t c memo united_states tax_court veterinary surgical consultants p c petitioner v commissioner of internal revenue respondent docket no filed date joseph h o’donnell jr for petitioner pamela j arthur-gerlach for respondent memorandum findings_of_fact and opinion cohen judge the petition in this case was filed in response to a notice_of_determination concerning worker classification under sec_7436 notice_of_determination regarding petitioner’s liabilities pursuant to the federal_insurance_contributions_act fica and the federal_unemployment_tax_act futa for and the issues for decision are - - whether kenneth k sadanaga sadanaga was an employee of petitioner for federal employment_tax purposes during through and if so whether petitioner is entitled to relief under sec_530 of the revenue act of publaw_95_ 92_stat_2885 as amended sec_530 unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure for convenience fica and futa taxes are collectively referred to as employment_taxes findings_of_fact some of the facts were deemed stipulated pursuant to rule f certain additional facts have been stipulated by the parties the stipulated facts are incorporated in our findings by this reference petitioner’s organization and operations sadanaga has been a licensed veterinarian since he subseguently decided to incorporate his business on account of the protections afforded by limited_liability in that a corporation’s debts are generally not assessed against individual shareholders petitioner was incorporated in pennsylvania on date and has at all relevant times operated as an s_corporation petitioner’s principal_place_of_business was located in pennsylvania at the address of sadanaga’s personal_residence during the years in issue and when the petition was filed in this case since its organization petitioner has provided consulting and surgical services to veterinarians this activity was and is petitioner’s only business and only source_of_income sadanaga has been the sole shareholder of petitioner from the time of its incorporation and throughout and sadanaga has at all times served as petitioner’s president and only officer minutes from petitioner’s annual meetings of directors and shareholders reflect that for each of the years in issue sadanaga was elected president vice president secretary and treasurer sadanaga was also petitioner’s sole director during and sadanaga performed the following services for petitioner solicited business on behalf of petitioner ordered and purchased supplies on behalf of petitioner entered into verbal and or written agreements on behalf of petitioner oversaw the finances of petitioner collected moneys owed petitioner managed petitioner obtained clients for petitioner maintained customer satisfaction performed all bookkeeping services for petitioner and performed all surgical and consulting services to clients on behalf of petitioner no other person provided any services to petitioner during the period in issue petitioner rendered services to veterinary orthopedic services ltd veterinary orthopedic sadanaga performed such services on behalf of petitioner pursuant to a service_contract between petitioner and veterinary orthopedic dated date sadanaga provided consulting and surgical services on petitioner’s behalf to other veterinarians at the veterinary orthopedic business office at the offices of the individual veterinarians and at petitioner’s office as maintained in sadanaga’s home during and sadanaga also worked approximately to hours per week as an employee of bristol-meyer squibb co which relationship had begun in in and petitioner did not maintain any type of business bank account rather all moneys earned on behalf of petitioner were deposited into the joint account of sadanaga and his wife amy sadanaga sadanaga used funds maintained in this account to pay both business_expenses of petitioner and his personal expenses as the need arose petitioner did not make regular payments at fixed times to sadanaga for his services petitioner’s tax reporting petitioner timely filed forms 1120s u s income_tax return for an s_corporation and related schedules for each of the years and petitioner reported ordinary_income from its trade_or_business of dollar_figure and dollar_figure for and - respectively petitioner claimed deductions for compensation of officers of dollar_figure in and dollar_figure in petitioner did not claim any deductions for salaries and wages schedules k-1 shareholder’s share of income credits deductions etc attached to the returns show dollar_figure for and dollar_figure for as the pro_rata share of and asa property distribution other than a dividend to sadanaga petitioner’s forms 1120s were signed by sadanaga as president and by joseph m grey grey as preparer during and petitioner did not issue any forms w- wage and tax statement to sadanaga petitioner issued forms 1099-misc miscellaneous income to sadanaga for and reporting respective payments of dollar_figure and dollar_figure petitioner did not file a form_941 employer’s quarterly federal tax_return for any quarter in or or a form_940 employer’s annual federal unemployment futa_tax return for or since petitioner’s incorporation in to the present petitioner has not filed any federal or employer tax returns reporting any payments to sadanaga as salary or wages for services provided by or on behalf of petitioner the sadanagas’ tax reporting for each of the years and sadanaga and his spouse filed a joint form_1040 u s individual_income_tax_return on these returns the sadanagas reported as ordinary_income from - - rental real_estate royalties partnerships s_corporations trusts etc dollar_figure and dollar_figure for and respectively for the foregoing amount is characterized on the attached schedule eh supplemental income and loss as nonpassive_income from schedule_k-1 and dollar_figure is shown on schedule c profit or loss from business as gross_receipts for dollar_figure is shown on schedule e as nonpassive_income from schedule_k-1 dollar_figure is shown on schedule e and on form_4831 rental income as rent and dollar_figure is shown on schedule c as gross_receipts the notice_of_determination respondent neither audited nor challenged petitioner’s or federal tax_return regarding petitioner’s treatment of sadanaga as other than an employee prior to the audit underlying the instant case covering and respondent did audit petitioner for employment_tax purposes for and that audit resulted in litigation of issues similar to those presented here this court issued an opinion thereon in favor of respondent in veterinary surgical consultants p c v commissioner t cc and the court_of_appeals for the third circuit affirmed sub nom 54_fedappx_100 3d cir during pendency of the prior matter on date respondent sent to petitioner the notice_of_determination at - issue in this proceeding the notice was based on a determination that sadanaga was to be legally classified as an employee for purposes of federal employment_taxes and that petitioner was not entitled to relief from such classification pursuant to sec_530 enclosed with the notice was a schedule setting forth petitioner’s liabilities for fica and futa taxes it is stipulated that if the court decides that sadanaga is to be classified as an employee for federal employment_tax purposes for all periods in and the amounts of taxes due and owing are as set forth in the notice_of_determination conversely if the court decides that sadanaga should not be classified as an employee for any of the periods in issue the parties agree that petitioner owes no employment_taxes ultimate findings_of_fact sadanaga as president of petitioner performed more than minor services and received remuneration therefor petitioner did not have a reasonable basis for failing to treat sadanaga as an employee during the years in issue opinion i statutory and regulatory provisions a subtitle c of the internal_revenue_code subtitle c of the internal_revenue_code governs payment of employment_taxes in particular sec_3111 and sec_3301 impose taxes on employers under fica pertaining to social_security and futa pertaining to unemployment respectively based on wages paid to employees the term wages as used in these statutes generally encompasses all remuneration for employment sec_3121 sec_3306 employee is defined for purposes of fica_taxes in sec_3121 and with modifications not germane here sec_3306 1i1 makes this definition applicable for purposes of futa taxes as well sec_3121 provides sec_3121 employee --for purposes of this chapter the term employee means--- any officer of a corporation or any individual who under the usual common_law rules applicable in determining the employer-employee relationship has the status of an employee or any individual other than an individual who is an employee under paragraph or who performs services for remuneration for any person-- a as an agent-driver or commission-- driver b as a full-time insurance salesman c as a home worker or d as a traveling or city salesman xk kk ke under specified conditions or any individual who performs services that are included under an agreement entered into pursuant to sec_218 of the social_security act --- - regulations promulgated under sec_3121 clarify the scope of the inclusion in paragraph for corporate officers as follows generally an officer of a corporation is an employee of the corporation however an officer of a corporation who as such does not perform any services or performs only minor services and who neither receives nor is entitled to receive directly or indirectly any remuneration is considered not to be an employee of the corporation sec_31 d - b employment_tax regs identical language is also included in regulations promulgated under sec_3306 sec_31 -l e employment_tax regs b sec_530 of the revenue act of sec_530 operates in enumerated circumstances to afford relief from employment_tax liability notwithstanding the actual relationship between the taxpayer and the individual performing services the statute provides in part sec_530 controversies involving whether individuals are employees for purposes of the employment_taxes a termination of certain employment_tax liability -- in general --if-- a for purposes of employment_taxes the taxpayer did not treat an individual as an employee for any