internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom p si - plr-119689-99 date date x trust trust trust trust trust trust trust a b c d e f g state d1 d2 d3 d4 year year law firm law firm accounting firm dear this letter responds to your letter dated date and subsequent correspondence submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code the information submitted states that x is a corporation incorporated under the laws of state on d1 x elected to be an s_corporation effective d1 the current shareholders of x are trust trust trust trust trust trust trust e and f g as chief financial officer of x represents that trust and trust are grantor trusts pursuant to sec_676 and that trusts are qualified subchapter_s trusts qssts within the meaning of sec_1361 on d2 a and b transferred shares of x to trust trust trust and trust on d3 c and d transferred shares of x to trust trust and trust law firm drafted the trusts on behalf of a b c and d with the intent that trusts would each qualify as a qsst a b c and d used law firm to handle the transfer of shares of x to the trusts each firm believed that the other firm would be responsible for filing the elections under sec_1361 qsst elections for the qssts therefore no qsst elections were filed timely for trusts and x’s s_corporation_election terminated as of d2 e the chief operating officer of x represents that the beneficiaries of trusts will file qsst elections accounting firm unaware of the stock transfers prepared x’s and the shareholders’ tax returns for year and year as if the transfer of shares to the trusts had not taken place lacking understanding of the significance of transferring s_corporation shares to trusts in year x made distributions to a b c and d and failed to make distributions to trusts in d4 accounting firm learned about the stock transfers in order to correct the distributions a and b have made payments to trust trust and trust and c and d have made payments to trust and trust these payments are comprised of the amounts that should have been distributed to the trusts and accrued interest g represents that x’s articles of incorporation authorize the issuance of only one class of stock designated common shares g further represents that the laws of state require that all common stockholders receive identical rights with respect to liquidations and distributions x and its shareholders have agreed to make such adjustments consistent with the treatment of x as an s_corporation as may be required by the secretary g represents that the circumstances resulting in the termination of x’s s_corporation_election were inadvertent g further represents that x and its shareholders did not use hindsight in requesting relief sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 as in effect for taxable years beginning on or before date provided that a small_business_corporation cannot have as a shareholder a person other than an estate and other than a_trust described in sec_1361 who is not an individual sec_1361 provides that for purposes of sec_1361 a_trust all of which is treated under subpart e of part i of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states may be a shareholder sec_1361 provides that in the case of a qualified_subchapter_s_trust qsst with respect to which a beneficiary makes an election under sec_1361 such trust shall be treated as a_trust described in sec_1361 and for purposes of sec_678 the beneficiary of such trust shall be treated as the owner of that portion of the trust which consists of stock in an s_corporation with respect to which the election under sec_1361 is made sec_1361 provides that a beneficiary of a qsst or his legal_representative may elect to have sec_1361 apply sec_1361 provides that an election under sec_1361 shall be effective up to days and months before the date of the election sec_1362 provides that an election under sec_1362 will be terminated whenever at any time on or after the 1st day of the 1st taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 provides that the termination shall be effective on and after the date of cessation sec_1362 provides that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in such ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the required shareholder consents and the corporation and each person who was a shareholder in the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in such ineffectiveness or termination such corporation shall be treated as an s_corporation during the period specified by the secretary based solely on the representations made and the information submitted we conclude that x’s s_corporation_election terminated on d2 under sec_1362 of the code because the respective beneficiary of trust sec_1 and failed to file an election under sec_1361 furthermore x’s s_corporation_election would have terminated on d3 because the respective beneficiary of trust sec_4 and failed to file an election under sec_1361 we conclude that the termination of x’s s_corporation_election was an inadvertent termination within the meaning of sec_1362 of the code we also conclude that the potential termination of x’s s_corporation_election on d3 would have been inadvertent within the meaning of sec_1362 accordingly pursuant to the provisions of sec_1362 x will be treated as an s_corporation effective d2 and thereafter provided x’s election to be an s_corporation was valid and was not otherwise terminated under sec_1362 from d2 and d3 respectively trusts and trusts will be treated as trusts described in sec_1361 and the respective beneficiary will be treated for purposes of sec_678 as the owner of that portion of the respective trust that consists of x stock accordingly x’s shareholders in determining their federal tax_liability must include their pro_rata share of the separately and nonseparately computed items of x under sec_1366 make any adjustments to stock basis under sec_1367 and take into account any distributions made by x to shareholders under sec_1368 this ruling is conditioned on the filing within days from the date of this letter of any amended returns consistent with x being an s_corporation and an election under sec_1361 for each of trusts if x or its shareholders fail to treat x as described above this ruling shall be null and void sec_1361 provides that a small_business_corporation cannot have more than one class of stock sec_1_1361-1 of the income_tax regulations provides that a corporation generally is treated as having only one class of stock if all outstanding shares of stock of the corporation confer identical rights to distribution and liquidation proceeds sec_1_1361-1 provides that the determination of whether all outstanding shares of stock confer identical rights to distribution and liquidation proceeds is made based on the corporate charter articles of incorporation bylaws applicable state law and binding agreements relating to distribution and liquidation proceeds although a corporation is not treated as having more than one class of stock so long as the governing provisions provide for identical distribution and liquidation rights any distributions including actual constructive or deemed distributions that differ in timing or amount are to be given appropriate tax effect in accordance with the facts and circumstances based solely on the representations made and the information submitted we conclude that the distributions made in year to a b c and d that should have been made to one or more of trust or did not create a second class of stock except as specifically ruled above we express no opinion concerning the federal tax consequences of the transactions described above under any other provision of the code including whether each of the trusts is a qsst under sec_1361 this ruling letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x sincerely yours h grace kim assistant to the chief branch office of the assistant chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


department of the treasury internal_revenue_service washington d c date number release date cc el gl br2 gl-600790-99 uil memorandum for associate district_counsel delaware- maryland district cc ser dem was from kathryn a zuba chief branch general litigation subject taxpayer x legend taxpayer x this responds to your request of date for post-issuance review of an advisory opinion you gave the district_director on date your memorandum to the district_director follows the pre-issuance chief_counsel_advice given to you by branch general litigation regarding this same case on date the division’s position is unchanged from that given to you on date we do not think there is an actual conflict between your advice given in the context of a converted chapter case and new irm which deals with compliance monitoring in a chapter individual debtor case however when the bankruptcy handbook is next revised we will consider whether to make a case to the service for adding further details in irm regarding the potential issues arising from a conversion thank you for bringing this matter to our attention please call the attorney assigned to this case pincite-3620 if you require further information


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 psi b02 plr-156938-06 date june x ----------------------------------------------------------------------------------------------------- ----------------------- ----------------------------------------------------------------------------------------------------- ------------------------- ---------------------- --------------------------- ---------------------- ----------------------------------------------------------------------------------------------------- ------------------------ ------------- a_trust state1 d1 d2 d3 dear --------------- correspondence submitted on behalf of x by its authorized representative requesting a ruling under sec_1362 of the internal_revenue_code election to be treated as an s_corporation effective d1 a a shareholder of x created trust on d2 a contributed and sold shares of x to trust on d2 trust is represented as being a grantor_trust from d2 until d3 and being eligible to be an electing_small_business_trust esbt as of d3 however the trustee of trust failed to make a valid esbt election effective d3 consequently x’s s_corporation_election terminated on d3 the information submitted states that x is a state1 corporation that made an this responds to a letter dated date and subsequent x represents that the failure_to_file the esbt election for trust was not motivated plr-156938-06 by tax_avoidance or retroactive tax planning x and its shareholders have agreed to make any adjustments that the commissioner may require consistent with the treatment of x as an s_corporation sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that the term small_business_corporation means a domestic_corporation which is not an ineligible_corporation and which does not have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 provides that for purposes of sec_1361 a_trust all of which is treated under subpart e of part i of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states may be a shareholder sec_1361 provides that for the purposes of sec_1361 an esbt may be a shareholder in an s_corporation sec_1361 provides that an esbt is any trust if i such trust does not have as a beneficiary any person other than i an individual ii an estate iii an organization described in sec_170 or or iv an organization described in sec_170 which holds