internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to plr-119319-99 cc intl b01 date date re tax_year a country b date c date d year e year f year g date h dear tin this is in response to your letter dated date on behalf of a requesting a ruling under sec_877 of the internal_revenue_code_of_1986 code that a’s loss of u s citizenship did not have for one of its principal purposes the avoidance of u s taxes under subtitle a or subtitle b of the code the information submitted for consideration is substantially as set forth below the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted plr-119319-99 in support of the request for rulings it is subject_to verification on examination a was born in country b on date c upon a’s marriage to his first wife a u s citizen and resident a moved to the united_states a was naturalized as a u s citizen on date d in year e a divorced his first wife and married his current wife a’s current wife is a citizen by birth of country b and was naturalized as a u s citizen in year f from year e to year g a and his current wife resided in the united_states in year g a and his current wife moved back to country b on date h a formally renounced his u s citizenship at the united_states embassy in country b on the date of his expatriation a’s net_worth exceeded the amount prescribed in sec_877 sec_877 generally provides that a citizen who loses u s citizenship or a u s long-term_resident who ceases to be taxed as a lawful permanent resident individuals who expatriate within the 10-year period immediately preceding the close of the taxable_year will be subject_to the special rules of sec_877 for such taxable_year unless such loss did not have for one of its principal purposes the avoidance of u s taxes sec_2107 and sec_2501 provide special estate and gift_tax regimes respectively for individuals who expatriate with a principal purpose to avoid u s taxes a former citizen or former long term-resident will be treated as having expatriated with a principal purpose to avoid u s taxes for purposes of sec_877 sec_2107 and sec_2501 if the individual's average income_tax_liability or the individual's net_worth on the date of expatriation exceed certain thresholds see sec_877 sec_2107 and sec_2501 a former u s citizen whose net_worth or average tax_liability exceeds these thresholds however will not be presumed to have a principal purpose of tax_avoidance if that former citizen is described within certain statutory categories and submits a request for a ruling within one year of the date of loss of u s citizenship for the secretary's determination as to whether such loss had for one of its principal purposes the avoidance of u s taxes see sec_877 sec_2107 and sec_2501 under notice_98_34 1998_27_irb_30 modifying notice_97_19 1997_1_cb_394 an eligible former citizen will not be presumed to have a principal purpose of tax_avoidance if that former citizen submits a complete and good_faith request for a ruling as to whether such loss had for one of its principal purposes the avoidance of u s taxes a is eligible to request a ruling under sec_877 because he is a citizen of country b the country in which he was born see sec_877 notice_97_19 requires that certain information be submitted with a request for a ruling that an individual's expatriation did not have for one of its principal purposes the avoidance of u s taxes plr-119319-99 a submitted all of the information required by notice_97_19 as modified by notice_98_34 accordingly based solely on the information submitted and the representations made it is held that a has made a complete and good_faith submission in accordance with sec_877 and notice_98_34 and therefore a will not be presumed to have expatriated with a principal purpose of tax_avoidance however because the information submitted does not clearly establish the existence or lack of a principal purpose to avoid taxes under subtitle a or b of the code no opinion is expressed as to whether a’s expatriation had for one of its principal purposes the avoidance of such taxes while this ruling rebuts the presumption of tax_avoidance under sec_877 it is not conclusive as to whether a subsequently may be found to have a principal purpose of tax_avoidance under sec_877 sec_2107 and sec_2501 based on all the facts and circumstances see sec_877 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in addition no opinion is expressed as to a’s u s tax_liability for the taxable years prior to expatriation or his united_states tax_liability for periods after his expatriation under sections of the code other than sec_877 sec_2107 and sec_2501 a copy of this letter must be attached to a’s u s income_tax return for the year in which a obtained the ruling whether or not a is otherwise required to file a return this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to a’s representative sincerely yours allen goldstein reviewer office of the associate chief_counsel international


internal_revenue_service number release date index number -------------------- -------------------------------- --------------------------------- ---------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------- id no ------------- telephone number --------------------- refer reply to cc corp b1 plr-149387-05 date date --------------------------------- ----------------------------------- ----------------------------------------------------- ----------------------------------------------------- legend parent --------------------------------------------------------------------------------------------- sub1 --------------------------------------------------------------------------------------------- sub2 --------------------------------------------------------------------------------------------- sub ----------------------------------------------------------------------------------------------------- sub ---------------------------------------------------------------------------- sub ---------------------------------------------------------------------------- sub6 ----------------------------------------------------------------------------------------------------- sub7 ----------------------------------------------------------------------------------------------------- sub8 ----------------------------------------------------------------------------------------------------- -------------------------------------------------------------- ---------------------------------------------------------- ---------------------------------------------- ----------------------------------------- ---------------------------------- ---- ------ ------ ------ --------------------- -------------------------------- ----------------------------------- this letter responds to your letter dated date which requests plr-149387-05 sub9 ----------------------------------------------------------------------------------- sub10 ----------------------------------------------------------------------------------------------------- country x a b c d dear ------------- rulings on certain federal_income_tax consequences of a proposed transaction additional information was received in subsequent letters dated date and date the material information submitted for consideration is summarized below summary of facts federal_income_tax return using the accrual_method of accounting parent is also the common parent of a group of non-us corporations described in relevant part below consolidated_group sub2 is a wholly owned subsidiary of sub1 and a member of parent’s consolidated_group sub3 is a country x corporation and a wholly owned subsidiary of sub2 sub4 is a country x corporation and a wholly owned subsidiary of sub3 sub is a country x corporation and a wholly owned subsidiary of sub3 that is treated as a disregarded_entity under the default classification provisions of the check- the-box rules which represents substantially greater than a of the value of sub6 and are the only shares in sub6 with voting rights sub4 owns all of sub6’s nonvoting preferred shares which represent no greater than b of the value of sub6 parent is the common parent of a group of corporations that files a consolidated sub6 is a country x corporation sub owns all of sub6’s common shares sub1 is a wholly owned subsidiary of parent and a member of parent’s sub7 is a country x corporation and a wholly owned subsidiary of sub6 sub8 is plr-149387-05 a country x corporation and a wholly owned subsidiary of sub6 sub8 owns approximately c of the common shares of sub9 which is a country x corporation treated as a partnership for federal_income_tax purposes sub10 an indirect wholly owned subsidiary of sub3 owns the remaining d of the common shares of sub9 sub9 is obligated on a subordinated loan from sub4 sub7 will make a cash distribution to sub6 that is approximately equal to sub7’s accumulated and current_earnings_and_profits following this distribution sub9 will borrow cash from a foreign financing affiliate to repay the subordinated debt which it owes to sub4 sub4 will use the cash received from sub9 to purchase the stock of sub7 from sub6 in exchange for such cash the cross-chain stock sale the amount of cash which will be paid_by sub4 to acquire the sub7 shares will be equal to the value of sub7 distribution amount received from sub7 to sub5 sub5 will then distribute such amounts to sub3 which in turn will distribute such amounts to sub2 the purpose of this transaction is for parent to restructure the ownership of sub7 and effect a dividend from sub4 to sub6 that will allow sub3 to make a qualifying_dividend within the meaning of sec_965 to sub2 sub6 then will distribute the sales proceeds received from sub4 as well as the representations have been made in connection with the cross-chain stock sale the following representations a the fair_market_value of sub7 stock to be transferred to sub4 will equal the cash to be received by sub6 in the transaction b the stock of sub7 is the sole property that sub6 will transfer to sub4 c there is no plan or intention to liquidate sub4 sub6 or sub7 and there is no plan or intention to engage in any transaction including a sale or issuance of stock of sub4 or sub7 that would have the effect of causing sub6 to not be in control of sub4 or sub7 within the meaning of sec_304 d sub7 is not a passive_foreign_investment_company within the meaning of section e as of the end of the taxable_year of sub7 in which the proposed transfer by sub6 of the stock of sub7 to sub4 will occur sub4 will have earnings_and_profits including any earnings_and_profits attributable to amounts included in the gross_income of sub4’s u s shareholder under sec_951 or b in excess plr-149387-05 of the purchase_price that will be paid_by sub4 to sub6 for the stock of sub7 f none of the sub7 stock transferred will be subject_to any liabilities and no liabilities of sub6 will be assumed by sub4 g sub6’s tax basis in the sub7 stock to be transferred to sub4 is equal to or less than the fair_market_value of such stock rulings above we hold as follows based solely on the information submitted and the representations set forth the cash paid_by sub4 to sub6 in exchange for the sub7 stock will be treated under sec_304 as a distribution in redemption of the stock of sub4 in the taxable_year in which the cross-chain stock sale is completed pursuant to sec_302 the redemption of sub4’s stock will be treated as a distribution_of_property to sub6 to which sec_301 applies pursuant to sec_304 the distribution is treated as a dividend to sub6 from sub4 to the extent of sub4’s earnings_and_profits the basis of the sub7 stock acquired by sub4 from sub6 will equal the basis of the sub7 stock in the hands of sub6 immediately prior to the transfer sec_304 and sec_362 the holding_period of the sub7 stock acquired by sub4 from sub6 will include the period during which sub6 held the sub7 stock sec_1223 the rulings contained in this letter are based upon information and except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter no opinion is expressed or implied as to whether amounts received by sub2 would qualify for the sec_965 dividends received deduction representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination the code provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer s requesting it sec_6110 of a copy of this letter must be attached to any income_tax return to which it is in accordance with the power_of_attorney on file with this office a copy of this plr-149387-05 relevant letter is being sent to your authorized representative cc sincerely _____________________________ michael j wilder senior technician reviewer branch office of associate chief_counsel corporate


