t c memo united_states tax_court michael w rehtorik et al petitioners v commissioner of internal revenue respondent docket nos filed date david m garvin for petitioner michael w rehtorik james p dawson and eli j dicker for respondent memorandum findings_of_fact and opinion swift judge respondent determined deficiencies in petitioners’ joint federal income taxes and additions to tax for and and deficiencies in petitioner michael w cases of the following petitioners are consolidated herewith michael w and barbara b rehtorik docket no and michael w rehtorik docket no rehtorik’s petitioner’s individual federal income taxes and additions to tax for and as follows michael w and barbara b rehtorik year deficiency dollar_figure big_number additions to tax sec_6653 b sec sec dollar_figure big_number dollar_figure big_number percent of interest due on amount of deficiency attributable to fraud michael w rehtorik year deficiency dollar_figure year additions to tax sec sec sec deficiency a a a a b dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure sec_6653 sec sec_6661 b b percent of interest due on amount of deficiency attributable to negligence percent of interest due on amount of deficiency attributable to fraud unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure after settlement the primary issues for decision in these consolidated cases are whether petitioner is liable for the fraud and other additions to tax for and and whether petitioner is entitled for to deduct dollar_figure in interest_expenses and for dollar_figure in legal expenses all issues relating to barbara b rehtorik have been settled findings_of_fact some of the facts have been stipulated and are so found in petitioner as sole shareholder incorporated government securities corp gsc as a florida corporation until date petitioner was president of gsc in petitioner incorporated government securities group of america gsc america as a florida corporation and as the parent holding_company of gsc petitioner was sole shareholder and president of gsc america gsc was engaged as a broker dealer in the purchase and sale for and to investors of government-backed securities such as government national mortgage association and federal_national_mortgage_association mortgage-backed_securities and u s government zero coupon bonds separately from gsc’s above brokerage activities on behalf of investors gsc solicited funds from a limited number of individual investors to be invested on behalf of gsc by petitioner and by oscar f gomez gomez vice president and gsc was originally incorporated under the name of the federal government securities corp fgsc in fgsc changed its name to gsc to comply with federal_law director of gsc these funds were referred to in the relevant written materials as managed accounts funds received from investors as managed accounts managed account funds were to be invested in various securities to be selected by and at the discretion of gsc of petitioner and of gomez and apparently were not limited to government-backed securities managed account funds had the characteristics of loans from the investors to gsc receipt of managed account funds was documented by written agreements that were signed by the individual investors and on behalf of gsc by petitioner and gomez the written agreements reflected total funds invested a fixed term for repayment to individual investors of the funds invested and a stated_interest rate interest was due monthly under each managed account investment agreement at the end of a stated fixed term the term of each managed account investment would be automatically renewed unless the investor gave days’ notice of cancellation upon cancellation the principal_amount of the investor’s managed account funds was to be repaid with any interest due investors expected to be repaid the total principal_amount invested in managed accounts repayments of principal on some occasions were made and payments of interest on many occasions were made most of the principal repayments and much of the interest payments that were due managed account investors however were not paid_by gsc by petitioner or by gomez as explained below the total principal of all managed account funds that was not repaid by gsc by petitioner or by gomez was repaid to the investors pursuant to the securities investor protection act of sipa federal legislation that protects investor funds when security brokerage companies are liquidated petitioner and gomez apparently maintained records relating to the managed account funds gsc’s internal accounting office however did not maintain records of the managed account funds and gsc’s general sales force apparently did not market or sell managed account investments and apparently did not know of the existence of the managed accounts the evidence in the record does not reflect the exact amount of managed account funds that were received from investors the following schedule reflects gomez’ estimate of total managed account funds that petitioner and gomez received on behalf of gsc for the years in issue year gomez’ estimate of total managed account funds received dollar_figure to big_number big_number to big_number big_number to big_number some managed account funds received from investors were deposited into gsc’s corporate bank accounts for use in purchasing government-backed securities that gsc in turn would resell to investors in the normal course of gsc’s retail securities business some managed account funds along with other funds such as petitioners’ substantial salary income were deposited into bank accounts in petitioner’s name from which accounts funds were used by petitioner for business_expenses and investments relating to gsc and also for personal purposes the following schedule reflects for the years in issue managed account funds that were deposited into gsc’s corporate bank accounts our estimate based on the evidence before us of managed account funds that were deposited into bank accounts in petitioner’s name and total deposits into bank accounts in petitioner’s name managed account funds deposited into total deposits year bank accounts in petitioner’s name gsc’s bank accounts into bank accounts in petitioner’s name dollar_figureo dollar_figure big_number big_number big_number big_number dollar_figure big_number big_number total dollar_figure dollar_figure dollar_figure at the end of petitioner hired a new accounting firm to perform for a yearend audit of gsc’s books_and_records this accounting firm determined that gsc’s books_and_records were not complete in upon verifying through yet another accounting firm serious errors and omissions in gsc’s books_and_records and on advice of gsc’s corporate counsel petitioner notified the u s securities_and_exchange_commission sec of gsc’s accounting problems and the sec commenced an investigation of gsc the record does not indicate that the sec investigation established anything illegal about gsc’s or petitioner’s use or management of managed account funds gomez however was subsequently prosecuted and pleaded guilty to making certain false representations in connection with the solicitation of managed account funds the sec investigation did conclude that gsc's financial situation was not healthy on date either voluntarily or at the insistence of the securities investor protection corp sipc a nonprofit corporation created by sipa gsc entered into a liquidation proceeding under sipa in the u s bankruptcy court for the southern district of florida in that proceeding a trustee sipc trustee was appointed to liquidate gsc as part of that liquidation proceeding managed account investors submitted to the sipc trustee claims for repayment of managed account funds also in that proceeding the sipc trustee sought damages against petitioner and gomez personally on behalf of managed account investors seeking to recover the principal_amount of outstanding managed account funds of these investors plus interest costs and other damages in petitioner hired and paid an attorney dollar_figure in legal fees to represent him in gsc's liquidation proceeding and against the claim for damages on date in gsc's liquidation proceeding petitioner and gomez signed consent judgments agreeing to pay dollar_figure and dollar_figure in damages with interest respectively to the sipc trustee for repayment to managed account investors the evidence in this case does not reflect how much if any of the above damages were actually paid_by petitioner and gomez as indicated however the sipc trustee did repay the principal_amount of the managed account funds owed to of the managed account investors use of managed account funds deposited into bank accounts in petitioner’s name from through with funds deposited into bank accounts in his name including managed account funds petitioner paid certain gsc business_expenses for example in gsc entered into certain investment hedge transactions to offset risks associated with gsc’s purchase and subsequent holding of mortgage-backed_securities for sale to gsc customers petitioner made all decisions relating to hedge transactions entered into on behalf of gsc and petitioner purchased securities with funds withdrawn from the bank accounts in his name for the above purpose of hedging gsc’s investment risks from through petitioner