t c memo united_states tax_court joseph anthony d’errico petitioner v commissioner of internal revenue respondent tax practice management inc petitioner v commissioner of internal revenue respondent docket nos filed date joseph anthony d’errico pro_se in docket no joseph anthony d’errico an officer for petitioner in docket no kimberly a kazda for respondent memorandum findings_of_fact and opinion goeke judge with respect to joseph d’errico respondent determined deficiencies in federal_income_tax of dollar_figure and dollar_figure for tax years and respectively respondent also determined penalties under section of dollar_figure and dollar_figure for and respectively with respect to tax practice management inc tpm respondent determined deficiencies in federal_income_tax of dollar_figure and dollar_figure for tax years ending tye date and respectively respondent also determined penalties under sec_6662 of dollar_figure and dollar_figure for tye date and respectively all dollar amounts are rounded these cases were consolidated for trial briefing and opinion the issues remaining for decision after concession sec_2 are whether tpm is entitled to business_expense deductions of dollar_figure and dollar_figure for tye date and we hold that it is not 1unless otherwise indicated all section references are to the internal_revenue_code code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure all dollar amounts are rounded 2respondent concedes certain issues relating to a short-term_capital_loss the sale price for a corporation sold and unreported income to mr d’errico from wages salaries and tips respondent also concedes some expense deductions claimed by tpm whether tpm is liable for liable for accuracy-related_penalties under sec_6662 for tye date and we hold that it is whether mr d’errico received constructive_dividend income from tpm of dollar_figure and dollar_figure for tax years and respectively as a result of rent and airplane expenses paid_by tpm we hold that he did receive constructive_dividend income for both and but not in the amounts determined by respondent whether mr d’errico understated his capital_gain income for by dollar_figure as a result of his failure to establish the bases he claimed in connection with the sale or liquidation of three corporations we hold that he did and whether mr d’errico is liable for accuracy-related_penalties under sec_6662 for tax years and we hold that he is 3respondent incorrectly calculated the amount of constructive_dividend income received by mr d’errico for because of airplane expenses paid_by tpm as discussed infra in addition respondent improperly included some constructive_dividend income paid in for mr d’errico’s tax_year and some constructive_dividend income paid in for mr d’errico’s tax_year as discussed infra the parties must determine the correct amounts of constructive_dividend income to include in mr d’errico’s and tax years in their rule_155_computations findings_of_fact at the time their petitions were filed the mailing addresses of both mr d’errico and tpm were in zephyr cove nevada background mr d’errico was the sole shareholder of tpm a c_corporation incorporated in from at least date to date before tpm provided management services for certain tax preparation s_corporations wholly owned by mr d’errico d’errico wedge inc d’errico wedge in mission hills california d’errico mccollor inc d’errico mccollor in santa barbara california and joseph a d’errico associates inc d’errico associates in lake tahoe nevada d’errico associates ceased doing business during and made its only payment to tpm in but both d’errico wedge and d’errico mccollor made payments to tpm for services provided through the end of on date mr d’errico sold of the shares of both d’errico wedge and d’errico mccollor to unrelated third parties the sales of these corporations are discussed further infra on his tax_return mr d’errico also claimed to have sold of the shares of d’errico associates although the corporation had actually been liquidated in tpm for its tye date tpm reported gross_receipts of dollar_figure tpm also claimed deductions of dollar_figure for depreciation of assets dollar_figure for rent payments made and dollar_figure for other business_expenses respondent disallowed all these deductions in his notice_of_deficiency but now concedes deductions totaling dollar_figure for accounting and banking expenses respondent continues to contest the following deductions expense depreciation rent airplane expenses auto and truck client expenses dues and subscriptions insurance meals and entertainment supplies telephone travel utilities total amount dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number 4these receipts comprised dollar_figure in rent payments to tpm from mr d’errico resulting from a sublease which allowed mr d’errico to live in the home in which tpm purportedly conducted business and dollar_figure in airplane rental income these items of income are discussed further infra for its tye date tpm reported gross_receipts of dollar_figure tpm also claimed deductions of dollar_figure for depreciation of assets dollar_figure for rent and dollar_figure for other business_expenses respondent disallowed all deductions in his notice_of_deficiency but now concedes deductions totaling dollar_figure for accounting and banking expenses respondent continues to contest the following deductions expense amount dollar_figure depreciation big_number rent big_number airplane expenses big_number auto and truck dues and subscriptions big_number insurance legal and professional meals and entertainment supplies big_number telephone travel big_number big_number utilities total big_number a rent expenses and income in date mr d’errico in his capacity as president of tpm entered into a three-year lease with his father anthony d’errico beginning on date and ending on date the lease was for the use 5these receipts comprised rent payments to tpm from mr d’errico resulting from a sublease which allowed mr d’errico to live in the home in which tpm purportedly conducted business and are discussed further infra of a residence owned by anthony d’errico pincite barton drive stateline nevada barton drive home and was renewed in date for rent of dollar_figure per month under the lease tpm was also responsible for utility payments the rent payments were actually made to anthony d’errico from tpm also in date mr d’errico entered into a three-year sublease with tpm for his personal_use of the barton drive home beginning on date and ending on date the sublease was renewed in date for rent of dollar_figure per month paid to tpm both the lease and the sublease appear to have ended date and tpm paid no rent to anthony d’errico during neither the lease nor the sublease identifies portions of the property which would be used by tpm for business purposes or that would be used by mr d’errico personally mr d’errico testified that he used three downstairs rooms only for business and a small loft upstairs for his personal_residence he further testified that certain common areas were shared b airplane expenses and income in date tpm purchased a cessna airplane airplane for dollar_figure mr d’errico had a pilot’s license and several years of flight training at the time tpm purchased the airplane mr d’errico testified that tpm purchased the airplane in order for him to travel quickly between tpm’s purported office at the barton drive home in stateline nevada and his two active tax preparation corporations d’errico mccollor and d’errico wedge which were in southern california a commute of approximately miles at the time tpm purchased the airplane mr d’errico knew that he was going to be selling d’errico mccollor and d’errico wedge tpm took delivery of the airplane on date and mr d’errico used it on december and to travel to southern california for discussions with the parties buying d’errico mccollor and d’errico wedge on date tpm entered into an aircraft leaseback agreement leaseback agreement which allowed the flight training company flying start aero to make the airplane available to the public for rental for no more than hours per month the leaseback agreement stated that tpm was entering into the agreement with the intention of generating some revenue for the purpose of offsetting a portion of the aircraft operating costs even though the airplane was leased to flying start aero tpm was still responsible for airplane expenses such as insurance and maintenance the lease was canceled by flying start aero in early upon tpm’s failure to pay such expenses 6d’errico associates had ceased doing business in the airplane was not used in tpm’s tax management related business during or petitioner claimed in his testimony that he used the airplane on business related trips in both january and date however mr d’errico did not introduce a log of his airplane use during into evidence the only airplane records summarized expenses one matthew laughlin incurred in a trip to los angeles mr laughlin had been mr d’errico’s certified flight instructor since mr d’errico began to fly in mr d’errico testified that mr laughlin came out from denver to talk to me about multiple uses for the airplane he thought it would be a good idea for us to start our own flight school in which he would have a flight school and i would rent the airplane to his flight school on its tye date tax_return tpm reported income from the airplane rental of dollar_figure airplane expenses of dollar_figure and airplane depreciation of dollar_figure on its tye date tax_return tpm reported no airplane rental income airplane expenses of dollar_figure and total depreciation of dollar_figure mr d’errico testified that some of the airplane expenses listed on the tye april 7the lease with flying start aero was terminated before tpm’s date tax_year began 