peranrwenrormereeasury internal_revenue_service washington d c tax_exempt_and_government_entities_division nov uniform issue list ter rte legend taxpayer a bank m bank n ira x account y amount s date date date date dear this is in response to your letter dated and supplemented by a letter dated in which you request a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code code the following facts and representations have been submitted under penalty of perjury in support of the ruling_request page taxpayer a age_ represents that on date he received a total_distribution from ira x held at bank m in amount s taxpayer a represents that he intended to rollover amount s to an ira certificate of deposit at bank n on date taxpayer a received the total_distribution of amount s from ira x in the form of a check on date taxpayer deposited the check for amount s into account y a certificate of deposit account cd at bank n taxpayer a represents that he informed the clerk at bank n of his intent to open an ira cd however account y was a non-ira cd a letter dated date that amount s had not been rolled over into an eligible rollover on date taxpayer a discovered that amount s had not been deposited into a rollover ira account at bank n bank n ain a ira due to a clerical_error taxpayer a asserts that his failure to accomplish a rollover within the 60-day period prescribed by sec_408 of the code was due to the clerical_error made by representative o of bank n which led to amount s being placed into a non-ira cd account taxpayer a further represents that amount s has not been used for any other purpose investigated the matter and advised taxpayer _ based on the facts and representations you request that the internal_revenue_service waive the 60-day rollover requirement contained in sec_408 of the code with respect to the distribution of amount s from ira x sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the account is maintained if i the entire amount received including money and any other_property i is paid into an ira for the benefit of such individual not later than the day after the day on which he receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 page sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the one-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the secretary may waive the 60-day requirement under sec_408 and sec_408 of the code where the failure to-waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 of the code revproc_2003_16 2003_4_irb_359 date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 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 and documentation presented by taxpayer a is consistent with his assertion that his failure to accomplish a timely rollover was caused by a clerical_error made by bank n which led to amount s from ira x being placed into a non-ira account therefore pursuant to sec_408 of the code the service hereby waives the 60-day rollover requirement with respect to amount s from ira x taxpayer a is granted a period of days from the issuance of this ruling letter to contribute amount s from ira x into a rollover ira provided all other requirements of sec_408 of the code except the 60-day requirement are met with respect to such contribution amount s will be considered a rollover_contribution within the meaning of sec_408 of the code no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto page4 this ruling is directed solely to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited by others as precedent if you wish to inquire about this ruling please contact i d no at se t ep ra t sincerely yours donzell littlejohn manager _ employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose


index numbers control number tam-101434-98 lal ven tt internal_revenue_service national_office technical_advice_memorandum taxpayer's name taxpayer's address taxpayer's ein tax_year involved date of conference legend taxpayer state a year year year dollar_figurea dollar_figureb dollar_figurec issues the amounts received from the contract customers that taxpayer whether taxpayer's adjusted_basis for its funeral home business for purposes of computing its gain on the sale of the business includes the net of the following amounts related to certain pre-need funeral contracts included in the sale treated as continuing to belong to the customers and at the time of the sale as held for the customers in one or more trust accounts plus the amount of taxpayer's accounts receivables related to the contracts less taxpayer's estimated cost to provide the merchandise and services specified in the contracts whether taxpayer's amount_realized from the sale includes an amount equal to taxpayer's estimated cost to provide the merchandise and services specified in the contracts because the purchaser of the contracts assumed taxpayer's obligation to provide the merchandise and services conclusions taxpayer's adjusted_basis for its funeral home business does not include the net of the three amounts described above taxpayer's amount_realized from the sale of its funeral home business does not include taxpayer's estimated cost to provide the merchandise and services specifted in the contracts facts taxpayer an s_corporation operated a funeral home in state a from year until year when it sold the assets of the business to another corporation purchaser in computing its gain from this sale the year sale on the form_4797 sales of business property attached to its form1120s u s income_tax return for an s_corporation for the tax_year ending december year taxpayer reported that its amount_realized from the sale was dollar_figurea that its adjusted_basis for the business was dollar_figureb and that its gain before selling_expenses was dollar_figurec after examining taxpayer's year form the field requested technical_advice as to whether taxpayer reported too little gain with respect to the year sale because it failed to properly take into account that part of the year sale consisting of the transfer of the pre-need funeral contracts that taxpayer had entered into during year through year the pre-need contracts a typical pre-need contract required its customer to pay a specified amount to taxpayer in one or more installments in exchange taxpayer became obligated to provide after the customer's death the funeral merchandise eg caskets urns vaults markers and clothing and services specified in the contract during the conference of right taxpayer's representatives indicated that the customer could cancel the contract and receive a full refund of the amounts previously paid prior to the death of a pre-need contract customer taxpayer generally treated the payments received from the customer as belonging to the customer and as held in trust by taxpayer for the customer ’ taxpayer deposited these payments in one of three accounts each a_trust account at the time of the year sale each trust account held only funds received from pre-need contract customers that taxpayer treated in this manner generally only after a pre-need contract customer died and taxpayer furnished the funeral merchandise and services specified in that contract did taxpayer claim ownership of the funds previously received from the customer at that time taxpayer would withdraw from the trust accounts the deceased customer's payments less any amount of such payments that had previously been withdrawn at the time of the year sale taxpayer had accounts_receivable for the portions of the contract prices of the pre-need contracts that it had not yet received from its customers the pre-need receivables’ prior to the year sale taxpayer did not recognize any income from year through year with respect to the amounts held in the trust accounts at the time of the year sale or with respect to the pre-need receivables existing at the time of the sale further prior to the year sale the taxpayer had incurred no costs related to the pre-need contracts other than certain costs that it deducted for tax purposes in the years incurred as part of the year sale taxpayer transferred the pre-need contracts to purchaser and purchaser succeeded to taxpayer's rights and obligations under the contracts in conjunction therewith taxpayer transferred to purchaser the trust accounts and the pre-need receivables and purchaser assumed taxpayer's obligations to provide the merchandise and services specified in the pre-need contracts in computing its gain from the year sale on the form_4797 attached to its year form_1120s taxpayer included in its adjusted_basis for its business an amount equal to the net of the aggregate amount in the trust accounts plus the amount of the pre-need receivables less its estimated cost to provide the merchandise and services specified in the pre-need contracts because this net amount was positive taxpayer's inclusion of these amounts in its computation of its adjusted_basis increased the adjusted_basis it claimed on its year form_4797 and reduced the gain from the year sale it reported on its year form_1120s taxpayer represents that state a law did not require that payments received from a customer on a pre-need contract be held in trust for the customer law and analysis taxpayer's treatment and reporting related to the pre-need contracts is illustrated by the following example involving a single hypothetical pre-need contract on march year taxpayer entered into a pre-need contract with customer a pursuant to the contract taxpayer agreed to furnish after customer a's death specified merchandise and services which taxpayer estimated would cost dollar_figure and customer a agreed to pay a total of dollar_figure for the merchandise and services prior to the year sale customer a paid dollar_figure to taxpayer which taxpayer deposited in a_trust account and treated as held in trust for customer a accordingly the pre-need receivables with respect to customer a at the time of the year sale were dollar_figure customer a was alive as of the time of the year sale prior to the year sale taxpayer did not recognize any income with respect to its pre-need contract with customer a as part of the year sale taxpayer transferred its pre-need contract with customer a to purchaser in conjunction therewith taxpayer transferred to purchaser the trust account containing the dollar_figure that it had received from customer a the dollar_figure of pre-need receivables reflecting the portion of the contract_price still to be received from customer a and the obligation to provide after customer a's death funeral merchandise and services that taxpayer estimated would cost dollar_figure taxpayer included in its adjusted_basis for its business for purposes of determining its gain from the year sale dollar_figure