also made certain repayments to investors of principal and payments of interest with respect to managed account funds and petitioner used funds withdrawn from the bank accounts in his name for such repayments of principal and payments of interest also in with funds withdrawn from the bank accounts in his name petitioner purchased for and in the name of gsc dollar_figure in gold krugerrands which krugerrands were later sold at a profit that gsc received on date after having received dollar_figure from a new managed account investor and after depositing such dollar_figure into one of the bank accounts in his name petitioner purchased with funds withdrawn from the same bank account into which the dollar_figure had been deposited a cashier’s check for dollar_figure that was endorsed over to gsc america this dollar_figure was then transferred from gsc america to gsc and was apparently used for gsc’s expenses and investments the following schedule reflects and where necessary estimates for each year the amount of gsc’s expenses that were paid with funds withdrawn from the bank accounts in petitioner’s name including funds used to participate in hedge transactions funds used to pay principal and interest to managed account investors funds used to purchase gold krugerrands and the dollar_figure that in february of petitioner received from a managed account investor and then transferred through gsc america to gsc purpose hedge transactions payments of principal and interest on managed account funds purchase of krugerrands dollar_figure transfer years in issue dollar_figure big_number dollar_figure big_number dollar_figure big_number big_number big_number total dollar_figure dollar_figure dollar_figure tax returns the following schedule reflects the date filed timeliness gross_income reported and filing_status relating to each of petitioner’s federal_income_tax returns for through return date filed filed reported filing_status gross_income dollar_figure timely untimely dollar_figure untimely dollar_figure untimely dollar_figure married_filing_jointly married_filing_jointly married_filing_separately married_filing_separately the above gross_income reported on the tax returns for each year consisted primarily of petitioner’s salary income from gsc and barbara b rehtorik’s salary income from her employment as manager of a retail clothing store petitioners did not include as income on their and joint federal_income_tax returns and petitioner did not include as income on his individual federal_income_tax return any managed account funds deposited into the bank accounts in petitioner’s name on his individual federal_income_tax return petitioner claimed dollar_figure as an interest_expense_deduction relating to a home mortgage on his individual federal_income_tax return petitioner claimed dollar_figure as an ordinary business_expense deduction for legal fees relating to the claim against him for damages in the gsc liquidation proceeding petitioner attached to his federal_income_tax return a disclosure statement reflecting tax_advice that petitioner had received from his tax accountant that the dollar_figure in managed account funds reflected in the consent judgment against petitioner in gsc’s liquidation proceeding should not be treated as income to petitioner but as loans that gsc and petitioner intended to repay to managed account investors respondent’s audit on audit using total deposits made into the bank accounts in petitioner’s name including deposits of managed account funds of dollar_figure dollar_figure and dollar_figure for and respectively respondent determined that petitioner received and was taxable on managed account funds in the following amounts year unreported income dollar_figure big_number big_number at trial and in her briefs respondent has made revisions to the above determination of unreported income as reflected below year respondent's revised determination of petitioner’s unreported income dollar_figure big_number big_number total dollar_figure for and respondent did not allow as business_expenses or otherwise give petitioner credit against any of the bank_deposits that respondent treated as unreported taxable_income to petitioner any of the investments by petitioner in hedge transactions repayments of principal and interest to managed account investors transfers to gsc or other_amounts that petitioner paid on behalf of gsc on date respondent’s notice_of_deficiency for was mailed to petitioner in which notice dollar_figure of claimed interest_expenses was disallowed on date respondent’s notices of deficiency for and were mailed to petitioner in the notice for dollar_figure of claimed legal expenses was disallowed in respondent’s notice_of_deficiency for and respondent also determined that the underpayments of tax were due to fraud without which respondent’s assessment of deficiencies for and would be barred by the period of limitations under sec_6501 for respondent also determined that the underpayment was due to fraud or in the alternative negligence further for respondent determined additions to tax for substantial_understatement and failure to timely file fraud for and opinion respondent bears the burden of proving fraud by clear_and_convincing evidence sec_7454 rule b 781_f2d_1566 11th cir affg tcmemo_1985_63 102_tc_632 to establish fraud respondent must prove for each year that a taxpayer’s federal_income_tax return as filed reflected an underpayment_of_tax and that some part of the underpayment was due to fraudulent intent sec_7454 rule b clayton v commissioner supra pincite 91_tc_874 56_tc_213 funds received by a taxpayer through misappropriation or embezzlement constitute taxable_income to the taxpayer 366_us_213 funds received as loans however are not properly treated as taxable_income james v united_states supra pincite if there exists between a taxpayer who receives funds and the provider of funds a good-faith expectation that the funds are to be repaid and an obligation to do so the funds in the hands of the taxpayer will be treated as nontaxable loan proceeds see 3_f3d_625 2d cir affg tcmemo_1992_478 funds received by a taxpayer as an agent or conduit of a corporation are not treated as taxable_income see 208_f2d_430 6th cir affg in part revg in part and remanding a memorandum opinion of this court ishijima v commissioner tcmemo_1994_ with regard to fraudulent intent respondent must prove that petitioner intended to evade taxes by conduct intended to conceal mislead or otherwise prevent the collection_of_taxes clayton v commissioner supra pincite 94_tc_654 81_tc_640 fraud may be proven by circumstantial evidence because direct evidence of fraud is generally not available clayton v commissioner supra pincite 80_tc_1111 as indicated respondent argues that all managed account funds deposited into bank accounts in petitioner’s name during the years in issue should be treated as unreported taxable_income to petitioner respondent argues that by depositing managed account funds into bank accounts in his name petitioner misappropriated managed account funds from either the managed account investors from gsc or from both petitioner argues that managed account funds deposited into bank accounts in his name constituted loans from managed account investors to gsc that petitioner did not misappropriate any managed account funds either directly or through gsc and that petitioner used managed account funds deposited into bank accounts in his name as an agent for gsc and to pay expenses and to make purchases of securities on behalf of gsc the evidence before us establishes that from the standpoint of managed account investors and gsc managed account funds transferred by investors to gsc to petitioner and to gomez were regarded as funds loaned from the investors to gsc managed account investors signed written agreements with gsc that provided for repayment of principal and interest and managed account investors did expect to be repaid all managed account funds and interest thereon the fact that some officers and employees of gsc did not know of the managed account funds does not eliminate gsc’s obligation as agreed to by petitioner and by gomez as senior officers of gsc with regard thereto petitioner deposited managed account funds into gsc’s bank accounts and into bank accounts in his name those funds including those deposited into bank accounts in petitioner’s name were in large part used for the benefit of gsc managed account funds deposited into bank accounts in petitioner’s name were used by petitioner to pay principal and interest owed to managed account investors to pay various business_expenses of gsc and to purchase securities for gsc that represented hedge transactions as indicated for and petitioner deposited dollar_figure dollar_figure and dollar_figure respectively in managed account funds into bank accounts in his name the evidence establishes that for and petitioner withdrew at least dollar_figure dollar_figure and dollar_figure respectively from the same bank accounts and used these funds for gsc’s benefit with regard to the balance of managed account funds that petitioner deposited into bank accounts in his name which the evidence does not establish that petitioner used for gsc’s benefit respondent has not established by clear_and_convincing evidence