8no depreciation schedule was attached to tpm’s tax_return and no other evidence was introduced which would show the amount of depreciation attributable to the airplane tax_return are the result of tpm’s rental of other airplanes for mr d’errico’s continued flight training c other expenses deducted by tpm mr d’errico testified that he and tpm had a reimbursement plan whereby he paid most of tpm’s expenses and would later be reimbursed by tpm for those expenses a brief summary of the expenses follows mr d’errico testified that tpm purchased a chevrolet tahoe solely for tpm’s business use mr d’errico also personally owned a jeep cherokee which he claims to have used for business purposes tpm deducted auto and truck expenses of dollar_figure and dollar_figure for its tye date and respectively for the tye date dollar_figure was claimed for fuel and dollar_figure was claimed for car registration expenses for the tye date dollar_figure was claimed as an expense reimbursement to mr d’errico dollar_figure was claimed for fuel and dollar_figure was claimed for car registration expenses tpm deducted dollar_figure of client expenses for its tye date mr d’errico testified that the expenses were unreimbursed expenses related to clients of his tax preparation businesses 9this additional flight training was for purposes of obtaining an advanced flight rating which would allow mr d’errico to fly during bad weather tpm deducted dues and subscription expenses of dollar_figure and dollar_figure for its tye date and respectively these expenses were for several airplane and flight magazine subscriptions mr d’errico’s membership in several airplane owner and pilot organizations and an on-star navigation system for the chevrolet tahoe tpm deducted insurance expenses of dollar_figure and dollar_figure for its tye date and respectively these expenses comprised mostly insurance on the chevrolet tahoe and on the barton drive home although dollar_figure of insurance expense is listed as for a tax prep bond during the tye date it was not clear why the tax prep bond expense was incurred tpm deducted dollar_figure in legal and professional fees for its tye date mr d’errico did not testify regarding these expenses tpm deducted expenses for meals and entertainment of dollar_figure and dollar_figure for its tye date and respectively petitioners introduced several meal receipts and credit card statements to support tpm’s claimed deductions many of the receipts are for meals purchased in mexico tpm deducted expenses for supplies of dollar_figure and dollar_figure for its tye date and respectively many of these supplies were purchased for the airplane although petitioners also produced receipts from stores such as home depot and staples tpm deducted telephone expenses of dollar_figure and dollar_figure for its tye date and respectively these expenses included the cost for a land line in the barton drive home listed in anthony d’errico’s name as well as the cost for two verizon wireless cellular phone numbers listed in mr d’errico’s name tpm paid these expenses out of its checking account tpm deducted travel_expenses of dollar_figure and dollar_figure for its tye date and respectively credit card statements introduced to support the deductions showed travel_expenses such as car rentals and airline flights some of the flight descriptions show that a number of the flights were to or from dallas texas in addition mr d’errico was reimbursed dollar_figure by tpm for a hotel expense in las vegas nevada during his trial testimony mr d’errico never mentioned doing business in either dallas or las vegas tpm deducted utility expenses for the barton drive home of dollar_figure and dollar_figure for its tye date and respectively these expenses included cable television internet gas electric and certain repairs 10the cable package included additional expenses for the movie tier and the digital sports tier mr d’errico a rent and airplane expenses paid_by tpm as discussed above tpm paid mr d’errico’s father dollar_figure in rent for the barton drive home during its tye date and dollar_figure in rent during its tye date respondent determined these rent payments to constitute constructive_dividend income paid to mr d’errico by tpm in and respectivelydollar_figure tpm also paid airplane expenses of dollar_figure and dollar_figure during its tye date and respectively respondent determined these airplane expense payments to constitute constructive_dividend income paid to mr d’errico by tpm in and respectively it appears respondent’s determination of dollar_figure of airplane expenses paid during tpm’s tye date was in error as tpm claimed only dollar_figure of airplane expenses as a deduction for that yeardollar_figure 11as discussed further infra the fact that tpm and mr d’errico used different tax years caused respondent to erroneously include certain constructive dividends_paid in in mr d’errico’s income and constructive dividends_paid in in mr d’errico’s income 12respondent’s notice_of_deficiency for mr d’errico states it has been determined that you received income in the amount continued the dollar_figure figure was the total amount of other deductions listed on tpm’s form_1120 u s_corporation income_tax return and attached statement this error was not addressed by either petitioners or respondent b tax preparation corporations and capital_gain income before mr d’errico had been a tax practitioner who did work for the tax preparation corporations which he owned in addition to the management work he did for tpm for his work mr d’errico received a salary from the corporations mr d’errico also took corporate draws which were reflected as negative stockholders’ equity on each corporation’s balance sheets mr d’errico prepared the financial statements including the balance sheets for each of his tax preparation corporations at some point mr d’errico decided he no longer wanted to be a tax practitioner and would rather concentrate on his management practice d’errico associates ceased doing business during on date mr d’errico continued of dollar_figure from dividends constructively received which were reported incorrectly on your return for the taxable_year ended date these amounts are determined to be taxable to you because you failed to establish that they are excludable from gross_income under provision of the internal_revenue_code the amounts received were claimed to be for airplane expenses dollar_figure and rent dollar_figure to your corporation accordingly your income is increased dollar_figure sic sold d’errico wedge to an unrelated third party for dollar_figure also on date mr d’errico sold d’errico mccollor to an unrelated third party for dollar_figure the price of this latter sale was later lowered by dollar_figure because d’errico mccollor did not meet a gross_receipts condition in the sale contract after selling d’errico wedge and d’errico mccollor mr d’errico worked for both corporations in his personal capacity during and however mr d’errico testified that some expenses were captured and deducted by tpm because there was an oral agreement between the corporations and tpm that although he would be employed in his personal capacity he would be doing the same work he would have done had the corporations hired him as an independent_contractor through tpmdollar_figure on his income_tax return mr d’errico claimed a dollar_figure basis in d’errico mccollor d’errico mccollor’s balance_sheet dated date shows capital stock of dollar_figure as well as a dollar_figure outstanding draw to mr d’errico on his income_tax return mr d’errico claimed a dollar_figure basis in d’errico wedge d’errico wedge’s balance_sheet dated date 13mr d’errico recognized that this arrangement was a little odd shows capital stock of dollar_figure as well as a dollar_figure outstanding draw to mr d’errico no later balance sheets for d’errico wedge were introduced on his income_tax return mr d’errico claimed to have sold d’errico associates for dollar_figure although the corporation had actually been liquidated in mr d’errico claimed a basis of dollar_figure in d’errico associates on his income_tax return d’errico associates’ balance_sheet dated date shows capital stock of dollar_figure as well as a dollar_figure outstanding draw to mr d’errico mr d’errico testified that the amount of the outstanding draw paid to him as listed on the date balance_sheet for d’errico associates was an error even though the balance_sheet balanced when asked whether he had any evidence to support his statement that the balance_sheet was incorrect mr d’errico stated that d’errico associates’ corporate tax_return would probably suffice however d’errico associates’ corporate tax_return is in conformity with the balance sheets reporting dollar_figure in property distributions including cash other than dividend distributions reported on form 1099-div dividends and distributions d’errico associates’ date balance_sheet shows no outstanding draw to mr d’errico and also reflects large adjustments made to net_income and retained earnings as compared with the date balance_sheet other information on date respondent issued a notice_of_deficiency to tpm for tye date and also on date respondent issued a notice_of_deficiency to mr d’errico for tax years and petitioners timely filed their petitions contesting the deficiencies and penalties at the close of trial the court ordered petitioners and respondent to file seriatim briefs with petitioners filing an answering brief days after respondent’s opening brief petitioners failed to file an answering brief despite being told multiple times at trial that they should use these briefs as their opportunity to use the evidence to support their legal positions opinion because the court ordered a posttrial brief and petitioners failed to file a brief we could