t c memo united_states tax_court esther p crabtree petitioner v commissioner of internal revenue respondent docket no filed date steven r director for petitioner thomas r thomas nancy b romano and jason m kuratnick for respondent memorandum opinion lauber judge the internal_revenue_service irs or respondent determined a dollar_figure deficiency in petitioner’ sec_2010 federal_income_tax and a dollar_figure penalty under sec_6662 the issues for decision are whether payments petitioner received from her ex-husband constitute alimony and whether petitioner is liable for the accuracy-related_penalty we decide both issues in petitioner’s favor background this case was submitted fully stipulated under rule the stipulation of facts consisting of paragraphs and three exhibits is incorporated by this refer- ence petitioner resided in pennsylvania when she petitioned this court petitioner the former mrs girard was married to donald anthony girard m d dr girard until late on date petitioner and dr gir- ard entered into an agreement incident to their divorce divorce agreement two days later the delaware family court in an uncontested proceeding entered the divorce agreement as an order this order states that it was issued w ithout a hearing without passing upon the substance form and or fairness of the agree- ment and without knowledge by the court of the facts and circumstances concerning the negotiations of the parties unless otherwise indicated all statutory references are to the internal_revenue_code in effect at all relevant times and all rule references are to the tax_court rules_of_practice and procedure we round all monetary amounts to the nearest dollar the divorce agreement which is drafted informally contains para- graphs paragraph six provides dr girard will continue to tender unallocated alimony child_support in the monthly sum of dollar_figure for a continued year period with the provision as long as mrs girard should not remarry or cohabi- tate the divorce agreement is silent as to whether the payment obligation created by this paragraph would terminate if petitioner or dr girard should die before eight years elapsed the remaining paragraphs of the divorce agreement outline the division of property constituting the marital estate and the payment obligations assumed by each party paragraph seven provides that dr girard will be solely responsible for the current tuitions for both daughters as far as the record reveals the daughters were in grammar or secondary school at the time paragraph eight provides that dr girard will be solely responsible for payment of years of un- dergraduate education for both daughters provided this begins after graduation of high school the parties agree that delaware law governs all matters relating to the enforceability and interpretation of the divorce agreement during dr girard satisfied his obligations under paragraph six and tendered monthly payments of dollar_figure to petitioner petitioner did not report these payments as alimony income on line of her form_1040 u s individual income_tax return respondent issued a notice_of_deficiency determining that petitioner had taxable alimony income for in the amount of dollar_figure dollar_figure petitioner timely petitioned this court contending that the payments do not constitute alimony for federal_income_tax purposes and are thus excludible from gross_income discussion i standard of review generally the commissioner’s determinations in a notice_of_deficiency are presumed correct and the taxpayer bears the burden of proving those determina- tions erroneous rule a 290_us_111 the submission of this case fully stipulated changes neither the burden_of_proof nor the effect of a failure of proof rule b 123_tc_258 petitioner does not contend nor does the evidence establish that the burden_of_proof shifts to respondent under sec_7491 as to any issue of fact ii alimony payments sec_71 provides that g ross income includes amounts received as alimony or separate_maintenance payments sec_71 defines the term alimony_or_separate_maintenance_payment to mean any payment in cash that satisfies four specified conditions the parties agree that dr girard’s payments satisfy the first three conditions their dispute focuses on the fourth condition set forth in sec_71 as relevant here it provides that a payment constitutes alimony only if there is no liability to make any such payment for any period after the death of the payee spouse in deciding whether payments constitute alimony under this provision we begin by examining the terms of the divorce agreement the parties agree that paragraph six does not explicitly state whether dr girard’s payment obligation would terminate upon petitioner’s death the drafting of this paragraph however gives rise to an inference that his payment obligation would not so terminate first paragraph six obligates dr girard to pay dollar_figure per month for a continued year period without suggesting that this period would be cut short by petition- er’s death second paragraph six states two conditions that would terminate dr girard’s payment obligation namely petitioner’s remarriage or cohabitation if the parties had intended petitioner’s death to be a third condition that would termi- nate dr girard’s payment obligation paragraph six could easily have been drafted to say so as a matter of contract interpretation therefore we think the better reading of the divorce agreement is that dr girard’s payment obligation would not terminate if petitioner were to die during the eight-year term if the instrument itself is silent or unclear as to the existence of a post-death obligation the payments may still constitute alimony under sec_71 if the payment obligation would terminate automatically by operation of state law upon the death of the payee spouse see 541_f3d_973 9th cir aff’g tcmemo_2006_105 407_f3d_186 3d cir aff’g tcmemo_2003_163 generally we de- cline to engage in complex highly technical inquiries into state law when making this determination 102_f3d_842 6th cir aff’g tcmemo_1995_183 rood v commissioner tcmemo_2012_122 103_tcm_1668 if the relevant state law is ambiguous as to whether the payor spouse’s obligation would terminate we will read the divorce_or_separation_instrument and make our own determination on the basis of the language of that document hoover f 3d pincite in contending that dr girard’s payment obligation would terminate auto- matically upon petitioner’s death respondent relies on title section g of the delaware code lexisnexis it provides unless the parties agree otherwise in writing the obligation to pay future alimony is terminated upon the unless otherwise indicated all references to the delaware code del code are to title death of either party or the remarriage or cohabitation of the party receiving alimony but del code section g does not apply to an agreement of the sort involved here in delaware alimony determinations may be made in two ways alimony may be judicially decreed following a hearing into the parties’ respective financial circumstances or it may be agreed to voluntarily by the divorcing parties themselves in a divorce agreement or similar contract see rockwell v rockwell a 2d del section g governs only alimony agreements that are judicially decreed it does not apply to voluntary alimony agreements stewart v stewart a 3d del the provision relevant here would appear to be del code section b which governs termination of alimony as the delaware supreme court has stated subsection b contemplates settlements in the form of written alimony agreements between parties to a divorce without a judicial determina- tion rockwell a 2d pincite the divorce agreement was a voluntary alimony agreement without a judicial determination although it was stamped as an order of the family court that order explicitly states that it was entered w ithout a hearing without passing upon the substance form and or fairness of the agreement and without knowledge by the court of the facts and circumstances concerning the negotiations of the parties section b provides unless otherwise agreed by the parties in writ- ing and expressly provided in the decree the obligation to pay future alimony is terminated upon the death of either party or the remarriage of the party receiving alimony we have discovered no delaware cases interpreting the first clause of this provision unless otherwise agreed by the parties in writing and expressly provided in the decree however respondent cites a line of cases interpreting a similar provision of california law which have ruled that an agreement otherwise in writing must be specific and express see johanson f 3d pincite quoting in re marriage of thornton cal rptr 2d ct app the question we must decide therefore is whether as required by del code section b it was agreed by the parties in writing and expressly provided in the divorce decree that dr girard’s support payments would continue if petitioner died within the eight-year period it is unclear what meaning we should ascribe to the requirement that the parties’ agreement to such effect must be expressly provided in the divorce decree here as is apparently typical for voluntary alimony agreements in delaware the divorce agreement was simply stamped so ordered by the delaware family court that order did the court ordered the parties to file supplemental briefs discussing del code section b and any relevant judicial precedent the parties did not invite our attention to any delaware judicial authority interpreting that section not provide for anything except to require that the divorce agreement be given legal effect according to its terms we thus accord principal weight to the statute’s first requirement which asks whether it was agreed by the parties in writing that dr girard’s support payments would continue if petitioner died within the eight-year payment period as discussed previously we think the better interpretation of the divorce agree- ment on the basis of reasonable inferences drawn from it is that dr girard’s pay- ment obligation would continue in that event although this understanding was implicit rather than explicit it is a point that appears to have been agreed by the parties in writing as required by del code section b we have discovered no delaware case law addressing the question whether an agreement to this effect must be specific and express cf johanson f 3d pincite quoting in re marriage of thornton cal rptr 2d pincite discussing similar provision of california law given the available delaware precedent we find del code section b to be ambiguous as applied to the divorce agreement in these circumstances we do not engage in complex subjective inquiries but rather make our own determination on the basis of the language of the parties’ agreement rood v commissioner t c m cch pincite this approach is consistent with the general approach of the delaware supreme court which emphasizes contract interpretation principles in this setting see eg rockwell a 2d pincite stating that the incorporation of a voluntary alimony agreement into a family court order does not divest that agreement of its contractual nature stewart a 3d pincite where the family court is asked to terminate or modify a voluntary alimony agreement that is incorporated into a divorce decree ‘the proper standards are the same that are generally applicable to the modification reformation or rescission of contracts ’ quoting