that petitioner was not holding these funds as loans and as an agent for gsc nor has respondent established by clear_and_convincing evidence that petitioner misappropriated these funds for his personal_use as indicated the record does not establish that petitioner used any managed accounts funds that were deposited into the bank accounts in his name for personal purposes there is no evidence that such funds were used by petitioner to take vacations purchase extravagant items or entertain himself or others we note that petitioners reported on their tax returns significant salary income for the years in issue and the evidence establishes that much of this salary income was deposited into the bank accounts in petitioner’s name and that the amount of petitioners’ salary deposits appears to have been sufficient to support petitioners’ lifestyle based on the evidence before us and for purposes of our decision as to petitioner’s liability for the fraud additions to tax on which respondent has the burden_of_proof by clear_and_convincing evidence we conclude that respondent has not established that petitioner was not an agent for gsc in his receipt of managed account funds nor that petitioner embezzled or misappropriated for his personal_use any managed account funds during and accordingly for purposes of the fraud additions to tax we conclude that managed account funds deposited into the bank accounts in petitioner’s name should not be treated as taxable_income to petitioner for and because respondent has not established by clear_and_convincing evidence that petitioner underreported his income one of the required elements of the fraud addition_to_tax is not present in particular for and because respondent has failed to prove fraud the assessment of any_tax deficiency and additions to tax for those years is barred by the statute_of_limitations sec_6501 c unreported income for for in spite of our conclusion that fraud has not been established respondent’s assessment of a tax_deficiency would not be barred by the 3-year period of limitation under sec_6501 and we must decide whether petitioner should be charged with dollar_figure in unreported income relating to the managed account funds deposited into the bank accounts in his name on this issue for this year petitioner has the burden_of_proof by a preponderance_of_the_evidence rule a we note that respondent has not raised the 6-year period of limitations under sec_6501 for and because respondent failed to raise the 6-year period of limitations in pleading amended pleading or briefs we shall not consider its application see 86_tc_980 n affd without published opinion per curiam 812_f2d_1401 4th cir 64_tc_989 respondent determined that dollar_figure in managed account funds was deposited into bank accounts in petitioner’s name on the evidence we have found that the correct amount of managed account funds deposited into bank accounts in petitioner’s name was dollar_figure as indicated funds received by a taxpayer through misappropriation or embezzlement are to be treated as taxable_income 366_us_213 funds received as loans however are not to be treated as taxable_income see collins v commissioner f 3d pincite respondent determined that for the total managed account funds deposited into the bank accounts in petitioner’s name should be treated as income to petitioner not as loan funds invested by managed account investors that had to be repaid nor as loans from gsc to petitioner respondent argues that petitioner misappropriated the managed account funds deposited into the bank accounts in his name from either gsc or from managed account investors petitioner argues that all managed account funds including those deposited into the bank accounts in his name constituted loans and were not misappropriated by him from gsc or from managed account investors petitioner argues that these funds were used and were intended to be used by him to pay expenses and to make purchases of securities for and on behalf of gsc and to make repayments of principal and interest to managed account investors during with funds from the bank accounts in his name petitioner paid dollar_figure for gsc’s benefit of which dollar_figure was paid for principal and interest on managed accounts and dollar_figure was paid for gold krugerrands also during and with funds from the same bank accounts petitioner transferred dollar_figure to gsc america and then to gsc and this dollar_figure was apparently used for gsc’s expenses and investments with regard to this total dollar_figure of managed account funds deposited into the bank accounts in petitioner’s name in petitioner has met his burden_of_proof and has established that such funds were not misappropriated by him but were used by him as an agent for gsc with regard however to dollar_figure in managed account funds deposited in into the bank accounts in petitioner’s name that was not used by petitioner to repay managed account investors to purchase gold krugerrands nor to make a transfer to gsc and that was still on deposit in the bank accounts in petitioner’s name at the end of petitioner who has the burden_of_proof on this issue has not adequately established the nontaxability of such funds with regard to this dollar_figure we hold for respondent we are not persuaded that such funds should be treated as loans to petitioner we rely primarily on petitioner’s burden_of_proof with regard to this dollar_figure dollar_figure claimed interest_expenses for and dollar_figure claimed legal expenses for with regard to the disallowed dollar_figure interest_expenses claimed for petitioner has offered no evidence and ha sec_5 dollar_figure plus dollar_figure plus dollar_figure equals dollar_figure failed to meet his burden_of_proof we sustain respondent's determination on this issue with regard to the disallowed dollar_figure legal expenses claimed for legal expenses that arise from personal nonbusiness matters of a taxpayer do not qualify as business_expense deductions 383_us_687 372_us_39 in re collins 26_f3d_116 11th cir petitioner’s dollar_figure in legal expenses that were incurred in relates to claims instituted against petitioner by the sipc trustee and involves petitioner’s activities as president of gsc and as a fund raiser and purchaser of securities for gsc and for others respondent argues that the legal expenses should be disallowed because they relate primarily to petitioner’s alleged misappropriation of managed account funds we disagree see commissioner v tellier supra pincite authority cited by respondent involves taxpayers subject_to criminal charges unrelated to their business activities we conclude that the claimed dollar_figure in legal expenses is allowable as a business_expense to petitioner negligence substantial_understatement and failure to timely file additions to tax -- a taxpayer may avoid liability for additions to tax for negligence under sec_6653 if a taxpayer reasonably relies on a competent professional adviser 469_us_241 89_tc_849 affd 904_f2d_1011 5th cir affd 501_us_868 the reliance must be reasonable in good_faith and based upon full disclosure freytag v commissioner supra pincite respondent alleges that petitioner was negligent under sec_6653 for failing to report income on his federal_income_tax return for relating to managed account funds petitioner argues that he reasonably relied on his accountant and tax_return_preparer and petitioner emphasizes that he disclosed -- to the accountant who prepared his federal_income_tax return and to respondent on his return -- facts relating to his receipt of managed account funds petitioner reasonably relied on his accountant’s tax_advice regarding nontaxability of managed account funds and no evidence in the record suggests that petitioner acted in bad faith with regard to his reporting thereof for we reject respondent's determination of the negligence addition_to_tax under sec_6653 the substantial_understatement addition_to_tax under sec_6661 does not apply where a taxpayer discloses adequate facts on the tax_return to disclose to respondent the nature of the item in question see sec_1 b income_tax regs petitioner attached a disclosure statement to his return disclosing significant facts relating to receipt of managed account funds and his involvement with the liquidation of gsc we reject respondent’s determination of this addition_to_tax a taxpayer is subject_to an addition_to_tax for failure to timely file a tax_return unless the taxpayer establishes that the failure to timely file was due to reasonable_cause and not due to willful neglect sec_6651 petitioner untimely filed his federal_income_tax return on date without extension petitioner failed to present evidence showing reasonable_cause petitioner is subject_to this addition_to_tax to reflect the foregoing decisions will be entered under rule