with respect to its contract with customer a this amount equaled the dollar_figure received from customer a that was held in the trust account plus the dollar_figure of pre-need receivables related to the contract less the dollar_figure estimated cost of performance sec_1001 of the internal_revenue_code provides that the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain sec_1001 provides that the amount_realized from the sale_or_other_disposition of property shall be the sum of any money received plus the fair_market_value of the property other than money received sec_1_1001-2 of the income_tax regulations provides that except as provided in paragraph a and a of that section the amount_realized from the sale_or_other_disposition of property includes the amount of liabilities from which the transferor is discharged as a result of the sale or disposition sec_1_1001-2 provides that in the case of a liability incurred by reason of the acquisition of property that section does not apply to the extent that such liability was not taken into account in determining the transferor's basis for such property sec_1011 provides with exceptions not relevant in this case that the adjusted_basis for determining gain shall generally be the basis determined under sec_1012 adjusted as provided in sec_1016 sec_1012 provides with exceptions not relevant in this case that the basis_of_property shall be the cost of such property the adjustments to basis set forth in sec_1016 are not relevant in this case in determining that its adjusted_basis for its funeral home business was dollar_figureb as it reported on the form_4797 attached to its year form_1120s taxpayer erroneously claimed an adjusted_basis for the pre-need contracts equal to the net of the amount in the trust accounts plus the amount of the pre-need receivables less its estimated cost to provide the merchandise and services specified in the contracts with respect to the first two items taxpayer did not recognize as income for tax purposes the pre-need receivables and the amount in the trust accounts with respect to the third item taxpayer incurred no costs in connection with its obligations to provide the merchandise and services specified in the contracts thus taxpayer had no basis in the pre-need contracts related to these items further taxpayer incurred no other costs in connection with the pre-need contracts other than costs it deducted for tax purposes in the years incurred thus taxpayer overstated its adjusted_basis for its business as determined under sec_1012 when it included the net of these amounts therein as a result taxpayer underreported the amount of its gain from the year sale by the net amount our conclusion that taxpayer overstated its adjusted_basis for its business when it included therein as its adjusted_basis for the pre-need contracts the net of the three amounts described above is consistent with the economic_substance of the transaction the pre-need contracts had value as of the time of the year sale that this is so may be illustrated with the facts of the hypothetical contract described above performance of that contract by taxpayer would have entitled it to receive dollar_figure the dollar_figure that the taxpayer held in the trust accounts for customer a and treated as belonging to customer a plus the additional dollar_figure still owed by customer a at the time of the year sale at a cost assuming the taxpayer's estimate of its cost of performance proved accurate of dollar_figure yielding a positive cash inflow of dollar_figure e o simply put the contract had value to taxpayer because assuming that the customer did not cancel it and request a refund the contract entitled taxpayer to a net cash inflow of dollar_figure the contract may have been even more valuable to others who believed they could perform the contract at a lesser cost in computing an amount_realized from the year sale of dollar_figurea as it reported on the form_4797 attached to its year form taxpayer did not include any amount therein related to it being relieved from the obligations to provide merchandise and services in accordance with the pre-need contracts as a result of purchaser's assumption of such obligations taxpayer's determination to not include in its amount_realized any amount with respect to relief from these obligations was proper under sec_1_1001-2 because those obligations were not taken into account in determining its basis for the pre-need contracts taxpayer contends alternatively that if it had reported too large an adjusted_basis as a result of including in its adjusted_basis the net of the three amounts described above as we have concluded it did then it also reported too large an amount_realized from the year sale taxpayer contends that this is so because it failed to reduce the dollar_figurea amount_realized it reported by the amounts held in the trust accounts that were transferred to purchaser taxpayer contends that this should have been done because when the trust accounts were transferred to purchaser they offset a portion of the dollar_figurea that taxpayer received from purchaser taxpayer's contention that the funds in the trust accounts belonged to it and thus offset a portion of the cash it received from purchaser is inconsistent with the manner in which taxpayer treated those funds for all other tax purposes -ie as continuing to belong to its customers because taxpayer treated these funds as belonging to its customers it would be inconsistent to treat them as belonging to it for purposes of determining its gain from the year sale therefore the funds in the trust accounts were not available to offset any portion of the consideration taxpayer received from purchaser and taxpayer did not overreport the amount_realized from the sale of its funeral home business we express no opinion on the tax treatment of the year sale under the provisions of any other section of the code or regulations that may apply specifically we express no opinion on the propriety of taxpayer's method of allocating the consideration received for its assets in the year sale further we express no opinion on the propriety of taxpayer's method_of_accounting for the initial sale of the pre-need contracts to customers under sec_451 or any other section of the code or regulations that may apply a copy of this technical_advice_memorandum is to be given to taxpayer sec_6110 provides that it may not be used or cited as precedent


internal_revenue_service number release date index number - ------------------------------------- ---------------------------------- --------------------------------------------- ---------- --------------------- -------------------------- - department of the treasury washington dc person to contact -------------------- id no -------------- telephone number --------------------- refer reply to cc psi b02 - plr-139926-03 date date a -------------------------------------------- b ------------------------------ ---------------------------------- -------------------------- ---------------------- --------- country d1 dear ----------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of b by its authorized representative requesting a ruling that b be given an extension of time to elect under ' c of the procedure and administration regulations to be classified as a disregarded_entity for federal tax purposes the information submitted states that a is a us partnership for federal tax purposes b a limited_company was formed on d1 pursuant to the laws of country b is wholly owned by a b represents that pursuant to ' a b is a foreign eligible_entity that is not required to be classified as a corporation for federal tax purposes b has single owner that has limited_liability as defined in sec_301_7701-3 b intended to disregarded for federal tax purposes effective d1 however b inadvertently failed to timely file a form_8832 entity classification election sec_301_7701-3 provides that a business_entity that is not classified as a corporation under ' b or an eligible_entity can elect its classification for federal tax purposes a business_entity is any entity recognized for federal tax purposes that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the internal_revenue_code sec_301_7701-2 sec_301_7701-3 provides that unless a foreign eligible_entity elects otherwise the entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owners if it has a single owner that does not have limited_liability sec_301_7701-3 provides that for purposes of ' b i a member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member sec_301_7701-3 provides that to elect to be classified other than as provided in ' b an eligible_entity must file form_8832 entity classification election with the designated service_center sec_301_7701-3 provides that an election will be effective on the date specified on the form_8832 or on the date filed if no such date is specified the effective date specified on the form_8832 cannot be more than days prior to the date the election is filed under c the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or an announcement published in the internal_revenue_bulletin use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of ' granted when the taxpayer provides evidence to establish that the taxpayer acted sec_301_9100-3 provides that requests for relief under ' will be sec_301_9100-1 and sec_301_9100-3 provide the standards the commissioner will based solely on the facts submitted and representations made we conclude that reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer failed to make the election because after exercising reasonable diligence taking into account the taxpayer's experience and the complexity of the return or issue the taxpayer was unaware of the necessity for the election the requirements of ' have been satisfied as a result b is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center and elect under ' c to be classified as a disregarded_entity for federal tax purposes effective for d1 a copy of this letter should be attached to the form_8832 a copy is included for that purpose federal tax consequences of the facts described above under any other provision of the code the internal_revenue_code provides that it may not be used or cited as precedent sent to b’s authorized representatives except as specifically set forth above no opinion is expressed concerning the pursuant to a power_of_attorney on file with this office a copy of this letter is being this ruling is directed only to the taxpayer who requested it sec_6110 of sincerely heather c maloy associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for ' purposes