rockwell a 2d pincite as noted previously the best interpretation of the divorce agreement based on reasonable inferences drawn from it is that dr girard’s payment obli- gation would not terminate if petitioner were to die during the eight-year payment period delaware law does not unambiguously provide for automatic termination in that event we accordingly conclude that the payments do not constitute alimony because the divorce agreement does not as required by sec_71 eliminate liability of the payor spouse to make any such payment for any period after the death of the payee spouse because we have ruled for given our disposition we need not decide whether petitioner would prevail on the basis of her alternative argument which focuses on the nature of dr gir- ard’s support payments as unallocated alimony child_support it is unclear how the delaware supreme court would treat an unallocated payment that could be continued petitioner on the alimony issue we find that she is not liable for the accuracy-related_penalty an appropriate order and decision will be entered continued partially allocable to child_support which in delaware survives the death of the payee spouse and is payable until the last child reaches the age of see del code sec a in deciding whether unallocated payments of this sort constitute alimony under sec_71 we have reached different conclusions depending on the law of the particular state compare berry v commissioner tcmemo_2005_91 ruling that unallocated support payments constituted alimony because they terminated upon death of payee spouse under california law and kean v commissioner tcmemo_2003_163 same under new jersey law aff’d 407_f3d_186 3d cir with 293_f3d_1208 10th cir ruling that unallocated support payments did not constitute alimony because they did not terminate upon death of payee spouse under colo- rado law aff’g miller v commissioner tcmemo_1999_273 and gilbert v commissioner tcmemo_2003_92 same under pennsylvania law aff’d sub nom 94_fedappx_126 3d cir neither party cites any delaware law on this point and the court has found no conclusive answer based on its own research


t c memo united_states tax_court mark a bishop petitioner v commissioner of internal revenue respondent docket no filed date robert p lowell for petitioner monica d gingras for respondent memorandum findings_of_fact and opinion laro judge the instant petition involving petitioner’s federal_income_tax return seeks a redetermination of respondent’s determination of a deficiency of dollar_figure an addition_to_tax under sec_6651 of dollar_figure and a penalty under sec_6662 of dollar_figure we decide the following issues whether petitioner is entitled to a bad_debt deduction under sec_166 for we hold that he is not whether petitioner is liable for the addition_to_tax under sec_6651 we hold that he is and whether petitioner is liable for the accuracy-related_penalty imposed under sec_6662 we hold that he is findings_of_fact the parties filed with the court a stipulation of facts and related exhibits the stipulated facts and the accompanying exhibits are incorporated herein by this reference we find the facts accordingly petitioner resided in california when he filed the petition from until date petitioner was the president of impac mortgage holdings inc impac where he worked as a whole-loan trader who bought and sold pools of loans during the same period petitioner was also the president of novelle financial novelle --a company impac acquired in date and wholly owned at least until date--where petitioner unless otherwise indicated section references are to the internal_revenue_code code in effect for the year at issue and rule references are to the tax_court rules_of_practice and procedure worked as a mortgage_lender between impac and novelle petitioner worked approximately hours a week from date through the rest of the year petitioner worked for quick loan funding quick loan as its president whose duties were mainly focused on the pooling of mortgages originated at quick loan and their sales to investment banks while at quick loan petitioner worked about hours a week around and impac was seeking local appraisers to provide appraisal services in connection with its purchases of mortgage loans landmark equities group landmark which was a real_estate appraisal firm that provided appraisal services to many local lenders from whom impac purchased its mortgage loans would occasionally provide such services to impac through this relationship petitioner became acquainted with james eaton who was landmark’s principal_shareholder and president in early petitioner met with mr eaton several times and learned that landmark had begun to develop a new product called the automated valuation model avm product which landmark intended to market to investment banks that purchased and securitized mortgage loans the avm product would enable its users to quickly and efficiently obtain accurate valuations by aggregating title petitioner terminated his services at novelle shortly before he left impac insurance information from numerous providers that could be translated into real_estate values on the basis of these meetings petitioner understood that landmark would have to raise close to dollar_figure million to fund the development and marketing of the product in petitioner’s view shared with landmark this capital requirement could be met only by either equity syndication or a public offering landmark’s need to raise the necessary capital through a possible public offering sparked petitioner’s interest in getting involved as he thought he could capitalize on his prior success in staging an initial_public_offering ipo by advising landmark on a similar offering in exchange for a substantial fee in while working at impac and novelle petitioner had successfully advised gvc holdings on its ipo on the alternative investment market aim of the london stock exchange lse through that transaction petitioner had acquired a few contacts including investment bankers and attorneys in london who petitioner thought might help landmark stage a similar offering on the aim market it appears the ipo was petitioner’s only experience in the area with respect to landmark petitioner believed he was uniquely positioned to prepare landmark for a successful ipo ostensibly because he understood landmark’s business model and the inner workings of the lse and the aim market he thought the aim was a good fit for landmark because it was a small cap market that had simpler disclosure requirements and shorter time-to-ipo in exchange for the provision of his services petitioner expected to earn a large fee that could range from three to five points on the capital raised in the ipo to lay the groundwork for a possible ipo petitioner and landmark worked together and purportedly developed a business plan marketing materials and a pro forma for an dollar_figure million public offering petitioner then contacted collins-stewart in london who would represent landmark on the investment banking side and hunton williams also in london who would be landmark’s legal representation after some conference calls and exchanges of documents petitioner traveled to london with mr eaton brian eaton and landmark’s chief financial officer cfo george shamchula purportedly to meet with the london-based investment bankers and attorneys but before landmark could raise any capital through an ipo it had immediate cash needs that had to be met in order to pay its current operational costs such as payroll and accounts_payable landmark tried to borrow dollar_figure from pacific mercantile bank pmb but pmb declined to extend such a loan petitioner did not endeavor to submit any of these documents into evidence the only documentary_evidence relating to these meetings is a one-page meeting schedule petitioner prepared because it thought landmark and mr eaton were already overleveraged undeterred and determined to earn his fee one day from putting together a successful ipo deal petitioner advanced dollar_figure to landmark to help it meet its immediate cashflow requirements so that the business could stay afloat and continue to grow while the company was preparing for an ipo on the lse while petitioner believed that the loan was crucial to landmark’s growth and a successful ipo petitioner testified that he would probably have made the loan even without the prospect of the ipo because on the basis of landmark’s financial health at the time the loan itself appeared to be secure notably petitioner did not require as a condition to the extension of the loan that landmark pay petitioner a percentage- point fee based on any capital raised through a subsequent ipo to finance the loan to landmark petitioner decided to borrow from pmb and on date he entered into a promissory note with pmb pmb note in the amount of dollar_figure under the pmb note petitioner was required to make a balloon payment plus all accrued but unpaid interest upon maturity on date in addition petitioner was required to make regular_interest payments of all accrued interest due as of each payment_date beginning date petitioner transferred the dollar_figure in proceeds of the pmb loan to landmark in exchange for an unsecured promissory note that landmark executed landmark note on the same date he signed his promissory note to pmb the landmark note contained an acceleration clause by which in the event of default which encompassed nonpayment of principal or interest petitioner could by written notice declare all unpaid balance of the note and accrued interest immediately due and payable the terms of the landmark note--ie the calculation of interest and the terms of monthly payment--tracked the terms provided in the pmb note further the landmark note was set to mature on the same date as the pmb note upon which the landmark note would become due and payable in full in other words other than the prospect of earning a large fee for petitioner testified that the note contained an acceleration clause but on brief petitioner along with respondent contend that the note did not give petitioner the right to accelerate repayment of the principal balance of the note upon default but this contention is not supported by the terms of the landmark note the fifth paragraph of the note states if any of the following events each an event of default shall occur then the holder of this note may at any time by written notice declare the entire unpaid principal of and the interest accrued on this note due and payable the entire fifth paragraph is one conditional sentence in which the conditional clause or the if clause lists a number of alternative grounds for default and the main clause that starts with then describes the particular result ie acceleration of the payment of principal that would happen if any one of the alternative conditions were met because default in the payment of any part of the principal or interest on this note is one of the alternative conditions petitioner had the right to exercise the acceleration clause when landmark failed to make its interest payments staging an ipo for landmark petitioner would not make any money on the loan to landmark under the loan’s terms in addition to making the short-term loan to landmark petitioner also worked between and hours per week for landmark for three months from march through date to help the company prepare for an ipo in connection with his employment at landmark