period and b in the case of periods after date all federal tax returns including information returns required to be filed by the taxpayer with respect to such individual for such period are filed on a basis consistent with the taxpayer’s treatment of such individual as not being an employee -- - then for purposes of applying such taxes for such period with respect to the taxpayer the individual shall be deemed not to be an employee unless the taxpayer had no reasonable basis for not treating such individual as an employee statutory standards providing one method of satisfying the requirements of paragraph -- for purposes of paragraph a taxpayer shall in any case be treated as having a reasonable basis for not treating an individual as an employee for a period if the taxpayer’s treatment of such individual for such period was in reasonable reliance on any of the following a judicial precedent published rulings technical_advice with respect to the taxpayer ora letter_ruling to the taxpayer b a past internal_revenue_service audit of the taxpayer in which there was no assessment attributable to the treatment for employment_tax purposes of the individuals holding positions substantially_similar to the position held by this individual or c long-standing recognized practice of a significant segment of the industry in which such individual was engaged in specified circumstances sec_530 places the burden_of_proof on the commissioner with respect to certain issues under sec_530 but this provision does not affect our analysis here sec_530 applies to periods after date small_business job protection act of publaw_104_188 sec b 110_stat_1767 a taxpayer desiring to take advantage of sec_530 first must establish a prima facie case that it was reasonable not to treat an individual as an employee and must have fully cooperated with the secretary because as explained in detail below petitioner did not establish a prima facie case that its treatment of sadanaga was reasonable the burden_of_proof remains on petitioner il classification of sadanaga for employment_tax purposes a status under fica and futa provisions in contending that sadanaga should not be classified as an employee under the fica and futa provisions of the internal_revenue_code petitioner focuses on sadanaga’s status as an s_corporation shareholder and alleged lack of status as a common_law_employee we briefly address these contentions seriatim contentions regarding s_corporation shareholders petitioner cites sec_1366 sec_1372 and sec_6037 and 70_f3d_548 9th cir presumably in support of an argument that s_corporation shareholders should not be deemed employees sec_1366 and sec_6037 generally require that income items of s_corporations be passed through to shareholders on a pro_rata basis and reported by such shareholders in a manner consistent with treatment on the corporate return these rules however pertain to calculation of income_tax_liability under subtitle a and have no bearing on computation of federal employment_taxes veterinary surgical consultants p c v commissioner t c pincite furthermore an employer cannot by the expedient of characterizing moneys paid in remuneration for services as distributions of net_income rather than as wages avoid fica and futa liabilities id pincite thus as in veterinary surgical consultants p c v commissioner supra pincite and 119_tc_121 we reject any suggestion that petitioner’s passing through of its net_income to sadanaga precludes the finding of an employer- employee relationship between petitioner and sadanaga we likewise reject as not germane to the question before us petitioner’s reliance on sec_1372 addressing fringe_benefits under subtitle a and the reference to that statute in durando v united_states supra pincite see veterinary surgical consultants p c v commissioner supra pincite contentions regarding common_law employment petitioner contends that employee as used throughout sec_3121 must be construed in a manner consistent with its use in sec_3121 such that the usual common_law rules for determining existence of an employer-employee relationship are to be taken into account in support of this position petitioner quotes the following passage from tex carbonate co v phinney 307_f2d_289 5th cir the statutory definition of employees as including officers of a corporation will not be so construed as to mean that an officer is an employee per se only such officers as work for it in fact are to be so included and in determining whether an officer is an employee within the meaning of the statutes the usual employer-employee tests are to be applied petitioner further emphasizes that common_law focuses on whether the alleged employer held the right to control the details of the work performed by the individual and argues that petitioner had neither the authority nor the ability to exert control_over sadanaga there exist however at least two fatal defects in petitioner’s arguments in this regard first from the standpoint of statutory construction the premise underlying petitioner’s position finds no support either in the structure of the text or in the tex carbonate co v phinney supra decision sec_3121 is written in the disjunctive with each of the four paragraphs expressly separated from the next by or accordingly each paragraph affords a separate and independent basis for deeming one engaged to perform services an employee individuals described in paragraphs and of sec_3121 are therefore frequently referred to as statutory employees subject_to fica and futa regardless of their status under common_law see joseph m grey pub accountant p c v commissioner supra pincite moreover tex carbonate co v phinney supra is not authority to the contrary significant regulatory and statutory developments have occurred since the years in issue in that case given that sec_31_3121_d_-1 and sec_31 -l e employment_tax regs were promulgated after those years and that the futa definition of employee then in effect appears to have contemplated a corporate officer who could be an independent_contractor under common_law see eg sec i r c the court of appeals’ statements concerning common_law rules may no longer be relevant joseph m grey pub accountant p c v commissioner supra pincite n the opinion in tex carbonate co v phinney supra pincite recognized that regardless of the test purportedly being applied such officers as work for a corporation in fact are included as employees the court also addressed the impact of an alleged absence of control in that case as follows even though an absence of control is shown and this as we have noted has not been done the force of the factor is diminished to near de_minimis by the fact that the service provider himself was a member of the board_of directors a vice president and the executive of the company in charge of its sales and the development of its markets id pincite hence critical components of the analysis in tex carbonate co v phinney supra are consistent with the current regulatory approach to officers and contrary to petitioner’s position second from a factual standpoint even if the common_law control factor were pertinent to our evaluation petitioner has failed to establish a lack of control_over sadanaga in the performance of his services as in joseph m grey pub accountant p c v commissioner supra pincite to accept petitioner’s contentions in this regard would be the equivalent of disregarding the corporate form in which sadanaga chose to -- - conduct his business caselaw does not permit a taxpayer to use his or her dual role as a shareholder of and service provider to a corporation as grounds for ignoring the legal ramifications of the business construct so selected 319_us_436 joseph m grey pub accountant p c v commissioner supra pincite application of sec_3121 d on the basis of the foregoing analysis the application of sec_3121 is not precluded or limited here by considerations pertaining to sadanaga’s status as an s_corporation shareholder or under the common_law sec_3121 and sec_31_3121_d_-1 and sec_31 -l e employment_tax regs specify that corporate officers are to be classified as employees if they perform more than minor services and receive or are entitled to receive remuneration the overwhelming weight of the evidence here shows that sadanaga’s activities vis-a-vis petitioner met these criteria accordingly considerations with respect to burden_of_proof do not affect our analysis on this point sadanaga at all relevant times served as petitioner’s president and worked in all aspects of petitioner’s consulting surgical and day-to-day business operations sadanaga also obtained remuneration from petitioner as his needs arose -- - furthermore although sec_3121 may be inapplicable to the extent that an officer performs services in some other capacity i as an independent_contractor petitioner has offered no convincing evidence that sadanaga worked for or was engaged by petitioner in a capacity other than as an officer see joseph m grey pub accountant p c v commissioner t c pincite revrul_82_83 1982_1_cb_151 the only items referenced in the record that could suggest an independent_contractor relationship are the forms 1099-misc reporting nonemployee compensation these documents are uncorroborated by other evidence such as a service agreement and are entitled to little weight see joseph m grey pub accountant p c v commissioner supra pincite hence we conclude that sadanaga was an employee of petitioner for employment_tax purposes in accordance with sec_3121 we also reject without further discussion petitioner’s argument that sadanaga falls within an exception applicable only to paragraph of sec_3121 d b availability of sec_530 relief sec_530 affords relief from employment_tax liability notwithstanding an adverse classification where the following three requirements are satisfied the taxpayer has not treated the individual or any individual holding a substantially_similar position as an employee for any period the taxpayer has consistently treated the individual as not being an employee on all tax returns for periods after date and the taxpayer has a reasonable basis for not treating the individual as an employee sec_530 with respect to the case at bar respondent has conceded that petitioner meets the first and second of the above requirements rather