the amounts deducted for those interest_expenses rent expenses for and respondent disallowed petitioners’ claimed rent expense deductions for pourmasters petitioners deducted amounts for rent expenses that they did not pay during the audit petitioners asserted that goods were used to pay rent invoices in lieu of monetary compensation travel meals and entertainment_expenses for pourmasters for petitioners claimed dollar_figure in expense deductions for attending a bartending conference for and petitioners claimed dollar_figure as meal and entertainment expense deductions related to mr skalko’s attendance at a bartending conference in the notice_of_deficiency respondent disallowed all of the expense deductions early distribution during mrs skalko received an early distribution of dollar_figure from a qualified_pension or retirement_plan during mrs skalko received dollar_figure as an early distribution from a qualified_pension or retirement_plan in the notice_of_deficiency respondent determined that the early distributions were to be included in petitioners’ income for the respective taxable years exemptions during petitioners’ daughter wa sec_26 years old and earned dollar_figure in income petitioners’ daughter filed a tax_return on which she claimed a personal_exemption for herself and also claimed the earned_income_tax_credit for petitioners claimed a dependency_exemption deduction for their daughter which respondent disallowed in the notice_of_deficiency discussion generally respondent’s determinations in the statutory_notice_of_deficiency are presumed correct see rule a 290_us_111 deductions are a matter of legislative grace and petitioners bear the burden of proving that they are entitled to the deductions claimed see rule a 503_us_79 292_us_435 under certain circumstances the burden_of_proof shifts to the commissioner sec_7491 sec_7491 does not shift the burden_of_proof to respondent because petitioners failed to maintain records or comply with substantiation requirements as required by sec_7491 and b where a taxpayer establishes that he incurred a business_expense but cannot prove the amount of the expense the court may approximate the amount allowable bearing heavily against the taxpayer whose inexactitude is of his own making 39_f2d_540 2d cir the cohan_rule to apply the cohan_rule however the court must have a reasonable basis for approximating the amount of the expense 85_tc_731 we are not required to accept a taxpayer’s unsubstantiated testimony that he is entitled to a deduction see 87_tc_74 hoang v commissioner tcmemo_2006_47 petitioners failed to offer sufficient substantiation to provide a reasonable basis for approximating the amounts of the expenses see vanicek v commissioner supra pincite petitioners substantiated the cost of a refrigerator the deduction for which respondent had disallowed however petitioners failed to demonstrate that they used it in one of their businesses in addition petitioners failed to provide any substantiation at trial that would permit the court’s use of the cohan_rule we conclude that petitioners have failed to carry their burden to show that they are entitled to deductions in excess of the amounts respondent allowed in the notice_of_deficiency accordingly we uphold respondent’s determinations in the notice_of_deficiency for the taxable years in issue in full we next consider whether petitioners are liable for accuracy-related_penalties pursuant to sec_6662 respondent determined sec_6662 accuracy-related_penalties of dollar_figure dollar_figure and dollar_figure for taxable_year sec_2001 sec_2002 and respondent determined that petitioners’ and underpayments of tax were attributable to negligence or disregard of rules and regulations or alternatively that the and underpayments were attributable to substantial understatements of income_tax pursuant to sec_6662 and b a taxpayer may be liable for a penalty of percent of the portion of an underpayment_of_tax due to negligence or disregard of rules or regulations the term negligence in sec_6662 includes any failure to make a reasonable attempt to comply with the internal_revenue_code and any failure to keep adequate books_and_records or to substantiate items properly sec_6662 sec_1_6662-3 income_tax regs negligence has also been defined as the failure to exercise due care or the failure to do what a reasonable person would do under the circumstances see 92_tc_1 affd 925_f2d_348 9th cir 85_tc_934 the term disregard includes any careless reckless or intentional disregard sec_6662 the commissioner has the burden of production with respect to accuracy-related_penalties sec_7491 to meet that burden the commissioner must produce sufficient evidence indicating that it is appropriate to impose the penalty see 116_tc_438 once the commissioner meets his burden of production the taxpayer must come forward with persuasive evidence that the commissioner’s determination is incorrect rule a see higbee v commissioner supra pincite the taxpayer may meet this burden by proving that he or she acted with reasonable_cause and in good_faith see sec_6664 sec_1_6664-4 income_tax regs we conclude that respondent has met his burden of production under c the record shows that petitioners failed to keep adequate books_or_records or to substantiate items properly for tax_year sec_2001 sec_2002 and see sec_6662 sec_1 b income_tax regs accordingly petitioners bear the burden of proving that the accuracy-related_penalties should not be imposed with respect to any portion of the underpayments for which they acted with reasonable_cause and in good_faith see sec_6664 sec_1_6664-4 income_tax regs petitioners claimed substantial deductions for which they failed to provide credible_evidence that respondent’s determinations are incorrect we conclude that petitioners have failed to meet their burden of persuasion with respect to the accuracy-related_penalties thus we conclude that petitioners are liable for the sec_6662 penalties for negligence determined by respondent we have considered the parties’ remaining arguments and conclude that the arguments are either without merit or unnecessary to reach to reflect the foregoing decision will be entered for respondent