petitioner earned wage income from landmark of dollar_figure that was reported on form_w-2 wage and tax statement petitioner undertook a similar financing_arrangement with daniel sadek who was the principal_shareholder of quick loan in petitioner lent dollar_figure million to mr sadek financed by advances petitioner drew on a home equity line of credit with virtualbank in exchange petitioner received a secured promissory note from mr sadek dated date sadek note according to its terms the interest and monthly payment calculations under the sadek note reflected the terms of the virtualbank home equity line of credit agreement virtualbank heloc agreement that petitioner entered into with virtualbank on date similar to the financing_arrangement with landmark petitioner would not make any profit on the sadek note because the sadek note and the virtualbank heloc agreement had the same terms petitioner claimed that the main reason he extended the loan to mr sadek was to help with quick loan’s short-term financial needs so that he could capture a large fee for staging a potential ipo for quick loan in the future the parties stipulated that petitioner received form_w-2 wage income for from the following sources continued soon after the execution of the landmark note the real_estate market showed signs of trouble and landmark’s financial condition began to deteriorate after landmark failed to make its first payment under the note due_date petitioner made several written demands for payment including letters dated july september and date requesting payment to which landmark did not make any specific responses in addition to the written demands petitioner purportedly made other oral demands for repayment as well as personal visits to landmark’s office from these personal visits that took place every month throughout according to petitioner he was able to gain access to landmark’s books_and_records providing him an insider’s look at landmark’s financial health because the note would not become due until date petitioner was interested only in continued employer landmark impac novelle quick loan wages dollar_figure dollar_figure dollar_figure dollar_figure petitioner did not offer into evidence any of the landmark books_and_records that he claimed to have reviewed getting landmark to meet its obligation to make interest-only payments indeed petitioner conceded during trial that the three separate letters that he wrote to landmark were demands for interest payments and not principal and on the basis of his review of landmark’s books petitioner believed landmark would be able to meet its interest payment obligation and expected payments to be forthcoming landmark never made a payment under its note despite landmark’s being in default on the note for nonpayment petitioner did not exercise the acceleration clause and demand immediate payment of the loan’s principal plus accrued and unpaid interest while petitioner continued to think landmark was in a position to make interest payments on the basis of his review of the company’s books he understood that landmark would not be able to pay the entire principal sum of the landmark note if he invoked the acceleration clause by continuing to work with landmark petitioner hoped to keep landmark on its feet so that it could make interest payments especially if landmark would undergo significant cuts in staff and expenses in any event while petitioner’s testimony shows landmark was experiencing serious financial difficulties nothing in the record shows one could conclude in that landmark would never be able to repay any portion of the principal moreover petitioner could not conclude whether landmark was insolvent by the end of and it appears to us that landmark continued to be a going concern into petitioner did not provide any testimony from a disinterested party or any documentary_evidence other than the three written payment demands to corroborate his worthlessness claim john epperson a certified_public_accountant for over years and petitioner’s accountant for over years prepared petitioner’s return petitioner filed a form_4868 application_for automatic_extension of time to file u s individual_income_tax_return which extended the time to file the return to date despite the extension the return was not filed until date it was filed late ostensibly because petitioner’s extensive business travel abroad combined with mr epperson’s living in another state rendered it difficult for petitioner to meet with mr epperson timely to discuss and prepare the filing of the return when petitioner was eventually able to meet with mr epperson he provided mr epperson the landmark note as well as the pmb note for review petitioner also told mr epperson about his efforts to collect on the landmark note but did not otherwise give mr epperson any of the financial documents from landmark that formed the basis of petitioner’s determination that the landmark note was not collectible mr epperson never personally reviewed the financial documents in question on the basis of the landmark note and the pmb note and after having reviewed certain professional publications and legal research materials including unspecified irs publications and court cases mr epperson determined petitioner would be entitled to claim a bad_debt deduction for correspondingly the schedule c profit or loss from business attached to petitioner’s return claimed an outside services deduction of dollar_figure according to mr epperson the deduction for outside services was a clerical mistake and he intended to identify the deduction as a bad_debt expense opinion the primary issue of this case is whether petitioner is entitled to a business_bad_debt deduction for under sec_166 to be able to claim the deduction for petitioner must show the landmark note was a bona_fide debt that became wholly worthless in see kean v commissioner t c mr epperson explained at trial to the best of his recollection that the dollar_figure in addition to the loan principal was a transaction fee paid to pmb petitioner has not produced any evidence to substantiate this claim petitioner has not argued that the note became partially worthless and the evidence does not show any portion of the landmark note was charged off in continued and the debt was not a nonbusiness_debt under sec_166 while we find the landmark note to be a bona_fide debt we conclude petitioner has failed to meet his burden to show the note became worthless in because petitioner cannot show the worthlessness of the landmark note we need not decide whether it was a nonbusiness_debt as defined in sec_166 i burden_of_proof the commissioner’s determinations in a notice_of_deficiency are generally presumed correct and a taxpayer bears the burden of proving those determinations are erroneous rule a 290_us_111 similarly a taxpayer bears the burden to show he is entitled to claim any deductions allowed under the code and to substantiate the amount of any claimed deductions 503_us_79 sec_1_6001-1 income_tax regs but with respect to liability for additions to tax under sec_6651 and any accuracy-related_penalty under sec_6662 the commissioner bears the burden of production under sec_7491 continued see sec_166 sec_1_166-3 income_tax regs petitioner does not contend nor does the record suggest that the burden_of_proof should be shifted to respondent under sec_7491 ii sec_166 bad_debt deductions a bona_fide debt a sec_166 bad_debt can arise only if the purported debt is a bona_fide debt conversely an advance that is a capital_contribution or a gift is not a debt for purposes of sec_166 kean v commissioner t c pincite sec_1_166-1 income_tax regs a bona_fide debt can arise only from a debtor-creditor relationship based on a valid and enforceable obligation to pay a fixed or determinable sum of money kean v commissioner t c pincite sec_1 c income_tax regs we determine whether a purported debt is a bona_fide debt for tax purposes from the facts and circumstances of each case see 376_f2d_623 9th cir rev’g on other ground tcmemo_1965_314 74_tc_476 the court_of_appeals for the ninth circuit to which this case is appealable absent any stipulation by the parties see sec_7482 has identified factors with varying degrees of influence in a debt-equity analysis the names given to the certificates evidencing the indebtedness the presence or absence of a maturity_date the source of the payments the right to enforce the payment of principal and interest participation and management a status equal to or inferior to that of regular corporate creditors the intent of the parties ‘thin’ or adequate capitalization identity of interest between creditor and stock holder payment of interest only out of ‘dividend’ money the ability of the corporation to obtain loans from outside lending institutions 424_f2d_1330 9th cir quoting o h kruse grain milling v commissi279_f2d_123 9th cir the court_of_appeals has also cautioned not to place a disproportionate emphasis on any single factor id here landmark’s indebtedness was evidenced by its promissory note to petitioner showing the parties’ intent to structure the advance as a genuine debt the note obligated landmark to pay monthly interest and to make a balloon payment of the principal and any unpaid but accrued interest upon maturity which was set at one year after the execution of the note the note provided an acceleration clause by which petitioner could declare the entire balance of the note due in the event of default it also appears to place petitioner on equal footing with other unsecured creditors since there is no evidence of subordination further petitioner was not an investor in landmark and did not otherwise participate in its growth or management the landmark note did not make the interest-only payments contingent on corporate earnings quite the opposite landmark’s obligation to repay the debt principal and interest was fixed and determinable under the valid and enforceable promissory note see sec_1_166-1 income_tax regs respondent maintains that the dollar_figure advance was not a bona_fide debt because the note was unsecured landmark was unable to borrow from pmb because it thought landmark was already overleveraged and petitioner did not demand payment in full when landmark defaulted and made only minimal effort to demand interest payments while the existence of collateral would tend to support genuine indebtedness its absence alone is not determinative similarly the fact that landmark could not obtain a similar loan from a commercial bank because the company was already overextended is not controlling see lundgren v commissioner f 2d pincite 314_f2d_620 9th cir aff’g in part rev’g in part tcmemo_1961_230 while extending a dollar_figure loan to landmark without collateral at a time when a commercial bank would not provide the same loan might sound like a risky proposition it is not our province to inquire into the wisdom of the loan so long as petitioner could show genuine indebtedness brenhouse v commis37_tc_326 it is true that petitioner did not exercise the acceleration clause under the note as it was his right to do but he did repeatedly make written and oral demands for interest payments his reluctance to push landmark too hard for payments can be explained by his credible testimony that he wanted to work with his debtor until it could improve its financial condition and recover from the real_estate market crisis existing at the time so