t c memo united_states tax_court william and shirley pratt petitioners v commissioner of internal revenue respondent docket no filed date william pratt pro_se fred fe green jr for respondent memorandum findings_of_fact and opinion jacobs judge in a statutory_notice_of_deficiency dated date respondent determined deficiencies in petitioners’ federal_income_tax additions to tax pursuant to sec_6651 and penalties pursuant to a as follows -- - additions to tax penalty year deficiency sec_6651 a sec_6662 a dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number all section references are to the internal_revenue_code for the years at issue and all rule references are to the tax_court rules_of_practice and procedure the issues for decision are whether for petitioners are entitled to the amount of cost_of_goods_sold reported on schedule c profit or loss from business whether for and petitioners are entitled to schedule c expense deductions in excess of those amounts allowed by respondent whether petitioners are liable for self-employment taxes whether petitioners are liable for additions to tax under sec_6651 for and and whether petitioners are liable for the sec_6662 accuracy-related_penalty for the substantial_understatement_of_income_tax as provided in sec_6662 b for and additional adjustments made by respondent to petitioners’ exemptions itemized_deductions and self-employment taxes are computational and will be resolved by our holdings with respect to the aforementioned issues findings_of_fact background some of the facts have been stipulated and are so found ’ the stipulation of facts and the exhibits submitted therewith are incorporated herein by this reference petitioners william and shirley pratt are husband and wife at the time the petition was filed petitioners resided in desert hot springs california william pratt petitioner has a tenth-grade education after leaving school petitioner went to korea for an unspecified period upon his return from korea petitioner became involved in sheet metal work petitioner owned and operated a sheet metal business under the name dormer louver of nevada dormer louver in north las vegas nevada dormer louver manufactured gable vents during the years at issue petitioner employed three to five employees depending upon the amount of business mrs pratt worked in the office of dormer louver when the business first started she was a homemaker during the years at issue petitioner turned over all of his business records including the checkbook check stubs and receipts for dormer louver to shirley pratt neither signed the stipulation of facts nor appeared at trial the case with respect to her will be dismissed for lack of prosecution and the decision with respect to her will be consistent with the decision entered with respect to william pratt q4e- his accountants consequently petitioner did not know what the rent was how much was paid for materials supplies and stuff with regard to the financial operations of the company federal_income_tax returns petitioners filed joint federal_income_tax returns for and dormer louver was operated as ae sole_proprietorship for federal_income_tax purposes the income and expenses of the business were reported on schedule c profit or loss from business sole_proprietorship on the schedules c petitioner described the principal business of dormer louver as manufacturing construction materials petitioners failed to file their tax returns timely they did not request extensions of time to file their income_tax returns for any of these years on an undisclosed date in petitioners filed for bankruptcy petitioners filed joint income_tax returns for after they filed for bankruptcy petitioners’ joint returns for and were prepared by accufast business services inc accufast of palmdale california the and returns were signed by accufast on date and date respectively both of these returns were signed by petitioners on date the returns were received by respondent’s ogden las vegas service_center on date - - the joint_return for was signed by both petitioners and a representative of j e associates j e assoc of las vegas nevada as tax preparer on date the return was received by respondent’s ogden las vegas service_center on date on the schedule c attached to their federal_income_tax return petitioners reported dormer louver’s gross_receipts to be dollar_figure cost_of_goods_sold to be zero total business_expenses to be dollar_figure and net profit to be dollar_figure on the schedule c attached to their federal_income_tax return petitioners reported dormer louver’s gross_receipts to be dollar_figure cost_of_goods_sold to be zero total business_expenses to be dollar_figure and net profit to be dollar_figure on the schedule c attached to their tax_return petitioners reported dormer louver’s gross_receipts to be dollar_figure returns and allowances to be dollar_figure cost_of_goods_sold to be dollar_figure total business_expenses to be dollar_figure and net_loss to be dollar_figure dormer louver’s gross_receipts and business_expenses for and were computed using the cash_method_of_accounting for tax years respondent determined dormer louver’s cost_of_goods_sold and business_expenses to be as follows item amount claimed amount allowed cost_of_goods_sold -0- -0- advertising dollar_figure dollar_figure car truck expenses big_number big_number insurance big_number big_number legal profl servs big_number big_number office expenses big_number big_number rent big_number repair sec_3 supplies big_number -q- utilities big_number big_number wages big_number big_number other expenses’ big_number big_number on line of the schedule c under rent or lease petitioners reported two expenses---dollar_figure for vehicles machinery equipment expenses and dollar_figure for other business’ property expenses these expenses consisted of dollar_figure for payroll_taxes dollar_figure for outside services dollar_figure for bank charges dollar_figure for freight delivery dollar_figure for insurance dollar_figure for postage dollar_figure for shipping shop supply dollar_figure for telephone and dollar_figure for small tools item amount claimed amount allowed cost_of_goods_sold -q- -q- advertising dollar_figure sec_42 car truck expenses big_number big_number depreciation big_number big_number insurance big_number big_number legal profl servs big_number big_number office expenses big_number big_number rent big_number repairs big_number big_number supplies big_number -q- taxes licenses big_number big_number utilities big_number big_number wages big_number big_number other expenses’ big_number big_number on line of the schedule c under rent or lease petitioners reported two expenses---dollar_figure for vehicles machinery equipment expenses and dollar_figure for other business’ property expenses these expenses consisted of dollar_figure for payroll_taxes dollar_figure for outside services dollar_figure for bank charges dollar_figure for freight delivery dollar_figure for fuel dollar_figure for insurance dollar_figure for postage dollar_figure for shipping shop supply dollar_figure for telephone and dollar_figure for small tools these figures are approximate item amount claimed amount allowed cost_of_goods_sold dollar_figure -o- returns allowances big_number --q- advertising big_number dollar_figure insurance legal profl servs big_number big_number rent big_number big_number repairs big_number big_number supplies big_number big_number taxes licenses big_number big_number meals entertainment big_number big_number utilities big_number big_number wages big_number big_number other expenses’ big_number big_number on line of the schedule c under rent or lease petitioners reported two expenses---dollar_figure for vehicles machinery equipment expenses and dollar_figure for other business property expenses these expenses consisted of dollar_figure for payroll_taxes dollar_figure for bank charges dollar_figure for dues subscriptions dollar_figure for postage dollar_figure for communication radios dollar_figure for shipping shop supply dollar_figure for subcontractors dollar_figure for property taxes dollar_figure for telephone dollar_figure for vehicle expense dollar_figure for siis dollar_figure for other taxes and dollar_figure for tool expense at an undisclosed date before date in conjunction with preparing a proof_of_claim in petitioners’ bankruptcy proceeding respondent commenced an examination of petitioners’ income_tax returns petitioners were notified in writing of proposed changes to their returns the 30-day_letter the examination of petitioners’ returns culminated in respondent’ sec_2 the 30-day_letter was also sent to thomas e crowe esq counsel for petitioners --- - issuance of a notice_of_deficiency to petitioners on date the adjustments made in this notice are the subject of the present controversy petitioners petitioned the court for a redetermination of respondent’s determinations the petition was filed on petitioners’ behalf by thomas e crowe esg mr crowe withdrew as petitioners’ counsel on date months before the trial in this case was scheduled to begin with respect to the returns for and petitioner contacted accufast and was informed that the tax returns for those years were correct petitioner requested that accufast provide him with all records receipts or other documentation which he could use to substantiate the expenses claimed on the and returns accufast however could not provide petitioner with the requested documentation because accufast did not retain clients’ records after years petitioner believed that the deductions accufast claimed as reflected on the and tax returns were accurate in addition petitioner contacted j e assoc for documents it had used in preparing the return petitioner testified that j e assoc claimed it had not prepared petitioners’ return petitioner sent a copy of the return to j e assoc which showed the return signed by a representative of j e - lo - assoc but no one from that accounting firm replied to petitioner’s inquiry opinion as a general_rule the determinations by the commissioner in a notice_of_deficiency are presumed correct and the burden is on the taxpayer to show that the commissioner’s determinations are incorrect rule a 290_us_111 deductions are a matter of legislative grace the taxpayer bears the burden of proving entitlement to all deductions claimed 503_us_79 292_us_435 i schedule c--adjustments a business’s income is computed by taking into account its cost_of_goods_sold as well as a variety of expenses cost_of_goods_sold reduces e 1s subtracted from gross_receipts in determining the business’s gross_income sec_1_61-3 income_tax regs cost_of_goods_sold is not treated as a deduction from gross_income and is not subject_to the limitations on deductions contained in sec_162 and sec_274 88_tc_654 all amounts claimed a sec_3 pursuant to sec_7491 the burden_of_proof or of production may be placed on the commissioner in certain circumstances for audits conducted after date sec_7491 is inapplicable in this case because petitioners’ examination commenced before date costs of goods however must be substantiated and taxpayers are required to maintain records sufficient for this purpose sec_6001 newman v commissioner tcmemo_2000_345 wright v commissioner tcmemo_1993_27 sec_1_6001-1 income_tax regs sec_162 allows a deduction for all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business as with cost_of_goods_sold amounts deducted pursuant to sec_162 must be substantiated and records sufficient to establish such deductions must be maintained by the taxpayer sec_6001 65_tc_87 affd 540_f2d_821 5th cir see also sec_1_6001-1 e income_tax regs when a taxpayer adequately establishes that he or she has paid_or_incurred a deductible expense but is unable to fully substantiate it the court is permitted in some circumstances to determine the amount of the allowable deduction based on an approximation bearing heavily against the taxpayer whose inexactitude is of his or her own making 39_f2d_540 2d cir there must however be sufficient evidence contained in the record to provide a basis for the court to make an estimate and to conclude that a deductible -- expense was incurred in at least in the amount to be allowed ’ 939_f2d_874 9th cir affg tcmemo_1989_390 245_f2d_559 5th cir 85_tc_731 petitioner unsuccessfully attempted to obtain from his accountants the business records of dormer louver as well as all documents the accountants had used in the preparation of petitioners’ tax returns petitioner requested all records receipts or other documentation which could substantiate the costs and expenses claimed on the returns however accufast the tax_return_preparer for and did not retain clients’ records after years