a contingent_interest in such trust and is not a potential_current_beneficiary ii no interest in such trust was acquired by purchase and iii an election under sec_1361 applies to such trust sec_1_1361-1 of the income_tax regulations provides that the trustee must make the esbt election by signing and filing with the service_center where the s_corporation files its income_tax return a statement meeting the requirements of sec_1_1361-1 sec_1_1361-1 provides that the election statement must include a the name address and taxpayer_identification_number of the trust the potential current beneficiaries and the s_corporation in which the trust currently owns stock b an identification of the election as an esbt election made under sec_1361 c the first date on which the trust owned stock in each s_corporation d the date on which the election is to become effective not earlier than days and two months before the date on which the election is filed and e representations signed by the trustee stating that the trust meets the requirements of sec_1361 and all potential current beneficiaries of the trust meet the shareholder requirements of sec_1361 plr-156938-06 sec_1_1361-1 provides that if a_trust makes a valid esbt election the trust will be treated as an esbt for purposes of chapter of the internal_revenue_code as of the effective date of the esbt election sec_1362 provides that a in general an election under sec_1362 shall be terminated whenever at any time on or after the first day of the first taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation and b any termination under sec_1362 shall be effective on and after the date of cessation sec_1362 provides that if an election under sec_1362 by any corporation a was not effective for the taxable_year for which made determined without regard to sec_1362 by reason of a failure to meet the requirements of sec_1361 or to obtain shareholder consents or b was terminated under sec_1362 or the secretary determines that the circumstances resulting in the ineffectiveness or termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the ineffectiveness or termination steps were taken a so that the corporation is a small_business_corporation or b to acquire the shareholder consents and the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to sec_1362 agrees to make such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the ineffectiveness or termination the corporation will be treated as an s_corporation during the period specified by the secretary sec_1_1362-4 provides that the determination of whether a termination was inadvertent is made by the commissioner the corporation has the burden of establishing that under the relevant facts and circumstances the commissioner should determine that the termination was inadvertent the fact that the terminating event was not reasonably within the control of the corporation and was not part of a plan to terminate the election or the fact that the event took place without the knowledge of the corporation notwithstanding its due diligence to safeguard itself against such an event tends to establish that the termination was inadvertent sec_1_1362-4 provides that the commissioner may require any adjustments that are appropriate in general the adjustments required should be consistent with the treatment of the corporation as an s_corporation during the period specified by the commissioner in the case of a transfer of stock to an ineligible shareholder that causes an inadvertent termination under sec_1362 the commissioner may require that ineligible shareholder to be treated as a shareholder of an s_corporation during the period the ineligible shareholder actually held stock in the corporation moreover the commissioner may require protective adjustments that prevent any loss of revenue due to a transfer of stock to an ineligible shareholder plr-156938-06 based solely on the facts submitted and the representations made we conclude that x’s s_corporation_election terminated on d3 because of the failure_to_file an esbt election for trust and that the termination was inadvertent within the meaning of sec_1362 we further hold that pursuant to the provisions of sec_1362 x will be treated as continuing to be an s_corporation from d3 and thereafter provided x’s s_corporation_election was valid and provided that the election was not otherwise terminated under sec_1361 trust will be treated as an esbt from d3 provided that trust is otherwise eligible to be an esbt until its esbt status terminates the shareholders of x must include their pro-rata share of the separately_stated and nonseparately computed items of x as provided in sec_1366 make any adjustments to basis as provided in sec_1367 and take into account any distributions made by x as provided in sec_1368 if x or its shareholders fail to treat themselves as described above this ruling is null and void this ruling is conditioned upon the trustee of trust filing a properly completed esbt election effective d3 with the appropriate service_center within days following the date of this letter a copy of this letter should be attached to the esbt election except as specifically ruled above we express no opinion concerning the federal tax consequences of the transactions described above under any other provisions of the code this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file a copy of this letter is being sent to x’s authorized representative sincerely james a quinn senior technician reviewer acting branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


ae pees ano government entities division department of the treasury internal_revenue_service washington d c jun uniform issue list se tier rat legend taxpayer a financial_institution b ira x ira y ira z amount dear xxxxxxxxx this is in response to your ruling_request dated date from your authorized representative as supplemented by correspondence dated date in which you request a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code the code’ the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a represents that he withdrew funds from three separate ira's totaling amount taxpayer a asserts that his failure to accomplish a rollover within the 60-day period prescribed by sec_408 of the code was because he thought he had days in which to deposit amount into a new ira account taxpayer a represents that he was the owner of ira x ira y and ira z eacha qualified_individual retirement arrangement ira established and maintained at financial_institution b under the rules of sec_408 of the code taxpayer a represents that on date he received distributions totaling amount from ira x ira y and ira z and placed the funds into his personal checking account with the idea that he needed a period of time to decide where to re-invest the funds taxpayer a asserts that he thought he had days in which to rollover amount based on the above facts and representations you request a ruling that the internal_revenue_service service waive the 60-day rollover requirement contained in sec_408 of the code with respect to the distribution of amount sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the 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 the service will consider all relevant facts and circumstances including bb 20uy5 errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and the documentation submitted in this case indicates that taxpayer a withdrew amount from ira x ira y and ira z with the intent to redeposit such funds at a later time into another ira that would yield a better rate of return taxpayer a’s failure to accomplish a rollover within the 60-day period was due to his inadvertence in thinking he had days in which to rollover amount into another ira the service has the authority to waive the 60-day rollover requirement for a distribution from an ira where the individual failed to complete a rollover to another ira within the 60-day rollover period but was prevented from doing so because of one of the factors enumerated in revproc_2003_16 for example errors committed by a financial_institution death hospitalization postal error incarceration and or disability although there was a misunderstanding as to the time period permitted to complete a tax-free_rollover the ability to redeposit amount into an ira within the 60-day rollover period was at all times within the reasonable control of taxpayer a under the circumstances presented in this case the service hereby declines to waive the 60-day rollover requirement with respect to the distribution of amount from ira x ira y and ira z and thus amount will not be considered a valid rollover_contribution within the meaning of sec_408 of the code because the 60-day rollover requirement was not satisfied no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter_ruling is being sent to your authorized representative 2v0vv938042 if you wish to inquire about this ruling please contact xxxxxxxxkxxxkxkx government identification_number xx-xxxxx by phone at xxx xxx-xxxx or by fax at xxx xxx-xxxx please address all correspondence to se t ep ra t1 sincerely colder a wetbnw carlton a watkins manager employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose cc


t c memo united_states tax_court michael r olsen and sheila olsen petitioners v commissioner of internal revenue respondent docket no filed date michael r olsen and sheila olsen pro sese christian a speck and william a heard iii for respondent memorandum opinion armen special_trial_judge this matter is before the court on respondent’s motion to dismiss for lack of jurisdiction respondent contends that this case should be dismissed on the ground that the petition was not timely filed pursuant to section - - a or sec_7502 as discussed in detail below we shall grant respondent’s motion to dismiss background on date petitioners commenced an action the refund action in the u s district_court for the eastern district of california seeking tax refunds for and although the record in this case does not include a complete copy of petitioners’ complaint it appears that the refund action was brought on the theory that petitioners were entitled to a credit carryforward that would result in overpayments for and on date respondent sent petitioners a notice_of_deficiency in the notice respondent determined deficiencies in petitioners’ federal income taxes for and in the amounts of dollar_figure and dollar_figure respectively the deficiencies were attributable to respondent’s disallowance of medical_expenses and schedule c deductions claimed by petitioners on their and income_tax returns and respondent’s determination that petitioners failed to report a state tax_refund on their return the notice advised petitioners how they could contest respondent’s deficiency determinations by filing a petition for redetermination with this court in that regard the notice further advised petitioners that last day to file a petition unless otherwise indicated all section references are to the internal_revenue_code as amended and all rule references are to the tax_court rules_of_practice and procedure with the united_states tax_court jul on or about date the united_states moved to dismiss petitioners’ refund action for lack of jurisdiction on date an order and findings and recommendation was filed by a united_states magistrate judge recommending that petitioners’ refund action be dismissed for lack of jurisdiction the order and findings and recommendation concluded that