dismiss this case entirely see rule sec_123 sec_151 84_tc_693 aff’d without published opinion 789_f2d_917 4th cir despite petitioners’ lack of response we will not do so i burden_of_proof the commissioner’s determinations in a notice_of_deficiency are presumed correct and taxpayers bear the burden of proving that the commissioner’s determinations are incorrect rule a 290_us_111 deductions are a matter of legislative grace and taxpayers bear the burden of proving that they have met all requirements necessary to be entitled to the claimed deductions rule a 503_us_79 petitioners have not argued that sec_7491 applies in this case and therefore bear the burden_of_proof with respect to most issues we address the burden_of_proof on the constructive_dividend issue below petitioners have submitted voluminous evidence in support of their positionsdollar_figure that evidence includes a large number of technical documents financial statements contracts and copies of receipts many of the exhibits are at least partially handwritten and difficult to decipher while mr d’errico did make some attempt during his trial testimony to use the evidence to support petitioners’ positions that testimony was often brief and vague the testimony typically summarized an exhibit as a whole rather than describing specific facts contained 14the evidence consisted of over exhibits spanning approximately big_number pages within by failing to file a posttrial brief petitioners have ignored our instructions to use the evidence in the record to support their legal positions we need not and will not undertake the work of sorting through every piece of evidence petitioners have provided in an attempt to find support for petitioners’ ultimate legal positions taken in this case see hale v commissioner tcmemo_2010_229 refusing to sort through pages of disorganized evidence in an attempt to determine whether a taxpayer provided adequate substantiation when that taxpayer failed to file a brief we will confine our examination to those exhibits which are well organized or which were well summarized by mr d’errico in his testimony ii tpm sec_162 provides that there shall be allowed as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business taxpayers are required to maintain records sufficient to establish the amounts of allowable deductions and to enable the commissioner to determine the correct_tax liability sec_6001 112_tc_183 no deduction is allowed for personal_living_and_family_expenses sec_262 certain expenses described in sec_274 are subject_to strict substantiation rules no deduction shall be allowed for among other things traveling expenses entertainment_expenses gifts and expenses with respect to listed_property defined in sec_280f unless the taxpayer substantiates by adequate_records or by sufficient evidence corroborating the taxpayer’s own statement the amount of the expense or other item the time and place of the travel entertainment or use or date and description of the gift the business_purpose of the expense or other item and in the case of entertainment or gifts the business relationship to the taxpayer of the recipients or persons entertained sec_274 a rent paid to anthony d’errico sec_162 provides for a deduction for ordinary and necessary rental expenses_incurred in carrying_on_a_trade_or_business tpm claimed deductions for rent expenses of dollar_figure and dollar_figure for its tye date and respectively respondent argues that tpm did not use the barton drive home for business purposes we find that tpm has failed to prove its entitlement to deductions for the rent expenses although tpm admits part of the barton drive home was used for mr d’errico’s personal purposes it contends that a larger portion of the home was used for business purposes tpm presented a sublease as evidence supporting its claim but neither the lease nor the sublease specifies which areas of the home were to be used for personal or business activities tpm failed to produce records of any business activity it performed at the property tpm also failed to show why it needed the barton drive home for business when it was not conducting any tax- related_services during tye date and we also note that the barton drive home was approximately miles from mr d’errico’s primary places of employment in southern california during those tax years considering the evidence presented we find tpm has failed to establish that it conducted business-related activities at the barton drive home and we sustain respondent’s determination disallowing deduction of the rent expenses by tpm b airplane expenses and depreciation tpm claims it is entitled to deductions for both airplane expenses under sec_162 and airplane depreciation under sec_167 respondent argues that the airplane was not property used in tpm’s tax management business or property otherwise held_for_the_production_of_income we find that tpm has failed to prove its entitlement to deductions for the airplane expenses and airplane depreciation tpm argues that the airplane was necessary for its tax management business because mr d’errico had to travel between nevada and southern california to fulfill tpm’s business obligations to d’errico mccollor and d’errico wedge however at the time tpm purchased the airplane mr d’errico knew that he was going to be selling d’errico mccollor and d’errico wedge the only business-related use of the airplane shown by petitioners was mr d’errico’s use of the airplane to travel to southern california in date to speak with the parties buying d’errico mccollor and d’errico wedge tpm has produced no evidence that the airplane was used in tpm’s tax management business after mr d’errico also testified that tpm entered the business of renting the airplane out to determine whether a taxpayer is conducting a trade_or_business requires an examination of the facts of each case 312_us_212 for a taxpayer to be engaged in a trade_or_business the primary purpose for engaging in the activity must be for income or profit 480_us_23 whether an enterprise is conducted as a business for profit is a matter of intention and good_faith am props inc v commissioner 28_tc_1100 aff’d 262_f2d_150 9th cir the reasonableness of the taxpayer’s belief that the activity will generate a profit is not relevant hillcone steamship co v commissioner tcmemo_1963_220 however a mere hope that an activity will generate profits in the absence of any specific plan to generate a profit is inconsistent with an allegation that the belief is in good_faith tax practice mgmt v commissioner tcmemo_2010_266 sutherland v commissioner tcmemo_1968_20 tpm has not proven that it entered into the lease agreement with flying start aero with the primary purpose of making a profit indeed the lease agreement itself stated that tpm was entering the agreement with the intention of generating some revenue for the purpose of offsetting a portion of the aircraft operating costs the court_of_appeals for the ninth circuit to which this case is appealable has held that a profit_motive does not exist where activities represented mere attempts to recoup some of the taxpayers’ costs 645_f2d_784 9th cir aff’g tcmemo_1978_202 we therefore find that tpm was not engaged in the trade_or_business of renting out the airplane depreciation is an accounting device that recognizes that the physical consumption of a capital_asset in a business activity is a true cost of doing business since the asset is being depleted 418_us_1 rooney v commissioner tcmemo_2011_14 sec_167 allows as a depreciation deduction a reasonable_allowance_for_exhaustion_wear_and_tear and obsolescence of property if the taxpayer uses the property in a trade_or_business or other income-producing activity see also sec_1_167_a_-1 income_tax regs as we have already found the airplane was not used in tpm’s tax management business or otherwise held_for_the_production_of_income we likewise find tpm has failed to meet the requirements to deduct airplane depreciation expenses c other expense sec_1 automobile expenses passenger automobiles and any other_property used as a means of transportation are generally listed_property as defined by sec_280f sec_274 sec_280f and ii accordingly with certain exceptions none of which tpm has shown it meets deductions for car and truck expenses must satisfy the strict substantiation requirements of sec_274 tpm did not provide sufficient evidence that such expenses were actually incurred as part of tpm’s trade_or_business as required by sec_274 accordingly tpm has failed to meet the substantiation requirements of sec_274 with respect to the automobile expenses and is not entitled to corresponding deductions client expenses tpm has not produced evidence that the client expenses it deducted were actually expenses of tpm it appears that the expenses are actually those of the tax preparation corporations formerly owned by mr d’errico we find tpm has not proven its entitlement to a deduction for these expenses dues and subscription expenses these expenses were for several airplane and flight magazine subscriptions mr d’errico’s membership in several airplane owner and pilot organizations and an on-star navigation system for the chevrolet tahoe we have already found that tpm failed to prove its entitlement to deductions for airplane or automobile expenses we likewise find tpm has failed to prove its entitlement to deductions for related dues and subscription expenses insurance expenses the insurance expenses comprised mostly insurance on the chevrolet tahoe and on the barton drive home although dollar_figure of insurance expense is listed as for a tax prep bond during the tye date we have already found that tpm failed to prove its entitlement to deductions for automobile expenses or to establish that it conducted business-related activities at the barton drive