department of the treasury internal_revenue_service washington d c office_of_chief_counsel date number release date memorandum for m k mortensen cc pa apjp mehara scaf-104676-02 uil associate area_counsel salt lake city small_business_self-employed_division cc sb slc attn mark h howard from subject pamela w fuller senior technician reviewer branch administrative provisions and judicial practice cc pa apjp b01 significant service_center advice ogd - black reparations claim eitc scaf-104676-02 this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent issue sec_1 should the internal_revenue_service service use the same claim disallowance letter that it has used for the previous black or slavery reparation claims or does it need to change the language of the claim disallowance letter does chief_counsel notice cc-2002-012 provide adequate direction on how to deal with this new type of claim or is further guidance necessary what procedures should the service follow in processing these returns claims should the service treat these new returns as valid returns for purposes of processing may the service use mathematical_or_clerical_error procedures to recover any erroneous refund issued on one of these returns claims may the service make summary assessments when it has not yet issued refunds scaf-104676-02 would any facts patterns arise where the service should use notices of deficiency with these returns claims and if so how should it treat the claimed credit ie as withholding negative tax etc would the answers to any of the above questions change because of correspondence attached to the return claim is the service authorized to take action to recover a refund which it has sent to the taxpayer’s bank as a direct deposit or paper refund but before the taxpayer has taken possession of it conclusions we agree with your office that the language of the claim disallowance letter as currently written or as proposed would serve the purpose of disallowing the black reparation claim and that the service replace the word believe in the first sentence with the word assert we recommend however against the inclusion of additional language relating to the filing of a false eitc claim as provided in sec_32 chief_counsel notice_2002_012 provides general guidance as to the processing of a frivolous slavery reparations credit additional advice concerning how to process returns that claim the slavery reparations credit as an eitc is given below chief_counsel notice_2002_012 provides the correct processing procedures for these returns claims the service should treat these new returns as valid returns for purposes of processing mathematical_or_clerical_error assessment procedures under sec_6213 generally may be used when a taxpayer has claimed a black reparations tax_credit on the line typically used to claim the eitc however mathematical_or_clerical_error summary_assessment procedures should not be used for tax_year when the taxpayer claims a credit of no more than dollar_figure on the eitc line no schedule eic is attached and the taxpayer’s earned_income and modified agi are both less than dollar_figure the service may simply disallow the claimed black reparations credit accordingly there would be no need for summary_assessment under sec_6213 scaf-104676-02 the service should issue a statutory_notice_of_deficiency where an erroneous refund has been issued the service has made a math error assessment under sec_6213 and the service has abated the assessment at the request of the taxpayer as required under sec_6213 in calculating the deficiency the service should treat the erroneous eitc as a negative tax as provided under sec_6211 the attachment of correspondence to the return claim may require that an service employee seek additional advice in connection with the processing of the claim return the service is authorized to take action to recover a refund which it has sent to the taxpayer’s bank as a direct deposit or paper refund but before the taxpayer has taken possession of it overview since the service centralized the frivolous_return program in ogden utah in january of taxpayers have submitted numerous black or slavery reparations claims most of these claims reflect a credit on the line of the return reserved for credits from an regulated_investment_company ric or real_estate_investment_trust reit and which are normally reported on a form_2439 however personnel in the frivolous_return program have begun to receive black or slavery reparations claims with a slightly different claim on these new returns or claims the taxpayers show the black or slavery reparations claims as a credit on the line where the taxpayer would normally claim an earned_income_tax_credit eitc as a result significant issues have arisen concerning the proper processing of these returns claims discussion issue should the service use the same claim disallowance letter that it has used for the previous black or slavery reparation claims or does it need to change the language of the claim disallowance letter we agree with your office that the language of the claim disallowance letter as currently written or as proposed would serve the purpose of disallowing the black reparation claim and that the service replace the word believe in the first sentence with the word assert we recommend however against the inclusion of additional language relating to the filing of a false eitc claim as provided under sec_32 sec_32 sets forth the statutory provisions regarding the eitc sec_32 prevents the taxpayer from claiming an eitc for the following ten taxable years when a taxpayer has filed a fraudulent claim for an eitc additionally sec_32 prevents the taxpayer scaf-104676-02 from claiming an eitc for the following two taxable years when a taxpayer has filed an unallowable claim for an earned_income_credit due to reckless or intentional_disregard_of_rules_and_regulations in this situation however taxpayers are claiming a black reparations credit and using the line item for the eitc they are not actually making a claim for the eitc under sec_32 issue does chief_counsel notice cc-2002-012 provide adequate direction on how to deal with this new type of claim or is further guidance necessary chief_counsel notice_2002_012 date provides correct general guidance concerning the processing of frivolous claims for slavery reparations processing instructions are separated into three categories cases in which the service has not issued a refund cases in which the service has already issued a refund and erroneous refunds returned to the service in cases in which the service has not issued a refund the processing is practically identical the only difference is that you use transaction code to reverse the eitc a claim for a refund based on a slavery reparations tax_credit has no legal foundation regardless of the line item used by the taxpayer to claim the credit no overpayment attributable to a slavery reparations tax_credit exists and the service has no obligation to issue a refund in such cases in cases in which the service has already issued a refund the chief_counsel notice advises the service to use math error procedures under sec_6213 under the facts addressed in the chief_counsel notice a mathematical_or_clerical_error was found based on the entry of an amount for a ric or a reit credit line of the form_1040 which was inconsistent with a zero entry for capital_gain income line of the form_1040 in the absence of a schedule d showing capital losses that would offset the capital_gain income from the ric or reit that was necessary to generate the credit math error procedures may also be used when a purported black reparations credit is claimed on the line item for eitc while the basis for summary_assessment under math error procedures is different processing of the return will be identical issue what procedures should the service follow in processing these returns claims chief_counsel notice_2002_12 as set forth above provides the correct processing procedures for these returns claims issue should the service treat these new returns as valid returns for purposes of processing the service should treat the returns claiming the black or slavery reparations credit as a valid_return for purposes of processing in zellerbach paper co v helvering scaf-104676-02 u s the supreme court stated that perfect accuracy or completeness is not necessary to rescue a return from nullity if it purports to be a return is sworn to as such and evinces an honest and genuine endeavor to satisfy the law see also 464_us_386 280_us_453 the lower courts have subsequently synthesized the criteria enunciated by the supreme court into the following four-part test for determining whether a defective or incomplete document is a valid_return 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 82_tc_766 aff’d per curiam 793_f2d_139 6th cir this generally accepted formulation of the criteria for determining a valid_return is known as the substantial compliance standard if a defective or incomplete document meets the substantial compliance standard the document is a valid_return for purposes of the statute_of_limitations on assessment and for purposes of determining the failure_to_file_penalty of sec_6651 apart from the so-called tax protestor cases see eg 618_f2d_280 5th cir zeros and constitutional objections 627_f2d_830 7th cir 426_f2d_519 10th cir beard 78_tc_558 and sochia v commissioner t c memo there is little authority for determining what constitutes an honest and reasonable attempt to satisfy the requirements of the tax law courts however have been reluctant to declare defective or incomplete returns as nullities in the absence of protestor language cases such as badaracco steines v commissioner tcmemo_1991_588 frivolous