the district_court lacked jurisdiction on the ground that petitioners could not be deemed to have paid the taxes that were the subject of their refund claim inasmuch as approval of a credit from overpayment by the internal_revenue_service is a prerequisite to filing suit for a refund under sec_7422 see sec_7422 d on date the district_court filed an order dismissing petitioners’ refund action for lack of jurisdiction based on the prior order and findings and recommendation of the magistrate judge on date petitioners filed a petition for redetermination with this court contesting the notice_of_deficiency dated date the envelope in which the petition was mailed to the court bears a u s postal service postmark date of date and postmark place of sacramento california as indicated respondent filed a motion to dismiss for lack of jurisdiction on the ground that the petition was not timely q4e- filed petitioners filed an objection to respondent’s motion to dismiss asserting that their petition was timely filed following the district court’s dismissal of their refund action petitioners argue that they will not have any remedy if this court dismisses their case respondent filed a reply to petitioners’ objection this matter was called for hearing at the court’s motions session in washington d c counsel for respondent appeared at the hearing and offered argument in support of respondent’s motion to dismiss there was no appearance by or on behalf of petitioners at the hearing nor did petitioners file a statement pursuant to rule c the provisions of which were explained in the court’s order calendaring respondent’s motion for hearing discussion the tax_court is a court of limited jurisdiction and we may exercise our jurisdiction only to the extent authorized by congress 85_tc_527 this court's jurisdiction to redetermine a deficiency depends on the issuance of a valid notice_of_deficiency and a timely filed petition rule a c 93_tc_22 90_tc_142 sec_6212 expressly authorizes the commissioner after determining a deficiency to send a notice_of_deficiency to the taxpayer by certified or registered mail the taxpayer in turn - ha sec_90 days or days if the notice is addressed to a person outside of the united_states from the date the notice_of_deficiency is mailed to file a petition in this court for a redetermination of the deficiency sec_6213 pursuant to sec_7502 a timely mailed petition will be treated as though it were timely filed there is no dispute in this case that respondent mailed the notice_of_deficiency for and to petitioners on date however the petition in this case was not filed with the court until date--10 months after the mailing of the notice_of_deficiency moreover the envelope in which the petition was mailed to the court bears a u s postal service postmark date of date under these circumstances it follows that the petition was not filed within the 90-day period prescribed by sec_6213 petitioners nonetheless contend that the petition should be considered timely filed on the theory that the period for filing a petition with this court was tolled during the pendency of their refund action in the district_court we disagree simply put there is no provision in the internal_revenue_code that serves to toll the statutory period for filing a petition with this court during the pendency of a refund action in a u s district_court or the court of federal claims to the contrary sec_7422 which establishes the procedures to be -- - followed where the commissioner issues a notice_of_deficiency to a taxpayer who has a pending refund action provides for the stay of the refund action and where appropriate the shifting of jurisdiction to the tax_court sec_7422 provides in pertinent part as follows sec_7422 stay of proceedings --if the secretary prior to the hearing of a suit brought by a taxpayer in a district_court or the united_states claims_court for the recovery_of any income_tax estate_tax gift_tax or tax imposed by chapter or or any penalty relating to such taxes mails to the taxpayer a notice that a deficiency has been determined in respect of the tax which is the subject matter of taxpayer’s suit the proceedings in taxpayer’s suit shall be stayed during the period of time in which the taxpayer may file a petition with the tax_court for a redetermination of the asserted deficiency and for days thereafter if the taxpayer files a petition with the tax_court the district_court or the united_states claims_court as the case may be shall lose jurisdiction of taxpayer’s suit to whatever extent jurisdiction is acquired by the tax_court of the subject matter of taxpayer’s suit_for_refund if the taxpayer does not file a petition with the tax_court for a redetermination of the asserted deficiency the united_states may counterclaim in the taxpayer’s suit or intervene in the event of a suit as described in subsection c relating to suits against officers or employees of the united_states within the period of the stay of proceedings notwithstanding that the time for such pleading may have otherwise expired sec_7422 does not provide for the tolling of the normal 90-day period during which a petition for redetermination is required to be filed with this court under sec_6213 ce sec_6213 the plain language of sec_7422 e indicates that if the commissioner issues a notice_of_deficiency to a taxpayer who has a pending refund action the taxpayer must invoke the jurisdiction of the tax_court if at all by filing a petition for redetermination within the statutorily prescribed filing period if the taxpayer files a timely petition with the tax_court the court with jurisdiction of the refund action shall lose jurisdiction of taxpayer’s suit to whatever extent jurisdiction is acquired by the tax_court of the subject matter of taxpayer’s suit_for_refund sec_7422 see sec_6512 a prohibiting taxpayers from bringing suits for refund while simultaneously litigating the same taxable_year in the tax_court see also sec_6512 conferring jurisdiction on the tax_court to determine overpayments in respect of a taxable_year for which an action for redetermination has been commenced because there is no provision for the tolling of the statutory period for filing a petition for redetermination with this court under the circumstances presented in the present case we shall grant respondent’s motion to dismiss as a final matter we observe that petitioners are not without a remedy although petitioners cannot pursue their case in this court they can still pay the taxes in question file a claim for a refund with the internal_revenue_service and if the claim is denied sue for a refund in the federal district_court or the u s court of federal claims see 55_tc_138 to reflect the foregoing an order will be entered granting respondent’s motion to dismiss for lack of jurisdiction


t c memo united_states tax_court central motorplex inc petitioner v commissioner of internal revenue respondent docket no filed date william g coleman jr for petitioner jason d laseter for respondent memorandum findings_of_fact and opinion lauber judge this case is before the court on a petition for redetermi- nation of employment status filed pursuant to sec_7436 in a notice of deter- unless otherwise indicated all statutory references are to the internal_revenue_code_of_1986 as amended and in effect for the taxable_year in issue we round all monetary amounts to the nearest dollar mination of worker classification dated date the internal_revenue_service irs or respondent determined that edwin t cheshire carvis v rainey and glenn smith were to be classified as petitioner’s employees for all taxable periods of calendar_year the irs accordingly determined that petitioner was liable for employment_taxes additions to tax under sec_6651 and and a failure to deposit penalty under sec_6656 in the following amounts quarter year amount fica tax_deficiency futa_tax deficiency sec_6651 date dollar_figure date big_number date big_number date big_number --- --- --- --- tax_year --- dollar_figure dollar_figure additions to tax sec_6651 to be determined to be determined to be determined to be determined to be determined sec_6656 dollar_figure after concessions by petitioner the issues for decision are whether the individuals listed in the notice_of_determination should be classified as petitioner’s employees for employment_tax purposes for whether petitioner is liable petitioner concedes that it is not entitled to relief under sec_530 of the revenue act of pub_l_no stat pincite for additions to tax under sec_6651 and for failure timely to file returns and pay tax and whether petitioner is liable for a penalty under sec_6656 for failure to deposit we answer all three questions in the affirmative findings_of_fact the parties filed stipulations of facts with accompanying exhibits that are incorporated by this reference when it petitioned this court petitioner’s principal_place_of_business was in mississippi petitioner was incorporated in mississippi in during the tax periods in issue petitioner engaged in the business of buying repairing reconditioning and reselling used automobiles petitioner sold the automobiles at wholesale and at a used car lot in ridgeland mississippi at all relevant times edwin t cheshire was petitioner’s president and sole shareholder in his capacity as president he exercised overall supervision and control of petitioner’s activities mr cheshire’s services for petitioner during included assigning work to be performed by petitioner’s other workers carvis v rainey and glenn smith supervising the activities of those two on date the court held that petitioner has standing to con- test respondent’s determinations even though it had previously been administ- ratively dissolved under state law see cent motorplex inc v commissioner tcmemo_2013_286 individuals and determining the remuneration they were to receive mr cheshire had the right to fire messrs rainey and smith and to hire other workers as necessary petitioner paid mr cheshire compensation of dollar_figure in his capacity as corporate officer and additional wages of dollar_figure during mr rainey was petitioner’s secretary and treasurer he was in charge of detailing automobiles for resale detailing included touching up exterior paint washing and waxing the exterior and cleaning and shampooing the interior petitioner paid mr rainey compensation of dollar_figure for direct labor performed in petitioner’s warehouse and office during both mr cheshire and mr rainey had signing authority over petitioner’s bank account mr smith was in charge of picking up and delivering automobiles including obtaining and delivering license plates and title certificates when mr smith incurred gasoline expenses in the performance of his services for petitioner petitioner reimbursed him petitioner paid mr smith compensation of dollar_figure for his services during petitioner treated all three individuals as independent contractors during petitioner did not enter into a contractual agreement of any kind with any of them nor did petitioner issue to these individuals or file with the irs forms 1099-misc miscellaneous income reporting the compensation it paid them consistently with its position that the workers were independent contract- ors petitioner did not issue to them or file with the irs forms w-2 wage and tax statement for petitioner likewise did not file form_941 employer’s quarterly federal tax_return for any calendar_quarter during or form_940 employer’s annual federal