that it might resume making payments ultimately petitioner had no financial interest in landmark and was not its shareholder before or after he provided the dollar_figure loan there was also an absence of any personal relationship between petitioner and landmark or mr eaton that would suggest the advance was a gift because landmark’s repayment obligation under the note was absolute there is nothing in evidence that could explain the advance as something other than genuine indebtedness see id pincite accordingly we find the landmark note to be a bona_fide debt b worthlessness in our determination of whether a debt is wholly or partially worthless is based on all facts and circumstances including the financial condition of the debtor sec_1_166-2 income_tax regs legal action is not required to show worthlessness if surrounding circumstances indicate that a debt is worthless and uncollectible and that any legal action in all likelihood would be futile because the debtor would not be able to satisfy a favorable judgment sec_1_166-2 income_tax regs petitioner bears the burden to show the landmark note became worthless in the year for which petitioner claimed the bad_debt deduction under sec_166 see rule a 77_tc_582 there is no standard test or formula for determining worthlessness and the determination depends on the particular facts and circumstances of the case 280_us_445 crown v commissioner t c pincite the fact that the debt has not matured or that no payment under the debt is due when a taxpayer claims a bad_debt deduction does not of itself prevent its allowance under sec_166 sec_1_166-1 income_tax regs but a taxpayer usually must show identifiable events to prove worthlessness in the year claimed am offshore inc v commissioner 97_tc_579 some objective factors include a decline in the debtor’s business a decline in the value of the debtor’s assets if any the overall business climate the debtor’s serious financial reverses the debtor’s earning capacity events of default insolvency of the debtor the debtor’s refusal to pay actions the creditor took to pursue collection subsequent dealings between the creditor and the debtor id pincite no single factor listed above is conclusive id pincite moreover the mere fact that a business is on the decline that it has failed to turn a profit or that its debt obligation may be difficult to collect does not necessarily justify treating the debt obligation as worthless 106_tc_312 aff’d without published opinion 121_f3d_723 11th cir this is especially true where the debtor continues to be a going concern with the potential to earn a future profit see 535_f3d_1221 10th cir citing 620_f2d_1176 6th cir aff’g 68_tc_213 aff’g tcmemo_2006_174 abc beverage corp v commissioner tcmemo_2006_195 92_tcm_268 while petitioner’s testimony suggests that the landmark note might have become worthless in it is insufficient to carry his burden to show worthlessness without testimony from a disinterested party or some documentary_evidence to corroborate the claim petitioner’s testimony as to the overall business climate in the real_estate market at the time intimates that landmark indeed experienced decline in its business but we do not know by how much landmark’s failure to make interest payments may reflect its inability to repay some portion of its debt to petitioner but that failure alone is not conclusive petitioner claimed he examined landmark’s financial records every month before he concluded the landmark note was worthless but none of the books petitioner purportedly examined is in the record for us to make an independent determination of landmark’s net_worth and ability to pay in there is no evidence showing landmark’s cashflow and earnings we do not have landmark’s balance_sheet to help us determine whether its aggregate liabilities exceeded the value of its assets because landmark remained a going concern into producing some evidence demonstrating its ability or inability to turn the business around and to generate enough income to pay the debt is crucial in sum t he unsupported opinion of the taxpayer alone that the debt is worthless will not usually be accepted as proof of worthlessness 53_tc_491 aff’d 467_f2d_47 9th cir even if we credit petitioner’s testimony on its face which we do not it does not support a finding of worthlessness in while a determination of worthlessness does not hinge on whether any portion of the debt has become due landmark’s nonpayment of principal could be explained by the fact that the landmark note’s principal was not due until date indeed petitioner never exercised the note’s acceleration clause by sending the required written demand on the contrary petitioner stated during trial that the written demands that he did send to landmark were only demands for interest payments thus there is nothing in the record that could even suggest that petitioner actually made an attempt in to collect on the note’s principaldollar_figure even petitioner’s testimony itself allows a strong inference that landmark would be able to repay its debt under the note at some point in the future petitioner claimed that he reviewed landmark’s financial records on the basis of his understanding of landmark’s financial condition he could not determine whether landmark was insolvent but still believed that landmark could make interest payments just not payments on the principal he also believed landmark’s financial health could improve if it was willing to go through significant cuts in staff and expenses petitioner did not want to push landmark into a corner by accelerating the note because if landmark were required to repay the whole debt as petitioner’s testimony suggests it might not be able to pay it at that moment but petitioner’s testimony says very little about whether landmark would be able to pay the principal in the foreseeable future especially when petitioner was willing to provide landmark some flexibility in meeting its payment the three demand letters referenced landmark’s dollar_figure note or the dollar_figurek note but these are only references made to identify the note and we do not understand them to be demands for payment of the entire principal balance obligation indeed it appears from petitioner’s testimony that there was a glimpse of hope that landmark could get back on its feet and meet its debt obligation to him while petitioner need not be an incorrigible optimist see 274_us_398 he needs to persuade us that there was an objective and substantial reason for abandoning any hope of repayment in the future see 14_tc_1282 because petitioner never exercised the acceleration clause and demanded payment of the principal petitioner has failed to persuade us that there could not be a reasonable expectation of repayment and landmark could not have recovered from its financial woes to satisfy the note by the date of maturity thus petitioner’s testimony at most can only suggest that landmark’s finances in would have prevented it from satisfying the debt in full in that year if petitioner had required it but he never did that is insufficient to support a finding of worthlessness because we find petitioner has failed to meet his evidentiary burden to show the landmark note became worthless in we conclude he is not entitled to the bad_debt deduction under sec_166 for correspondingly our conclusion renders it unnecessary to determine whether the debt was a business debt or a nonbusiness_debt under sec_166 iii addition_to_tax and penalty a addition_to_tax under sec_6651 sec_6651 imposes an addition_to_tax for failure to timely file a federal_income_tax return unless the taxpayer can show that the failure was due to reasonable_cause and not willful neglect it is undisputed that petitioner did not timely file his tax_return on brief petitioner did not make any arguments to establish that he may avail himself of the affirmative defense thus we deem the defense waived see 124_tc_223 aff’d 652_f3d_1042 9th cir see also 116_tc_438 b penalty under sec_6662 respondent determined that petitioner is liable for an accuracy-related_penalty for because petitioner substantially understated his income_tax or alternatively because he was negligent or disregarded rules or regulations see sec_6662 and b and there is a substantial_understatement_of_income_tax if the amount of the understatement for the taxable_year exceeds the greater of at trial mr epperson explained the return was filed late because petitioner’s extensive travel abroad made it difficult for them to meet to prepare the return timely even if we were to conclude that petitioner did not abandon the reasonable_cause defense we would still find mr epperson’s explanation inadequate to show reasonable_cause of the tax required to be shown on a return for a taxable_year or dollar_figure sec_6662 alternatively we will sustain respondent’s determination to impose an accuracy-related_penalty if we determine petitioner failed to make a reasonable attempt to comply with provisions of the internal revenue laws or disregarded rules or regulations by acting carelessly recklessly or with intentional disregard sec_6662 sec_1_6662-3 and income_tax regs only one accuracy-related_penalty may be imposed for a given portion of an underpayment even though that portion implicates more than one form of misconduct described in sec_6662 sec_1_6662-2 income_tax regs because respondent has carried his burden under sec_7491 to show that the inappropriately claimed bad_debt deduction resulted in a substantial_understatement of petitioner’s income_tax we need not decide whether petitioner would also be liable for the penalty by reason of negligence or reckless disregard of rules and regulations once respondent has proved his prima facie case for imposing the penalty under sec_6662 petitioner bears the burden of proving that the penalty is unwarranted by establishing an affirmative defense such as reasonable_cause or the correct_tax required to be shown on petitioner’s return was dollar_figure the understatement_of_tax due from petitioner for is dollar_figure ten percent of the correct_tax liability for is dollar_figure thus petitioner substantially understated his income_tax_liability substantial_authority see sec_6664 sec_6662 again petitioner did not make any arguments on brief to establish that his claim of the bad_debt deduction was based on reasonable_cause or substantial_authority thus we conclude that petitioner has abandoned the argument see zapara v commissioner t c pincite see also higbee v commissioner t c pincite in any event the record does not show the substantial_authority defense is available to petitioner who has not otherwise cited any authority not to mention substantial_authority to support his worthlessness claim reasonable_cause requires that the taxpayer have exercised ordinary business care and prudence as to the challenged item see 469_us_241 a taxpayer’s reliance on the advice of a professional such as a certified_public_accountant may constitute reasonable_cause and good_faith if the taxpayer could prove by a preponderance_of_the_evidence that the taxpayer reasonably believed the professional was a competent tax adviser with sufficient expertise to justify reliance the taxpayer provided necessary and accurate information to the advising professional the taxpayer actually relied in good_faith on the professional’s advice see neonatology assocs p a v commissioner t c aff’d 299_f3d_221 3d cir see also sec_1 c income_tax regs it is apparent from the record that petitioner did not provide all the necessary and accurate information to mr epperson for him to determine whether the landmark note was worthless in mr epperson only reviewed the landmark note and the pmb note in addition to irs publications and some unnamed court cases petitioner did not provide mr epperson the landmark financial records that formed the basis of his worthlessness claim nor did petitioner take mr epperson with him to landmark’s office to review the company’s financial records thus even if petitioner had relied in good_faith on mr epperson’s advice mr epperson’s determination that the landmark note was worthless rings hollow and cannot form the predicate for the reasonable_cause defense we have considered all of petitioner’s arguments for a contrary holding and to the extent not discussed herein we conclude they are irrelevant moot or lacking in merit to reflect the foregoing decision will be entered for respondent