schedule c claiming dollar_figure billion loss and nicolaisen v commissioner tcmemo_1985_120 are typical in badaracco the taxpayer filed returns that were fraudulent but which contained no tax protestor arguments or alterations to the official return form despite the fraudulent nature of the returns the supreme court declared them valid for purposes of starting the statute_of_limitations noting that a lthough those returns in fact were not honest the holding in zellerbach does not render them nullities badaracco u s pincite therefore despite the fact that a return may erroneously or fraudulently claim a black or slavery reparations claim it is considered a valid_return for purposes of starting the statute_of_limitations on assessment issue may the service use mathematical_or_clerical_error procedures to recover any erroneous refund issued on one of these returns claims mathematical_or_clerical_error assessment procedures under sec_6213 generally may be used when a taxpayer has claimed a black reparations tax_credit on the line typically used to claim the eitc sec_6213 includes in the definition scaf-104676-02 of math error an omission of a correct taxpayer_identification_number required under sec_32 relating to the eitc to be included on a return sec_32 and sec_32 require the taxpayer to provide the name age and taxpayer_identification_number of the qualifying_child on the return in cases where the taxpayer is claiming the credit on the basis of a qualifying_child in that situation the identification information for the child is required to be placed on schedule eic earned_income_credit the failure to provide this information where the taxpayer is claiming the credit on the basis of a qualifying_child permits the service to summarily assess the amount claimed as an eitc under sec_6213 taxpayers without a qualifying_child can also claim the credit this taxpayer must meet certain additional requirements and the taxpayer’s earned_income and modified agi must both be very low below dollar_figure for tax_year in this situation the maximum credit the taxpayer can claim for tax_year is dollar_figure thus mathematical_or_clerical_error summary_assessment procedures should not be used for tax_year when the taxpayer claims a credit of no more than dollar_figure on the eitc line no schedule eic is attached and the taxpayer’s earned_income and modified agi are both less than dollar_figure a claim for a black reparations credit may also fit within other provisions of sec_6213 defining mathematical or clerical errors depending on the facts and circumstances of each case issue may the service make summary assessments when it has not yet issued refunds as discussed in chief_counsel notice_2002_012 the service has no obligation to issue a refund based on a purported tax_credit that does not exist under the internal_revenue_code if the credit is entered on the taxpayer’s account then the credit may simply be reversed there is no need for summary_assessment procedures to be used issue would any facts patterns arise where the service should use notices of deficiency with these returns claims and if so how should it treat the claimed credit ie as withholding negative tax etc the service should issue a statutory_notice_of_deficiency where an erroneous refund has been issued the service has made a math error assessment under sec_6213 and the service has abated the assessment at the request of the taxpayer as required under sec_6213 in calculating the deficiency the service should treat the erroneous earned_income_credit as a negative tax as provided under sec_6211 issue would the answers to any of the above questions change because of correspondence attached to the return claim scaf-104676-02 attached correspondence could affect the determination of whether a return is valid for purposes of processing the courts have found that submissions that raise constitutional objections are not returns for purposes of the failure_to_file_penalty see eg 618_f2d_280 5th cir zeros and constitutional objections together with form w-4e falsely swearing to nonexistence of taxable_income 78_tc_558 form_1040 together with attached materials raising constitutional arguments if an service employee finds correspondence or attachments included with returns which they believe could affect any of the answers in the service_center advice they should seek further advice from appropriate service personnel issue is the service authorized to take action to recover a refund which it has sent to the taxpayer’s bank as a direct deposit or paper refund but before the taxpayer has taken possession of it the service is authorized to recover a refund which the service has sent to the taxpayer’s bank as a direct deposit or paper refund but before the taxpayer has taken possession of it under the summary_assessment procedures for mathematical_or_clerical_error under sec_6213 the service should also consider the potential applicability of jeopardy_assessment and collection procedures under sec_6861 and sec_7429 if the bank or other financial_institution has all or most of the proceeds of the refund a jeopardy_assessment and levy may be appropriate to collect the refund before it can be dissipated counsel should work with the service to ensure that the jeopardy_assessment and levy procedures are followed and that the necessary approvals as required by delegation orders have been obtained the service however should not employ the summary_assessment procedures for erroneous income_tax prepayment_credits under sec_6201 sec_6201 permits the service to summarily assess overstated credits for income_tax withheld at the source or for amounts paid as estimated income_tax payments under the eitc do not constitute either income_tax withheld at the source or estimated income_tax thus the summary_assessment procedures of sec_6201 applicable to overstatements of credit for income_tax withheld at the source or to estimated_tax payments do not apply to payments under the eitc and such assessments are invalid if you have any questions please contact michael hara at


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc intl br1-plr-155013-02 date date a country b year c date d this is in response to a letter dated date requesting a ruling under sec_877 of the internal_revenue_code_of_1986 code that a’s loss of lawful permanent resident status expatriation did not have for one of its principal purposes the avoidance of u s taxes under subtitle a or subtitle b of the code 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 the information submitted for consideration is substantially as set forth below a was born in and is a citizen of country b a became a permanent resident_of_the_united_states in year c for employment reasons on date d a returned with his family to country b where he is subject_to tax on his worldwide income as of date d a elected to be treated as a resident of country b under the provisions of the tax_treaty between the united_states and country b and a did not waive the benefits of the treaty applicable to residents of country b on the date of a's expatriation his net_worth exceeded the applicable_amount set forth in sec_877 plr-155013-02 sec_877 generally provides that a citizen who loses u s citizenship or a u s long-term_resident who ceases to be taxed as a lawful permanent resident individuals who expatriate within the 10-year period immediately preceding the close of the taxable_year will be taxed under sec_877 and the special rules of sec_877 for such taxable_year unless such loss did not have for one of its principal purposes the avoidance of u s taxes sec_2107 and sec_2501 provide special estate and gift_tax regimes respectively for individuals who expatriate with a principal purpose to avoid u s taxes a former u s citizen or former u s long-term_resident will be treated as having expatriated with a principal purpose to avoid u s taxes for purposes of sec_877 sec_2107 and sec_2501 if the individual's average income_tax_liability or the individual's net_worth on the date of expatriation exceed certain thresholds see sec_877 sec_2107 and sec_2501 a former u s citizen whose net_worth or average tax_liability exceeds these thresholds however will not be presumed to have a principal purpose of tax_avoidance if that former citizen is described within certain statutory categories and submits a request for a ruling within one year of the date of loss of u s citizenship for the secretary's determination as to whether such loss had for one of its principal purposes the avoidance of u s taxes see sec_877 sec_2107 and sec_2501 under notice_98_34 1998_2_cb_29 modifying notice_97_19 1997_1_cb_394 a former long-term_resident whose net_worth or average tax_liability exceeds the applicable thresholds will not be presumed to have a principal purpose of tax_avoidance if that former resident is described within certain categories and submits a complete and good_faith request for a ruling as to whether such loss had for one of its principal purposes the avoidance of u s taxes a is eligible to request a ruling pursuant to notice_98_34 because he is a resident fully liable to income_tax in country b the country in which he was born notice_98_34 requires that certain information be submitted with a request for a ruling that an individual’s