home in addition tpm introduced no evidence pertaining to the tax prep bond insurance expense accordingly we find that tpm failed to prove its entitlement to deductions for these insurance expenses legal and professional expenses mr d’errico did not testify regarding the legal and professional expenses and tpm did not submit any evidence which might substantiate them accordingly we find tpm failed to prove its entitlement to deductions for those expenses meals and entertainment the heightened substantiation requirements of sec_274 apply to meals and entertainment_expenses tpm introduced several meal receipts and credit card statements to support its claimed deductions however tpm did not provide sufficient evidence that such expenses were actually incurred as part of its trade_or_business as required by sec_274dollar_figure accordingly tpm has failed to meet the substantiation requirements of sec_274 with respect to the meals and entertainment_expenses and is not entitled to corresponding deductions 15it was not explained why tpm attempted to deduct expenses for meals purchased in mexico mr d’errico did not testify that he ever did any business in mexico either personally or through tpm supplies tpm failed to establish any business_purpose for the supply expenses accordingly we find tpm failed to prove its entitlement to deduct the amounts of those expenses telephone expenses the telephone expenses included the cost for a land line in the barton drive home listed in anthony d’errico’s name as well as the cost for two verizon wireless cellular phone numbers listed in mr d’errico’s name we have already found that petitioners failed to establish that tpm conducted business-related activities at the barton drive home likewise we find that tpm failed to establish a business_purpose for its payment of the barton drive home landline telephone tpm is therefore not entitled to deduct the landline telephone expenses the heightened substantiation requirements of sec_274 apply to cellular telephone expenses_incurred during the years at issue sec_280f bogue v commissioner tcmemo_2007_150 petitioners did not provide evidence that sec_280f was amended by the small_business jobs_act of pub_l_no sec_2043 sec_124 stat pincite which removed cellular phones and other similar telecommunications equipment from listed_property subject_to sec_274 however that amendment is effective only for tax years beginning after date id sec_2043 such expenses were actually incurred as part of tpm’s trade_or_business as required by sec_274 accordingly tpm has failed to meet the substantiation requirements of sec_274 with respect to the cellular phone expenses and is not entitled to corresponding deductions travel_expenses the heightened substantiation requirements of sec_274 also apply to travel_expenses sec_274 tpm produced receipts and mr d’errico’s personal credit card statements to substantiate the travel_expenses however petitioners did not provide sufficient evidence that those expenses were actually incurred as part of tpm’s trade_or_business as required by sec_274dollar_figure accordingly tpm has failed to meet the substantiation requirements of sec_274 with respect to the travel_expenses and is not entitled to corresponding deductions utilities the utility expenses for the barton drive home paid_by tpm included those for cable television internet gas electricity and certain repairs we have already 17for example petitioners made no mention of any potential business which tpm had in dallas texas or las vegas nevada yet tpm seeks to deduct expenses reimbursed to mr d’errico for flights to dallas and a dollar_figure hotel expense in las vegas found that petitioners failed to establish that tpm conducted business-related activities at the barton drive home likewise we find that petitioners failed to establish a business_purpose for tpm’s payment of the barton drive home utilities tpm is therefore not entitled to deduct the utility expenses iii mr d’errico a constructive dividends the determinations of constructive_dividend income received by mr d’errico are determinations of unreported income the court_of_appeals for the ninth circuit18 has held that for the presumption of correctness to attach to the notice_of_deficiency in unreported income cases the commissioner must establish some evidentiary foundation connecting the taxpayer with the income-producing activity see 596_f2d_358 9th cir rev’g 67_tc_672 or demonstrating that the taxpayer actually received unreported income 680_f2d_1268 9th cir if the commissioner introduces some evidence that the taxpayer received unreported 18it appears an appeal of these cases would be made to the court_of_appeals for the ninth circuit under sec_7483 given the activities which took place in nevada and california however the parties did not stipulate or present sufficient evidence to determine mr d’errico’s legal residence or tpm’s principal_place_of_business or principal office or agency rather the parties only stipulated that the mailing addresses of both mr d’errico and tpm were in zephyr cove nevada income the burden shifts to the taxpayer who must establish by a preponderance_of_the_evidence that the deficiency was arbitrary or erroneous see 181_f3d_1002 9th cir aff’g tcmemo_1997_97 considering the evidence presented regarding tpm’s payment of rent and airplane expenses we find respondent has established an adequate evidentiary foundation to shift the burden_of_proof to mr d’errico on this issue sec_301 requires a taxpayer to include in gross_income amounts received as dividends generally a dividend is a distribution_of_property by a corporation to its shareholders out of its earnings_and_profits sec_316 a dividend need not be formally declared or even intended by a corporation 368_f2d_439 9th cir aff’g tcmemo_1965_84 when a shareholder’s use of corporate property serves no legitimate corporate purpose the value of the use of that property may constitute constructive_dividend income paid to that shareholder 85_tc_332 for the personal_use of corporate property to be treated as a constructive_dividend it must be nondeductible by the corporation and represent some economic gain or benefit to the shareholder 565_f2d_1388 9th cir aff’g in part rev’g in part and remanding tcmemo_1973_223 a corporation’s inability to substantiate a deduction without more is not grounds for treating corporate expenditures as constructive dividends to the individual 598_f2d_525 9th cir aff’g in part rev’g in part tcmemo_1976_147 palo alto town country vill inc v commissioner f 2d pincite 56_tc_1225 as discussed above tpm failed to establish that it conducted business-related activities at the barton drive home with the result that the rent payments made to anthony d’errico are not deductible by tpm further mr d’errico failed to introduce evidence to support his claim that he used only a portion of the barton drive home as his personal living area neither the lease between tpm and anthony d’errico nor the sublease between mr d’errico and tpm identifies certain areas of the barton drive home reserved for tpm’s business use we find that mr d’errico derived a personal benefit from his use of the entire barton drive home and received constructive_dividend income as a result of the rent payments made by tpm petitioners have also failed to prove tpm’s entitlement to deductions for the airplane expenses further petitioners have failed to introduce evidence to show that mr d’errico did not benefit from tpm’s purchase of the airplane or tpm’s paying for rental of another airplane for mr d’errico to fly mr d’errico admitted that he enjoy ed flying and everything and that he used the rented airplane to continue his flight training mr d’errico also discussed using tpm’s airplane to start a flight training school with his certified flight instructor mr laughlin finally petitioners failed to substantiate any amount of business travel or lack of mr d’errico’s personal_use of the airplane during the years at issuedollar_figure we find that mr d’errico derived a personal benefit from the airplane expenses paid_by tpm and received constructive_dividend income as a result as previously noted respondent erroneously included certain constructive dividends_paid in in mr d’errico’s income and constructive dividends_paid in in mr d’errico’s income respondent’s error was a result of the fact that mr d’errico owed taxes on the basis of the calendar_year while tpm owed taxes on the basis of a tax_year ending april as a result respondent determined the amounts of expenses paid_by tpm in the first four months of 19mr d’errico stated at trial that it was bad for an airplane to sit unused on the ground for extended periods and that you always want to have them keep running and keep them well maintained as the airplane was not used in either tpm’s tax management business or through the flying start aero lease which had been canceled in it seems likely that mr d’errico made some personal_use of the airplane during and to be constructive_dividend income includable for mr d’errico’s and tax years respectivelydollar_figure neither party addressed this issue and we are unable to determine the correct distribution of constructive dividends from the evidence in the record the parties must resolve this issue in their rule_155_computations under sec_301 and sec_316 distributions are dividends taxable to shareholders as ordinary_income to the extent of the earnings_and_profits of the corporation and any amount received by a shareholder in excess of earnings_and_profits is considered a nontaxable return_of_capital to the extent of the shareholder’s basis in his stock 89_tc_1280 any amount received in excess of both the earnings_and_profits of the corporation and the shareholder’s basis in his stock is treated as gain from the sale_or_exchange of