the parties dispute whether petitioner had a reasonable basis for not treating sadanaga as an employee concerning the existence of a reasonable basis for purposes of sec_530 sec_530 sets forth three statutory safe havens reliance upon any of the circumstances enumerated in subparagraph a b or c of sec_530 is deemed sufficient to establish the requisite reasonable basis subparagraph a lists judicial precedent published rulings technical_advice with respect to the taxpayer ora letter_ruling to the taxpayer the amended petition alleges the petitioner did not treat its sole shareholder kenneth k sadanaga as an employee during any part of and and reasonable basis exists for not treating kenneth k sadanaga as an employee for the said periods based on a judicial precedent contained in the opinion of 307_f2d_289 5th cir cert_denied 371_us_940 and based on the rules concerning the employer and employee relationship as outlined by the common_law as mentioned in sec_530 of the revenue act of and sec_3121 on brief petitioner reiterates reliance on tex carbonate co v phinney 307_f2d_289 5th cir and cites as well to -- - 527_fsupp_515 b d wis in support of the premise that petitioner reasonably looked to common_law control concepts in classifying sadanaga for the reasons previously discussed tex carbonate co v phinney supra does not afford a reasonable basis for disregard of the explicit rules of sec_3121 and sec_31_3121_d_-1 and sec_31 -l e employment_tax regs in affirming our opinion in petitioner’s prior case the court_of_appeals ruled texas carbonate is not authoritative and it does not support the taxpayers’ argument thus any reliance upon texas carbonate was unreasonable particularly in light of the subsequent decisions in radtke joseph 895_f2d_1196 7th cir and spicer accounting 918_f2d_90 9th cir indeed spicer accounting rejected the taxpayer’s argument that it had a reasonable basis for not treating its officer as an employee under sec_530 and should not be held liable the court reasoned that mr spicer was for all practical purposes the central worker for the taxpayer and it declared that a corporation’s sole full-time worker must be treated as an employee f 2d pincite yeagle drywall co v commissioner fed appx pincite equally unavailing in this regard is automated typesetting inc v united_states supra the district_court in that case simply evaluated the employment relationship of the involved individuals both through a common_law analysis and through application of the provisions relating to corporate officers id pincite in deciding that the individuals qualified as employees under either rubric the court did not repudiate the statutory treatment of corporate executives id pincite see also joseph m grey pub accountant p c v commissioner supra pincite n moreover even if we were to assume arguendo that the cited cases could offer a reasonable basis for treating an officer as a nonemployee petitioner has failed to establish reliance on the claimed precedent as a factual matter to fall within the safe harbors of sec_530 the taxpayer must have relied on the alleged authority during the periods in issue at the time the employment decisions were being made the statute does not countenance ex post facto justification see 181_f3d_272 2d cir reversing and remanding because it was unclear from the record whether the taxpayer in fact relied on any specific industry practice in reaching its decision to treat its workers as non-employee tenants let alone whether such reliance was reasonable 205_fsupp2d_376 m d pa the taxpayer must show that it relied upon those grounds alleged as a reasonable basis and that the reliance was reasonable w va pers servs inc v united_states aftr 2d pincite8 ustc par big_number at big_number s d w va the plain - - meaning of sec_530 is that only evidence known to and relied upon by the taxpayer is relevant facts that are learned after the incorrect treatment of the employees are not facts that a taxpayer relied upon in making its original decision regarding how to treat its employees until a few months before trial petitioner did not purport to rely on sec_530 or the bases described therein and expressly disclaimed any dependence on the statute petitioner’s present claim of reliance is not credible the following colloquy transpired at trial between sadanaga and counsel for respondent q counsel for respondent are you aware of the case of texas carbonate versus phinney a sadanaga no q have you ever discussed that case with anyone a yes q who did you discuss the case with a it was just mentioned to me by my accountant q could you clarify just mentioned to you a he had mentioned it as incorporating it as evidence within this q and that was today that you discussed it a no q when did you discuss the case a two or three months ago --- - petitioner also called grey the accountant who advised petitioner and prepared petitioner’s tax returns grey was permitted to testify in this case despite petitioner’s failure to list him as a witness in its trial memorandum in the interest of a complete record and because respondent had been given sufficient warning and time to prepare grey explained that he had based his determination that sadanaga was not an employee on common_law concepts pertaining to the employment relationship particularly the element of control as regards sec_530 and judicial precedent grey testified that he was unaware of the tex carbonate co v phinney supra case until posttrial briefing during the fall of in 119_tc_121 hence given the testimony that neither petitioner’s sole shareholder and officer nor the accountant was familiar with the alleged judicial authority at the time petitioner decided to treat sadanaga as a nonemployee for and petitioner has failed to establish that it relied on judicial precedent or for that matter on any of the other sources specified in sec_530 a accordingly we conclude that subparagraph a does not aid petitioner here the same result obtains with respect to subparagraphs b and c the parties have stipulated that respondent did not audit petitioner for employment_tax purposes prior to the -- - examination underlying 117_tc_141 which as here challenged petitioner’s treatment of sadanaga as a nonemployee petitioner therefore cannot show reliance on a past audit under sec_530 b likewise petitioner has adduced no evidence of conventions in the consulting and surgical industry to establish longstanding industry practice under sec_530 the safe havens of sec_530 are therefore inapplicable on the record before us in seeking to establish a reasonable basis for sadanaga’s treatment apart from the safe havens petitioner quotes from the following definition of employment status in sec_530 the term ‘employment status’ means the status of an individual under the usual common_law rules applicable in determining the employer-employee relationship as an employee or as an independent_contractor or other individual who is not an employee petitioner apparently believes that the purported lack of common_law control makes its treatment of sadanaga reasonable within the meaning of sec_530 and that the above definition supports this view again however petitioner’s approach is contrary to controlling statutes and to the facts of this case as a matter of construction sec_530 defines employment status for purposes of certain provisions of sec_530 not germane here - - it does not purport to override or interpret the definition of employee in sec_3121 and related regulations hence sec_530 does not render it rational for petitioner to have ignored the statutory mandate regarding corporate officers and to have taken a position that was not otherwise supported by authority petitioner also does not claim in actuality to have relied on sec_530 in deciding not to treat sadanaga as an employee in or we conclude and have found as a fact that petitioner did not have a reasonable basis for failing to characterize sadanaga as an employee consequently relief from employment_tax liability is not available to petitioner under sec_530 lastly in connection with sec_530 petitioner raises a due process argument this issue has never been properly pled by petitioner rather petitioner mentioned due process in its motion for leave to file an amended petition did not allege a due process violation in the amended petition itself and argued the matter only on brief generally issues not properly raised prior to briefing will not be considered when to do so would prevent the opposing party from presenting evidence that might have been offered if the issue had been timely raised dibleo v commissioner 96_tc_858 affd 959_f2d_16 2d cir 71_tc_874 here however even if we were to treat the due -- - process issue as appropriately before us petitioner’s position is without merit sec_530 provides that the internal_revenue_service shall before or at the commencement of any audit inquiry relating to the employment status of one or more individuals who perform services for the taxpayer provide the taxpayer with a written notice of the provisions of this section small_business job protection act of sec a 110_stat_1766 on brief petitioner alleges that it learned of the existence of sec_530 only through the date notice_of_determination which postdated by a substantial margin the commencement in early of the underlying employment_tax audit petitioner then states the inaction of respondent in not providing petitioner with the reguired sec_530 notice constitutes a serious constitutional violation of due process rights guaranteed to petitioner and petitioner moves this court to allow it to recover its legal fees since the conduct against petitioner by respondent is so egregious and the basis of respondent’s reclassification of dr sadanaga as an employee of petitioner is totally unreasonable and without merit to the extent that petitioner’s due process contentions take the form of a claim for litigation or administrative costs and fees under sec_7430 such claim is premature rule a as pertinent here specifies that the appropriate time to seek recovery_of legal costs follows service of a written - - opinion see 104_tc_320 87_tc_533 furthermore even if petitioner’s allegations might be read as a plea encompassing other remedies petitioner has failed to show that its situation satisfies