expatriation did not have for one of its principal purposes the avoidance of u s taxes a submitted all of the information required by notice_97_19 as modified by notice_98_34 including additional information requested by the service after review of the submission accordingly based solely on the facts submitted and the representations made we conclude that a has made a complete and good_faith submission in accordance with sec_877 and notice_98_34 therefore a will not be presumed under sec_877 to have had as one of his principal purposes for expatriating the avoidance of u s taxes we further conclude that a will not be treated under sec_877 as having as one of his principal purposes for expatriating the avoidance of u s taxes because the information submitted clearly establishes the lack of a principal purpose to avoid taxes under subtitle a or b of the code plr-155013-02 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 in addition no opinion is expressed as to a’s u s tax_liability for taxable periods prior to his expatriation or for taxable periods after his expatriation under sections of the code other than sec_877 sec_2107 and sec_2501 a copy of this letter must be attached to a’s u s income_tax return for the year in which a obtained the ruling whether or not a is otherwise required to file a return 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 representatives sincerely elizabeth u karzon chief branch office of associate chief_counsel international cc


t c memo united_states tax_court daniel gerard callahan petitioner v commissioner of internal revenue respondent docket no filed date daniel gerard callahan pro_se james m klein for respondent memorandum opinion paris judge on date respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax and additions to tax of dollar_figure under sec_6651 for failure_to_file a return dollar_figure under sec_6651 for failure to 1all section references are to the internal_revenue_code_of_1986 as amended pay tax and dollar_figure under sec_6654 for failure to make estimated_tax payments for tax_year petitioner timely petitioned this court for redetermination of the tax_deficiency as well as the additions to tax for tax_year the principal issue for decision is whether the payments petitioner received in exchange for services he provided are gross_income on which taxes should be paid background some of the facts have been stipulated and are so found the stipulation of facts is incorporated herein by this reference during tax_year petitioner worked as an assistant supervisor and clinician for the midwest college of oriental medicine in racine wisconsin an institution owned by acupuncture center inc aci petitioner was paid dollar_figure with checks issued by aci for services he provided to aci pursuant to a contract which stated that aci would file a form 1099-misc miscellaneous income with the internal_revenue_service and that petitioner would be responsible for paying any_tax liability which resulted from the payments petitioner has a b s degree in economics a master’s degree in industrial relations a b s degree in nutrition and a master’s degree in nutrition and is currently working on a doctorate in nutrition petitioner 2respondent has conceded the dollar_figure addition_to_tax determined under sec_6651 although not an attorney also ha sec_4 years of experience as a municipal court judge in sturtevant wisconsin petitioner did not file a tax_return for tax_year he did not pay any federal_income_tax or make any payments of estimated_tax for that year on date respondent mailed to petitioner a notice_of_deficiency setting forth respondent’s determination_of_a_deficiency in petitioner’s income_tax for tax_year and additions to tax under sec_6651 and and a the notice_of_deficiency reflected a filing_status of married_filing_separately petitioner filed a timely petition with this court on date at the time of filing petitioner resided in wisconsin petitioner’s marital status was not further addressed by the parties tax_deficiency discussion petitioner argues that he is a citizen of the republic of wisconsin and not a citizen of the state of wisconsin or of the united_states consequently petitioner argues that he does not have to pay federal income taxes petitioner’s argument that he is not a citizen of wisconsin or of the united_states is a frivolous argument of the sort that this court and other courts have consistently rejected see 7_f3d_1340 7th cir 999_f2d_1255 8th cir 985_f2d_962 8th cir bland- barclay v commissioner tcmemo_2002_20 solomon v commissioner tcmemo_1993_509 affd without published opinion 42_f3d_1391 7th cir petitioner claims that the compensation he received during tax_year is not income for federal taxation purposes petitioner admits that he was associated with aci and was monetarily compensated for services he performed for aci however petitioner contends that his time and talent are a like- kind exchange for the money received akin to an exchange of property aci’s dean of faculty testified for respondent that aci made payments to petitioner in for the work he performed that year under a contract with aci aci reported the payments made to petitioner on form 1099-misc wages and other compensation received in exchange for personal services are taxable_income 805_f2d_902 10th cir affg tcmemo_1985_ 687_f2d_264 8th cir affg tcmemo_1981_506 for federal_income_tax purposes gross_income means all income from whatever source derived and includes compensation_for services sec_61 petitioner performed services for aci and was compensated for those services therefore the compensation petitioner received for those services is taxable as gross_income under sec_61 sec_6651 and and a additions to tax respondent determined that petitioner is liable for additions to tax for failure_to_file a return and failure to pay estimated income_tax under sec_6651 and sec_6654 respectively respondent bears the burden of production ie the burden of producing evidence that it is appropriate to impose the additions to tax see sec_7491 116_tc_438 once the commissioner meets his burden of production under sec_7491 the taxpayer bears the burden_of_proof regarding reasonable_cause or similar provisions higbee v commissioner supra pincite petitioner received a form 1099-misc from aci which reflected the amount of money he received for the services he performed however petitioner did not file a tax_return for tax_year petitioner did not offer a cognizable defense for his failure_to_file a federal_income_tax return the failure_to_file addition_to_tax under sec_6651 is sustained respondent determined that petitioner is liable for a sec_6654 addition_to_tax for failure to pay estimated income taxes for tax_year absent a statutory exception an 3as previously noted respondent conceded the sec_6651 addition_to_tax before trial addition_to_tax for failure to pay estimated income_tax is mandatory once an underpayment of a required_installment of the tax is established 102_tc_596 664_fsupp2d_774 e d mich 535_fsupp2d_1135 d haw respondent has the burden of production to show that an addition_to_tax is appropriate see sec_7491 127_tc_200 affd 521_f3d_1289 10th cir respondent met his burden of production by presenting evidence that petitioner paid no estimated_tax for and provided the same services to aci the previous year but filed no income_tax return for the previous year petitioner has not argued that any of the statutory exceptions apply see bagby v commissioner supra pincite therefore the addition_to_tax under sec_6654 is sustained sec_6673 penalty sec_6673 authorizes the court to require a taxpayer to pay to the united_states a penalty not in excess of dollar_figure whenever it appears that the taxpayer has instituted or maintained the proceedings primarily for delay or that the taxpayer’s position in such proceeding is frivolous or groundless respondent has filed a motion to impose on petitioner a penalty under sec_6673 on the basis of the record presented the court is convinced that petitioner’s position is frivolous while petitioner is not an attorney petitioner is a sophisticated individual who holds advanced degrees and ha sec_4 years of experience as a municipal judge petitioner argued that he does not have citizenship in the state of wisconsin or in the united_states but he is a citizen of the republic of wisconsin an argument that this court and other courts have consistently rejected 7_f3d_1340 7th cir 999_f2d_1255 8th cir 985_f2d_962 8th cir bland-barclay v commissioner supra solomon v commissioner supra petitioner’s alternative argument that he did not work or provide services but instead exchanged his talents and property for tax-free payment has also been consistently found by this court and other courts to be frivolous and without merit 939_f2d_499 7th cir 898_f2d_942 3d cir 661_f2d_71 5th cir affg tcmemo_1981_122 this opinion does not undertake to address petitioner’s other frivolous arguments such as the form 1099-misc reflecting his compensation is unsworn to under bounds of perjury sic under the laws of either the united_states of america or the united_states the ‘factual notion’ that the payments received were ‘income’ and a basis of the actions taken by respondent have created a ‘legal fiction based on color of law’ that the tax_court