and j e assoc the other purported tax_return_preparer claimed it had not prepared petitioners’ return and ignored petitioner’s inquiry ‘ sec_274 requires a taxpayer to substantiate expenses for travel meals and entertainment and gifts and with respect to listed_property as defined in sec_280f and including passenger automobiles by adequate_records or by sufficient evidence corroborating the taxpayer’s own statement establishing the amount time place and business_purpose of the expense sec_274 sec_1_274-5t temporary income_tax regs fed reg date the sec_274 rules of substantiation supersede the doctrine_of 39_f2d_540 2d cir 50_tc_823 affd 412_f2d_201 2d cir sec_1_274-5t temporary income_tax regs supra the expenses and deductions at issue in this case do not fall within those expenses covered by sec_274 a gross_receipts and cost_of_goods_sold reported on petitioners’ schedule c for the tax_year petitioners reported gross_receipts from dormer louver in the amount of dollar_figure and claimed cost_of_goods_sold of dollar_figure at trial petitioner testified that the dollar_figure reported on petitioners’ return as gross_receipts and the dollar_figure reported as cost_of_goods_sold were each a mistake petitioner further testified there was no way i could ever earned a million dollars in sales petitioner however could not substantiate how the dollar_figure claimed as cost_of_goods_sold was calculated he testified that he provided the accountants with the business records checkbook stubs and receipts and that he relied on his accountants in the preparation of the tax_return petitioner asserted that he never looked at the return rather he testified that he signed it and off it went statements made on a tax_return signed by the taxpayer have long been considered admissions and such admissions are binding on the taxpayer absent cogent evidence indicating they are wrong 412_f2d_800 3d cir affg tcmemo_1968_126 62_tc_739 affd without published opinion 521_f2d_1399 3d cir rankin v commissioner tcmemo_1996_350 affd 138_f3d_1286 9th cir other than petitioner’s blanket renunciation of the amount of gross_receipts reported on the return there is nothing in the record to substantiate petitioner’s claim that dormer louver’s gross_receipts were overstated moreover petitioner did not testify or offer any other evidence as to the cost_of_goods_sold thus we are unable to estimate with a degree of reliability the amount of dormer louver’s cost_of_goods_sold for because of petitioner’s inexactitude we sustain respondent on this issue b schedule c business_expense deductions for and rent expenses petitioners claimed rent expenses of dollar_figure for dollar_figure for and dollar_figure for with respect to the rent expenses of dollar_figure for and dollar_figure for petitioner testified that he believed these figures were accurate petitioner’s testimony was not sufficient to enable us to estimate the rent expenses indeed petitioner did not even testify as to whether rent was actually paid nor did he identify the lessor the amount of rent or the rental period morever petitioner disputed the claimed dollar_figure rent expense for and in general testified that the return was blown out of proportion again because petitioner presented no evidence documentary or otherwise to substantiate the rent expenses we sustain respondent’s determinations on this issue supplies petitioners claimed schedule c expenses for supplies in the amounts of dollar_figure for dollar_figure for and dollar_figure for - - respondent disallowed the dollar_figure and dollar_figure deductions for and respectively on account of a lack of substantiation as well as petitioners’ failure to establish that the expenses were ordinary and necessary at trial petitioner failed to present any evidence documentary or otherwise to substantiate the claimed supply expenses consequently we sustain respondent’s position on this issue returns and allowances for petitioner claimed schedule c returns and allowances for the tax_year in the amount of dollar_figure respondent disallowed the deduction and adjustment on account of petitioner’s lack of substantiation again at trial when asked if he had anything to substantiate his returns and allowances for petitioner stated i just don’t have a thing petitioner presented no evidence to substantiate entitlement to the amounts claimed again we must sustain respondent’s determination on this issue conclusion petitioners failed to substantiate any of the amounts claimed on the schedules c that were disallowed in the notice_of_deficiency instead of providing documentary_evidence to attempt to substantiate the amounts claimed petitioner chose to rely solely on his testimony petitioner did not call as witnesses the -- - accountants who prepared the income_tax returns or the attorney who represented petitioners until months before trial in order for the court to estimate the amount of a deductible expense we must have some basis upon which an estimate may be made vanicek v commissioner t c pincite here there is no such basis and were we to nonetheless permit any allowance such would amount to unguided largess williams v united_states f 2d pincite although we are sympathetic with petitioner’s plight the fact remains that petitioner failed to present even a modicum of evidence to substantiate the disallowed deductions il self-employment taxes respondent determined that petitioners are liable for self- employment_tax of dollar_figure for dollar_figure for and dollar_figure for petitioner was self-employed during each of the years at issue he reported the income and expenses of his business on a schedule c petitioner presented no evidence on this issue we thus hold petitioner is liable for the self-employment_tax under sec_1401 on his schedule c earnings for and as determined in the notice_of_deficiency respondent’s determination on this issue is sustained til sec_6651 additions to tax respondent determined that petitioners are liable for the addition_to_tax under sec_6651 a as a result of - petitioners’ failure to timely file their federal_income_tax returns for the years at issue sec_6651 imposes an addition_to_tax for failure_to_file timely a tax_return the addition_to_tax does not apply if the failure_to_file is due to reasonable_cause and not to willful neglect id if a taxpayer exercised ordinary business care and prudence and was nonetheless unable to file the return within the date prescribed by law then reasonable_cause exists sec_301_6651-1 proced admin regs willful neglect means a conscious intentional failure or reckless indifference 469_us_241 the addition_to_tax is equal to percent of the amount of the tax required to be shown on the return if the failure_to_file is not for more than month sec_665l1 a an additional percent 1s imposed for each month or fraction thereof in which the failure_to_file continues to a maximum of percent of the tax id the addition_to_tax 1s imposed on the net amount due sec_6651 b petitioners’ tax_return for was due_date the return was prepared and dated date by accufast however petitioners did not sign the return until date more than a year after the return was prepared further they did not file the return until another year later it was filed on date - - petitioners’ tax_return for was due_date it was prepared and dated date by accufast the return was signed by petitioners on date and filed a year later on date petitioners’ tax_return for was due_date it was prepared and dated date by a representative of j e assoc the return was signed by petitioners on the same date but not filed until date at trial petitioner offered no reasonable explanation for petitioners’ failure to timely file their and federal_income_tax returns when asked why his federal_income_tax return was also filed late petitioner replied well i’ve got no excuse for that you know i’1l1 be honest with you petitioners failed to show that they exercised ordinary care and prudence in this case accordingly petitioners are liable for the additions to tax under sec_6651 for and respondent’s determination on this issue is sustained iv sec_6662 penalty pursuant to sec_6662 a taxpayer may be liable for a penalty of percent on the portion of an underpayment_of_tax attributable to ae substantial_understatement of tax sec_6662 b the accuracy-related_penalty is not imposed with respect to any portion of the understatement as to which the taxpayer acted - - with reasonable_cause and in good_faith sec_6664 the decision as to whether the taxpayer acted with reasonable_cause and in good_faith depends upon all the pertinent facts and circumstances sec_1_6664-4 income_tax regs relevant factors include the taxpayer’s efforts to assess his proper tax_liability including the taxpayer’s reasonable and good_faith reliance on the advice of a professional such as an accountant id further an honest misunderstanding of fact or law that is reasonable in light of the experience knowledge and education of the taxpayer may indicate reasonable_cause and good_faith see furnish v commissioner tcmemo_2001_286 remy v commissioner tcmemo_1997_72 at trial petitioner testified that he provided his accountants accufast for and and j e assoc for with all of his business records receipts and check stubs in this regard petitioner testified i had an accountant that takes care of all this stuff so i really don’t understand it don’t know what it is you know he had all the records and took care of all that stuff as far as what the rent was and how much was paid and the materials supplies and stuff as far as the charges and stuff he had the records the check stubs and all that and he figured out what was there petitioner further testified that he tried to obtain his business records and any substantiating documentation from accufast for and but was told that clients’ records were not retained after years moreover petitioner stated that upon - - contacting j e assoc to obtain his records and any substantiating documentation for he was told that j e assoc did not handle petitioner’s account in although the signature of the tax preparer for petitioners’ tax_return was that of a representative of j e assoc further attempts by petitioner to reach j e assoc proved unsuccessful in addition petitioner testified at trial that his counsel who withdrew months before trial handled most matters for petitioner although petitioner failed to present either the accountants or his former counsel as witnesses to show that his reliance was reasonable we found petitioner’s testimony in this regard to be credible petitioner through his testimony demonstrated that he simply had no available documentation to offer to substantiate the claimed expenses petitioner provided all his records to accufast and believed that the deductions claimed by accufast as reflected on the and tax returns were accurate it is clear from the record that petitioner is an unsophisticated taxpayer with a limited education who relied reasonably and in good_faith on accufast consequently we conclude that for and petitioner had reasonable_cause and acted in good_faith as to any underpayment resulting from the deductions in issue accordingly we hold that --- - petitioners are not liable for the penalty pursuant to sec_6662 for the years and with respect to petitioner asserts that his reliance on j e assoc was reasonable we disagree petitioner asserted that the figures reflected on petitioners’ tax_return were plown out of proportion petitioner testified that although it was possible to have gross_receipts and expenses in amounts as reflected on petitioners’ and returns with respect to petitioners’ return jumping up another half a million dollars in one more year it’s