the prerequisites for relief under the due process clause as this court has noted even ina criminal context defendants are generally required to establish actual prejudice in order to obtain due process relief 79_tc_185 involving a claimed denial of due process on account of delay in issuance of the subject deficiency_notice the record in the instant case is devoid of evidence of such prejudice although petitioner was made aware of sec_530 at least prior to filing its petition with the court petitioner failed therein to raise the statute nonetheless petitioner was subsequently granted leave to file an amended petition specifically to place at issue its right to relief under sec_530 the matter of substantive relief under sec_530 not as previously noted of a due process violation based on sec_530 notice procedures therefore was properly before the court at trial and petitioner was afforded an opportunity to be heard accordingly no actual prejudice was sustained the above analysis is consistent with our recent jurisprudence on the notice provision contained in section - - a of the internal_revenue_service restructuring and reform act of publaw_105_206 112_stat_767 in 114_tc_489 affd 275_f3d_912 10th cir we considered this requirement that the commissioner include on each notice_of_deficiency the last date for filing a petition with the tax_court we held that where the commissioner failed to place such date on the notice but the taxpayers nonetheless received the notice and filed a petition in a timely manner the notice was valid id pincite in so holding we noted the absence of any delay prejudicial to the taxpayers’ ability to petition the court id pincite thus failure to comply with certain procedural notice requirements does not rise to the level of a denial of due process where as here the taxpayer’s opportunity to present its position is not prejudiced c conclusion we hold that sadanaga is an employee of petitioner pursuant to sec_3121 and that petitioner is not entitled to relief under sec_530 accordingly petitioner is liable for fica and futa taxes for the periods in issue as set forth in respondent’s notice_of_determination and relevant stipulations furthermore given this result compelled by the facts before us it is unnecessary to reach respondent’s additional contention that petitioner should in any event be precluded from challenging -- p7 - the employment_taxes at issue under the doctrine_of collateral_estoppel to reflect the foregoing decision will be entered for respondent and in accordance with stipulations as to amounts


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc fip bo4 - plr-113056-03 date july legend parent taxpayer state a ic administrator dear this is in response to your authorized representative’s submission dated date requesting rulings that certain extended service contracts issued by taxpayer are insurance contracts for federal_income_tax purposes and that taxpayer will qualify as an insurance_company taxable under sec_831 of the internal_revenue_code facts parent is a corporation organized under the laws of state a and is engaged in business as a franchised automobile dealership parent has elected pursuant to the check the box income_tax regulations to be treated as an association taxable as a c_corporation for federal_income_tax purposes parent files its federal_income_tax returns on a calendar_year basis and employs the cash receipts and disbursement method_of_accounting parent sells only one make of new automobiles but sells all makes and models of used automobiles as a franchised dealership parent also maintains a large parts department service_department and body shop in connection with the sale of new and used automobiles parent has offered its customers extended service contracts to date the extended service contracts offered by parent are written in the standard form of dealer obligor contracts in general parent’s customers purchase the extended service contracts for the purpose of supplementing the manufacturer’s warranty on the plr-113056-03 vehicle under the extended service contracts parent agrees to assume the costs of automobile breakdowns if the mechanical breakdowns are caused by the failure of a covered part in normal use and if that covered part is not already covered under a manufacturer’s warranty while parent would prefer that the extended service_contract holders take advantage of its service_department the contract holders do not need to have their vehicle serviced by parent in order to be reimbursed pursuant to the extended service_contract parent’s current program of extended service contracts is administered by administrator an unrelated corporation administrator administers warranty products related to auto vehicle service agreements recreational vehicle service agreements auto reinsurance programs self-funded programs after market products and manufacturer warranties the services performed by administrator include warranty administration services claims administration and adjusting functions administrator performs these services in exchange for an administrative fee paid_by parent as part of parent’s current program of extended service contracts parent has entered into an indemnification arrangement with ic a licensed property and liability insurer which is unrelated to parent the indemnification arrangement is designed to protect the contract holder from the insolvency or similar default of parent under the arrangement parent is required to deposit certain assets with ic equal to the required reserves and liabilities relating to the extended service contracts in turn ic agrees to hold these assets together with investment_income in a custodial_account on behalf of parent from the custodial_account ic makes withdrawals to cover parent’s share of premiums refunded as a result of cancellation of individual coverages parent’s share of claims with respect to the extended service contracts parent’s share of investment_income and underwriting profits in excess of required reserves and ic’s own investment and custodial expenses ic becomes liable to contract holders under parent’s extended service contracts only if parent defaults however ic’s liability to contract holders is limited to the assets deposited by parent in the custodial_account plus credited investment earnings less prior withdrawals from such account under the proposed transaction taxpayer will be formed as a separate corporation under the laws of state a with the same ownership as parent for the purpose of issuing extended service contracts taxpayer will be the sole obligor for all extended service contracts that it issues the extended service contracts issued by taxpayer will continued to be marketed by parent to purchasers of new and used cars and will provide contract holders with the same level of coverage with respect to the costs of mechanical breakdowns as parent’s current dealer obligor extended service contracts under the marketing arrangement parent will sell the extended service contracts at a price to be negotiated by parent and the vehicle customer after collecting the contract sales_price parent will remit a pre-determined amount to taxpayer to cover reserve requirements and administrative fees the balance of the contract sales_price will be retained by parent as compensation_for the sale of the plr-113056-03 extended service contracts as the obligor under the extended service contracts taxpayer will be obligated to the contract holder to pay for the cost of labor parts and necessary repairs caused by mechanical breakdown if the mechanical breakdowns are caused by the failure of a covered part in normal use and if the covered part is not already covered under the manufacturer’s warranty taxpayer will provide no automotive repair services to the holders of the extended service contracts while the terms of the extended service contracts provide incentives for the contract holder to return the vehicle to parent for covered repairs the contract holder can choose the service facility however if the contract holder chooses a facility other than parent the contract holder must have the problem diagnosed and approved by administrator prior to the start of any work under the laws of state a taxpayer will not be treated or recognized as an insurance_company however taxpayer may be required to obtain indemnification from a licensed insurance carrier for the risks that taxpayer has assumed under the extended service contracts if so required it is anticipated that taxpayer will enter into an indemnification arrangement with ic similar to that currently used in parent’s extended service_contract program accordingly taxpayer will deposit assets with ic equal to the required reserves for the extended service contracts and ic will maintain those assets together with investment earnings in a custodial_account for ic subject_to the withdrawal provisions described above taxpayer will be primarily liable to holders of the extended service contracts and ic will only become liable to the contract holders if taxpayer defaults however ic’s liability to contract holders is limited to the assets deposited by taxpayer in the custodial_account plus credited investment earnings less prior withdrawals from such account taxpayer anticipates accepting a large number of risks the number of risks is dependent on the number of extended service contracts sold accepting a large number of risks will enable taxpayer to use the law of large numbers so as to make its average loss statistically more predictable law and analysis sec_831 provides that taxes as computed in sec_11 will be imposed on the taxable_income of each insurance_company other than a life_insurance_company sec_1_801-3 of the income_tax regulations provides that for purposes of sec_831 and sec_832 the term_insurance companies means only those companies that qualify as insurance_companies under the definition of former sec_1_801-1 now sec_1_801-3 of the regulations sec_1_801-3 of the regulations provides that the term_insurance company means a company whose predominant business activity during the taxable plr-113056-03 year is the issuing of insurance or annuity_contracts or the reinsuring of risks underwriter by insurance_companies sec_1_801-3 further provides that though the company's name