may not use other tax_court cases as precedent that there is a difference between the united_states a corporation created under the district of columbia organic act of and the united_states of america that the only applicable_section of the code authorizing tax petitioner’s income is sec_1_61-15 income_tax regs and that the terms wages and compensation are defined under other united_states_code titles and are unrelated to income_tax petitioner made similar frivolous arguments before this court and a penalty of dollar_figure was imposed under sec_6673 see callahan v commissioner tcmemo_2007_301 affd 334_fedappx_754 7th cir on appeal the court_of_appeals for the seventh circuit affirmed this court’s decision and imposed a presumptive dollar_figure sanction for filing a frivolous appeal 4petitioner makes this argument while claiming that he is not a citizen_of_the_united_states 5perhaps this is the reason petitioner argues that the tax_court may not use other tax_court cases as precedent 6see 334_fedappx_754 7th cir where the seventh circuit imposed a presumptive dollar_figure sanction for filing a frivolous appeal in a tax case affg t c memo see also 460_f3d_884 7th cir noting that the presumptive award will be doubled for a recidivist litigator therefore this court finds that petitioner was aware of the consequences of making frivolous arguments yet he continued to assert them the court is also aware that the tax_liability in this case without accrued interest is approximately dollar_figure accordingly the court grants respondent’s motion in that it imposes on petitioner a dollar_figure penalty pursuant to sec_6673 finally in reaching the conclusions herein the court has considered all arguments made and to the extent not mentioned above concludes they are moot irrelevant or without merit to reflect the foregoing including respondent’s concession an appropriate order and decision will be entered


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division mar uniform issue list tep ata rna ke rururkakake kkk kkk rnnkkknknkr kkk kek legend taxpayer a ss aeekkiiik ira b monee financial_institution d sone kis financial_institution e stodroroik financial_institution f sdn iiie company g tke rrr amount gta amount oe amount ik aelabalalailelelelalattotetetatete dear rrnkeraknkeakkrakrkeak this is in response to your request received in this office 8et8eehhihe ih which you request a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code the code’ the following facts and representations have been submitted under penalty of perjury in support of the ruling requested qui ioey taxpayer a represents that he requested and received a distribution of amount from individual_retirement_account ira b taxpayer a asserts that the failure to roll over amount within the 60-day period was due to the failure of financial_institution d investment_advisor for company g to initiate for distribution the correct amount of funds taxpayer a represents that the funds have not been used for any other purpose taxpayer a represents that he requested a distribution of amount from ira b with financial_institution e taxpayer a intended the distribution to include all of his liquid_assets in company g after receiving amount from ira b on shanexmnexeeeeeeees taxnaver a received notice from financial_institution d that the distribution amount was incorrect and that taxpayer a had exceeded the amount of liquid_assets he could withdraw based on the partnership_interest that ira b held in company g financial_institution d acknowledged their distribution error by letter dated ong requested that taxpayer a return amount to the partnership financial_institution d’s recognition of its error occurred after the expiration of the 60-day rollover requirement in accordance with the instructions of financial_institution d taxpayer a deposited amount into ira b on ekwkekeeeeeseekieh ond on the same day financial_institution e wired the amount funds to financial_institution f custodian for company g financial_institution d noted that taxpayer a’s actual distribution from ira b for should have been amount amount less amount and requested that financial_institution e issue a corrected r for amount based on the above facts and representations you request a ruling that the internal_revenue_service service waive the 60-day rollover requirement with respect to amount contained in sec_408 of the code in this instance sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the rollover provisions of sec_408 do not apply to any amount required to be distributed under sec_408 sec_408 of the code provides that the secretary may waive the day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 of the code revproc_2003_16 2003_4_irb_359 date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and documentation submitted by taxpayer a is consistent with his assertion that his failure to accomplish a timely rollover was caused by an error on the part of financial_institution d to initiate for distribution the correct amount of funds ep we therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to the contribution made by taxpayer a of amount into ira b provided all other requirements of sec_408 of the code except the 60-day requirement are met with respect to such contribution amount will be considered a rollover_contribution within the meaning of sec_408 of the code this ruling does not authorize the rollover of amounts that are required to be distributed by sec_408 of the code no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent if you wish to inquire about this ruling please contact t xe identification_number exeanaeaeaaes at ht diease address all correspondence to wrakkkkarkknkkakkkk sincerely yours callen a waithins carlton a watkins manager employee_plans technical group


t c memo united_states tax_court james o davenport jr petitioner v commissioner of internal revenue respondent docket no filed date james o davenport jr pro_se kim-khanh thi nguyen for respondent memorandum findings_of_fact and opinion vasquez judge respondent determined an dollar_figure deficiency and a dollar_figure addition_to_tax pursuant to sec_6651 in petitioner’ sec_2001 federal_income_tax at the close of trial unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure respondent orally moved to impose a dollar_figure penalty pursuant to sec_6673 after concessions the issues for decision are whether the pension distributions petitioner received during from the defense finance and accounting service and from the thompson-ramo-wooldridge trw pension_plan are includable in income for and whether the court should impose a penalty pursuant to sec_6673 findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts stipulation of settled issues and the attached exhibits are incorporated herein by this reference at the time he filed the petition petitioner resided in apple valley california petitioner had been a reserve officer in the u s air force during petitioner received dollar_figure in retirement pension distributions from the defense finance and accounting service on account of his prior service as a reserve officer in the u s air force petitioner was not injured while serving in the u s air force and the retirement pension distributions were paid for petitioner’s prior service in the u s air force and not on account of a disability petitioner had been an engineer for trw during petitioner received dollar_figure in retirement pension distributions from the trw pension_plan petitioner submitted to the internal_revenue_service a form_1040 u s individual_income_tax_return for listing only zeros eg listing zero income and zero tax due attached to the form_1040 was an affidavit from petitioner containing frivolous and groundless arguments opinion i deficiencies sec_61 defines gross_income as all income from whatever source derived gross_income includes among other things pensions and annuities sec_61 see also sec_72 petitioner admits that he received the income listed in the notice_of_deficiency from the defense finance and accounting service and from the trw pension_plan petitioner admits that the amounts received from the defense finance and accounting service were not amounts received as a pension or annuity for personal_injury_or_sickness resulting from active_service in the armed_forces or as a disability annuity see sec_104 excluding such amounts from income accordingly we conclude that the pension distributions petitioner received during from the defense finance and accounting service and from the trw pension_plan are includable in income for ii sec_6673 sec_6673 authorizes this court to require a taxpayer to pay to the united_states a penalty not to exceed dollar_figure if the taxpayer took frivolous or groundless positions in the proceedings or instituted the proceedings primarily for delay a position maintained by the taxpayer is frivolous where it is contrary to established law and unsupported by a reasoned colorable argument for change in the law 791_f2d_68 7th cir see also 820_f2d_1464 9th cir sec_6673 penalty upheld because taxpayer should have known claim was frivolous respondent repeatedly warned petitioner that his arguments are frivolous respondent provided petitioner with a copy of the truth about frivolous tax arguments respondent