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division jul sec_2013 a ' ay y ep ts ‘ u i l xxxxxxxxxxxxxxxxkxxkk xxxxxxxxxxxxxxxxxxxxx xxxxkxxxxxxxxxxxxxxxxx legend taxpayer a xxxxxxxxxxxxxxxxxx individual b xxxxxxxxxxxxxxxxxx plan x xxxxxxxxxxxxxxxxxx credit_union b xxxxxxxxxxxxxxxxxx company n xxxxxxxxxxxxxxxxxx amount a xxxxxxxxaxxxaxaank amount b xxxxxxxxxxxxxxxxxx amount c xxxxxxxxxxxxxxxxxx dear xxxxxxxxx this is a revision of my ruling letter dated date in your letter dated date as supplemented by correspondence dated date and date you requested a waiver of the 60-day rollover requirement contained in sec_402 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 taxpayer a represents that he received a distribution from plan x totaling amount a taxpayer a asserts that his failure to accomplish a rollover within the 60-day period prescribed by sec_402 of the code was due to his having received conflicting advice from the credit_union b and from his tax advisor compounded by his preoccupation with the medical_condition and death of his mother individual b taxpayer a received a statement from company n on december indicating the distribution of amount a less federal_income_tax withholding in the amount of amount b from plan x for a net distribution of amount c upon receipt of the statement taxpayer a called his former employer company n and was informed that a check representing his investment in plan x had been mailed to him on december company n that he had never requested nor received the check that was mailed to him on december check for the amount of amount c also on february attempted to open an ira with credit_union b but was advised by his accountant that he had missed the deadline on march taxpayer a deposited amount c into a non-ira account with credit_union b intending to research his rollover options taxpayer a represents that he told company n re-issued the on february taxpayer a taxpayer a also represents that he was the primary caregiver of individual b starting on august _ until the death of individual b on april based on the above facts and representations you request a ruling that the internal_revenue_service waive the 60-day rollover requirement with respect to the distribution of amount a sec_402 of the code provides that if any portion of the balance_to_the_credit of an employee in a qualified_trust is paid to the employee in an eligible_rollover_distribution and the distributee transfers any portion of the property received in such distribution to an eligible_retirement_plan and in the case of a distribution_of_property other than money the amount so transferred consists of the property distributed then such distribution to the extent transferred shall not be included in gross_income for the taxable_year in which paid sec_402 states that such rollover must be accomplished within days following the day on which the distributee received the property an individual_retirement_account ira constitutes one form of eligible_retirement_plan sec_402 of the code provides that an eligible_rollover_distribution shall not include any distribution to the extent such distribution is required under sec_401 of the code sec_402 of the code provides in relevant part that the secretary may waive the 60-day requirement under sec_402 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_402 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_402 of the code 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 due to his having received conflicting advice from the credit_union b and from his tax advisor compounded by his preoccupation with the medical_condition and death of his mother individual b therefore pursuant to sec_402 of the code the service hereby waives the 60-day rollover requirement with respect to the distribution of amount a from plan x taxpayer a is granted a period of days from the issuance of this ruling letter to contribute amount a into a rollover ira provided all other requirements of sec_402 of the code except the 60-day requirement are met with respect to such contribution amount a will be considered a rollover_contribution within the meaning of sec_402 of the code this ruling does not authorize the rollover of amounts that are required to be distributed by sec_401 of the code this ruling supersedes the prior ruling issued to taxpayer a on date 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 xxxxxxxxxxxxxxxxxxxxxxx se t ep ra t3 at xxxxxxxxxxxxxxxxx sincerely yours waa laura b warshawsky manager employee_plans technical group enclosures deleted copy of letter_ruling notice of intention to disclose


id office uilc cca_2011021615431769 ----------------------------- number release date from ----------------------- sent wednesday date pm to ------------------------ cc ----------------------------------------------------- subject form issue hello you asked us what date the period of limitations for making employment_tax adjustments begins to run for a taxpayer with a form_944 filing requirement you stated that the taxpayer filed a form_941 for the first quarter of the year in question which was rejected as unpostable but did not file any other form sec_941 for that year the taxpayer then filed an untimely form_944 - filed after april 15th of the subsequent year the single form_941 filed did not contain all the information necessary to determine the taxpayer's liability for the year it is our view that in this case the year period of limitations would begin to run on the day the taxpayer actually filed the form_944 -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- ----------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- ------------------


t c memo united_states tax_court norman klootwyk petitioner v commissioner of internal revenue respondent docket no 21030-06l filed date norman klootwyk pro_se chris j sheldon for respondent memorandum opinion gale judge this case is before the court on respondent s motions to dismiss for lack of prosecution and to impose a penalty under sec_6673 petitioner s motion to strike unless otherwise noted all section references are to the internal_revenue_code_of_1986 as amended and all rule references are to the tax_court rules_of_practice and procedure certain portions of respondent s motion to dismiss for lack of prosecution and petitioner s motion for sanctions are also pending background petitioner seeks review under sec_6330 of respondent s determination to proceed with a levy to collect unpaid income taxes for petitioner s and taxable years which totaled dollar_figure and dollar_figure respectively when the notice_of_intent_to_levy was issued petitioner resided in arizona when the petition was filed respondent s determination was contained in a notice_of_determination concerning collection action s under sec_6320 and or issued after petitioner requested a hearing concerning the proposed levy a notice setting case for trial setting the trial in this case for date was served on petitioner on date this notice stated the parties are hereby notified that the above-entitled case is set for trial at the trial session beginning on date the calendar for that session will be called pincite a m on that date and both parties are expected to be present at that time and be prepared to try the case your failure to appear may result in dismissal of the case and entry of decision against you your attention is called to the court s requirement that the parties before trial must agree in writing to all facts and all documents about which there should be no disagreement therefore the parties should contact each other promptly and cooperate fully so that the necessary steps can be taken to comply with this requirement your failure to cooperate may also result in dismissal of the case and entry of judgment against you the notice setting case for trial was accompanied by a standing_pretrial_order which likewise ordered the parties to stipulate facts to the maximum extent possible ordered the parties to submit pretrial memoranda not less than days before the first day of the trial session and warned that an unexcused failure to comply with the standing_pretrial_order might result in sanctions including dismissal on date the court received a document from petitioner styled as a motion to set_aside trial date in which petitioner contended that a trial was unnecessary because the court s review of his case was confined to what took place during his administrative hearing the motion accordingly requested that the court set a briefing schedule that same day petitioner s motion was denied when this case was called for trial on date there was no appearance by or on behalf of petitioner counsel for respondent appeared and moved to dismiss for lack of prosecution respondent also filed a motion to impose penalties under sec_6673 a hearing was conducted at which respondent introduced documents from petitioner s administrative file pursuant to rule sec_803 and sec_902 of the federal rules of respondent served both motions on petitioner by mail on date evidence that same day petitioner mailed to the court a document styled as a statement under rule c in lieu of physically attending the trial which was filed as petitioner s report on date petitioner filed an objection to respondent s motion to dismiss and an objection to respondent s motion to impose a penalty under sec_6673 on date petitioner filed a supplement to his objection to respondent s motion to dismiss for lack of prosecution on date dismissal for lack of prosecution discussion the court may dismiss a case at any time and enter a decision against the taxpayer for failure properly to prosecute his case failure to comply with the rules of this court or any order of the court or for any cause which the court deems sufficient rule b 829_f2d_828 9th cir affg tcmemo_1986_223 696_f2d_1234 9th cir affg 76_tc_1027 in addition the court may dismiss a case for lack of prosecution if the taxpayer inexcusably fails to appear at trial and does not otherwise participate in the resolution of hi sec_3 in addition petitioner filed a motion to strike in which he moved that any references to anti-tax rhetoric be stricken from respondent s motion to dismiss for lack of prosecution and respondent s motion to impose a penalty and he filed a motion for sanctions claim rule a 82_tc_413 affd without published opinion 772_f2d_910 9th cir petitioner has failed to properly prosecute this case