impossible additionally petitioner testified that he never examined the tax_return until recently the return was signed by petitioners on date petitioner stated that his attorney was handling most of it until him his attorney and i parted ways the colloguy set forth below exemplifies petitioner’s testimony on this matter the court when you saw the return--i know that you have an accountant prepare-- mr pratt i never saw this return until just recently the court why not mr pratt my attorney was handling most of it until him and i parted ways the court yes but we’re talking about ‘95 mr pratt yes -- - the court in you filed that return sometime in what in ‘96 mr pratt it says here in ‘96 ther court right so and normally you would file a return by the way in april mr pratt oh i understand that sir the court and here you filed it not in april but you filed it in november mr pratt november the court and then you just accepted numbers without looking mr pratt well you know again i have to say that you know all i did was a guy says here you’ve got to get this signed or i think it’s probably my attorney you’ve got to get this signed and out of here so i signed it and off it went i didn’t even look at the million dollars until just recently that mr green respondent’s counsel here showed it to me and pointed it out petitioner further testified at trial that with respect to the return as far as i am concerned he just wrote some numbers down and my accountant probably--i mean my attorney at that time probably said ‘look you haven’t filed that thing’ he probably went back to his office and made one real quick petitioner contends that he simply provided the information to his accountants and that the accountants decided the amount_of_deductions to which petitioners were entitled a cursory look at the return would have revealed the large increase in gross_receipts reported on the return--gross receipts that petitioner testified - - were not accurate thus we find that petitioner did not reasonably rely on j e assoc we conclude that for petitioner did not have reasonable_cause or act in good_faith accordingly we hold that petitioners are liable for the penalty pursuant to sec_6662 for we have considered all other arguments made by the parties and find those arguments not discussed herein to be without merit to reflect the foregoing an appropriate order of dismissal and decision will be entered


department of the treasury internal_revenue_service washington d c number release date date cc ebeo mswim frev-115397-98 uilc memorandum for district_counsel attn senior attorney from senior technician reviewer employee_benefits exempt_organizations branch subject plan legend state plan retirement_system pursuant to your request we have post-reviewed your memorandum to the chief examination_division concerning whether wages earned by participants in the state’s plan are subject_to federal_insurance_contributions_act fica tax we agree with your analysis and conclusion that such compensation is not subject_to fica tax as background any member of the state’s retirement_system who is eligible for regular retirement may elect to participate in the plan this election may be made only once for a specified period not to exceed years beginning within days after the member first becomes eligible for regular retirement and ending no later than years and days from the date the member first becomes eligible for regular retirement in no case may the actual participation in the plan exceed years and once specified the period of participation may not be extended a member participating in the plan may not terminate participation prior to the end of the selected duration without terminating employment once participation in the plan commences the election to participate is irrevocable during the period of participation in the plan membership in the retirement_system ceases the participant is considered by the retirement_system to be in a retired status retirement benefits which would otherwise have been due the participant shall during the period of participation in the plan be credited to the individual’s subaccount in the plan thus it is our understanding that during the period of participation in the plan the participants receive current compensation from the state and their retirement_system benefits are credited to their plan subaccounts upon termination of both their participation in the plan and employment a participant may receive at his or her option either a lump sum payment of their individual plan subaccount or systematic disbursements with respect to fica tax code sec_3101 and sec_3111 impose fica tax on wages received by employees and paid_by employers with respect to employment under code sec_3121 the term employment does not include service performed in the employ of a state by any individual who is a member of a retirement_system of such state under sec_31_3121_b_7_-2 participants in the plan will be deemed to be participants in the state retirement_system without regard to whether they continue to accrue a benefit or whether the distribution of benefits under the retirement_system has been suspended pending cessation of services thus the compensation paid to the plan participants and paid_by the state will not considered wages paid with respect to employment and thus will not be subject_to fica tax if you have any questions regarding this matter feel free to contact attorney michael swim of my staff who may be reached on patricia mcdermott senior technician reviewer branch employee_benefits exempt_organizations


acknowledged significant advice may be disseminated office_of_chief_counsel memorandum internal_revenue_service cc dom it a cgabrysh tl-n-5179-97 sca released date aug to district_counsel brooklyn cc ner brk attn patricia riegger from assistant chief_counsel cc dom it a income_tax and accounting __________________________________________________________________________ subject significant service_center advice - fraud_penalty based on earned_income_credit in a memorandum dated date this office responded to your undated request for significant advice forwarded by an electronic mail message dated date in connection with questions posed by the civil_fraud coordinator examination_division of the brookhaven service_center this memorandum supersedes our date memorandum with respect to issue as explained below we still agree with the conclusions reached in your request for significant advice however by this memorandum this office is adopting a different rationale for the conclusion reached in respect to issue disclosure statement unless specifically marked acknowledged significant advice may be disseminated above this memorandum is not to be circulated or disseminated except as provided in ccdm d and e this document may contain confidential information subject_to the attorney-client and deliberative_process privileges therefore this document shall not be disclosed beyond the office or individual s who originated the questions discussed herein and are working the matter with the requisite need to know in no event shall it be disclosed to taxpayers or their representatives issue sec_1 does the disallowance of an earned_income_credit eic under sec_32 of the internal_revenue_code result in a statutory deficiency may the civil_fraud penalty under sec_6663 of the code be asserted when a fraudulent eic claim is made assuming the civil_fraud penalty under sec_6663 can be asserted when a fraudulent eic claim is made how is the amount of the underpayment determined when the correct_tax is zero and the service has not issued a refund of the falsely claimed eic how is the amount of the underpayment determined when the service has issued a refund conclusion sec_1 based on the facts described below the disallowance of an eic results in a statutory deficiency based on the facts described below the civil_fraud penalty under sec_6663 may be asserted when a fraudulent eic claim is made if there is an underpayment_of_tax attributable to fraud based on the facts described below the underpayment_of_tax for purposes of calculating the civil_fraud penalty is determined under the formula prescribed in sec_6664 and the regulations thereunder under that formula the eic under sec_32 may be taken into account as a negative_amount of tax in a manner consistent with the rules provided in sec_6211 however there cannot be an underpayment attributable to a fraudulently claimed eic if the service has not issued a refund facts the service_center has received numerous form_1040 series returns that appear to have a pattern of falsely claimed items of income and deductions in order to falsely obtain refunds of the eic in a typical scenario a taxpayer previously a non-filer files a timely return and delinquent returns for and on each return the taxpayer falsely reports earned_income that is reduced by the standard_deduction and sufficient exemptions to eliminate any_tax due sometimes a taxpayer will report self-employment_tax with respect to the earned_income attributable to self-employment_income the taxpayer also falsely claims the eic the taxpayer does not claim any credits for withholding or estimated_tax payments it appears that the correct_tax is zero including self-employment_tax and the correct eic is zero discussion does the disallowance of an eic under sec_32 of the code result in a statutory deficiency sec_32 provides for the eic sec_6211 defines a deficiency as follows a in general --for purposes of this title in the case of income estate_and_gift_taxes imposed by subtitles a and b and excise_taxes imposed by chapter sec_41 sec_42 sec_43 and sec_44 the term deficiency means the amount by which the tax imposed by subtitle a or b or chapter or exceeds the excess of-- the sum of a the amount shown as the tax by the taxpayer upon his return if a return was made by the taxpayer and an amount was shown as the tax by the taxpayer thereon plus b the amounts previously assessed or collected without assessment as a deficiency over-- the amount of rebates as defined in subsection b made for purposes of determining the amount of a deficiency sec_6211 provides that the eic is treated as a negative tax sec_6211 states for purposes of subsection a -- a any excess of the sum of the credits allowable under sec_32 and sec_34 over the tax imposed by subtitle a determined without regard to such credits and b any excess of the sum of such credits as shown by the taxpayer on his return over the amount shown as the tax by the taxpayer on such return determined without regard to such credits shall be taken into account as negative amounts of tax the statutory requirements can be summarized by the following formulas a tax shown less eic shown tax on return b correct_tax less correct eic tax imposed c tax imposed less tax on return deficiency within your request for significant advice you provided two examples that are correct applications of sec_6211 in the first general example the correct_tax is dollar_figure the correct eic is zero the taxpayer shows no tax on the return and the taxpayer claims a dollar_figure eic a deficiency is computed using the formulas as follows a tax shown less eic shown tax shown on return b correct_tax big_number less correct eic tax imposed big_number c tax imposed big_number less tax on return deficiency big_number in the second example applicable to the cases under consideration the correct_tax is zero including self- employment_tax the correct eic is zero the taxpayer shows no tax on the return including self-employment_tax and the taxpayer falsely claims a dollar_figure refund solely attributable to the eic the deficiency would be computed as follows a tax shown