property id tpm’s tax returns appear to show insufficient retained earnings to allow respondent to treat all of the constructive dividends as taxable ordinary_income to mr d’errico however on the basis of our rulings in this case and in tax practice 20for example respondent included rent payments made in the first four months of in mr d’errico’s income as constructive dividends respondent also included airplane-related expenses paid in the first four months of and in mr d’errico’s and income respectively as constructive dividends mgmt v commissioner tcmemo_2010_266 a prior case involving mr d’errico and his corporations tpm may have sufficient retained earnings for all of the constructive dividends to be treated as taxable ordinary_income to mr d’errico the parties must resolve this issue in their rule computationsdollar_figure to the extent tpm does not have retained earnings sufficient to cover the constructive dividends received by mr d’errico the excess amounts are first considered nontaxable returns of capital to mr d’errico to the extent of his basis in his tpm stock and thereafter treated as gains from the sale_or_exchange of property sec_301 sec_316 truesdell v commissioner t c pincite5 b capital_gain income gain_or_loss from the sale_or_other_disposition of property is the excess of the amount_realized over the adjusted_basis of the property sec_1001 the basis in a shareholder’s stock in an s_corporation is reduced by losses deductions 21in tax practice mgmt v commissioner tcmemo_2010_266 we agreed with the commissioner that tpm was not entitled to deductions of dollar_figure for its tye date and that mr d’errico received constructive dividends of dollar_figure from tpm during 22we are unable to decide this issue because of the uncertainty of the amounts of constructive_dividend income mr d’errico received in and as previously discussed nondeductible expenses which do not constitute capital expenditures and tax-free distributions under sec_1368 sec_1367 respondent claims that the draws mr d’errico took from his three tax preparation s_corporations should be construed as basis-reducing distributions under sec_1368 to mr d’errico because petitioners offered no evidence that the draws were repaid or were to be repaid we agree with respondent the forgiveness of a shareholder’s debt by an s_corporation is considered a distribution_of_property see 52_tc_255 aff’d per curiam 422_f2d_198 5th cir see also sec_301 sec_1_301-1 income_tax regs if an s_corporation has no accumulated_earnings_and_profits and none of the three tax preparation s_corporations did the distribution is nontaxable to the extent of the shareholder’s adjusted_basis in the stock see sec_1368 unlike d’errico mccollor and d’errico wedge d’errico associates was liquidated amounts received by a shareholder in a complete_liquidation of a corporation are treated as full payment in exchange for the shareholder’s stock sec_331 the gain_or_loss to a shareholder from a liquidating_distribution is determined under sec_1001 by subtracting the cost or other basis of the stock from the amount of the distribution see sec_331 sec_1_331-1 income_tax regs when a corporation cancels debt that is owed to it by a shareholder in connection with a complete_liquidation the amount of the debt is treated as a distribution under sec_331 robson v commissioner tcmemo_2000_201 petitioners offered no evidence that mr d’errico ever repaid any of the draws he took from his three tax preparation s_corporations in addition there was no evidence presented that mr d’errico remained liable for the outstanding draws to d’errico mccollor or d’errico wedge after these corporations were sold on date mr d’errico prepared balance sheets for d’errico associates which showed an outstanding draw to mr d’errico of dollar_figure as of date but no outstanding draw as of date when asked to explain the accounting mr d’errico claimed that the date balance_sheet was incorrect however the balance_sheet balanced and was in conformity with d’errico associates’ form 1099-div petitioners offered no other evidence to show that the balance_sheet was incorrect because petitioners offered no evidence that mr d’errico repaid or remained liable for the draws taken from the three tax preparation s_corporations we find the draws reduce mr d’errico’s basis in the stock he held in each corporation under sec_1368 this reduction in basis results in an increase in mr d’errico’s capital_gain realized upon the sale or dissolution of the three tax preparation corporations of dollar_figure for iv sec_6662 accuracy-related_penalties respondent determined that both petitioners were liable for the accuracy-related_penalty under sec_6662 and b for negligence or disregard of rules and regulations or in the alternative under sec_6662 and b for substantial_understatement_of_income_tax negligence includes any failure to make a reasonable attempt to comply with the provisions of the code including any failure to maintain adequate books_and_records or to substantiate items properly sec_6662 sec_1_6662-3 income_tax regs under sec_7491 the commissioner bears the burden of production with regard to penalties and must come forward with sufficient evidence indicating that it is appropriate to impose penalties see 116_tc_438 however once the commissioner has met the burden of production the burden_of_proof remains with the taxpayer including the burden of proving that the penalties are inappropriate because of reasonable_cause or substantial_authority under sec_6664 see rule a higbee v commissioner t c pincite respondent has met the burden of production because petitioners failed to produce adequate_records substantiating their claimed deductions an accuracy-related_penalty is not imposed on any portion of an underpayment as to which the taxpayer acted with reasonable_cause and in good_faith sec_6664 the taxpayer bears the burden_of_proof with regard to those issues higbee v commissioner t c pincite petitioners have not argued the reasonable_cause exception applies in these cases and have not provided any evidence indicating that their tax deficiencies were due to reasonable_cause or that substantial_authority exists to support their positions accordingly we find petitioners liable for the sec_6662 penalty for the years at issue see id pincite v conclusion we find that tpm is not entitled to business_expense deductions of dollar_figure and dollar_figure for tye date and we further find that mr d’errico received constructive_dividend income from tpm for tax years and respectively and that he understated his capital_gain resulting from the sale or 23as explained supra the amount of constructive_dividend income received in and and whether the constructive_dividend income should be taxable to mr d’errico as ordinary_income nontaxable return_of_capital or gain from the sale_or_exchange of property are issues the parties must resolve in their rule continued liquidation of his three tax preparation corporations by dollar_figure for finally we find that both petitioners are liable for the accuracy-related_penalty under sec_6662 for all years in issue to reflect the foregoing decisions will be entered under rule continued computations


internal_revenue_service number release date index number 860d ----------------------------- ------------------- ------------------------------------------------ ----------------------------- ------------------- ---------------------------------- - 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 fip b02 plr-105869-06 date date -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- legend underlying trust ------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------ trusts ------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------- original servicer backup servicer state date date date year year year year firm a firm b firm c -------------------------------- ------------------------------------- ------------- --------------- ------------ ------ ------- ------- ------- ------- ------------------------------ ------------------------ ---------------------------------- plr-105869-06 dear ------------------------ this responds to a letter dated date and subsequent correspondence submitted on behalf of the trusts requesting an extension of time under sec_301_9100-1 of the procedure and administration regulations to make an election under sec_860d of the internal_revenue_code the code to treat the trusts as real_estate mortgage investment conduits remics facts underlying trust was formed as a grantor_trust under the laws of state pursuant to a pooling and servicing agreement on date of year by the terms of the pooling and servicing agreement the original servicer was to elect to treat a segregated pool of assets consisting of certain home mortgage loans and unsecured consumer loans as a remic to be designated as trust in addition the original servicer was to further elect to treat the regular_interest in trust as a separate remic to be designated as trust pursuant to its duties as the initial tax_matters_person the pooling and servicing agreement also required the original servicer to prepare and file federal tax returns for trust and trust collectively the trusts and to cause the elections for the trusts to be treated as remics for federal_income_tax purposes on or about date of year the original servicer filed voluntary chapter petitions under title u s c sec_101 et seq in date of year the backup servicer assumed the original servicer’s responsibilities under the pooling and servicing agreement the backup servicer requested that the original servicer deliver to it all books_and_records related to the trusts at the time the backup servicer assumed its responsibilities the year remic tax returns should have already been filed for the trusts when beginning preparation of