in his motion to dismiss respondent s counsel contends that he received no communication from petitioner with respect to any aspect of the tax_court proceeding in his objection to respondent s motion to dismiss petitioner does not deny this claim he simply ignores it we take it as established for purposes of respondent s motion in addition respondent s counsel also contends in his motion to dismiss and petitioner fails to dispute in his objection that petitioner disregarded respondent s attempts to reach agreement on a stipulation of facts in contravention of the court s standing_pretrial_order this likewise represents a failure to participate meaningfully in preparing the case for trial or otherwise resolving it petitioner was obviously aware that this case had been set for trial as evidenced by his motion to set_aside trial date submitted days before the scheduled trial in his motion to set_aside trial date his purported rule c statement filed as petitioner s report and in his objection to respondent s motion to dismiss petitioner citing 439_f3d_455 8th cir revg 123_tc_85 contends that a trial is unnecessary because the court may consider only the administrative record--that is the matters raised and considered as part of the hearing under sec_6330 petitioner s reliance on robinette is misplaced even where the tax_court is confined under the principles of robinette to a review of the record compiled in a sec_6330 hearing a trial is often appropriate to allow the reviewing court to receive evidence concerning what happened during the agency proceedings id pincite here upon petitioner s failure to appear for trial respondent offered into evidence pursuant to rule sec_803 and sec_902 of the federal rules of evidence certain documents from petitioner s administrative file that had been relied on by respondent s appeals_office in reaching the determination in the notice_of_determination these documents fully support the determination whether the documents in evidence constitute a complete and fair representation of the administrative hearing is an issue that would be resolved at a trial if petitioner contended they do not yet petitioner maintains that a trial is unnecessary his contention is meritless we note that were we to decide this case on the administrative record available to us as petitioner contends we should the decision would be for respondent petitioner s two principal contentions are that he was improperly denied the opportunity to dispute the underlying tax_liabilities and the opportunity for a face-to-face conference the record of the administrative hearing in evidence demonstrates that the appeals_office employee conducting petitioner s hearing verified that a notice_of_deficiency covering the liabilities at issue had been issued to petitioner and mailed to him at his last_known_address the foregoing was sufficient to preclude consideration of the underlying liabilities at the hearing under sec_6330 continued we are also satisfied that petitioner was on fair notice i that he was required to appear for trial on the scheduled trial date and ii that a statement under rule c was not an acceptable substitute for his appearance the notice setting the case for trial advised petitioner that he was expected to be present on the trial date and warned that a failure to appear may result in dismissal of the case and entry of decision against you rule c provides as follows attendance at hearings if a motion is noticed for c hearing then a party to the motion may prior to or at the time for such hearing submit a written_statement of such party s position together with any supporting documents such a statement may be submitted in lieu of or in addition to attendance at the hearing rule c by its clear terms applies only to hearings or more specifically to hearings on motions petitioner is no stranger to this court having filed a petition at docket no for redetermination of a deficiency for hi sec_2001 taxable_year see klootwyk v commissioner tcmemo_2006_130 in that case petitioner did not personally appear but requested and received a continued absent some indication from petitioner that he was not residing at the address used or there was some other irregularity in connection with the mailing which petitioner did not provide likewise the documents in evidence show that petitioner was offered a face-to-face conference on a range of dates on condition that petitioner identify nonfrivolous issues that he wished to raise petitioner neither identified the issues nor designated a date as a consequence the appeals_office employee conducting the hearing offered petitioner a telephone hearing which he spurned see eg stephens v commissioner tcmemo_2005_183 n time and date certain for his trial at which he was represented by counsel on the basis of the foregoing we conclude that petitioner was aware of his obligation to appear for trial his failure to appear is therefore unexcused and when combined with the other previously discussed derelictions in prosecuting his case renders a dismissal for lack of prosecution fully justified all of the material allegations set forth in the amended petition in support of assignments of error have been denied in respondent s answer and respondent has likewise not conceded any error assigned in the amended petition accordingly respondent is entitled to a decision in his favor and may proceed with the proposed levy to collect petitioner s outstanding and income_tax liabilities sec_6673 penalty respondent has moved for the maximum penalty under sec_6673 on the grounds that petitioner instituted and maintained this proceeding primarily for delay whenever it appears to the court that proceedings have been instituted or maintained primarily for delay the court may require the taxpayer to pay a penalty not in excess of dollar_figure id sec_5 we have also reviewed petitioner s motion to strike and motion for sanctions we conclude that they are meritless and we shall deny them a applies to proceedings under sec_6330 115_tc_576 having carefully reviewed petitioner s submissions in this case we are satisfied that he instituted and maintained the proceedings primarily for delay one principal reason for our conclusion is that a number of the positions petitioner has taken are frivolous petitioner seizes upon and repeatedly rails against the fact that respondent alleges that the notice_of_deficiency for and was mailed to petitioner s last_known_address but then lists two addresses to which the notice was sent at no point in his repeated discussions of this topic does petitioner ever deny that he resided or received correspondence at the addresses respondent listed or suggest that some other address was his last_known_address petitioner also advances a litany of charges to the effect that his due process rights have been egregiously violated by internal_revenue_service personnel he made no such claims under oath at trial instead he deliberately avoided his trial date the foregoing positions and actions damage petitioner s credibility moreover as noted petitioner had a previous case in this court see klootwyk v commissioner supra in that case petitioner did not personally appear but had counsel to represent him his counsel however neither presented a case nor offered any evidence on petitioner s behalf id the court concluded that petitioner had instituted and maintained the proceedings primarily for delay and imposed a penalty of dollar_figure under sec_6673 the opinion in klootwyk was issued on date approximately months before petitioner filed the original petition herein date we perceive here a pattern of trifling with this court s process petitioner has again wasted the time and resources of this court and respondent it is apparent that a dollar_figure penalty has not deterred petitioner from this course of conduct we are also mindful that the sums for which petitioner has attempted to delay collection are substantial accordingly a more substantial penalty is warranted and we shall impose one under sec_6673 of dollar_figure to reflect the foregoing an appropriate order and decision will be entered in the previous case petitioner also failed to submit a pretrial memorandum or a posttrial brief as ordered by the court


t c memo united_states tax_court dave graf daimler f k a dieter g mondragon a k a hans dieter garcia mondragon a k a hans dieter mondragon a k a hans dieter modzanowski and thelma mondragon a k a tami mondragon petitioners v commissioner of internal revenue respondent dieter electronics co inc d b a audio video masters a k a perry bob tv a k a ace sewing machine a k a daimler inc a k a daimler group petitioner v commissioner of internal revenue respondent docket nos filed date john w duncan for respondent memorandum opinion chiechi judge these cases which we have consolidated for purposes of opinion only are before us on respondent’s motions - - for summary_judgment collectively respondent’s motions we shall grant those motions at the time the petition was filed in docket no the legal address of petitioner dave graf daimler f k a dieter g mondragon a k a hans dieter garcia mondragon a k a hans dieter mondragon a k a hans dieter modzanowski mr daimler was wichita falls texas at the time the petition was filed in docket no the legal address of petitioner dieter blectronics co inc d b a audio video masters a k a perry bob tv a k a ace sewing machine a k a daimler inc a k a daimler group dieter electronics or the company was in wichita falls texas mr daimler and dieter electronics failed to reply in any manner to respondent’s respective requests for admissions in docket nos and consequently each matter set forth in each of those requests is deemed admitted see rule c 85_tc_267 the deemed admissions in these cases demonstrate that there are no ‘in docket no respondent filed a motion for summary_judgment only as to petitioner dave graf daimler that is because on date petitioner thelma mondragon a k a tami mondragon ms mondragon and respondent filed a stipula- tion of settlement which reflects their agreement as to all issues in that case all rule references are to the tax_court rules_of_practice and procedure all section references are to the internal_revenue_code in effect for the years at issue genuine issues of material fact herein mr daimler and ms mondragon were the sole stockholders of dieter electronics an electronics repair business that had been operating in wichita falls texas since mr daimler and ms mondragon filed a joint u s individual_income_tax_return joint_return form_1040 for each of the years through the company filed a u s_corporation short--form income_tax return form 1120-a for each of its taxable years ended date date and date it filed a u s_corporation income_tax return form_1120 for its taxable_year ended date we shall refer collectively to the forms 1120-a and form_1120 filed by the company as corporate returns during through petitioners diverted substantial funds from dieter electronics deposited those funds into their personal accounts and used them personally income diversion scheme throughout those years as part of the income diversion scheme mr daimler diverted all the checks submitted to dieter electronics as corporate income on which the payee section of the check was left blank diverted corporate checks and stamped his own name d g mondragon in that section of those checks throughout those same years and also as part