charter powers and subjection to state insurance laws are significant in determining the business that a company is authorized and intends to carry on it is the character of the business actually done in the taxable_year that determines whether the company is taxable as an insurance_company under the code see also 285_us_182 to the same effect as the regulation revrul_83_172 c b holding taxpayer was an insurance_company as defined in sec_1_801-3 notwithstanding that taxpayer was not recognized as an insurance_company for state tax purposes to qualify as an insurance_company a taxpayer must use its capital and efforts primarily in earning income from the issuance of contracts of insurance 344_fsupp_870 d s c aff'd per curiam 481_f2d_609 4th cir cert_denied 414_us_1143 to determine whether a taxpayer qualifies as an insurance_company all of the relevant facts will be considered including but not limited to the size and activities of its staff whether it engages in other trades_or_businesses and its sources of income see generally 285_us_182 indus life ins co pincite 300_fsupp_387 n d tex rev'd on other grounds 293_f2d_72 8th cir 56_tc_497 aff'd per curiam 469_f2d_697 9th cir nat'l capital ins co of the dist of columbia v commissioner 28_bta_1079 notice_2003_34 i r b insert page status of an offshore insurance_company investing in hedge funds neither the internal_revenue_code nor the regulations thereunder define the terms insurance or insurance contracts the accepted definition of insurance for federal_income_tax purposes relates back to 312_us_531 in which the supreme court stated that historically and commonly insurance involves risk-shifting and risk distributing case law has defined insurance as involve ing a contract whereby for adequate_consideration one party agrees to indemnify another against loss arising from certain specified contingencies or perils i t is contractual security against possible anticipated loss see epmeir v united_states 199_f2d_508 7th cir in addition the risk transferred must be risk of economic loss 572_f2d_1190 7th cir cert_denied 439_us_835 risk shifting occurs when a person facing the possibility of economic loss transfers some or all of the financial consequences of the potential loss to the insurer see revrul_92_93 1992_2_cb_45 while parent_corporation purchased a group-term_life_insurance policy from its wholly owned insurance subsidiary the arrangement was not held to be self-insurance because the economic risk of loss was not that of the parent modified on other grounds revrul_2001_31 2001_1_cb_1348 if the insured has shifted its risk to the insurer then a loss by the insured does not affect the plr-113056-03 insured because the loss is offset by the insurance payment see 811_f2d_1297 9th cir risk_distribution incorporates the statistical phenomenon known as the law of large numbers distributing risk allows the insurer to reduce the possibility that a single costly claim will exceed the amount taken in as a premium and set_aside for the payment of such a claim insuring many independent risks in return for numerous premiums serves to distribute risk by assuming numerous relatively small independent risks that occur randomly over time the insurer smooths out losses to match more closely its receipt of premiums see clougherty packing co f 2d pincite based on the information submitted we conclude that for federal_income_tax purposes the extended service contracts to be issued by taxpayer are insurance contracts not prepaid service contracts unlike prepaid service contracts the extended service contracts are aleatory contracts under which taxpayer for a fixed price is obligated to indemnify the contract holder for economic loss not covered by the manufacturer's warranty arising from the breakdown of and repair expense to a purchased automobile from damage to tire from road hazards the contracts are not prepaid service contracts because taxpayer does not provide any repair services further by accepting a large number of risks taxpayer will distribute the risk of loss under the contracts so as to make the average loss more predictable based on taxpayer's representations concerning its proposed business activities we find taxpayer's primary and predominant business activity will be the issuing of extended service contracts which we have just concluded are insurance contacts for federal tax purposes thus under sec_1_801-3 of the regulations taxpayer will qualify as an insurance_company for purposes of sec_831 of the code conclusions the extended service contracts to be issued by taxpayer are insurance contracts for federal_income_tax purposes taxpayer also will qualify as an insurance_company for purposes of sec_831 of the code caveat except as expressly provided herein no opinion is expresses or implied concerning the consequences of any aspect of any transaction or item discussed or referenced in this letter no ruling has been requested and no opinion is expressed concerning whether plr-113056-03 taxpayer's gross premiums written include the entire amount the purchasers of the extended warranty contracts pay to parent for their contracts no ruling has been requested and no opinion has been expressed concerning what amount if any paid_by the purchasers of the extended service contracts and retained by parent is deductible as a commission expense by taxpayer no ruling has been requested and no opinion has been expressed concerning the reinsurance arrangement it should be noted that certain reinsurance arrangement as described in notice_2002_70 2002_44_irb_765 are identified as listed transactions for purposes of sec_1_6011-4t b of the temporary income_tax regulations and sec_301_6111-2t b of the temporary procedure and administration regulations this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to taxpayer the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by the taxpayer and accompanied by a penalty of perjury statement executed by the appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely yours gary e geisler assistant to branch chief branch office of associate chief_counsel financial institutions and products cc


department of the treasury internal_revenue_service washington d c date cc el d gl-613441-98 uilc number release date internal_revenue_service national_office chief_counsel_advice memorandum for delaware-maryland district_counsel cc ser dem bal attn from subject chief branch disclosure litigation cc el d memorandum of understanding mou with maryland comptroller of the treasury this is in response to your request dated date this document is not to be cited as precedent we have reviewed a copy of the mou between the service and the maryland comptroller of the treasury comptroller to perform joint site visits of electronic return originators eros we assume the provisions of the mou are consistent with the basic and implementing agreements with maryland the mou should state the disclosure authority for this program is sec_6103 we suggest including the following provision in the mou the basic agreement previously entered into between the parties and or this memorandum constitute the written request for the disclosure of any federal tax returns and return_information to the state of maryland comptroller of the treasury pursuant to sec_6103 because the term joint site visit has no standard meaning it is important for the mou to explicitly indicate what the joint activity entails throughout the process for example the mou does not indicate if the service and comptroller will contact the eros together and visit them together or whether the service will conduct the visit and then provide the information to the comptroller the letter from the comptroller seems to indicate that the visits will be joint we would modify the language in paragraph to read as follows which is a modification of what we have suggested in other joint examination mous all records and documents maintained or collected by the service and disclosed to the comptroller under this agreement including information developed during the site visits and return preparer meetings add any other joint activities that will result in the collection of information such as joint notification letters joint information document requests joint interviews or resulting joint criminal investigations will be subject_to the confidentiality requirements of sec_6103 except that which the state separately develops and is clearly maintained as state tax information when a disclosure is made to the comptroller under the provisions of this mou a form 5466b multiple record of disclosure will be prepared as required the forms will be forwarded to the district disclosure_officer no less frequently than monthly the parties will have access to all information and documentation we note that because of the lack of detail we are not certain what information will be considered that which the state develops and is clearly maintained as state tax information we have assumed that it is information collected solely by state personnel not jointly and have added the modifier separately to make this clear paragraph indicates site visits will not be conducted solely to secure records for state tax issues we would delete solely irs personnel collect information for the purpose of administering federal not state tax laws in addition in paragraph we would change shared with the state to disclosed to the state paragraph indicates a courtesy notification will be given to the other agency prior to the use of information by an agency developed by the team in any criminal action we note that the basic agreement requires notification by the state prior to any disclosure in a judicial tax proceeding which would include disclosure in the state criminal tax proceeding if you have any further questions please call