less eic shown tax shown on return b correct_tax less correct eic tax imposed c tax imposed less tax on return deficiency we note that sec_6213 provides exceptions to the restrictions on making assessments one of which is for assessments arising out of mathematical or clerical errors with respect to taxpayers who do not report self-employment_tax with respect to the earned_income attributable to self-employment_income you should be aware that sec_6213 provides that a mathematical_or_clerical_error includes an entry on a return claiming the credit under sec_32 with respect to net_earnings_from_self-employment described in sec_32 to the extent the tax imposed by sec_1401 relating to self-employment_tax on such net_earnings has not been paid this provision applies with respect to returns the due_date for which without regard to extensions is more than days after date may the civil_fraud penalty under sec_6663 of the code be asserted when a fraudulent eic claim is made sec_6663 provides that if any part of any underpayment_of_tax required to be shown on a return is due to fraud there shall be added to the tax an amount equal to percent of the portion of the underpayment which is attributable to fraud we see no reason why the civil_fraud penalty under sec_6663 should not apply to a falsely claimed eic if it causes an underpayment as defined in sec_6664 or the formula prescribed in sec_1_6664-2 of the income_tax regulations assuming the civil_fraud penalty under sec_6663 can be asserted when a fraudulent eic claim is made how is the amount of the underpayment determined when the correct_tax is zero and the service has not issued a refund of the falsely claimed eic how is the amount of the underpayment determined when the service has issued a refund sec_6664 provides that for purposes of this part which includes sec_6663 the term underpayment means the amount by which any_tax imposed by this title title 26-internal revenue code exceeds the excess of a the amount shown as the tax by the taxpayer on his the sum of-- return plus b amounts not so shown previously assessed or collected without assessment over the amount of rebates made for purposes of paragraph the term rebate means so much of an abatement credit refund or other repayment as was made on the ground that tax imposed was less than the excess of the amount specified in paragraph over the rebates previously made sec_1_6664-2 provides in part that an underpayment for purposes of sec_6663 means the amount by which any income_tax imposed under subtitle a as defined in sec_1_6664-2 exceeds the excess of the sum of-- i the amount shown as the tax by the taxpayer on his return as defined in sec_1_6664-2 plus ii amounts not so shown previously assessed or collected without assessment as defined in sec_1_6664-2 over the amount of rebates made as defined in sec_1 e the regulations also provide that the definition of underpayment also may be expressed by the following equation underpayment w - x y - z w the amount of income_tax imposed x the amount shown as the tax by the taxpayer on his return y amounts not so shown previously assessed or collected without assessment z the amount of rebates made sec_1_6664-2 provides that the amount of income_tax imposed is the amount of tax imposed on the taxpayer under subtitle a for the taxable_year determined without regard to the credits for tax withheld under sec_31 relating to tax withheld on wages and relating to tax withheld at source on nonresident_aliens and foreign_corporations payments of tax or estimated_tax by the taxpayer any credit resulting from the collection of amounts assessed under sec_6851 as the result of a termination_assessment or sec_6861 as the result of a jeopardy_assessment and any_tax that the taxpayer is not required to assess on the return such as the tax imposed by sec_531 on the accumulated_taxable_income of a corporation sec_1_6664-2 defines the amount shown as the tax by the taxpayer on his return as the tax_liability shown by the taxpayer on his return determined without regard to the items listed in sec_1_6664-2 and except that it is reduced by the excess of i the amounts shown by the taxpayer on his return as credits for tax withheld under sec_31 relating to tax withheld on wages and sec_33 relating to tax withheld at source on nonresident_aliens and foreign_corporations as payments of estimated_tax or as any other_payments made by the taxpayer with respect to a taxable_year before filing the return for such taxable_year over ii the amounts actually withheld actually paid as estimated_tax or actually paid with respect to a taxable_year before the return is filed for such taxable_year sec_1_6664-2 provides that amounts not so shown previously assessed means only amounts assessed before the return is filed that were not shown on the return such as termination assessments under sec_6851 and jeopardy assessments under sec_6861 made prior to the filing of the return for the taxable_year the amount collected without assessment is the amount by which the total of the credits allowable under sec_31 relating to tax withheld on wages and sec_33 relating to tax withheld at source on nonresident_aliens and foreign_corporations estimated_tax payments and other_payments in satisfaction of tax_liability made before the return is filed exceed the tax_shown_on_the_return provided such excess has not been refunded or allowed as a credit to the taxpayer sec_1_6664-2 defines rebate as so much of an abatement credit refund or other repayment as was made on the ground that the tax imposed was less than the excess of i the amount shown as the tax by the taxpayer on his the sum of-- return plus ii amounts not so shown previously assessed or collected without assessment over rebates previously made example of sec_1_6664-2 shows how to calculate the amount of underpayment in a situation involving overstated estimated_tax payments on form_1040 filed for tax_year taxpayer correctly reported a tax_liability of dollar_figure and incorrectly reported estimated_tax payments of dollar_figure taxpayer received a refund of dollar_figure the correct amount of estimated_tax payments was only dollar_figure for purposes of determining the amount of the underpayment subject_to a penalty under sec_6662 or sec_6663 the tax shown on the is dollar_figure reported tax_liability of dollar_figure reduced by the overstated estimated_tax of dollar_figure dollar_figure minus dollar_figure the underpayment is dollar_figure determined as follows tax imposed under subtitle a tax shown on return tax previously assessed or collected without assessment none amount of rebates made none balance dollar_figure underpayment dollar_figure dollar_figure dollar_figure if the facts of example were the same except that no refund was made the underpayment would be dollar_figure determined as follows tax imposed under subtitle a tax shown on return tax previously assessed or collected without assessment amount of rebates made balance dollar_figure dollar_figure none underpayment dollar_figure dollar_figure dollar_figure in this situation the amount collected without assessment is dollar_figure dollar_figure minus dollar_figure the amount of the total of the credits allowable under sec_31 and sec_33 estimated_tax payments and other_payments in satisfaction of tax_liability made before the return is filed is dollar_figure the tax_shown_on_the_return is dollar_figure for purposes of sec_1_6664-2 the term tax_shown_on_the_return must be interpreted as equivalent to the amount shown as the tax by the taxpayer on his return in order for the formula to produce the correct result sec_6211 provides that for purposes of title_26 in the case of income estate_and_gift_taxes imposed by subtitles a and b and excise_taxes imposed by chapter sec_41 sec_42 sec_43 or sec_44 the term deficiency means the amount by which the tax imposed by subtitle a or b or chapter or exceeds the excess of--- the sum of a the amount shown as the tax by the taxpayer upon his return if a return was made by the taxpayer and an amount was shown by the taxpayer thereon plus without assessment as a deficiency over--- b the amounts previously assessed or collected the amount of rebates as defined in subsection b made sec_6211 provides that for purposes of sec_6211 a any excess of the sum of the credits allowable under sec_32 and sec_34 over the tax imposed by subtitle a determined without regard to such credits and b any excess of the sum of such credits as shown by the taxpayer on his return over the amount shown as the tax by the taxpayer on such return determined without regard to such credits shall be taken into account as negative amounts of tax sec_1_6664-2 does not specifically address how to factor the sec_32 credit into the formula prescribed for calculating an underpayment however some guidance may be derived from the language of sec_1_6664-2 and c both of these subsections state that certain line items in the underpayment formula are to be computed without regard to the sec_31 and sec_33 credits this language suggests that such line items are to be computed with regard to other credits such as the sec_32 credit further in the absence of specific guidance on this issue a reasonable approach is to treat the sec_32 credit as it is treated in a comparable context the language used in sec_6211 includes the terms the amount by which the tax imposed by subtitle a income_tax and the amount shown as the tax by the taxpayer upon his return these two terms are nearly identical to the sec_1_6664-2 term the amount by which any_tax imposed by this title the sec_1_6664-2 term amount shown as the tax by the taxpayer on his return and the sec_1_6664-2 term tax_shown_on_the_return the degree of similarity between the terms used in sec_6211 and sec_6664 provides a reasonable basis for treating the sec_32 credit for purposes of sec_6664 as the credit is treated in sec_6211 therefore when the sec_32 credit exceeds the income_tax imposed determined without regard to the sec_32 credit or when the sec_32 credit shown by the taxpayer on his return exceeds the amount shown as the tax by the taxpayer on his return determined without regard to such credits a negative_amount of tax results by analogy the terms amount of income_tax imposed amount shown as the tax by the taxpayer on his return and the tax_shown_on_the_return in sec_1_6664-2 could be negative numbers that represent negative amounts of tax the net effect of these principles is to compute an underpayment only when a negligently or fraudulently claimed eic is refunded within your request for significant advice you provided two examples that demonstrate how the status of a refund may affect the calculation of an underpayment as discussed above the formula for computing an underpayment is underpayment w - x y - z w the amount of income_tax imposed x the amount shown as the tax by the taxpayer on his return y amounts not so shown previously assessed or collected without assessment z the amount of rebates made in the following examples the correct_tax is zero including self-employment_tax the correct eic is zero the taxpayer shows no tax on the return including self-employment_tax and the taxpayer fraudulently claims a dollar_figure refund solely attributable to the eic in the first example the refund was not made to the taxpayer in the second example the refund was made to the taxpayer example underpayment when refund not made underpayment w - x y - z w x dollar_figure y dollar_figure z underpayment - dollar_figure dollar_figure - underpayment example underpayment when refund made underpayment w - x y - z w x dollar_figure y z underpayment - dollar_figure - underpayment dollar_figure in example where the service has not issued a refund there is no underpayment_of_tax therefore the service may not impose a civil_fraud penalty we note that this memorandum does not address the application of criminal penalties to the facts of example see eg sec_7206 and sec_7207 in example where the service has issued a refund there is an underpayment and the service may impose the civil_fraud penalty if the underpayment is due to fraud if you have any questions concerning issue please contact peter cohn at if you have any questions concerning issue sec_2 and please contact celia gabrysh at jody j brewster by s peter j frederick assistant to the branch chief branch