of the income diversion scheme mr daimler removed all the cash that dieter rlectronics received as corporate income diverted corporate q4e- cash and placed that cash into a lockbox located in his house lockbox during the years and mr daimler and ms mondragon personally maintained account no at texas commerce bank in houston texas tcb account and mr daimler personally maintained account no at deutsche bank in bremen germany german account during those years the diverted corporate checks were deposited into the tcb ac-- count and whenever mr daimler accumulated diverted corporate cash in excess of dollar_figure to dollar_figure in the lockbox he converted such cash into cashier’s checks and deposited those checks into the german account mr daimler and ms mondragon knowingly diverted the follow- ing amounts of corporate funds from dieter electronics for the years indicated by depositing diverted corporate checks into the tcb account amount of year diverted corporate checks dollar_figure big_number big_number ‘there is a dollar_figure inconsistency in the deemed admissions between the amount of diverted corporate checks that mr daimler and ms mondragon deposited into the tcb account during and the amount of dividend income consisting of such checks that they failed to report in their joint_return for that year we have used the lower amount for purposes of this opinion - - mr daimler and ms mondragon personally used the foregoing funds that were deposited into the tcb account even though such funds constituted income of dieter electronics they did not report the diverted corporate checks as dividend income from the company in their joint returns for the years at issue mr daimler knowingly diverted the following amounts of corporate funds from dieter electronics for the years indicated by depositing diverted corporate cash into the german account amount of year diverted corporate cash dollar_figure big_number big_number big_number mr daimler and ms mondragon personally used the foregoing funds that were deposited into the german account even though such funds constituted income of dieter electronics they did not report the diverted corporate cash as dividend income from the company in their joint returns for the years at issue dieter electronics failed to report taxable_income in the amounts of dollar_figure dollar_figure dollar_figure and dollar_figure for the taxable years ended date date date and date respectively because those funds were diverted from it to the tcb account the personal account of its stockholders mr daimler and ms mondragon dieter electronics failed to report taxable_income in the amounts of dollar_figure - - dollar_figure dollar_figure and dollar_figure for the taxable years ended date date date and date respectively because those funds were diverted from it to the german account the personal account of its stockholder mr daimler dieter electronics also failed to report taxable_income in the amount of dollar_figure for the taxable_year ended date throughout the years through mr daimler and ms mondragon caused dieter electronics to pay their personal ex- penses in the amounts of dollar_figure dollar_figure and dollar_figure respec-- tively which they failed to report as dividend income from the company in their respective joint returns for those years dieter electronics improperly deducted dollar_figure of its stockhold-- ers’ personal expenses as a miscellaneous expense in its return for the taxable_year ended date during dieter electronics also paid mr daimler and ms mondragon dollar_figure which they used to pay their automobile lease an additional dollar_figure of mr daimler’s personal ex- penses and mr daimler’s personal model airplane expenses in the amount of dollar_figure all of which they failed to report as divi- dend income from the company in their joint_return for that year mr daimler and ms mondragon knowingly caused dieter electronics to deduct improperly the dollar_figure of mr daimler’s personal ex- penses and the dollar_figure of mr daimler’s personal model airplane - expenses that dieter electronics paid during as parts and cost of goods sold-contract labor in its corporate return for the taxable_year ended date the accumulated_earnings_and_profits of dieter electronics for the years at issue were sufficient to cover the total divi- dends including constructive dividends that mr daimler and ms mondragon received during those years dieter electronics paid mr daimler and ms mondragon net salary of dollar_figure dollar_figure and dollar_figure for tax years and respectively mr daimler and ms mondragon reported net wages e gross wages on line of forms w-2 less federal_income_tax and social_security_tax withheld in the amounts of dollar_figure dollar_figure and dollar_figure in their joint returns for and respectively as a result petitioners failed to report taxable wages that they received from the company in the amounts of dollar_figure dollar_figure and dollar_figure for and respectively in their respective joint returns for those years on date mr daimler and ms mondragon person- ally purchased a building located at the corner of kemp and avenue k in wichita falls texas the building for dollar_figure dollar_figure of which was allocated to land the building was used as the principal_place_of_business of dieter electronics on date mr daimler and ms mondragon sold a portion e percent of the building date sale to an - - unrelated third party for dollar_figure at the time of that sale the basis of mr daimler and ms mondragon in that portion of the building and land was dollar_figure they failed to include the gain ie dollar_figure minus dollar_figure or dollar_figure that they realized on the date sale in their joint_return for during mr daimler and ms mondragon sold the remainder ie percent of the building sale for dollar_figure at the time of that sale their basis in that portion of the building and land was dollar_figure they failed to include the gain dollar_figure minus dollar_figure or dollar_figure that they realized on the sale in their joint_return for mr daimler and ms mondragon personally financed the date sale of the building they financed a dollar_figure downpayment for months pincite percent interest dollar_figure note and the remainder of the dollar_figure sales_price ie dollar_figure for years pincite percent interest dollar_figure note the payments on both of those notes began in date the dollar_figure note was paid off during in date mr daimler and ms mondragon sold the dollar_figure note mr daimler and ms mondragon failed to include interest_income associated with the foregoing two notes in the amounts of dollar_figure for and dollar_figure for in their respective joint returns for those years in mr daimler and ms mondragon personally purchased a new_building to house the place of business of dieter electron- - ics new_building they did not claim depreciation either on the building that they purchased on date or on the new_building that they purchased in in its corporate returns for the taxable years ended date date date and date dieter electronics with the full knowledge and consent of mr daimler and ms mondragon improperly deducted depreciation in the amounts of dollar_figure dollar_figure dollar_figure and dollar_figure respectively on the two buildings personally owned by mr daimler and ms mondragon during the years through mr daimler and ms mondragon had a lease agreement office lease with the company with respect to either the building or the new_building collec- tively office buildings that they owned and that housed dieter klectronics’ place of business the office lease required dieter electronics to pay them rent in the amount of dollar_figure per month ie dollar_figure per year during and the company paid mr daimler and ms mondragon dollar_figure dollar_figure and dollar_figure respectively as rent on the office buildings mr daimler and ms mondragon did not include rental income under the office lease in the amount of dollar_figure per year in their joint returns for and dieter klectronics did not deduct rental expense in that annual amount in its corporate returns for the taxable years ended date date date and date - in mr daimler and ms mondragon maintained a personal bank account no at ncnb of texas in wichita falls texas ncnb personal bank account during they deposited dollar_figure as cash or misc into the ncnb personal bank account mr daimler and ms mondragon did not include the amount of those deposits in their joint_return for and have failed to show that such deposits were derived from a nontaxable source during the taxable years ended date date date and date dieter electronics maintained a bank account no at ncnb of texas in wichita falls texas ncnb corporate bank account the bank statements and canceled checks from the ncnb corporate bank account were used to prepare the corporate returns of dieter electronics for those taxable years dieter electronics overstated its purchases expense by dollar_figure dollar_figure dollar_figure and dollar_figure for the taxable years ended date date date and date respectively dieter electronics overstated its cost_of_goods_sold by dollar_figure for the taxable_year ended date during the years and the german account earned interest in the amounts of dollar_figure dollar_figure dollar_figure and dollar_figure respectively mr daimler and ms mondragon failed to include the respective amounts of that interest_income in their joint returns for the years through mr daimler and ms mondragon did not disclose the existence of the tcb account or the german account to the individuals who prepared their joint returns and dieter electronics’ corporate returns for the taxable years at issue during the examination of the joint returns of mr daimler and ms mondragon and the corporate returns of dieter electronics for the taxable years at issue mr daimler presented false loan documents to respondent’s agent on various occasions mr daimler has bragged about diverting cash and checks from dieter electronics and using those funds personally in addition on various occasions mr daimler has bragged about underreporting both his personal income and the taxable_income of dieter electronics by using the income diver- sion scheme described above respondent issued a notice_of_deficiency notice to mr daimler and ms mondragon for their taxable years and and a separate notice for their taxable_year in those notices respondent determined the following deficiencies in and fraud penalties under sec_6663 on their federal_income_tax tax_fraud penalty under taxable_year ended deficiency sec_6663 dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number respondent issued to dieter electronics a notice with respect to the taxable years ended date date and date and a separate notice with respect to the taxable_year ended date in those notices respondent determined the following deficiencies in and fraud penalties under sec_6663 on the company’s tax_fraud penalty under taxable_year ended deficiency sec_6663 date dollar_figure dollar_figure date big_number big_number date big_number big_number date big_number big_number mr daimler and dieter electronics did not file responses to respondent’s motions the undenied admissions in these cases establish facts requiring a decision against mr daimler in docket no and against dieter electronics in docket no with respect to both the deficiency determinations in the notices on which they have the burden_of_proof and the fraud_penalty determinations in those notices on which respondent has the burden_of_proof by clear_and_convincing evidence accord- ingly respondent’s motion for summary_judgment as to mr daimler in docket no and as to dieter electronics in docket no will be granted to reflect the foregoing and the stipulation of settlement between respondent and ms mondragon that was filed on date an order granting respondent’s motion for summary_judgment as to petitioner mr daimler will be issued and decision will be en- tered for petitioner ms mondragon and for respondent as to petitioner mr daimler in docket no an order will be issued grant- ing respondent’s motion for summary_judgment and decision will be entered for respondent in docket no