of f i c e of c h i ef c ou n sel department of the treasury i n t e r n al r e v e n u e s e r v i c e w ashington d c march number info release date conex-111453-09 uil the honorable anthony d weiner u s house of representatives washington d c dear mr weiner thank you for your letter of date about guidance on the tax consequences to victims of the investment fraud mr bernard l madoff perpetrated on date we issued guidance revrul_2009_9 and revproc_2009_20 on the tax treatment of losses from so-called ponzi schemes similar to that mr madoff operated i am enclosing copies for your information revrul_2009_9 explains the income_tax law that applies to an investor who loses money in a fraudulent investment arrangement it provides that an investor who was the victim of a fraudulent investment arrangement is entitled to a theft_loss deduction that is not limited by the rules that apply to capital losses investment theft losses are not subject_to limitations that apply to personal casualty and theft losses the theft_loss is deductible in the year the fraud is discovered except to the extent the investor had a reasonable_prospect_of_recovery the amount of the theft_loss includes not only the investor's unrecovered investment but also amounts reported as income from the investment in prior years and reinvested in the fraudulent investment arrangement a theft_loss deduction that creates a net_operating_loss for the investor can be carried back and forward according to the timeframes prescribed by law to generate a refund of taxes paid in other taxable years conex-111453-09 to claim a theft_loss deduction in any taxable_year an investor must prove that the loss was due to theft and that no reasonable prospect exists of recovering the investment investors often cannot make highly factual determinations with certainty in the year the loss is discovered for this reason we published revproc_2009_20 to provide a simplified_method for investors to compute and report their losses from fraudulent investment schemes this revenue_procedure generally allows an investor who was a victim of mr madoff’s fraud to claim a theft_loss in the amount the investor may deduct is up to percent of the loss less the amount of reimbursement he or she expects to receive as an advance for customer claims from the securities investor protection corporation sipc or from private insurance or other contractual arrangements that guarantee the investor against loss i hope this information is helpful i am sending a similar letter to your colleague please call me at -------------------- if i can further assist you sincerely george j blaine associate chief_counsel income_tax and accounting enclosures


t c memo united_states tax_court timothy nicholls petitioner v commissioner of internal revenue respondent docket no filed date philip a putman for petitioner charles j graves for respondent memorandum opinion halpern judge by separate notices of deficiency respondent determined deficiencies in and additions to petitioner’s and federal income taxes as follows year1 deficiency sec_6651 sec_6654 additions to tax dollar_figure big_number dollar_figure dollar_figure dollar_figure dollar_figure in an attachment to the notice_of_deficiency for respondent notes since this report does not reflect your prepayment_credits of dollar_figure you may not owe the total amount shown on the enclosed report respondent has also moved the court to impose a penalty on petitioner on the grounds that petitioner’s position in this case is frivolous and has been maintained primarily for delay the deficiencies the additions to tax and the motion remain in issue unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure background for the principal adjustments giving rise to the deficiency result from respondent’s inclusion in petitioner’s gross_income of dollar_figure of capital_gain dollar_figure of wages received from oxnard building materials dollar_figure and dollar_figure of nonemployee compensation received from holoworld inc and flannery inc respectively dollar_figure of interest received from washington mutual bank fa dollar_figure of dividends received from assorted payers and the addition of self-employment_tax of dollar_figure for the principal adjustments giving rise to the deficiency result from respondent’s inclusion in petitioner’s gross_income of dollar_figure of capital_gain and dollar_figure of interest received from washington mutual bank fa for both years respondent describes the sec_6651 addition_to_tax as being determined on account of petitioner’s delinquency in filing his tax_return and the sec_6654 addition_to_tax as being determined on account of petitioner’s failure to pay sufficient estimated_tax petitioner filed a petition in which he assigned error to respondent’s determinations of deficiencies of dollar_figure and dollar_figure for and respectively the deficiencies claiming i do not owe that to the irs the irs numbers are phony the petition does not set forth any facts on which petitioner bases his assignment of error because of irregularities in the petition and because he had failed to pay the required filing fee petitioner was ordered to file a proper petition and pay the required fee subsequently petitioner paid the fee and filed an amended petition in which he set forth his prayer for relief as follows the court decide that the irs numbers are wrong because they are i don’t know where their numbers come from like the petition the amended petition does not set forth any facts on which petitioner bases his assignment of error in neither the petition nor the amended petition without distinction the petition does petitioner assign error to respondent’s determinations of the additions to tax for and the additions to tax other than any assignment that can be implied from his objections to respondent’s numbers petitioner did not appear in person for the trial of this case but he was represented by counsel who neither called any witnesses nor otherwise offered admissible evidence on petitioner’s behalf instead petitioner’s counsel filed petitioner’s memorandum on burden_of_proof setting forth petitioner’s argument that since this case involves unreported income respondent bears the burden of proving receipt of that income beyond that petitioner’s counsel did object to exhibits offered by respondent which objections for the most part were overruled at the conclusion of the trial the court discussed with petitioner’s counsel the issues that needed to be decided in this case in response to the court’s question as to whether it would be fair to say that if the court were to conclude that respondent had shown sources for the alleged items of unreported income the court should sustain the determinations of deficiencies and additions to tax petitioner’s counsel agreed that would be a logical conclusion the court reserved its ruling on petitioner’s objections to two exhibits offered by respondent exs 13-r and 19-r and ordered petitioner to file a memorandum in support of his objections within days of the end of the trial petitioner failed to file the ordered memorandum and the court interprets that failure as petitioner’s concession that his objections are without merit we shall issue an appropriate order discussion i deficiencies in tax while petitioner has assigned error to respondent’s determinations of the deficiencies he does not aver any facts supporting his assignment nor does he argue that respondent made any mistake of law in determining the deficiencies petitioner has ignored the merits of the case in favor of a defense based on his supposition that it is respondent’s burden to prove that petitioner had unreported income petitioner is wrong in that supposition in pertinent part rule a provides that the burden_of_proof shall be upon the petitioner except as otherwise provided by statute or determined by the court sec_7491 places the burden_of_proof on the commissioner with respect to any factual issue relevant to determining a taxpayer’s liability for the income_tax but the provision is of no application unless the taxpayer first introduces credible_evidence with respect to the issue since petitioner has introduced no evidence sec_7491 is of no application to this case petitioner retains the burden_of_proof under rule a nevertheless the venue for appeal of this case is uncertain the petition shows petitioner’s mailing address as being in albuquerque new mexico petitioner would not however stipulate that he resided there agreeing only that at the time he filed the petition he was located or could be found there the address to which the notices of deficiency are addressed is in california which may be the state of petitioner’s legal residence the place of petitioner’s legal residence is important for determining the venue for appeal of a decision of the tax_court sec_7482 california is within the geographical boundaries of the u s court_of_appeals for the ninth circuit and 596_f2d_358 9th cir revg 67_tc_672 begins a line of cases of the court_of_appeals for the ninth circuit to which we defer in accordance with the doctrine_of 54_tc_742 affd 445_f2d_985 10th cir the general_rule established by that line of cases is that for the government to prevail in a case involving unreported income there must be some evidentiary foundation linking the taxpayer to the alleged income-producing activity see weimerskirch v commissioner supra pincite apparently however unless the although 596_f2d_358 9th cir revg 67_tc_672 dealt specifically with illegal unreported income it is now well established that the court_of_appeals for the ninth circuit applies the weimerskirch rule in all cases of unreported income where the taxpayer challenges the commissioner’s determination on the merits e g 680_f2d_1268 9th cir in that case involving unreported income from an income-generating auto repair business owned by the taxpayer the court stated we note however that the commissioner’s assertion of deficiencies are presumptively correct once some substantive evidence is introduced demonstrating that the taxpayer received unreported income 596_f2d_358 9th cir 92_tc_661 the ninth circuit requires that respondent come continued taxpayer challenges the commissioner’s determination_of_a_deficiency in tax on the merits the commissioner need not provide any such foundation see 847_f2d_1379 9th cir sustaining order of tax_court dismissing taxpayers’ case for failure to prosecute while we believe that petitioner has forgone a challenge to the merits of respondent’s determinations of deficiencies see id no challenge to merits of the commissioner’s deficiency determination where taxpayer did not argue merits did not seek information about merits and relied solely on motion to dismiss for lack of jurisdiction we need not