unemployment futa_tax return for that year petitioner made no deposits of employment_taxes into any federal depository for i burden_of_proof opinion the commissioner’s determinations set forth in a notice_of_deficiency are presumed to be correct and the taxpayer bears the burden of proving that those a small portion of the deficiencies is attributable to two payments totaling dollar_figure listed as payable to cash in petitioner’s general ledger accounts for wages office and commissions the irs treated this dollar_figure as paid to an unidentified fourth worker whom it also classified as an employee petitioner at trial presented no evidence on this issue and it is therefore deemed conceded see schladweiler v commissioner tcmemo_2000_351 aff’d 28_fedappx_602 8th cir an adjustment concerning interest_income was deemed conceded because taxpayer offered no evidence concerning the adjustment determinations are in error see rule a 290_us_111 this principle also applies to the commissioner’s determination of an employer-employee relationship see 117_tc_263 petitioner thus bears the burden of proving that the individuals listed in the notice_of_determination were not its employees during the tax periods in issue petitioner as a corporation also bears the burden of proving that it is not liable for the additions to tax under sec_6651 and for failure timely to file returns and pay tax and for the penalty under sec_6656 for failure to deposit see 126_tc_191 ii worker classification employers are subject_to employment_taxes which include taxes imposed by the federal_insurance_contributions_act fica the federal_unemployment_tax_act futa and income_tax_withholding under sec_3402 employers are required to make periodic deposits of amounts withheld from employees’ wages and amounts corresponding to the employer’s share of fica and futa_tax secs sec_7491 which shifts the burden_of_proof to the secretary in certain circumstances does not apply to employment_tax disputes see 121_tc_89 aff’d 425_f3d_1203 9th cir sec_31_6302-1 sec_31_6302_c_-3 employment_tax regs these employment_taxes apply only in the case of employees and do not apply to payments made to independent contractors employee is defined for fica and futa purposes to include any officer of a corporation and any individual who under the usual common_law rules applicable in determining the employer-employee relationship has the status of an employee see sec_3121 i for purposes of income_tax with- holding under sec_3402 the term employee also includes an officer of a corporation see sec_3401 for other types of workers the regulations adopt the common_law definition of an employee see sec_31_3401_c_-1 and b employment_tax regs atl coast masonry inc v commissioner tcmemo_2012_233 a petitioner’s corporate officers an officer of a corporation who performs more than minor services and re- ceives remuneration for such services is a statutory_employee for employment_tax purposes see 119_tc_121 aff’d 93_fedappx_473 3d cir nu-look design inc v commissioner tcmemo_2003_52 85_tcm_927 aff’d 356_f3d_290 3d cir sec_31_3121_d_-1 sec_31_3306_i_-1 c -1 f employment_tax regs an officer can escape statutory_employee status only if he performs no services or only minor services for the corporation and neither receives nor is entitled to receive any remuneration directly or indirectly for services performed see 117_tc_141 aff’d sub nom 54_fedappx_100 3d cir sec_31_3121_d_-1 sec_31_3306_i_-1 sec_31_3401_c_-1 employment_tax regs petitioner stipulated that mr cheshire and mr rainey were corporate officers both provided more than minor services for petitioner and both received remuneration for their services mr cheshire was petitioner’s sole shareholder acted as president of the corporation and made most corporate decisions see nu-look design inc t c m cch pincite characterizing as a statutory_employee an s_corporation shareholder who served as corporation’s president petitioner’s corporate_income_tax return for expressly reports that petitioner paid mr cheshire compensation of dollar_figure in his capacity as a corporate officer the conclusion that a corporate officer is a statutory_employee may not apply to the extent that he or she performs services in some other capacity nu- look design inc t c m cch pincite whether a corporate officer is performing services in his capacity as an officer is a question of fact joseph m grey pub accountant p c t c pincite revrul_82_83 1982_1_cb_151 petitioner stipulated that mr rainey was petitioner’s secretary and treasurer that he had check-signing authority over petitioner’s bank account and that he received compensation of dollar_figure during petitioner submitted no evidence such as an employment agreement suggesting that mr rainey performed services in a capacity other than his capacity as a corporate officer in sum we find as a fact that mr cheshire and mr rainey were statutory employees of petitioner for employment_tax purposes throughout the calendar_year having made that determination we are not required to consider whether they would also be classified as employees under the common_law test see nu-look design inc f 3d pincite b petitioner’s third worker under the common_law test it is a question of fact whether an individual performing services for a principal is an employee or an independent_contractor ewens miller inc t c pincite weber v commissioner 103_tc_378 aff’d per curiam 60_f3d_1104 4th cir sec_3121 sec_3306 sec_31_3401_c_-1 employment_tax regs absent stipulation to the contrary this case is appealable to the court_of_appeals for the fifth circuit see sec_7482 that court considers the following factors in deciding whether a worker is a common_law_employee the degree of control the principal has over the worker the worker’s opportunity for profit or loss the worker’s investment in facilities the permanence of the relationship and the skill required in the operation 900_f2d_49 5th cir no single factor is determinative and all facts and circumstances must be taken into account id pincite see donald g cave a professional law corp v commissioner 476_fedappx_424 5th cir aff’g tcmemo_2011_48 a realistic interpretation of the term employee should be adopted and doubtful questions should be resolved in favor of employee status in order to accomplish the remedial purposes of the legislation breaux daigle inc f 2d pincite the principal’s right to exercise control_over the agent whether or not exer- cised is the crucial test for the existence of an employer-employee relationship see weber t c pincite considering the degree to which a principal may intervene to assert control sec_31_3121_d_-1 sec_31_3306_i_-1 sec_31 c - the tax_court generally considers factors resembling those used by the court_of_appeals for the fifth circuit the degree of control exercised by the principal over the worker which party invests in work facilities the worker’s opportunity for profit or loss whether the principal has the right to discharge the worker whether the work is part of the principal’s regular business the permanency of the relationship and the relationship the parties believed they were creating see eg ewens miller inc t c pincite b employment_tax regs the degree of control required varies according to the nature of the services provided the central inquiry is whether the principal has the right to exercise such control it is not necessary that the employer stand over the employee and direct his every move weber t c pincite in donald g cave a professional law corp tcmemo_2011_48 this court concluded that a law firm acting through its president exercised substantial control_over its associate attorneys because the president controlled the assignment of job tasks reviewed the associates’ work and determined how they would be paid similarly here we conclude that mr cheshire as petitioner’s president exercised control_over mr smith’s activities by assigning him tasks supervising his performance and setting his compensation these facts are highly probative that petitioner controlled the manner in which mr smith performed his work and hence that mr smith was an employee of petitioner a second factor relevant in deciding a worker’s status is whether he has the opportunity for profit or risk of loss on the basis of his own efforts and skill 64_tc_974 this court has concluded that a taxpayer who earns a salary and receives reimbursement for expenses is not in a position to increase his profit through his own efforts and conversely bears no risk of loss this is indicative of an employer-employee relationship see weber t c pincite juliard v commissioner tcmemo_1991_230 characterizing an individual as an employee where he was paid a salary and reimbursed for expenses the evidence establishes that mr smith was not in a position to increase his profits through his own efforts mr cheshire had sole discretion to determine mr smith’s compensation which was paid in fixed amounts monthly or biweekly petitioner reimbursed mr smith for all gasoline expenses_incurred in the performance of his duties these facts favor employee status the fact that a worker provides his own tools may be indicative of independent_contractor status ewens miller inc t c pincite sec_31_3121_d_-1 sec_31_3306_i_-1 sec_31_3401_c_-1 employment_tax regs mr smith’s principal tasks included picking up cars that petitioner had purchased and delivering cars that petitioner had reconditioned in performing these tasks mr smith did not employ his own tools he was also tasked with obtaining license plates and title certificates for the reconditioned vehicles and he seems to have used his own car on these missions while this provides some evidence of petitioner’s general ledger indicates that mr smith received periodic com- pensation for direct labor totaling dollar_figure during he appears to have received one additional payment of dollar_figure labeled as a commission independent_contractor status it is far from dispositive see juliard tcmemo_1991_230 determining that taxpayer’s use of his own computer and automobile was insufficient to demonstrate that he was an independent_contractor this third factor is neutral or slightly favors respondent a permanent work relationship generally weighs in favor of an employer- employee relationship whereas a transitory relationship tends to show independent_contractor status ewens miller inc t c pincite citing 161_f3d_299 5th cir although petitioner did not have a written contractual arrangement with mr smith the relationship in practice appears to have been ongoing see twin rivers farm inc v commissioner tcmemo_2012_184 mr smith performed services for petitioner throughout and received compensation categorized as wages every month of the year this fourth factor favors respondent the final factor considers the skill required of the individual in breaux daigle inc the court_of_appeals for the fifth circuit observed that the workers were not specialists called in to solve a problem but unskilled laborers who performed the essential everyday chores of the taxpayer’s operation f 2d pincite quoting 861_f2d_450 5th cir modified 867_f2d_875 5th cir the fact that minimal skills are required tends to show that the worker is an employee rather than an independent_contractor the fact that the work he performs is integral to the principal’s regular business likewise suggests employee status donald g cave a professional law corp fed appx pincite mr smith’s duties which consisted of picking up and