internal_revenue_service department of the treasury number release date index numbers washington dc person to contact telephone number refer reply to cc dom corp 2-plr-115252-00 date date legend distributing controlled x trust y trust z trust a b c d business a business b state date dear this is in response to your authorized representative’s letter dated date requesting rulings under sec_355 of the internal_revenue_code the code with respect to a proposed transaction additional information was received in letters dated date and date the material information submitted is summarized below distributing is a state corporation that files its federal_income_tax return on a calendar_year basis distributing made a subchapter_s_election effective date and has been an s_corporation continuously since then distributing has a single class of stock outstanding immediately prior to the distribution discussed below the distributing stock will be owned a by the x trust b by the y trust and c by the z trust distributing is engaged in business a and business b financial information has been received indicating that each of business a and business b has had gross_receipts and operating_expenses representing the active_conduct_of_a_trade_or_business for each of the last five years five key employees the key employees of business a have expressed a desire to acquire equity in distributing distributing believes it is essential to grant such equity interests to the key employees in order to keep them in the employ of distributing and not of its competitors the key employees desire an equity_interest that will give them a meaningful voice in the management of business a the key employees do not desire an equity_interest in business b and they could not afford to purchase a significant interest in both lines of business furthermore the key employees do not contribute to the value of business b and distributing does not want them indirectly to own an interest in business b therefore as soon as practicable and in no event more than six months after the distribution discussed below distributing will issue to the key employees an aggregate of d of distributing stock pursuant to a share purchase agreement to be entered into by and among distributing and the key employees in order to retain the key employees distributing proposes the following series of transactions the distribution distributing will form a subsidiary controlled and will contribute to controlled the assets of business b in exchange for of the stock of controlled and the assumption by controlled of certain distributing liabilities related to business b distributing will distribute all of the stock of controlled pro_rata to the distributing shareholders distributing has made the following representations with respect to the distribution a no part of the consideration to be distributed by distributing will be received by a shareholder as a creditor employee or in any capacity other than that of a shareholder of the corporation b the five years of financial information submitted on behalf of distributing is representative of the corporation’s present operation and with regard to such corporation there have been no substantial operational changes since the date of the last financial statements submitted c following the transaction distributing and controlled will each continue the active_conduct of its business independently and with its separate employees with the exception of the chief_executive_officer and two other employees who will be employed by both distributing and controlled neither the chief_executive_officer nor either of the two other employees is a key_employee as described above d the distribution of the stock or stock and securities of controlled is carried out for the following corporate business_purpose to retain key employees the distribution of the stock or stock and securities of controlled is motivated in whole or substantial part by one or more these corporate business purposes e distributing is an s_corporation within the meaning of sec_1361 of the code controlled will elect to be an s_corporation pursuant to sec_1362 on the first available date after the distribution and there is no plan or intent to revoke or otherwise terminate the s_corporation_election of either distributing or controlled f there is no plan or intention by the shareholders or security holders of distributing to sell exchange transfer by gift or otherwise dispose_of any of their stock in or securities of either distributing or controlled after the transaction g there is no plan or intention by either distributing or controlled directly or through any subsidiary_corporation to purchase any of its outstanding_stock after the transaction other than through stock purchases meeting the requirements of sec_4 b of revproc_96_30 h there is no plan or intention to liquidate either distributing or controlled to merge either corporation with any other corporation or to sell or otherwise dispose_of the assets of either corporation after the transaction except in the ordinary course of business i the total adjusted_basis and fair_market_value of the assets transferred to controlled by distributing each equals or exceeds the sum of the liabilities assumed by controlled plus any liabilities to which the transferred