decide that issue because in apparent anticipation of the application of the weimerskirch line of cases respondent has provided a satisfactory evidentiary foundation linking petitioner to both employment-type and investment-type income-producing activities during the years in question that foundation consists of certified internal_revenue_service irs records payer-provided information returns such as irs forms 1099-div and w-2 and bank records including continued forward with substantive evidence establishing a ‘minimal evidentiary foundation’ in all cases involving the receipt of unreported income to preserve the statutory notice's presumption of correctness although appeal of this case may lie to a court_of_appeals other than the court_of_appeals for the ninth circuit weimerskirch imposes as high a hurdle as respondent may face though respondent has provided verification of some of the items of income reported in those information returns continued copies of paychecks endorsed and deposited by petitioner as well as declarations under penalties of perjury and supporting business records from petitioner’s previous employers and other payers respondent has met any burden that he has under the weimerskirch line of cases and we are left with petitioner’s having failed to substantiate his assignment of error which in the usual case would allow us to decide the issue in respondent’s favor see eg 123_tc_213 that does not conclude the matter of the deficiencies however since in his posttrial memorandum respondent states that documents subpoenaed for purposes of the trial show that petitioner wrote checks in totaling dollar_figure that would give him bases to be applied against amounts realized in on the liquidation of certain investment accounts respondent concedes that as a consequence of that application of basis respondent must reduce his adjustment on account of capital_gain income for by an equal amount respondent asks us to sustain his determination_of_a_deficiency for nevertheless on the continued respondent had no obligation to do so since petitioner has asserted no reasonable dispute with respect to those items nor has petitioner fully cooperated with respondent see sec_6201 describing the secretary’s burden to produce reasonable and probative information in addition to the information reported in the information returns when the taxpayer asserts a reasonable dispute with that information and has cooperated with the secretary ground that copies of petitioner’s bank records obtained by subpoena from petitioner’s bank bank of america na show deposits in of dollar_figure and dollar_figure from icon trading inc and with respect to petitioner’s golf instruction business count yogi co respectively respondent did not take those deposits into account in his adjustments to petitioner’s income for respondent correctly argues that nevertheless bank_deposits are prima facie evidence of income 87_tc_74 see also 281_f2d_100 ndollar_figure 9th cir affg tcmemo_1958_94 respondent asks for no increased deficiency for but only that we sustain the deficiency of dollar_figure that he determined petitioner made no objection to the bank of america na records on the grounds of relevance when they were proffered by respondent and we interpret that failure as implying petitioner’s consent to try the issue of his unreported income from bank_deposits described in those records see rule b we find that for petitioner failed to report items of income of dollar_figure and dollar_figure as evidenced by respondent’s exhibits showing bank_deposits in those amounts respondent did not err in determining the deficiencies ii additions to tax a introduction 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 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 percent 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 percent for returns more than months delinquent sec_6654 provides for an addition_to_tax in the event of an underpayment of a required_installment of individual estimated_tax sec_6654 and b as relevant to this case each required_installment of estimated_tax is equal to percent of the required_annual_payment which in turn is equal to the lesser_of percent of the tax shown on the individual's return for that year or if no return is filed percent of his or her tax for such year or if the individual filed a return for the immediately preceding_taxable_year percent of the tax shown on that return sec_6654 and b i and ii the due dates of the required installments for a calendar taxable_year are april june and september of that year and january of the following year sec_6654 b burden of production in pertinent part sec_7491 provides t he secretary shall have the burden of production in any court_proceeding with respect to the liability of any individual for any addition_to_tax the commissioner’s burden of production under sec_7491 is to produce evidence that it is appropriate to impose the relevant addition_to_tax 118_tc_358 unless the taxpayer puts the addition_to_tax into play however by assigning error to the commissioner’s determination of an addition_to_tax the commissioner need not produce evidence that the addition_to_tax is appropriate since the taxpayer is deemed to have conceded the addition_to_tax id we can discern from the petition no assignment of error with respect to the additions to tax other than with respect to their calculation should we determine deficiencies different from those respondent determined moreover at the conclusion of the trial petitioner’s counsel as much as conceded that if the court were to conclude that respondent had shown sources for the alleged items of unreported income the court should sustain the determinations of deficiencies and additions to tax we could therefore without further discussion sustain the additions to tax respondent however has introduced evidence sufficient to show that it is appropriate to impose both the sec_6651 and sec_6654 additions to tax we shall sustain the additions to tax on the basis of the evidence in the record c discussion sec_6651 respondent’s evidence shows that petitioner did not file a federal_income_tax return for either or and we so find respondent’s evidence also shows that for each of those years petitioner had sufficient income above the exemption_amount that he was required to file a return and we so find petitioner’s only defense to the sec_6651 additions to tax is that he was not required to file returns because his income did not exceed the exemption amounts we have found that for each year petitioner’s income did exceed the year’s exemption_amount nor has petitioner introduced any evidence to show that his mistaken beliefs were reasonable and free from willful neglect petitioner is liable for the sec_6651 additions to tax as computed by respondent sec_6654 respondent’s evidence shows the following which we find accordingly petitioner filed a federal_income_tax return for showing a liability of dollar_figure he made no return for his tax_liability for is dollar_figure he made two payments of estimated_tax for one on date and the other on date each in the amount of dollar_figure dollar_figure was withheld from his wages in since percent of petitioner’s tax_liability for dollar_figure is greater than his reported tax_liability for dollar_figure which is dollar_figure greater than the sum sec_6012 requires every individual having gross_income exceeding a certain minimum amount to file an income_tax return petitioner’s gross_income exceeded the exemption amounts of dollar_figure and dollar_figure for and respectively see sec_151 revproc_97_57 sec_3 1997_2_cb_584 revproc_98_61 sec_3 1998_2_cb_811 of his estimated_tax payments and withholding for dollar_figure respondent has shown that it is appropriate to determine a sec_6654 addition_to_tax with respect to petitioner for and we so find with respect to respondent’s evidence also shows the following which we find accordingly petitioner filed no return for his tax_liability for is dollar_figure he made no payments of estimated_tax for he had no withholdings in where as here no return is filed for the immediately preceding_taxable_year the estimated_tax payment is computed a sec_90 percent of the taxpayer’s tax for the year at issue since percent of petitioner’s tax_liability for is dollar_figure and petitioner had no estimated_tax payments or withholding for respondent has shown that it is appropriate to determine a sec_6654 addition_to_tax with respect to petitioner for and we so find iii penalty sec_6673 provides that the court may impose a penalty not in excess of dollar_figure where among other things a we question whether in computing petitioner’s sec_6654 addition_to_tax for respondent determined that addition_to_tax on the proper basis from the notice_of_deficiency it appears to the court that respondent ignored the computation for the previous year’s tax_liability which was the lesser_of the two computations however petitioner has not challenged that computation nor has respondent justified it we assume that in the rule computation the parties will compute the correct amount of the addition_to_tax taxpayer takes positions that are frivolous or groundless or has instituted or maintained proceedings primarily for delay a taxpayer’s position is frivolous if it is contrary to established law and unsupported by a reasoned colorable argument for change in the law 119_tc_285 the inquiry is objective if a person should have known that his position is groundless a court may and should impose sanctions id furthermore a taxpayer’s failure to provide the commissioner with requested information and his failure to offer evidence at trial pertaining to the substantive issues raised in the notice_of_deficiency are evidence that a suit in this court was instituted primarily for delay 95_tc_624 affd without published opinion 956_f2d_1168 9th cir respondent asks that we impose a penalty on petitioner pursuant to sec_6673 respondent argues that by his conduct it is evident that petitioner instituted and maintained these proceedings for delay as well as to advance frivolous arguments respondent asks us to consider the following petitioner never substantively addressed the pertinent issues in this case which relate to the correct determination of tax and various