delivering cars license plates and title certificates required minimal skill these tasks were also integral to petitioner’s business of reconditioning and reselling used vehicles this factor like at least three of the other four factors we have considered conclusively favors respondent we accordingly conclude that mr smith was petitioner’s common_law_employee during and that all payments made to him were wages subject_to employment_tax iii sec_6651 additions to tax and sec_6656 penalty respondent determined that petitioner is liable for additions to tax under sec_6651 and and for a penalty under sec_6656 sec_6651 provides for an addition_to_tax of of the tax required to be shown on a return for each month or fraction thereof for which there is a failure_to_file the return not to exceed in toto sec_6651 provides for an addition_to_tax when a taxpayer fails to pay timely the tax shown on a return sec_6656 provides for a penalty equal to of the amount of the underpayment of employment_taxes required to be deposited by an employer if the deposit is more than days late as determined by sec_6656 sec_6656 sec_7436 see also ewens miller inc t c pincite it is undisputed that petitioner filed no employment_tax returns paid no employment_taxes and deposited no required employment_taxes into any federal depository a taxpayer may avoid the additions to tax under sec_6651 and and the penalty under sec_6656 if it can establish that its failure_to_file pay and or deposit was due to reasonable_cause and not willful neglect sec_6651 a see charlotte’s office boutique inc t c pincite because one does not have to be a tax expert to know that tax returns have fixed filing dates and that taxes must be paid when they are due reliance on a return preparer generally does not establish a reasonable_cause defense to these penalties see 469_us_241 however reliance on a return preparer may constitute reasonable_cause if the return preparer furnishes substantive advice on a matter of tax law such as whether liability exists or whether a return is required see id pincite 204_f2d_19 7th cir no penalty where taxpayer was advised by a reputable tax attorney that he did not have to file a tax return 178_f2d_769 2d cir mr cheshire testified that he engaged return preparers to prepare petitioner’s tax returns on the basis of his limited testimony petitioner has not established that anyone on its behalf sought specific advice from return preparers regarding the legal status of its workers for employment_tax purposes nor has petitioner established that anyone on its behalf provided its return preparers with all relevant information regarding the nature of their employment petitioner did not call any return preparer as a witness at trial we thus find that petitioner has failed to establish reasonable_cause for its failure timely to file returns its failure timely to pay taxes due and its failure to deposit see ramirez v commissioner tcmemo_2007_346 we accordingly sustain the sec_6651 and additions to tax and the sec_6656 penalty to reflect the foregoing decision will be entered for respondent


tcmemo_2012_230 united_states tax_court calvin lloyd walters petitioner v commissioner of internal revenue respondent docket no filed date calvin lloyd walters pro_se adam p sweet for respondent memorandum findings_of_fact and opinion kerrigan judge respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax for taxable_year the issue for our consideration is whether petitioner is entitled under sec_151 to dependency_exemption deductions for his two children unless otherwise indicated all section references are to the internal_revenue_code in effect for the year at issue and all rule references are to the tax_court rules_of_practice and procedure findings_of_fact the parties have stipulated some facts which are incorporated herein at the time the petition was filed petitioner resided in virginia petitioner has two sons d w and s w petitioner is divorced from the mother of his sons on date the commonwealth of virginia granted sole custody of d w and s w to their mother the children moved from virginia to florida petitioner was granted visitation rights of two two-week periods in the summer and one week at christmas in the absence of an agreement under the custody order visits were to take place in florida on his form_1040 u s individual_income_tax_return dated date petitioner claimed dependency_exemption deductions for d w and s w petitioner’s ex-spouse did not sign an internal_revenue_service form_8332 release revocation of release of claim to exemption for child by custodial_parent for the taxable_year petitioner did not affix any other 1the court redacts the names of minor children see rule a written declaration to his federal_income_tax return that conformed to the substance of form_8332 in the notice_of_deficiency respondent disallowed petitioner’s claimed dependency_exemption deductions for d w and s w petitioner timely petitioned this court for redetermination opinion the commissioner’s determination is presumed correct and generally the taxpayer bears the burden to prove his entitlement to the exemptions and credits he claimed rule a 290_us_111 petitioner does not contend that the burden_of_proof should be shifted to respondent under sec_7491 and the record does not suggest any basis for a shift sec_151 provides that an individual is entitled to a deduction for his or her dependents sec_151 provides an exemption for each dependent of the taxpayer as defined in sec_152 sec_152 defines the term dependent to mean either a qualifying_child see sec_152 or a qualifying_relative see sec_152 in addition sec_152 provides a special rule for divorced parents etc this special rule for divorced parents applies to petitioner where the parents of dependent_children are divorced or legally_separated sec_152 allows the dependency_exemption to the parent having custody of the children for the greater portion of the calendar_year custodial_parent custody exists only where the parent has the right under state law to physical custody of the child sec_1_152-4 income_tax regs petitioner’s wife was the custodial_parent of both children in pursuant to an order for custody visitation issued by the commonwealth of virginia as an exception to the general_rule a noncustodial_parent may claim the exemption where the custodial_parent executes a valid written declaration releasing his or her claim to the exemption and the noncustodial_parent attaches that declaration to his or her federal_income_tax return for the taxable_year sec_152 sec_1_152-4 income_tax regs the declaration required by sec_152 must be made on either form_8332 or on a statement conforming to the substance of that form see 114_tc_184 aff’d sub nom 293_f3d_1208 10th cir petitioner did not attach to his tax_return a form_8332 the form prescribed for the custodial spouse to release his or her claim to the exemption pursuant to sec_152 petitioner also did not attach to his tax_return a written declaration which could serve as a substitute for form_8332 petitioner contended that he should be entitled to claim his sons as dependents because his ex-wife does not pay income_tax petitioner also contended that he is entitled to claim the deductions because he pays child_support congress created several objective tests in sec_152 these tests draw bright lines and without these tests there would need to be rules that are sensitive to a wide variety of family circumstances such rules would be difficult to craft and hard for the commissioner and the courts to administer and would likely require government intrusion into delicate family issues the court is required to apply the law as passed by congress and the rules of sec_152 d and e are explicit sec_152 prevents a parent in petitioner’s circumstances from claiming a dependency_exemption deduction irrespective of the amount of financial support he provided his children see jeter v commissioner tcmemo_2001_223 aff’d per curiam 26_fedappx_321 4th cir consequently we find that petitioner is not entitled to dependency_exemption deductions for his two children for to reflect the foregoing decision will be entered for respondent


internal_revenue_service number release date index number ------------------------- ----------------------- ------------------------------------------------ ------------------------------------ -------------------------------------- in re ----------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------- id no ------------ telephone number -------------------- refer reply to cc intl b04 plr-126200-05 date date a ----------------------------------------------------------------------------------------------------------- - b ----------------------------------------------------------------- x ---------------------- dear --------------- this replies to a letter dated date and a supplemental correspondence submitted on behalf of a and a’s former subsidiary b requesting an extension of time under sec_301_9100-3 to furnish to the internal_revenue_service notices of nonrecognition transfer required by sec_1_1445-5 and to file pursuant to sec_1_897-6t and sec_1_897-5t copies of notices of nonrecognition transfer and provide other required information with respect to seven distributions of property in complete_liquidation of b pursuant to sec_332 of the internal_revenue_code during years -------------- the information for consideration is substantially as set forth below the ruling contained in this letter is predicated upon facts and representations submitted by the taxpayer and accompanied by penalty of perjury statements executed by appropriate parties this office has not verified any of the above material submitted in support of the request for a ruling verification of the factual information representations and other data may be required as a part of the audit process b was a u s_corporation and a wholly-owned subsidiary of a a foreign_corporation during its ---------------taxable years b was a u s real_property_holding_company as plr-126200-05 defined in sec_897 on september ------- b adopted a plan of complete_liquidation under sec_332 on october ------- and through december ------- b made a series of seven liquidating distributions to a in full redemption of all of a’s outstanding_stock in a complete_liquidation under sec_332 x was engaged to handle all u s tax compliance for a including the tax_return filings of a and b a and b relied upon x to comply with the reporting requirements required in connection with the complete_liquidation of b under sec_332 however x inadvertently failed to file notices of nonrecognition transfer for each of the seven liquidating distributions x also failed to file copies of the notices and other supplemental information with a’s u s income_tax returns for -------------- sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-3 to make a regulatory election under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines a regulatory election as an election whose due_date is prescribed by a regulation revenue_ruling revenue_procedure notice or announcement an election includes an application_for relief in respect of tax sec_301_9100-3 provides that requests for relief subject_to this section will be granted when the taxpayer provides evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that the grant of relief will not prejudice the interests of the government based on the facts and circumstances of this case we conclude that the standards of sec_301_9100-3 have been satisfied accordingly a is granted an extension of time until days from the date of this ruling letter to furnish to the internal_revenue_service notices of nonrecognition transfer required by sec_1_1445-5 and to file pursuant to sec_1_897-6t and sec_1_897-5t copies of notices of nonrecognition transfer and provide other required information with respect to seven distributions of property in complete_liquidation of b pursuant to sec_332 of the internal_revenue_code during years -------------- no opinion is expressed as to the application of any other section of the code or regulations to the facts presented specifically no opinion is expressed as to whether the liquidation qualified as a tax free liquidation within the meaning of sec_332 this ruling is directed to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent plr-126200-05 pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely christopher l trump assistant to the branch chief branch office of associate chief_counsel international this document may not be used or cited as precedent sec_6110 of the internal_revenue_code enclosures copy of letter copy for sec_6110 purposes