department of the treasury int ernal revenue service washington d c date o f f i c e o f c h i e f c o u n s e l number release date gl-147398-01 cc pa cbs b01 uil memorandum for associate area_counsel sb_se greensboro from mitchel s hyman senior technician reviewer branch collection bankruptcy summonses subject notice to a single member owner of a disregarded llc this chief_counsel_advice responds to your request for advice on a collection_due_process cdp issue relating to a limited_liability_company llc in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent issue if the internal_revenue_service service makes an assessment against a disregarded llc and provides a collection_due_process cdp_notice to the disregarded llc must the service issue a separate cdp_notice to the single member owner if the service adds his name to the assessment conclusion the service should issue another cdp_notice to the single member owner even when the single member owner received actual notice and was not prejudiced by the service’s error this approach ensures that a single member owner will receive the cdp safeguards that congress enacted background an llc is a hybrid_entity created under state law which has attributes of both a partnership and a corporation see generally uniform limited_liability_company act see also n y ltd liab co law mckinney the owners of an llc are the members who generally are not liable for the debts of the llc an llc may own property in its own name and members have no interest in such property the law of most states permit organization of single member llcs ie llcs having only one member commonly known as the single member owner sec_301_7701-1 et seq commonly referred to as the check-the-box_regulations provides a framework for the federal tax classification of entities under the regulations the classification of an llc will depend on the number of members in the llc and any election filed for the llc for example an llc may be either a multi- member or single member llc if it is a multi-member llc it may elect to be treated as an association_taxable_as_a_corporation sec_301_7701-3 if no election is made sec_301_7701-3 provides as a default that the multi-member llc will be treated as a partnership alternatively if an llc is a single member llc the question is whether it is treated as an association_taxable_as_a_corporation or as a disregarded_entity a single member owner could elect to have the llc classified as an association_taxable_as_a_corporation sec_301_7701-3 if no election is made sec_301_7701-3 provides that the llc will be disregarded as an entity separate from its owner a disregarded llc’s activities are treated in the same manner as a sole_proprietorship branch or division of the owner sec_301_7701-2 because a disregarded llc is not separate from its owner the service may seek to collect the taxes arising from the llc’s business directly from the single member owner by administrative collection action including the filing of a notice_of_federal_tax_lien nftl in pursuing administrative collection action collection_due_process cdp rights under sec_6320 and sec_6330 must be accorded the single member owner taxpayer as a general_rule a single member limited_liability_company that is disregarded has no tax filing obligation as all its activities are reported by the company’s sole owner as an exception to the general_rule notice_99_6 1999_3_irb_12 permits a disregarded llc to separately calculate report and pay its employment_tax obligation with respect to its employees under its own name and ein the notice makes clear that the owner of a single member limited_liability_company that is treated as a disregarded_entity for federal tax purposes is the employer for purposes of employment_tax liability consequently the owner retains ultimate responsibility for the employment_tax obligations incurred with respect to employees of the disregarded_entity id thus as a disregarded_entity a single member limited_liability_company cannot be the employer for employment_tax purposes regardless of the fact that it files employment_tax returns where the employment_tax liability is reported by the disregarded llc pursuant to notice_99_6 the service’s current practice is to assess employment_taxes in the name and ein of the limited_liability_company consequently a limited_liability_company that is a disregarded_entity is often assessed for the employment_tax liabilities that are the ultimate responsibility of the company’s single member owner also the service makes notice_and_demand for payment on the disregarded llc for purposes of discussion in this memorandum we shall assume the following as a model situation the service has made an assessment against a disregarded llc and has made notice_and_demand for payment on the llc looking to collect the tax_liability the service has provided cdp notices under both sec_6320 and sec_6330 to the disregarded llc subsequently the service adds the single member owner’s name to the assessment made against the disregarded llc law and analysis sec_6201 authorizes the service to assess the taxpayer’s liability the service’s positions regarding assessments against disregarded llcs is as follows assessments and notices and demand under the name and or taxpayer_identification_number of a disregarded llc are valid against the single member owner this is consistent with the notion that notices containing technical defects are valid where the taxpayer has not been prejudiced or misled by the error and is afforded a meaningful opportunity to litigate his claims 881_f2d_340 6th cir citing 719_f2d_1507 10th cir and 386_fsupp_499 n d tex aff’d without published opinion 514_f2d_1070 5th cir in substance a disregarded llc is a trade_name by which the company’s sole owner conducts business see marvel given the close relationship between a single member limited_liability_company and its sole owner any reference in an assessment to a disregarded llc and notice to the llc is tantamount to an assessment and notice to the single member owner accordingly notice_and_demand for payment made on the disregarded llc serves as notice_and_demand for payment under sec_6303 on the single member owner who actually received the notice and was not prejudiced by the service’s error analogous support for this can be drawn from cases holding that notice_and_demand erroneously made on a business or nonexistent partnership was a valid when the taxpayer received actual notice and was not prejudiced by the error for exampie in marvel the taxpayers contended that because the notices were in the name of marvel photo and not in the name of fred and angela marvel the notice_and_demand for payment did not comply with sec_6303 the court rejected the taxpayers’ argument reasoning that a lthough the notices were addressed to taxpayers’ business rather than to the individual taxpayers it is undisputed that taxpayers doing business as marvel photo actually received the notices and that the notices listed the correct taxpayer_identification_number marvel f 2d pincite accord 116_fsupp2d_1007 s d ind holding that service made a valid notice_and_demand on marvin barmes a sole_proprietor who actually received the notice even though the notice was mistakenly sent to the barmes partnership given the disregarded status of the llc for all federal tax purposes and its close relationship to its single member owner the owner who actually receives the notice_and_demand addressed to the disregarded llc and is not prejudiced by the service’s mistake cannot seriously object to the validity of the notice where an assessment and notice_and_demand is made with respect to the disregarded llc the service’s practice is to add the single member owner’s name to the assessment to facilitate collection against the owner the question arises whether this procedure requires the service to send a new cdp_notice to the single member owner sec_6303 provides that notice shall be left at the dwelling or usual place of business of such person liable for the unpaid tax or shall be sent by mail to such person’s last_known_address there is no clear answer to this question on the one hand it could be argued that there is no need to send a new cdp_notice to the single member owner who actually received a cdp_notice addressed to the disregarded llc and was not prejudiced by the service’s mistake essentially the service would apply the standard for determining the validity of a notice under sec_6303 to cdp notices under sec_6303 the service is not required to identify the taxpayer correctly when the taxpayer should recognize that the notice applies to his tax_liability see marvel f 2d pincite barmes 116_fsupp2d_1014 there is nothing in sec_6320 or sec_6330 indicating that congress intended to impose a more exacting standard for providing a cdp_notice than the notice standard under sec_6303 on the other hand it could also be argued that the standard for providing notice under sec_6303 does not apply to cdp notices because cdp notices serve a different purpose specifically a cdp_notice alerts a taxpayer that a limited period exists for filing a request for a cdp hearing sec_6320 and sec_6330 there is no similar right to a hearing under sec_6303 moreover recognizing that a taxpayer has a limited time in which to request a cdp hearing congress could have intended that cdp notices correctly identify the taxpayer so that there would not be any confusion or delay a cdp_notice addressed to a disregarded llc may cause confusion and mislead a single member owner because the single member owner may believe that the service intends to take collection action against the assets of the disregarded llc the single member owner may not grasp the abstract tax concept that the llc is disregarded for federal tax purposes and that the service is actually seeking to collect the tax_liability from the assets of the single member owner finally requiring that a cdp_notice correctly identify the taxpayer comports with the overall legislative intent underlying the cdp hearings which was to provide greater safeguards to a taxpayer during the service’s collection process requiring the service to issue a cdp_notice correctly identifying the taxpayer provides greater protection to taxpayers in conclusion we believe the service should send a new cdp_notice addressed to the single member owner even when the single member owner actually received a cdp_notice addressed to the disregarded llc and was not prejudiced by the service’s mistake this cautious approach will ensure that a single member owner’s cdp rights will be protected if we can be of any further assistance please call