assets are subject j the liabilities assumed in the transaction were incurred in the ordinary course of business and are associated with the assets being transferred k distributing neither accumulated its receivables nor made extraordinary payment of its payables in anticipation of the transaction l no intercorporate debt will exist between distributing and controlled at the time of or subsequent to the distribution of controlled stock m payments made in connection with all continuing transactions if any between distributing and controlled will be for fair_market_value based on terms and conditions arrived at by the parties bargaining at arm’s length n no two parties to the transaction are investment companies as defined in sec_368 and iv based solely on the information provided and the representations made we conclude as follows the transfer by distributing to controlled of the assets described above in exchange for all the stock of controlled and the assumption of certain liabilities followed by the distribution of all of the controlled stock to the shareholders of distributing pro_rata in accordance with their shareholdings in distributing will be a reorganization within the meaning of sec_368 of the code distributing and controlled will each be a party to the reorganization within the meaning of sec_368 no gain_or_loss will be recognized by distributing upon the transfer of assets to controlled in exchange for the controlled stock and assumption_of_liabilities by controlled as described above sec_361 and sec_357 no gain_or_loss will be recognized to controlled on the receipt of the business b assets in exchange for controlled stock sec_1032 the basis of each of the assets to be received by controlled in the transaction will be the same as the basis of such assets in the hands of distributing immediately prior to the transaction sec_362 the holding_period of each of the assets to be received by controlled will include the period during which distributing held such asset sec_1223 no gain_or_loss will be recognized by distributing upon the distribution of all of its controlled stock sec_361 no gain_or_loss will be recognized by and no amount will included in the income of the shareholders of distributing upon the receipt of controlled stock as described above sec_355 the aggregate basis of the distributing stock and the controlled stock in the hands of the distributing shareholders after the distribution will in each instance be the same as the aggregate basis of the distributing stock held immediately before the distribution allocated in proportion to the fair_market_value of each in accordance with sec_1_358-2 sec_358 the holding_period of the controlled stock in the hands of the distributing shareholders will include the period for which such shareholder held the distributing stock provided that such stock is held as a capital_asset by such shareholder on the date of the exchange sec_1223 as provided in code sec_312 the earnings_and_profits of distributing will be allocated among distributing and controlled under sec_1_312-10 no opinion is expressed as to the tax treatment of the transaction under other provisions of the code or regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the transaction that are not specifically covered by the above ruling this ruling is directed only to the taxpayer that requested it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter should be attached to the federal_income_tax returns of the taxpayers involved for the taxable_year in which the transaction covered by this ruling letter is consummated in accordance with a power_of_attorney on file in this office copies of this letter are being sent to your authorized representatives sincerely yours assistant chief_counsel corporate by lewis k brickates assistant to the chief branch


internal_revenue_service p o box cincinnati oh date date number release date department of the treasury employer_identification_number contact person - id number contact telephone number legend uil dear we have considered your request for advance approval of your grant-making program under sec_4945 of the internal_revenue_code dated date our records indicate you were recognized as exempt from federal_income_tax under sec_501 of the code and that it is classified as a private_foundation as defined in sec_509 you engage in charitable activities by enhancing access to higher education specifically you provide scholarships to certain academically-qualified graduates of x in which approximately students are eligible for the scholarship the students are those who are in need of financial assistance and who attend or will attend a college or university located in the state of y the number of scholarships that are awarded each year and the amount of each scholarship will vary depending upon the required amount and the number of applicants your trustee expects to renew each scholarship for a total of four years required amount is defined as the net_income of the trust or if greater the amount that must be distributed to enable the trust to satisfy code sec_4942 minimum distribution_requirements after taking into account administrative expenses and qualifying_distribution carry forwards memos and flyers will be distributed to the students by x’s guidance counselor’s office these memos and flyers will be posted on bulletin boards in the guidance office you will maintain case histories showing recipients of your scholarship including names addresses purposes of the scholarship amount of each scholarship and manner of selection until the applicable statute_of_limitations period expires the selection committee will be made up of the bank trustee - z an attorney at law in the state of y and - a member selected by