t c memo united_states tax_court j michael shedd and marita shedd petitioners v commissioner of internal revenue respondent j j management group inc petitioner v commissioner of internal revenue respondent docket nos filed date marc a letvin for petitioners gary r shuler jr and matthew j fritz for respondent memorandum findings_of_fact and opinion gerber judge these consolidated cases involve income_tax deficiencies determined by respondent for petitioners’ and taxable years respondent determined income_tax deficiencies and penalties for petitioners j michael and marita shedd docket no as follows penalty year deficiency sec_6662’ dollar_figure dollar_figure big_number big_number respondent determined income_tax deficiencies and penalties for petitioner j j management group inc j j docket no as follows penalty year deficiency sec_6662’ dollar_figure s680 big_number big_number ' respondent has conceded that petitioners are not liable for sec_6662 penalties for the or taxable_year respondent concedes that the shedds did not receive constructive dividends for unless otherwise indicated all section references are to the internal_revenue_code in effect for the taxable periods under consideration and all rule references are to the tax_court rules_of_practice and procedure the primary issue for our consideration is whether advances from j j to tlc management inc tlc were business loans or contributions to capital if we decide that they were business loans we must then decide whether j j is entitled to a bad_debt deduction under sec_166 if we find that the advances were contributions to capital we must then decide whether the advances should be treated as constructive dividends from j j to the shedds in light of mr shedd’s ownership of stock in both j ji and tlc findings_of_fact the parties’ stipulation of facts and the exhibits are incorporated herein by this reference petitioners j michael and marita shedd the shedds are husband and wife and resided in livonia michigan at the time their petition was filed the shedds each owned percent of j j whose principal_place_of_business was romulus michigan at the time its petition was filed j j was engaged in the freight forwarding business in the detroit michigan metropolitan area mr shedd owned percent of tlc which was engaged in a freight forwarding business in cleveland ohio j j and tlc are related due to mr shedd’s stock ownership j j began operating in date and mrs shedd maintained its books without receiving compensation mr shedd was president of j j j j did not declare or pay any dividends j j was the first of the shedds’ companies to become involved in a network of independent freight forwarding contractors named seko payments were made by freight customers to seko which retained percent of adjusted revenues and remitted the balance to the contractors seko also retained the right to apply customer receipts to outstanding indebtedness and was entitled to maintain contractor security deposits under its agreement with seko j j’s shareholders were required to q4e- personally guarantee performance of the contract and of all of j j’s financial obligations to seko j j became indebted to seko in its first year of business in date j j executed a promissory note to seko for an amount in excess of dollar_figure the borrowed funds were used to pay j j’s operating_expenses the promissory note reflected an unsecured loan without interest and with payments scheduled to end on date or upon termination of the independent_contractor agreement between j j and seko the payments were made from the periodic settlement of commissions owed by seko to j j seko would reduce the commission to j j by an amount equal to percent of the commission under this payment schedule j j paid its indebtedness to seko in approximately year tlc was also incorporated in but did not begin operations until when it received its ohio business certificate mr shedd was the president and treasurer and mrs shedd was secretary of tlc tlc also contracted with seko and established a customer base due to the seko affiliation tlc was incorporated with dollar_figure paid in capital and no additional capital was contributed by the shedds advances in the total amount of dollar_figure were made by j j to tlc from date through date for operating_expenses evidenced by unsecured demand notes bearing 7-percent interest and signed by mrs shedd as tlc’s secretary as follows amount of dates of advances advances date amount of note to dollar_figure dollar_figure to big_number dollar_figure to big_number dollar_figure to big_number dollar_figure total big_number dollar_figure j j did not reguire any personal guaranties from the shedds on the advances to tlc no repayment schedule was established and j j made no demand of tlc for payment of the principal or interest on the notes tlc was dissolved prior to date and it fileda notification of dissolution or surrender with the state of ohio department of taxation indicating that it ceased or would cease operations on date on its federal_income_tax return tlc reported dollar_figure income due from the forgiveness of the above-described debt j j claimed the amount as a bad_debt deduction and respondent disallowed the deduction opinion respondent contends that j j’s advances to tlc a corporation wholly owned by j j’s shareholders constituted equity investments in those companies as such tlc’s subsequent failure resulted in capital as opposed to ordinary losses for j j respondent also contends that the funds advanced to tlc by j j were constructive dividends petitioners counter that the advances constituted valid debt between j j and tlc and that tlc's inability to repay the debt resulted in worthlessness and -- - entitled j j to an ordinary_loss deduction under sec_166 because of petitioners’ characterization of the advances as bona_fide loans they contend that the advancing of funds was not a constructive_dividend bad_debt bad_debts which become worthless within the taxable_year are deductible by a corporate taxpayer as ordinary losses under sec_166 the right to a deduction is limited to genuine debt and capital contributions are not considered debt for the purposes of sec_166 see 511_f2d_185 6th cir capital contributions on the other hand may result in a capital_loss for a shareholder if the stock becomes worthless see sec_165 the determination of whether advances to a corporation are loans or capital contributions depends on whether there is an intention to create an unconditional obligation to repay the advances see raymond v commissioner supra pincite advances between related corporations are subject_to particular scrutiny because the relationship more readily facilitates fictionalized debt see in re uneco inc 532_f2d_1204 8th cir petitioners must show that the advances were loans rather than capital contributions as determined by respondent see rule a 290_us_111 - in order to show entitlement to an ordinary_loss under sec_166 petitioners must establish that a bona_fide debt existed between j j and tlc which obligated tlc to pay j j a fixed or determinable sum of money the debt was created or acquired in connection with a trade_or_business of j j and the debt became worthless when claimed see 405_us_93 95_tc_257 55_tc_85 52_tc_147 a gift or contribution_to_capital is not debt within the meaning of sec_166 see calumet indus inc v commissioner supra pincite 91_tc_575 accordingly petitioners must show that there was a genuine intention to create a debt with a reasonable expectation of repayment and that the intention was consistent with the economic reality of creating a debtor-creditor relationship 61_tc_367 whether the requisite intention to create a true debtor-creditor relationship existed is a question of fact to be determined from a review of all the evidence see id factors that have been considered in the analysis of this issue include the names given to the certificates evidencing the indebtedness the presence or absence of a fixed maturity_date the source of --- - payments the right to enforce payments participation in management as a result of the advances the status of the advances in relation to regular corporate creditors the ratio of debt to capital of the corporation the ability of the corporation to obtain credit from outside sources the use to which the advances were put the failure of the debtor to repay and the risk involved in making the advances see 800_f2d_625 6th cir calumet indus inc v commissioner supra 74_tc_476 no single factor is determinative and not all factors are applicable in each case see dixie dairies corp v commissioner supra the various factors are only aids in answering the ultimate question whether the investment analyzed in terms of its economic reality constitutes risk capital entirely subject_to the fortunes of the corporate venture or represents a strict debtor-creditor relationship 398_f2d_694 3d cir we consider each of the suggested factors in our analysis of whether petitioners created bona_fide debt rather than equity as determined by respondent name given instruments evidencing indebtedness the issuance of a note may be indicative of bona_fide debt see 464_f2d_394 5th cir the existence of a note however is not in and of itself conclusive an unsecured note with no payments made thereon weighs towards equity see 730_f2d_634 11th cir affg tcmemo_1982_314 12_tc_1158 affd per curiam 192_f2d_391 2d cir here notes were signed but they were not signed until the end of the fiscal_year in which funds had been advanced further the notes were executed in amounts that were less than the amount that had been advanced furthermore the evidence shows that no payments were ever made on these unsecured advances when a transaction involves a closely_held_corporation the forms and labels assigned to a transaction may mean little due to the parties’ ability to mold the transaction to their will see 93_tc_382 for these reasons we find that the notes have only limited probative value in our evaluation of whether the advances were bona_fide indebtedness presence or absence of fixed maturity_date and schedule of payments here no schedule of payments or due_date was established petitioners’ claim that demand notes weigh in their favor but -- - that argument was of little import because no demand for payment was