the remic tax returns for year the backup servicer was unable to locate in the documentation transferred to it from the original servicer copies of the year remic tax returns the backup servicer then made repeated inquiries to the original servicer about the year remic tax returns because the original servicer was in bankruptcy and because of employee turnover caused by the bankruptcy the backup servicer had difficulty in obtaining any further information from the original servicer finally sometime at the end of year the original servicer referred the backup servicer to firm a an attorney at firm a informed the backup servicer that the original servicer had consulted the attorney around date of year during the consultation the attorney told the original servicer that the filing of remic elections for the trusts was not necessary after discovery that remic elections had not been made for the trusts the backup servicer began to consult with firm b which informed the backup servicer about the plr-105869-06 possibility of requesting relief under sec_301_9100-1 and sec_301_9100-3 of the regulations for a reasonable extension of time for the trusts to elect to be treated as remics the backup servicer initially began discussions with firm b as to the preparation of a ruling_request but relationship issues arose with firm b as a result at the beginning of year the backup servicer requested firm c to prepare the ruling_request the delay from that point was attributable to the process of group editing and getting parties to agree on a document to be submitted the trusts make the following additional representations the request for relief was filed before the failure to make regulatory elections was discovered by the service granting the relief requested will not result in the trusts having a lower tax_liability in the aggregate for all years to which the regulatory election applies than the trusts would have had if the election had been timely made taking into account the time_value_of_money the trusts did not seek to alter a return position for which an accuracy-related_penalty has been or could have been imposed under sec_6662 of the code at the time the trusts requested relief and the new position requires or permits a regulatory election for which relief is requested being fully informed of the required regulatory election and related tax consequences the trusts did not choose to not file the election law and analysis sec_860d of the code provides that an entity which meets the requirements of a remic under sec_860d may elect to be treated as a remic for its first taxable_year and that such election must be made on the return for its first taxable_year sec_1_860d-1 provides that a qualified_entity makes a remic election by timely filing for its first taxable_year a form_1066 signed by a person authorized to sign that return this regulation also provides a reference to sec_301_9100-1 for rules regarding extensions of time for making elections sec_1_860f-4 of the regulations provides that the due_date and any extensions for filing a remic’s annual tax_return are determined as if the remic were a partnership therefore pursuant to sec_1 e a remic’s annual return must be filed on or before the fifteenth day of the fourth month following the close of the taxable_year unless an extension is granted sec_301_9100-1 of the regulations provides in part that the commissioner has discretion to grant a reasonable extension of time to make a regulatory election defined in sec_301_9100-1 as an election whose due_date is prescribed by regulations or by a revenue_ruling a revenue_procedure a notice or an announcement published in the internal_revenue_bulletin or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the code except e g h and i plr-105869-06 sec_301_9100-3 through c i of the regulations set forth rules that the internal_revenue_service generally will use to determine whether under the particular facts and circumstances of each situation the commissioner will grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that subject_to paragraphs b i through iii of sec_301_9100-3 when a taxpayer applies for relief under this section before the failure to make the regulatory election is discovered by the service the taxpayer will be deemed to have acted reasonably and in good_faith and sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all years to which the regulatory election applies than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money conclusion based on the information submitted and representations made we conclude that the trusts have satisfied the requirements for granting a reasonable extension of time to allow them to make elections under sec_860d of the code to be treated as remics for year and subsequent taxable years therefore the trusts are granted a period of time not to exceed days from the date of this letter to submit forms this ruling is limited to the timeliness of the remic election of the trusts this ruling does not relieve the trusts from any penalty that they may owe as a result of the failure to timely file form_1066 this ruling’s application is limited to the facts representations code sections and regulations cited herein no opinion is expressed with regard to whether the trusts meet the requirements of a remic under sec_860d of the code no opinion is expressed with regard to whether each trust’s tax_liability is not lower in the aggregate for all years to which the election applies than such tax_liability would have been if the election had been timely made taking into account the time_value_of_money upon audit of the federal_income_tax returns involved the director’s office will determine such tax_liability for the years involved if the director’s office determines that such tax_liability is lower that office will determine the federal_income_tax effect a copy of this letter is being forwarded to the service_center where trusts file their return with instructions that although their forms were not timely filed trusts are treated as having made timely elections under sec_860d of the code 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 plr-105869-06 this ruling is directed only to the taxpayers that requested it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the provisions of a power_of_attorney currently on file we are sending a copy of this ruling letter to your authorized representative sincerely william e coppersmith william e coppersmith chief branch office of associate chief_counsel financial institutions products


t c summary opinion united_states tax_court george b n ayittey petitioner v commissioner of internal revenue respondent docket no 20837-04s filed date george b n ayittey pro_se scott a hovey for respondent powell special_trial_judge this case was heard pursuant to the provisions of sec_7463 the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year in issue and rule references are to the tax_court rules_of_practice and procedure respondent determined a deficiency of dollar_figure and a penalty under sec_6662 of dollar_figure in petitioner’s federal_income_tax the issue is whether petitioner is entitled to a casualty_loss deduction under sec_165 in an amount greater than dollar_figure allowed by respondent petitioner resided in lorton virginia at time the petition was filed background the facts may be summarized as follows petitioner is a professor of economics in addition he has published books and articles concerning africa in february petitioner’s office at the university at which he taught was destroyed by fire included in the destruction were items of personal_property belonging to petitioner on his federal_income_tax return petitioner claimed a casualty_loss deduction for the following books on economics books by famous authors books on africa african journals magazines book manuscript memorabilia awards plaques etc briefcases fans etc computer printer labor inconvenience distress dollar_figure big_number big_number big_number big_number big_number big_number big_number petitioner concedes that he received other income of dollar_figure a distribution from an individual_retirement_account of dollar_figure income from a discharge_of_indebtedness of dollar_figure and interest_income of dollar_figure on his schedule a itemized_deductions petitioner claimed a deduction of dollar_figure for miscellaneous expenses petitioner concedes that dollar_figure of those deductions are not allowable respondent concedes that petitioner is entitled to an additional prepayment credit of dollar_figure some of the books were given to him as were the items shown as memorabilia petitioner did not seek any expert advice concerning the value of the items destroyed petitioner has no records receipts or other documents concerning the cost of any of the items destroyed nor did petitioner attempt to reconstruct such cost petitioner did not seek any professional advice concerning the preparation of his tax_return petitioner received dollar_figure from the university’s insurance_company for the loss that he suffered from the fire upon audit respondent allowed a casualty_loss deduction of dollar_figure and disallowed the remainder of the deductions claimed on petitioner’s return discussion generally the burden of proving that respondent’s determination is incorrect is on petitioner sec_7491 provides in limited circumstances that the burden shifts to respondent petitioner does not fall within these limited circumstances and the burden_of_proof is on petitioner casualty_loss sec_165 allows as a deduction any loss sustained during the taxable_year and not_compensated_for_by_insurance_or_otherwise the general_rule for determining the amount of a casualty_loss whether or not incurred_in_a_trade_or_business or in a transaction for profit is the lesser_of i the