directed petitioner to among other things sec_61 and sec_72 additionally petitioner is no stranger to this court in docket no petitioner also argued that distributions from the defense finance and accounting service and from the trw pension_plan for were not taxable on date we granted summary_judgment for respondent in docket no and entered an order and decision holding among other things that the distributions from the defense finance and accounting service and from the trw pension_plan for were income and taxable to petitioner in docket no 9757-05l a sec_6330 case regarding collection of petitioner’s tax_liability respondent filed a motion for summary_judgment and to impose a penalty under sec_6673 in docket no 9757-05l petitioner advanced frivolous and groundless arguments and on date--7 months prior to the trial of the instant case--the court entered an order and decision granting respondent’s motion to impose a penalty under sec_6673 and imposing a penalty of dollar_figure pursuant to sec_6673 furthermore in the case at bar on date in an order granting partial summary_judgment to respondent this court stated petitioner is admonished not to pursue frivolous arguments which have been rejected by both this court and the court_of_appeals for the ninth circuit should petitioner continue to pursue those frivolous arguments this court will impose a penalty on petitioner under sec_6673 at trial the court reminded petitioner of this admonishment petitioner stated that he was familiar with sec_6673 petitioner continued to advance frivolous arguments eg the definition of income in sec_61 is used in its constitutional sense and shopworn arguments regarding the 16th amendment characteristic of tax-protester rhetoric that has been universally rejected by this and other courts 848_f2d_1007 9th cir affg tcmemo_1987_225 784_f2d_1006 9th cir we do not painstakingly address petitioner’s assertions with somber reasoning and copious citation of precedent to do so might suggest that these arguments have some colorable merit 737_f2d_1417 5th cir petitioner was warned several times by respondent and the court that his arguments were frivolous and without merit and that if he continued to advance them he could be subject_to a penalty of up to dollar_figure even after receiving repeated warnings and the court imposing a penalty of dollar_figure pursuant to sec_6673 in another docket only months before the trial of this case petitioner continued to advance frivolous and meritless arguments we conclude petitioner’s position was frivolous and groundless and that petitioner instituted and maintained these proceedings primarily for delay accordingly pursuant to sec_6673 we hold petitioner is liable for a dollar_figure penalty to reflect the foregoing an appropriate order and decision will be entered


internal_revenue_service number release date index number ------------------------------------ ----------------------------- ----------------------------- re -------------------------------------------- --------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b04 plr-113952-10 date date legend grantor spouse estate accounting firm trust year year date date a b dear ----------------- ------------------------------- --------------------------------------------------------------------- ------------------------------------------------------- ------------------- ----------------------------------------------------- ------- ------- -------------------------- -------------------------- --------- --------- this letter responds to your letter dated date requesting an extension of time under sec_2642 of the internal_revenue_code and sec_301_9100-3 of the procedure and administration regulations to allocate spouse’s gst_exemption to transfers to trust the facts and representations submitted are summarized as follows on date prior to date grantor established trust an irrevocable_trust for the benefit of the then living lineal_descendants of grantor upon the death of the survivor of grantor and spouse the balance of the trust estate is to be paid to grantor’s then living lineal_descendants per stirpes plr-113952-10 in year grantor made a gift of dollar_figurea to trust in year grantor made a gift of dollar_figureb to trust grantor and spouse consented to treat the gifts made in year and year as being made one-half by each pursuant to sec_2513 grantor and spouse hired accounting firm to prepare their form sec_709 united_states gift and generation-skipping_transfer_tax returns for year and year accounting firm prepared the form sec_709 but failed to allocate spouse’s gst_exemption on those returns spouse died on date you have requested an extension of time under sec_2642 and sec_301_9100-3 to allocate spouse’s available gst_exemption to the year and year transfers to trust law and analysis sec_2513 provides that a gift made by one spouse to any person other than the donor's spouse is considered for purposes of the gift_tax as made one-half by the donor and one-half by the donor's spouse but only if at the time of the gift each spouse is a citizen or resident_of_the_united_states sec_2601 imposes a tax on every generation-skipping_transfer a generation-skipping_transfer is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2602 provides that the amount of the tax imposed by sec_2601 is the taxable_amount multiplied by the applicable_rate sec_2641 defines applicable_rate as the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer sec_2631 as in effect for the years at issue provides that for purposes of determining the gst tax every individual shall be allowed a gst_exemption of dollar_figure which may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2631 provides that any allocation under sec_2631 once made shall be irrevocable sec_26_2632-1 of the generation-skipping_transfer_tax regulations provides that an allocation of gst_exemption to property transferred during the transferor's lifetime other than in a direct_skip is made on form_709 sec_2652 provides that for purposes of the gst tax the term transferor means the decedent in the case of any property subject_to the estate_tax and the donor in the case of any property subject_to the gift_tax plr-113952-10 sec_2652 provides that if under sec_2513 one-half of a gift is treated as made by an individual and one-half of such gift is treated as made by the spouse of such individual such gift shall be so treated for purposes of chapter sec_2642 provides that except as provided in sec_2642 if the allocation of the gst_exemption to any transfers of property is made on a gift_tax_return filed on or before the date prescribed by sec_6075 for such transfer or is deemed to be made under sec_2632 or c the value of such property for purposes of sec_2642 shall be its value as finally determined for purposes of chapter within the meaning of sec_2001 or in the case of an allocation deemed to have been made at the close of an estate_tax_inclusion_period its value at the time of the close of the estate_tax_inclusion_period sec_2642 provides that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 or and an election under sec_2632 or c such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of sec_2642 sec_2642 provides that in determining whether to grant relief under this paragraph the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief under this paragraph the time for making the allocation or election shall be treated as if not expressly prescribed by statute see notice_2001_50 2001_2_cb_189 sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose date is prescribed by a regulation and not expressly provided by statute in accordance with sec_2642 and notice_2001_50 taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer reasonably relied on a qualified_tax plr-113952-10 professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied therefore estate is granted an extension of time of days from the date of this letter to allocate spouse’s available gst_exemption to the year and year transfers to trust the allocation will be effective as of the respective date of the transfers to trust and the value of the transfers to trust as determined for federal gift_tax purposes will be used in determining the amount of spouse’s gst_exemption to be allocated to trust these allocations should be made on supplemental form sec_709 for year and year the form sec_709 should be filed with the cincinnati service_center at the following address internal_revenue_service cincinnati service_center - stop cincinnati oh a copy of this letter should be attached to the supplemental form sec_709 a copy is enclosed for this purpose in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives 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 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 the rulings in this letter pertaining to the federal estate and or generation-skipping_transfer_tax apply only to the extent that the relevant sections of the internal_revenue_code are in effect during the period at issue plr-113952-10 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely associate chief_counsel passthroughs special industries _________________________ by lorraine e gardner senior counsel branch office of the associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter cc