made source of repayments if the expectation of repayment depends solely on the success of the borrower's business the transaction has the appearance of a capital_contribution see in re 742_f2d_1311 11th cir estate of mixon v commissioner supra pincite an expectation of repayment solely from corporate earnings is not indicative of a bona_fide debt see in re lane supra pincite there has been no showing of any other source of repayment other than the tlc’s business receipts the right to enforce payments a definite obligation to repay principal and interest favors the existence of debt see stinnett’s pontiac serv inc v commissioner supra pincite repayment that is within the discretion of the parties and conditioned upon the occurrence of certain events is more like equity see id even where there is a basic right to enforce payment failure to take customary steps to ensure payment----such as securing the advance or establishing a sinking fund--may indicate an equity rather than debt relationship see in re lane supra pincite j j made no attempt to demand payment from tlc further j j did not reguire security or a sinking_fund tlc had no obligation to repay on a fixed schedule or by a certain date the evidence does not support petitioners’ claim that they expected to be repaid participation in management as a result of the advances normally acquisition of management responsibilities by the party advancing funds is more likely to be evidence of an equity relationship see stinnett’s pontiac serv inc v commissioner supra pincite here however mr shedd was already the managing shareholder of j j and tlc and so this factor is neutralized in this case the status of the advances in relation to reqular corporate creditors subordination of advances to claims of other creditors indicates that the advances were capital contributions and not loans see id there is insufficient evidence to judge the weight of this factor the ratio of debt to capital of the corporation thin or inadequate capitalization is strong evidence that the advances are capital contributions rather than loans see stinnett’s pontiac serv inc v commissioner supra pincite estate of mixon v commissioner supra pincite here mr shedd testified that tlc received dollar_figure of initial capitalization and no further contributions were received from the shedds comparing capital of dollar_figure with over dollar_figure in advances it appears that the advances were more likely capital in nature the ability of the corporation to obtain credit from outside sources if a party receiving an advance can borrow funds from another lender in an arm’s-length transaction on similar terms the advance may appear to be debt see 695_f2d_1367 fed cir estate of mixon v commissioner supra pincite this factor is strongest for petitioners at trial the chief financial officer of seko testified that seko would have made the loans to tlc up to the dollar_figure that was actually advanced he spoke of the industry norm of thin_capitalization and of the practice of advancing funds to companies losing money for a certain period of time though the independent_contractor agreement addresses guaranties he testified that no personal guaranties were reguired on the notes to the contractors if j j had advanced the funds in the exact same manner that seko advanced funds to its independent contractors this factor would have had more probative value in petitioners’ favor in its loan agreement seko arranges to withhold percent of any commission payment due to the independent_contractor by doing so the independent_contractor is not given a choice of which creditor to pay the note also establishes a termination_date by which time the note must be paid these two important factors are not present in the advances to tlc and do not support an intention by j j to collect on the advances the use to which the advances were put use of advances to meet the daily operating needs of the corporation rather than to purchase capital assets is indicative of bona_fide indebtedness see stinnett’s pontiac serv inc v commissioner f 2d pincite raymond v united_states f 2d pincite estate of mixon v commissioner f 2d pincite the advanced funds were used to pay the operating_expenses of tlc accordingly this factor favors petitioners’ position the failure of the debtor to repay the absence of payments of principal or interest is a strong indication that the advances were capital contributions rather than loans see stinnett’s pontiac serv inc v commissioner supra pincite raymond v commissioner supra pincite 432_f2d_741 it is undisputed that tlc never made a payment over the 4-year period when it received funds from j j nor did j j make any demand for payment accordingly it appears that j j never intended to compel repayment of the advances the risk involved in making the advances the absence of security for the advances indicates that the advances were more likely capital contributions see in re lane f 2d pincite raymond v united_states supra pincite austin village inc v commissioner supra pincite j j did not require security from tlc having weighed all the factors we hold that j j’s advances were capital contributions and not bona_fide loans the fact that seko would have been willing to lend to tlc weighed in favor of bona_fide indebtedness but the differences in the terms and the ability of seko to collect directly from the receipts of its borrowers stripped away much of the weight having decided the advances were contributions to capital we must now decide whether those contributions should be treated as constructive dividends to the shedds constructive_dividend to common shareholder generally distributions of property of a corporation to a shareholder with respect to the shareholder’s stock out of its earnings_and_profits are taxable to the shareholder as dividend income to the extent of the availability of corporate earnings_and_profits see sec_61 sec_301 sec_301 sec_316 here we consider whether the advances to tlc were constructive_dividend to the shedds even though there was no formal dividend declaration see wilkof v commissioner tcmemo_1978_496 affd 636_f2d_1139 6th cir a transfer of property between related corporations may constitute a dividend to common -- - shareholders even though no funds or property are directly received by them two tests are normally employed to decide whether a transfer between related corporations constitutes a constructive_dividend one is an objective distribution test and the other a subjective test of primary purpose both of which must be satisfied see stinnett's pontiac serv inc v commissioner supra pincite first there must be a distribution from the transferring corporation's earnings_and_profits ie the transferee corporation must receive something at the expense of the transferor this test requires property to leave the control of the transferor_corporation in a way that allows a common shareholder to directly or indirectly control the property through some other instrumentality where property is transferred between related corporations a common shareholder does not personally receive the property therefore a distribution is thought to occur when a transferee corporation attains an increase in assets or control at the expense of a transferor_corporation the amount of such distribution is measured by the loss to the transferring corporation see 472_f2d_449 5th cir affg in part revg in part and remanding on other grounds tcmemo_1971_145 stinnett's pontiac serv inc v commissioner -- - supra sparks nugget inc v commissioner tcmemo_1970_74 affd 458_f2d_631 9th cir here j j made a capital_contribution rather than a loan to tlc when petitioner j j advanced the funds to tlc mr shedd as president and sole shareholder of tlc then had indirect control_over those funds the advance by j j to tlc is sufficient to meet the objective test the second test is designed to differentiate between normal business transactions of related corporations and those designed primarily to benefit a common shareholder the primary or dominant motivation for a distribution must be examined see sammons v commissioner supra pincite the shedds must show a legitimate corporate or business justification which is the primary cause for the advance and which is sufficient to overcome the conclusion that mr shedd as the shareholder primarily benefited from the advance of funds a legitimate corporate justification is demonstrated by showing that the distribution would be in the best interest of the transferring corporation if justifiable business reasons exist that account for the transfer such reasons will suffice to override any incidental or derivative benefit to a common shareholder see wilkof v commissioner supra however where a corporation's distribution serves no legitimate corporate purpose it must be treated as a constructive_dividend to the benefited shareholder see 374_f2d_161 8th cir affg in part revg in part and remanding on another ground tcmemo_1964_190 mr shedd testified that j j lent the money to tlc in order to create a business with which it could share costs of forwarding freight while this would be a valid business_purpose the shedds have presented no documentary or corroborating evidence of any savings over the 4-year period funds were advanced in this regard petitioners contend that requiring corroborating documentary_evidence of the savings effectively increases the level of their burden_of_proof from a preponderance to beyond a reasonable doubt petitioners have confused the level of their burden with the need to provide particulars or details of the savings petitioners have merely made the uncorroborated statement that there either could have been or were savings they have not however explained how those savings would or did occur petitioners have not presented sufficient documentary_evidence or testimony explaining the business_purpose for the advances it has not been shown that the shedds were acting in j j’s business interests when funds were advanced to tlc instead it appears that mr shedd was acting in his own best interests as sole shareholder of tlc when he caused the injection of additional capital into tlc an - inadequately capitalized entity accordingly we hold that petitioners shedd realized a constructive_dividend to address concessions of the parties and to reflect the foregoing decisions will be entered under rule