fair_market_value before the casualty reduced by the fair_market_value after the casualty or ii the adjusted_basis determined under sec_1_1011-1 income_tax regs sec_1_165-7 income_tax regs the regulation also provides however if property used in a trade_or_business or held_for_the_production_of_income is totally destroyed by casualty and if the fair_market_value of such property immediately before the casualty is less than the adjusted_basis of such property the amount of the adjusted_basis of such property shall be treated as the amount of the loss for purposes of sec_165 id for purposes here the adjusted_basis in the property destroyed is the cost of such property sec_1011 and sec_1012 the parties apparently agree that at least as far as the majority of the items are concerned the property destroyed was used in a trade_or_business or was held_for_the_production_of_income and was totally destroyed we therefore are concerned pursuant to sec_1_165-7 income_tax regs with petitioner’s bases or costs of the items destroyed petitioner however has not produced any evidence as to what his bases or costs in the various items may have been indeed while they may have had value to petitioner it is clear that the memorabilia had no costs to petitioner and petitioner would have no bases in these items with respect to what petitioner describes as labor inconvenience distress as we understand petitioner’s testimony the deduction was for mental upset having to prepare new lecture notes etc and for teaching these are not items of property the losses of which are deductible as casualty losses turning to the item described as a book manuscript petitioner testified that the manuscript was the foundation for three future books he determined that it had a fair_market_value of dollar_figure because he had received advances from publishers for previous books but petitioner admitted that he had no record of the cost or expenses apart from his time and labor in the creation of the manuscript in short he has not established that he had a cost_basis in the manuscript with regard to copies of magazines journals and books again petitioner has no records concerning the costs of these items furthermore petitioner admits that he would have deducted the costs of at least some of the magazines journals and books in prior years we note also with respect to the other claimed deductions including particularly the manuscript any costs would appear to have been deducted in prior years see eg sec_263a see also 819_f2d_359 2d cir turning to the remainder of the items claimed as a casualty_loss deduction even if we assume that petitioner had bases or costs in the amounts claimed petitioner collected dollar_figure from insurance and respondent allowed a casualty_loss deduction of dollar_figure under these circumstances we fail to understand how the bases or costs of these items would be deductible we sustain respondent’s determination with respect to the casualty_loss deduction section 6662--penalty sec_6662 provides a penalty in an amount equal to percent of the portion of any underpayment attributable to among other things any substantial_understatement_of_income_tax sec_6662 a substantial_understatement_of_income_tax exists if the amount of the understatement for the taxable_year exceeds the greater of-- i percent of the tax required to be shown on the return for the taxable_year or ii dollar_figure sec_6662 for purposes of sec_6662 an understatement may be reduced if there is substantial_authority for the position taken or if the facts were adequately disclosed in the return and there was a reasonable basis for the position taken sec_6662 further no penalty will be imposed if there was a reasonable_cause for the understatement and the taxpayer acted in good_faith sec_6664 there is no substantial_authority for the position taken here the facts concerning the unreported items of income that petitioner conceded supra note were obviously not disclosed and are not subject_to the sec_6662 exception from the penalty while petitioner did disclose the fact that there was a casualty_loss deduction we cannot say there was a reasonable ground for the amount of the deduction claimed as a loss petitioner made no attempt to ascertain the correct_tax treatment of the items composing the casualty_loss deduction claimed a reasonable basis or reasonable_cause cannot be transmuted from intentional ignorance we sustain respondent’s determination of the sec_6662 penalty reviewed and adopted as the report of the small_tax_case division to reflect the foregoing decision will be entered under rule


t c summary opinion united_states tax_court dean strom karnaze petitioner v commissioner of internal revenue respondent docket no 19235-05s filed date dean strom karnaze pro_se jonathan a neumann for respondent dean special_trial_judge this case was heard pursuant to the provisions of sec_6320 sec_6330 and sec_7463 unless otherwise indicated all section references are to the internal_revenue_code as amended and all rule references are to the tax_court rules_of_practice and procedure the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority the petition in this case was filed in response to a notice_of_determination concerning collection action s under sec_6320 and or notice_of_determination for and petitioner does not dispute the amount of the underlying taxes and interest owed for the years in issue what petitioner does dispute is his liability for the additions to tax under sec_6651 for failure to timely file returns sec_6651 for failure to timely pay the unpaid tax reported on the returns and sec_6654 for failure to pay estimated_taxes background the stipulated facts and the exhibits received into evidence are incorporated herein by reference at the time the petition in this case was filed petitioner resided in stockton california petitioner filed federal tax returns for each year in issue reporting taxes due as follows year date due date filed tax due dollar_figure big_number big_number big_number at the time petitioner filed each return he either did not pay or made only small payments toward the amounts shown as taxes on the returns respondent assessed the amounts reported on petitioner’s returns plus statutory additions to tax as follows year additions to tax sec_6651 sec_6651 dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure --- sec_6654 dollar_figure dollar_figure dollar_figure dollar_figure on date respondent filed a notice_of_federal_tax_lien against petitioner for income taxes for and on date respondent sent to petitioner a notice_of_federal_tax_lien filing and your right to a hearing under sec_6320 for the years in issue on date petitioner filed a timely form request for a collection_due_process_hearing for the years in issue the hearing was conducted via telephone and written correspondence with settlement officer martin splinter on date the appeals_office issued to petitioner a notice_of_determination sustaining respondent’s filing of the federal_tax_lien to collect petitioner’s unpaid taxes for the years in issue discussion sec_6320 entitles a taxpayer to notice of the taxpayer’s right to request a hearing after a notice of lien is filed by the 1after the tax and additions to tax were assessed for each year petitioner subsequently made payments on his tax_liabilities tax interest additions to tax combined for each of the years in issue therefore the amount of the outstanding balance attributable to the additions to tax has yet to be determined commissioner in furtherance of the collection from the taxpayer of unpaid federal taxes if one is requested the administrative hearing is before the appeals_office of the internal_revenue_service sec_6330 the taxpayer requesting the hearing may raise any relevant issue with regard to the commissioner’s intended collection activities including spousal defenses challenges to the appropriateness of the commissioner’s intended collection action and alternative means of collection sec_6320 and c c see 114_tc_604 114_tc_176 the taxpayer may raise challenges to the existence or amount of the underlying tax_liability however only if he did not receive any statutory_notice_of_deficiency for such tax_liability or did not otherwise have an opportunity to dispute such tax_liability sec_6330 in making a determination the appeals officer is required to take into consideration issues properly raised the verification that the requirements of applicable law and administrative procedures have been met and whether any proposed collection action balances the need for efficient collection_of_taxes with the legitimate concern of the person that any collection action is no more intrusive than necessary sec_6330 within days after the appeals_office issues a notice_of_determination the taxpayer may appeal the determination to the tax_court if the court has jurisdiction over the underlying tax_liability sec_6330 the court has jurisdiction in this case for purposes of these provisions underlying tax_liability includes additions to tax 115_tc_329 lites v commissioner tcmemo_2005_206 petitioner seeks abatement of the sec_6651 additions to tax for late filing of the sec_6651 additions to tax for failure to timely pay the amounts shown as taxes on the returns and of the sec_6654 additions to tax for failure to pay estimated_taxes because petitioner self- assessed his taxes for all years in issue no statutory_notice_of_deficiency was issued see sec_6201 petitioner’s challenge to the additions to tax at the hearing was proper see sec_6320 sec_6330 118_tc_22 the court reviews de novo respondent’s determination with respect to the additions to tax for the years in issue see goza v commissioner supra pincite additions to tax under sec_6651 sec_7491 imposes the burden of production in any court_proceeding on the commissioner