t c summary opinion united_states tax_court david c matthews and marcia k matthews petitioners v commissioner of internal revenue respondent docket no 28106-13s filed date david c matthews and marcia k matthews pro sese edwin b cleverdon for respondent summary opinion guy special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by unless otherwise indicated section references are to the internal revenue continued any other court and this opinion shall not be treated as precedent for any other case respondent determined a deficiency of dollar_figure in petitioners’ federal_income_tax for and an accuracy-related_penalty under sec_6662 petitioners husband and wife filed a timely petition for redetermination with the court pursuant to sec_6213 at the time the petition was filed they resided in alabama after concessions the issue remaining for decision is whether petitioners are liable for the additional tax on early distributions from qualified_retirement_plans under sec_72 background some of the facts have been stipulated and are so found the stipulation of facts the supplemental stipulation of facts and the accompanying exhibits are incorporated herein by this reference continued code code as amended and in effect for and rule references are to the tax_court rules_of_practice and procedure monetary amounts are rounded to the nearest dollar petitioners concede that they omitted from their return dollar_figure of self- employment income respondent concedes that petitioners are not liable for an accuracy-related_penalty under sec_6662 other adjustments are computational and flow from our decision in this case i mr matthews’ employment from until date mr matthews worked for sparta inc a defense contractor in huntsville alabama during that time mr matthews participated in sparta’s sec_401 retirement savings_plan 401_k_plan account administered by prudential insurance co of america prudential in date mr matthews left sparta and accepted a position as a senior engineer with synapse wireless synapse in date however he was laid off mrs matthews is primarily a homemaker she has a background in education and home schools the couple’s two children ii retirement account loan and distributions sometime before mr matthews borrowed dollar_figure from hi sec_401 plan account during shortly after losing his job with synapse mr matthews requested a distribution of dollar_figure from hi sec_401 plan account he understood that his loan would have to be repaid before he could receive a distribution from the account in this regard prudential applied dollar_figure of mr matthews’ accrued plan benefits to offset his outstanding loan withheld federal_income_tax of dollar_figure and transferred dollar_figure the balance of the requested dollar_figure distribution to him after the transaction described above mr matthews had dollar_figure remaining in hi sec_401 plan account he then rolled those funds over to a prudential individual_retirement_account ira and promptly requested a distribution of dollar_figure prudential withheld federal_income_tax of approximately dollar_figure and transferred the balance of dollar_figure to mr matthews mr matthews wa sec_49 years old in he explained at trial that he did not want to apply for unemployment_compensation after losing his job with synapse because he did not want to become a burden on society and that he was compelled to withdraw funds from his retirement accounts to pay the mortgage and support his family the parties agree that mr matthews withdrew funds from his retirement accounts to alleviate economic hardship iii petitioners’ tax_return petitioners filed a form_1040 u s individual_income_tax_return for the parties agree that petitioners had adjusted_gross_income agi of dollar_figure for and that they paid unreimbursed medical_expenses of dollar_figure that year petitioners did not report any additional tax due under sec_72 in respect of the distributions from mr matthews’ retirement accounts described above discussion petitioners do not dispute that the amounts distributed from mr matthews’ retirement accounts during constitute gross_income subject_to federal_income_tax see sec_61 b a a d see also 111_tc_250 the only issue in dispute is whether the distributions are subject_to the additional tax imposed by sec_72 as a general_rule if a taxpayer receives a distribution from a qualified_retirement_plan before attaining the age of sec_72 imposes an additional tax equal to of the portion of the distribution which is includible in the taxpayer’s gross_income sec_72 and the additional tax is intended to discourage taxpayers from taking premature distributions from retirement plans--actions that frustrate public policy encouraging saving for retirement see 106_tc_337 citing and discussing the legislative_history underlying sec_408 the statutory predecessor to sec_72 milner v commissioner tcmemo_2004_111 sec_72 provides an exception to the imposition of additional tax to the extent that retirement_plan distributions do not exceed the amount the definition of qualified_retirement_plan include sec_401 plan accounts and iras see sec_72 sec_401 k c uscinski v commissioner tcmemo_2005_124 allowable as a deduction under sec_213 to the employee for amounts paid during the taxable_year for medical_care determined without regard to whether the employee itemizes deductions for such taxable_year sec_213 in turn allows as a deduction the expenses paid during the taxable_year not_compensated_for_by_insurance_or_otherwise for medical_care of the taxpayer his spouse or a dependent to the extent that such expenses exceed percent of adjusted_gross_income petitioners’ agi for was dollar_figure and they paid dollar_figure in unreimbursed medical_expenses that year because petitioners’ unreimbursed medical_expenses did not exceed dollar_figure of dollar_figure --the floor for an allowable deduction under section 213--it follows that they are ineligible for the medical expense exception prescribed in sec_72 see dwyer v commissioner t c pincite mcgraw v commissioner tcmemo_2013_ petitioners maintain that they should be excused from the additional tax prescribed in sec_72 because mr matthews was obliged to take the for taxable years beginning after date sec_213 provides that eligible medical_expenses may be deducted to the extent they exceed of agi see patient protection and affordable_care_act pub_l_no sec_9013 sec_124 stat pincite distributions under consideration to alleviate economic hardship we have considered similar claims in the past and have observed that there is no authority in the code the legislative_history or caselaw for a general financial hardship exception to the imposition of the additional tax on early distributions see arnold v commissioner t c pincite dollander v commissioner tcmemo_2009_187 milner v commissioner tcmemo_2004_111 while we are sympathetic to petitioners’ position the court may not add an exception to sec_72 by judicial fiat and we are obliged to apply the law as written see 270_us_245 as a final matter petitioners contend that inasmuch as they did not actually receive the dollar_figure that prudential applied to offset mr matthews’ outstanding loan the additional tax should not be applied in respect of that amount we disagree under the general_rule of sec_72 the making of a loan from a qualified_retirement_plan gives rise to a deemed_distribution that is taxable in the year in which the taxpayer receives the loan however sec_72 provides an exception to the general_rule for loans that satisfy certain requirements the sec_72 provides an exception where the following requirements are met the loan does not exceed the lesser_of the amount set forth in sec continued record does not disclose when mr matthews took the loan from hi sec_401 plan account or the respective terms of the loan or the 401_k_plan itself because the parties do not dispute that mr matthews’ loan satisfied the requirements of sec_72 we have no reason to delve into that matter although a loan may initially satisfy the requirements of sec_72 at the time that it is made and be excepted from the general_rule of sec_72 a deemed_distribution may nevertheless arise in accordance with sec_1_72_p_-1 q a-4 a income_tax regs as the result of a failure of one of the aforementioned requirements see owusu v commissioner tcmemo_2010_ or an actual distribution may occur in accordance with sec_1_72_p_-1 q a-13 a and b income_tax regs in the event of a plan_loan offset see royal v commissioner tcmemo_2006_72 sec_72 applies to a deemed continued p a i or ii the loan by its terms must be repaid within five years from the date of its inception or is made to finance the acquisition of a home which is the principal_residence of the participant and the loan must have substantially level amortization with quarterly or more frequent payments required over the term of the loan in addition the loan must be evidenced by a legally enforceable agreement sec_1_72_p_-1 q a-3 b income_tax regs sec_1_72_p_-1 q a-13 a income_tax regs provides in relevant part a distribution of a plan_loan_offset_amount as defined in sec_1_402_c_-2 q a-9 b occurs when under the terms governing a continued distribution under sec_72 in the same manner as an actual distribution sec_1_72_p_-1 q a-11 b income_tax regs mr matthews understood that hi sec_401 plan account loan would have to be repaid before he would be permitted to take a distribution from the account in although we cannot be entirely certain on this record the circumstances strongly suggest that as a consequence of mr matthews’ separation from sparta or his request for a distribution prudential offset a portion of his accrued plan benefits to repay his loan as described in sec_1_72_p_-1 q a-13 a and b income_tax regs as discussed above a plan_loan offset constitutes an actual plan distribution that is subject_to additional tax under sec_72 notwithstanding that the loan was taken in an earlier year petitioners have not continued plan_loan the accrued_benefit of the participant or beneficiary is reduced offset in order to repay the loan including the enforcement of the plan’s security_interest in the accrued_benefit a distribution of a plan_loan_offset_amount could occur in a variety of circumstances such as where the terms governing the plan_loan require that in the event of the participant’s request for a distribution a loan be repaid immediately or treated as in default the amount of the account balance that is offset against a loan is an actual distribution as opposed to a deemed_distribution under sec_72 sec_1_72_p_-1 q a-13 b income_tax regs see royal v commissioner tcmemo_2006_72 pointed to an exception to the application of sec_72 in this instance and we are aware of none in sum despite petitioners’ economic hardship mr matthews’ distributions from hi sec_401 plan account and ira are subject_to additional tax under sec_72 respondent’s determination on this issue is sustained to reflect the foregoing an appropriate decision will be entered