t c summary opinion united_states tax_court timothy charles qunell jr petitioner v commissioner of internal revenue respondent docket no 22719-14s filed date timothy charles qunell jr pro_se c d bradley and madeline morgan student for respondent summary opinion carluzzo special_trial_judge this case was heard pursuant to the provisions of section of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not 1unless otherwise indicated section references are to the internal_revenue_code_of_1986 as amended and in effect for rule references are to the tax_court rules_of_practice and procedure reviewable by any other court and this opinion shall not be treated as precedent for any other case in a notice_of_deficiency dated date notice respondent determined a dollar_figure deficiency in petitioner’ sec_2011 federal_income_tax and imposed a dollar_figure sec_6651 addition_to_tax a dollar_figure sec_6651 addition_to_tax and a dollar_figure sec_6662 accuracy-related_penalty the issues for decision are whether wages petitioner earned in afghanistan during are excludable from gross_income under sec_911 petitioner is liable for the above-referenced additions to tax and petitioner is liable for a sec_6662 accuracy-related_penalty background some of the facts have been stipulated and are so found at the time the petition was filed petitioner resided in georgia after graduating from high school and completing semesters of college petitioner enlisted in the u s army and served on active_duty for years petitioner began working for aecom technology aecom as an atmospheric manager in afghanistan on date in connection with a contract that aecom held with the u s department of defense his employment with aecom lasted approximately year and months during that time petitioner lived on a u s military facility in kabul afghanistan petitioner’s passport records show that during he left afghanistan from time to time for vacations early in he traveled to the united_states he was married on february of that year and returned to afghanistan without his wife a short time later during petitioner and his wife owned a house in illinois illinois residence his wife and their children lived in the illinois residence while petitioner was working in afghanistan neither petitioner’s wife nor any of their children visited petitioner while he was in afghanistan petitioner maintained several bank accounts all at banks in the united_states on date on account of a disagreement with aecom regarding the location of his next assignment petitioner resigned petitioner wanted and believed he was entitled to an assignment in the united_states according to petitioner aecom kept pushing it down the road and keeping him in afghanistan petitioner was unemployed from the time he left his employment with aecom until he returned to the u s army in date petitioner’ sec_2011 federal_income_tax return return due on date was filed on date after petitioner was notified that respondent was preparing a substitute for return see sec_6020 on a form_2555 foreign_earned_income included with the return petitioner disclosed the wages he earned from aecom while employed in afghanistan but took the position based on sec_911 that his tax_home was in afghanistan and excluded those wages from the income otherwise reported on that return we accept his claim that he did so upon the advice he received through a service offered by the army and a recommendation made by an acquaintance who professionally prepared federal_income_tax returns in the notice respondent determined that petitioner was not entitled to the sec_911 foreign_earned_income_exclusion for respondent further determined that petitioner was liable for the additions to tax under sec_6651 and and for the accuracy-related_penalty under sec_6662 on various grounds discussion the commissioner’s determinations in a notice_of_deficiency are presumed correct and the taxpayer generally bears the burden of proving them erroneous rule a 290_us_111 i foreign_earned_income_exclusion sec_61 provides that gross_income means all income from whatever source derived citizens of the united_states are taxed on their worldwide income unless a specific exclusion applies 117_tc_95 aff’d sub nom 68_fedappx_44 9th cir and aff’d sub nom 357_f3d_1108 10th cir eram v commissioner tcmemo_2014_60 at exclusions from gross_income are construed narrowly and a taxpayer must clearly establish his entitlement to any such exclusion eram v commissioner at sec_911 provides that a qualified_individual may subject_to limitations set forth in subsection b elect to exclude from gross_income his or her foreign_earned_income to be entitled to this exclusion a taxpayer must satisfy two requirements first the taxpayer must be an individual whose tax 2petitioner does not claim and the record does not show that the provisions of sec_7491 are applicable and we proceed as though they are not home is in a foreign_country sec_911 second the taxpayer must either be a bona_fide_resident of one or more foreign countries or be physically present in such country or countries during at least days in a 12-month_period id we first consider whether petitioner’s tax_home during was in afghanistan sec_911 defines the term tax_home to mean in the case of an individual such individual’s home for purposes of sec_162 under sec_162 a person’s home is generally considered to be the location of his regular or principal_place_of_business see 74_tc_578 however sec_911 goes on to provide that an individual shall not be treated as having a tax_home in a foreign_country for any period for which his abode is within the united_states that is an individual whose abode is within the united_states cannot establish that his or her tax_home is in a foreign_country see 927_f2d_849 5th cir rev’g tcmemo_1989_616 93_tc_297 in bujol v commissioner tcmemo_1987_230 53_tcm_762 aff’d without published opinion 842_f2d_328 5th cir we considered the meaning of the word abode as used in sec_911 we pointed out abode has been variously defined as one’s home habitation residence domicile or place of dwelling black’s law dictionary 5th ed while an exact definition of abode depends upon the context in which the word is used it clearly does not mean one’s principal_place_of_business thus abode has a domestic rather than vocational meaning and stands in contrast to tax_home as defined for purposes of sec_162 id t c m cch pincite a taxpayer’s abode is generally in the country in which the taxpayer has the strongest economic family and personal ties id pincite see also jones v commissioner f 2d pincite a taxpayer posted abroad will invariably have some connections with the foreign_country in which the taxpayer works but where the taxpayer’s ties to the united_states are stronger we have held that the taxpayer’s abode remains in the united_states see eg harrington v commissioner t c pincite during petitioner owned a home in illinois where his wife and children lived and he maintained bank accounts in the united_states see lemay v commissioner tcmemo_1987_256 aff’d 837_f2d_681 5th cir petitioner lived on a military facility in kabul afghanistan his family did not visit him there and nothing in the record suggests that he traveled within afghanistan other than as required by his employment moreover he terminated his employment with aecom because he wanted to return to the united_states his ties to afghanistan were entirely transitory and did not extend much beyond if at all the bare minimum required to perform his duties there see daly v commissioner tcmemo_2013_147 at finding a military contractor’s tax_home was not where he worked in iraq and afghanistan because his ties to those countries were severely limited and transitory and his abode was in the united_states other than the location of his employment petitioner has not established that he had any economic family or personal ties to afghanistan we are satisfied that petitioner’s economic family and personal ties to the united_states were sufficiently strong for us to consider the united_states to be the location of his abode at all times relevant here that being so the wages he earned in afghanistan during are not excludable from his income under sec_911 ii additions to tax the burden of production with respect to the imposition of each addition_to_tax rests with respondent see sec_7491 116_tc_438 a sec_6651 sec_6651 provides for an addition_to_tax in the event a taxpayer fails to file a timely return determined with regard to any extension of time for 3because of our finding on this point we need not decide whether petitioner met the bona_fide_resident or physical_presence_test of sec_911 filing unless it is shown that such failure is due to reasonable_cause and not due to willful neglect the amount of the addition is equal to of the amount_required_to_be_shown_as_tax on the delinquent_return for each month or fraction thereof during which the return remains delinquent up to a maximum addition of for returns more than four months delinquent petitioner’ sec_2011 return was due to be filed on or before date but it was not submitted for filing until on or about date see sec_6072 sec_7503 that being so respondent’s sec_7491 burden of production has been met with respect to the imposition of the sec_6651 addition_to_tax petitioner does not argue nor does the record show that he had reasonable_cause for failing to timely file hi sec_2011 tax_return respondent’s imposition of the addition_to_tax under sec_6651 is sustained b sec_6651 sec_6651 provides for an addition_to_tax for failure to timely pay the amount shown as tax on any return specified in paragraph unless the taxpayer establishes that the failure was due to reasonable_cause and not willful neglect the addition is calculated as of the amount shown as tax on the return but not paid with an additional for each month or fraction thereof during which the failure to pay continues up to a maximum of id the amount of the addition_to_tax under sec_6651 reduces the addition_to_tax under sec_6651 for any month for which both additions to tax apply see sec_6651 respondent has not submitted sufficient evidence to establish that a substitute for return relating to petitioner’ sec_2011 tax_liability had been produced see sec_6651 127_tc_200 aff’d 521_f3d_1289 10th cir 120_tc_163 aff’d without published opinion a f t r 2d ria 3d cir that being so respondent’s sec_7491 burden of production has not been met with respect to the imposition of the sec_6651 addition_to_tax accordingly petitioner is not liable for the sec_6651 addition_to_tax iii sec_6662 accuracy-related_penalty lastly we consider whether petitioner is liable for a sec_6662 accuracy-related_penalty sec_6662 imposes a accuracy-related_penalty on the portion of an underpayment_of_tax required to be shown on a return if among other reasons the underpayment is due to a substantial_understatement_of_income_tax see sec_6662 d respondent bears the burden of production with respect to the imposition of a sec_6662 accuracy-related_penalty see sec_7491 in this case the underpayment_of_tax as defined in sec_6664 is equal to and computed in the same manner as the deficiency see sec_6211 and that amount is a substantial_understatement_of_income_tax because it exceeds the greater of dollar_figure or of the amount of tax required to have been shown on petitioner’ sec_2011 return see sec_6662 it follows that respondent’s burden of production has been met the sec_6662 accuracy-related_penalty does not apply to any portion of an underpayment as to which there was reasonable_cause and the taxpayer acted in good_faith sec_6664 sec_1_6664-4 income_tax regs but the burden_of_proof rests with the taxpayer to show that the penalty does not apply see 116_tc_438 on a form_2555 attached to hi sec_2011 return petitioner disclosed the wages he sought to exclude from income under sec_911 furthermore we accept his claim that he relied on the advice of tax professionals with respect to the application of sec_911 the provisions of sec_911 are technical and we are satisfied that petitioner reasonably relied upon the advice he was given with respect to its application we find that petitioner had reasonable_cause and acted in good_faith with respect to the underpayment_of_tax required to be shown on hi sec_2011 return see sec_6664 he is not liable for the sec_6662 accuracy-related_penalty to reflect the foregoing decision will be entered for respondent with respect to the deficiency and the sec_6651 addition_to_tax and for petitioner with respect to the sec_6651 addition_to_tax and the sec_6662 penalty