with respect to the liability of any individual for penalties and additions to tax 116_tc_438 trowbridge v commissioner tcmemo_2003_164 affd 378_f3d_432 5th cir in order to meet the burden of production under section c the commissioner need only make a prima facie case that imposition of the penalty or addition_to_tax is appropriate higbee v commissioner supra the burden_of_proof remains on the petitioner who must prove that his failure_to_file timely was due to reasonable_cause and not due to willful neglect sec_6651 469_us_241 higbee v commissioner supra pincite a failure_to_file timely a federal_income_tax return is due to reasonable_cause if the taxpayer exercised ordinary business care and prudence and nevertheless was unable to file the return within the prescribed time barkley v commissioner tcmemo_2004_287 sec_301_6651-1 proced admin regs willful neglect means a conscious intentional failure or reckless indifference united_states v boyle supra pincite respondent has carried his burden of production by introducing into evidence certified copies of form_4340 certificate of assessments payments and other specified matters for and establishing that respondent did not timely receive federal_income_tax returns for those years see 115_tc_35 downey v commissioner tcmemo_2005_215 in the absence of evidence that petitioner timely filed his returns the court finds that the returns were not timely filed petitioner introduced no evidence or any legally sufficient reason for his failure_to_file timely returns therefore the court finds that petitioner is liable for additions to tax under sec_6651 for failure to timely file his returns for the years in issue additions to tax under sec_6651 sec_6651 imposes an addition_to_tax for failure to pay the amount shown as tax on the return on or before the date prescribed for payment of that tax unless the failure was due to reasonable_cause and not willful neglect see sec_301 c proced admin regs petitioner may demonstrate reasonable_cause for late payment by showing that he exercised ordinary business care and prudence in providing for payment of his tax_liability and was nevertheless either unable to pay the tax or would suffer an undue_hardship if he paid on the due_date sec_301_6651-1 proced admin regs the term undue_hardship means more than an inconvenience to the taxpayer and it must appear that substantial financial loss would result to the taxpayer from making payments by the due_date see sec_1_6161-1 income_tax regs at the time petitioner filed his returns he made small payments towards his tax_liabilities for and and he made no payment toward his tax_liability for the bulk of the amount shown as tax on the return for each of the years in issue remained unpaid as of the respective due dates petitioner contends that he did not remit full payments for the years in issue because of hardship due to his divorce and subsequent loss of employment petitioner has not shown that he would have suffered substantial financial loss if he had paid his taxes by the due_date moreover adverse economic conditions do not necessarily constitute reasonable_cause because almost every nonwillful failure to pay taxes is the result of financial difficulties see estate of hartsell v commissioner tcmemo_2004_211 612_fsupp_605 d mont affd on other grounds 798_f2d_1241 9th cir the court therefore finds that petitioner failed to demonstrate that his failure to timely pay the taxes shown on the returns for the years in issue was due to reasonable_cause and not willful neglect see sec_301_6651-1 proced admin regs sec_1_6161-1 income_tax regs accordingly petitioner is liable for the additions to tax under sec_6651 for the years in issue additions to tax under sec_6654 sec_6654 imposes an addition_to_tax for failure to make timely and sufficient payments for estimated_taxes in order for respondent to satisfy his burden of production under sec_7491 he must produce evidence necessary to enable the court to conclude that the taxpayer had an obligation to make an estimated_tax payment 127_tc_200 specifically respondent must produce evidence showing that the taxpayer had a required_annual_payment as defined by sec_6654 for the year in issue id the sec_6654 addition_to_tax is calculated with reference to four required_installment payments of the taxpayer’s estimated_tax liability sec_6654 each required_installment of estimated_tax is equal to percent of the required_annual_payment sec_6654 under sec_6654 required_annual_payment means the lesser_of i percent of the tax_shown_on_the_return for the taxable_year or if no return is filed percent of the tax for such year or ii percent of the tax_shown_on_the_return of the individual for the preceding_taxable_year clause ii shall not apply if the preceding_taxable_year was not a taxable_year of months or if the individual did not file a return for such preceding_taxable_year respondent produced a form_4340 for establishing that petitioner filed a tax_return for reporting a tax_liability of dollar_figure this evidence is sufficient for the court to make the analysis required by sec_6654 respondent however failed to introduce evidence showing whether petitioner filed a return_for_the_preceding_taxable_year ie and if he did the amount of tax shown on that return without that evidence the court cannot identify the amount equal to percent of the tax shown on petitioner’s return the court cannot conclude that petitioner had a required_annual_payment for because respondent failed to produce sufficient evidence as required by sec_7491 to allow the court to complete the comparison required by sec_6654 see wheeler v commissioner supra accordingly petitioner is not liable for an addition_to_tax under sec_6654 for respondent met his burden of production under sec_7491 for and the evidence produced was sufficient for the court to make the required comparison under sec_6654 and to make a determination that petitioner had a required_annual_payment for each of those years the sec_6654 addition_to_tax is mandatory unless petitioner can place himself within one of the computational exceptions provided by sec_6654 91_tc_874 75_tc_1 petitioner did not pay the estimated_taxes for and moreover petitioner failed to show that his failure to timely pay estimated_taxes qualifies for one of the exceptions under sec_6654 accordingly petitioner is liable for additions to tax under sec_6654 for and reviewed and adopted as the report of the small_tax_case division to reflect the foregoing decision will be entered under rule


internal_revenue_service index numbers number release date date cc dom corp plr-100837-99 re distributing_corporation a division a business a controlled date a purchaser dear we respond to your letter dated date requesting a supplemental ruling to plr-21626-96 a ruling letter issued date prior ruling letter additional information was submitted in a letter dated date the information submitted for consideration is summarized below as part of the transactions described in the prior ruling letter distributing caused its wholly-owned subsidiary_corporation a to be merged into distributing resulting in the complete_liquidation of corporation a corporation a has since been operated as a unincorporated division of distributing engaged in business a division a in the prior ruling letter distributing represented that t here is no plan or intention to liquidate either distributing or controlled to merge either corporation or to sell or otherwise dispose_of the assets of either corporation after the transaction except in the ordinary course of business after consummation of the transactions described in the prior ruling letter however certain events have occurred which have significantly changed the business a industry in which division a operates historically business a has been a highly fragmented industry division a was able to succeed in business a in part due to its relative size however the business a industry has been identified as being in the early stages of consolidation and consequently division a’s relative size is diminishing several industry participants have begun aggressively pursing a consolidation strategy creating companies which are significantly larger than division a distributing believes it would require an extensive commitment for division a to continue to compete effectively and that the changes in the industry necessitate the sale of division a to an industry consolidator on date a distributing was approached by purchaser an industry consolidator with respect to the possible acquisition of division a subsequent to the submission of the current supplemental ruling_request a letter of intent was executed by distributing and purchaser for the cash acquisition of all the assets of division a by purchaser based solely on the information and documentation submitted we hold as follows the disposition of all of the assets of division a to purchaser as described above will have no adverse effect on any of the rulings set forth in the prior ruling letter and those rulings will remain in full force and effect no opinion is expressed about the tax treatment of the proposed transaction under any other provisions of the code and regulations or about the tax treatment of any conditions existing at the time of or effects resulting from the proposed transaction not specifically covered by the above rulings this ruling is directed only to the taxpayers who requested it sec_6110 provides that it may not be used or cited as precedent it is important that a copy of this letter be attached to the federal_income_tax returns of taxpayers involved for the taxable_year in which the transaction covered by this letter is consummated sincerely yours assistant chief_counsel corporate by __________________________ mark s jennings senior technician reviewer branch