the other two members of the selection committee each applicant must have at least a gpa must be actively involved in community service and campus leadership and must have a financial need to apply the applicant will provide a current free application_for federal student aid form and a completed application the selection committee will review the qualifications of the applicants and consider recommendations of x’s scholarship committee all scholarships are awarded on an objective and non-discriminatory basis no scholarships may be awarded to any individual who is related by blood adoption or marriage to any member of the selection committee or any disqualified_person of the trust as a first cousin or nearer relative if all students have the same gpa the selection committee will look at the financial need community service and leadership abilities of each applicant the selection committee provides written notification to the guidance counselor’s office in x of the names of the recipients of the scholarship award and then the guidance counselor’s office will send letters to the scholarship recipients announcing the awarding of the scholarship the trustee pays the scholarship proceeds directly to the universities the scholarship recipients attend for the benefit of the scholarship recipients the trustee provides a letter to each university specifying that the university’s acceptance of the scholarship proceeds constitutes they university’s agreement to i refund any unearned portion of the scholarship if subsequent to the payment of the scholarship a scholarship recipient fails to meet any term or condition of the scholarship program and ii notify the trustee if a scholarship recipient fails to meet any term or condition of the scholarship program the scholarships are renewable but the scholarship recipients must re-apply each year to renew a scholarship a student must have at least a gpa sec_4945 and b of the code impose certain excise_taxes on taxable_expenditures made by a private_foundation sec_4945 of the code provides that the term taxable_expenditure means any amount_paid or incurred by a private_foundation as a grant to an individual for travel study or other similar purposes by such individual unless such grant satisfies the requirements of subsection g sec_4945 of the code provides that sec_4945 shall not apply to individual grants awarded on an objective and nondiscriminatory basis pursuant to a procedure approved in advance if it is demonstrated that the grant constitutes a scholarship or fellowship_grant which is subject_to the provisions of sec_117 and is to be used for study at an educational_organization described in sec_170 the grant constitutes a prize or award which is subject_to the provisions of sec_74 if the recipient of such prize or award is selected from the general_public or the purpose of the grant is to achieve a specific objective produce a report or similar product or improve or enhance a literary artistic musical scientific teaching or other similar capacity skill or talent of the grantee sec_53_4945-4 of the regulations provides that to secure approval a private_foundation must demonstrate that i ii its grant procedure includes an objective and nondiscriminatory selection process such procedure is reasonably calculated to result in performance by grantees of the activities that the grants are intended to finance and iii the foundation plans to obtain reports to determine whether the grantees performed activities that the grants are intended to finance based on the information submitted and assuming your award programs will be conducted as proposed with a view to provide objectivity and nondiscrimination in making the awards we have determined that your procedures for granting the awards comply with the requirements contained in sec_4945 of the code and that awards granted in accordance with such procedures will not constitute taxable_expenditures within the meaning of sec_4945 in addition we have determined that awards made under your procedures are excludable from the gross_income of the recipients subject_to the limitations provided by sec_117 of the code this determination is conditioned on the understanding that there will be no material_change in the facts upon which it is based it is further conditioned on the premise that no grants will be awarded to foundation managers or members of the selection committee or for a purpose that is inconsistent with the purpose described in sec_170 of the code the approval of your award program procedures herein constitutes a one-time approval of your system standards and procedures designed to result in awards which meet the requirements of sec_4945 of the code this determination only covers the grant programs described above thus approval shall apply to subsequent award programs only as long as the standards and procedures under which they are conducted do not differ materially from those described in your request any funds you distribute to individuals must be made on a true charitable basis in furtherance of the purposes for which you are organized therefore you should maintain adequate_records and case histories so that any or all award distributions can be substantiated upon request by the internal_revenue_service this determination is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited as a precedent you must report any future changes in your grant making procedures please keep a copy of this letter in your permanent records we have sent a copy of this letter to your representative as indicated in your power_of_attorney if you have any questions please contact the person whose name and telephone number are shown above sincerely yours lois lerner director exempt_organizations enclosure notice