additions to tax for the years in issue in contravention of the court’s rules on assigning errors with specificity petitioner’s petition and amended petition averred no particular facts with respect to respondent’s numerous adjustments petitioner was ordered to show cause why the proposed facts in the stipulation should not be admitted as true whereupon petitioner made directly contradictory statements under oath petitioner asserted a jurisdictional challenge to the notices of deficiency premised on the shopworn argument that the notices were void because they were not issued by an authorized individual with either statutory or delegated authority to do so that argument is without merit see 118_tc_162 and we denied that motion petitioner’s intention to institute and maintain this proceeding for delay is also indicated by his failure_to_file a pretrial memorandum as required by the court’s pretrial order moreover at the trial the court ordered petitioner to file a memorandum in support of his objections to two of respondent’s exhibits but petitioner failed to do so in sum petitioner failed to file federal_income_tax returns for the years at issue and offered no credible justification for that failure he instituted a proceeding in this court without assigning any specific errors to respondent’s determinations he failed to cooperate with respondent in preparing this case for trial and essentially failed to produce any evidence whatsoever to justify his blanket rejection of respondent’s deficiency determinations we interpret those actions as evidence of his intent to delay this proceeding he has also advanced frivolous arguments he has caused both the court and respondent to expend valuable time and resources to respond to his groundless filings and other actions and to conduct a trial at which he failed to present any evidence whatsoever to prove that respondent’s deficiency determinations were in error we will grant respondent’s motion for sanctions and we will require petitioner to pay a penalty to the united_states of dollar_figure iv conclusion to reflect the foregoing an appropriate order will be issued and decision will be entered under rule


internal_revenue_service p o box cincinnati oh department of the treasury ‘release number sole ia legend b c d x employer_identification_number contact person - id number contact telephone number uil dear’ we have considered your request for advance approval of your employer-related grant- making program under sec_4945 of the internal_revenue_code dated date our records indicate that you were recognized as exempt from federal_income_tax under sec_501 of the code and classified as a private_foundation as defined in sec_509 your letter indicates that you will operate a grant-making program called b is to provide scholarships to a limited number of children of the the purpose of b employees of c the amount of each grant will be x dollars half of the grant will be paid for the fall semester and the remainder will be paid at the beginning of the spring semester the spring semester scholarship will be forfeited if the student fails to complete the fall semester or maintain a minimum of credits or the equivalent the grants are for authorized college expenses which are defined as tuition fees and or course-related expenses such as books supplies and equipment at accredited post- secondary education institutions in order to be eligible to be selected for b a candidate must be the child of active employees of c who is entering their senior year in high school or currently enrolled as a freshman sophomore or junior at a 4-year college university a b reasonably expect to attend or continue to attend an accredited college or university in the following academic year meet the minimum standard for admission to or continued enrollment in such an institution c d must maintain a minimum course load of credits and e must have a cumulative grade point average of dollar_figure or better child or children is defined as biological children legally adopted children stepchildren living in an employee's household children born out of wedlock if a valid state affidavit of paternity is signed with respect to such child and grandchildren of employees who are the legal guardians of said grandchildren the term active means employees at the time the grant application is signed and submitted as well as the time the award is offered family members of disqualified persons of the foundation substantial contributors to the foundation directors and officers of the foundation or individuals who together with their family members own or more of a corporation that is a substantial_contributor to the foundation are not eligible nor are children of selection committee members children of officers of c are not eligible for b an external selection committee composed of five administrators from d will choose the recipients the committee will be advised by a member of the foundations board who will affirm that the recipients meet the requirements of b but will have no influence on the committee’s selections employees may be informed of the availability of the scholarship grants through a company newsletter for the employees of c there will also be a web page added to c’s web site containing information regarding the program c will not use b to recruit employees or induce employees to continue their employment or other wise use the program to influence the action of c employees the courses of study for which b is available will not be limited to those that would be of particular benefit to c the award will not terminate if the recipient's parent terminates employment with c before the spring semester begins b is not used as an employee recruiting tool or to induce employees to continue their employment or otherwise follow a course of action sought by c eligible applicants will apply for b by completing an application that requests information regarding academic performance performance on filed of study college entrance exams extracurricular activity community service work experience and recommendations applicants from all employment locations will be placed in a single pool the number of scholarships awarded each year will be the lesser_of or of the number of employees’ children who i were eligible ii applied and iii were considered by the selection committee b is not renewable grantees receiving b may apply for subsequent scholarships in succeeding years so long as they continue to be enrolled as students in good standing at an accredited college or university and continue to meet all of the other eligibility requirements of the program any subsequent award will not be considered a renewal of the initial or any prior award a prior award will in no way guarantee recipients of successive year awards the foundation will disburse b by making them payable to the educational_institution attended to be attended by the recipient and the scholarship recipient the institution will be instructed to apply the grant funds only for enrolled students in good standing if the foundation learns that the terms of b were violated the foundation will take all reasonable steps to recover diverted funds and will withhold any subsequent grant awards until it obtains assurances that further diversions will not occur and that grantees will take extraordinary precautions to prevent future diversions from occurring you have agreed to maintain records that include the following e e e information used to evaluate the qualifications of potential grantees identification of the grantees including any relationship of any grantee to the private_foundation the amount and purpose of each grant and all grantee reports and other follow-up data obtained in administering the private foundation's grant program sec_4945 and b of the code impose certain excise_taxes on taxable_expenditures made by a private_foundation sec_4945 of the code provides that the term taxable_expenditure means any amount_paid or incurred by a private_foundation as a grant to an individual for travel study or other similar purposes by such individual unless such grant satisfies the requirements of subsection g sec_4945 of the code provides that sec_4945 shall not apply to individual grants awarded on an objective and nondiscriminatory basis pursuant to a procedure approved in advance if it is demonstrated that the grant constitutes a scholarship or fellowship_grant which is subject_to the provisions of sec_117 and is to be used for study at an educational_organization described in sec_170 the grant constitutes a prize or award which is subject_to the provisions of sec_74 if the recipient of such prize or award is selected from the general_public or the purpose of the grant is to achieve a specific objective produce a report or similar product or improve or enhance a literary artistic musical scientific teaching or other similar capacity skill or talent of the grantee sec_53_4945-4 of the regulations provides that to secure approval a private_foundation must demonstrate that i its grant procedure includes an objective and nondiscriminatory selection process ii such procedure is reasonably calculated to result in performance by grantees of the activities that the grants are intended to finance and iii the foundation plans to obtain reports to determine whether the grantees performed activities that the grants are intended to finance revproc_76_47 1976_2_cb_670 sets forth guidelines to be used in determining whether a grant made by a private_foundation under an employer-related program to a child of an employee of the particular employer to which the program relates is a scholarship grant that meets the provisions of sec_117 of the code as that section read before the tax_reform_act_of_1986 if a private foundation's program satisfies the seven conditions set forth in sections dollar_figure through dollar_figure of revproc_76_47 and meets the percentage_test described in sec_4 the service will assume the grants meet the provisions of sec_117 as that section read before the tax_reform_act_of_1986 you have agreed that procedures in awarding grants under your program will be in compliance with sections dollar_figure through dollar_figure of revproc_76_47 without regard to the amendments to sec_117 made by the tax_reform_act_of_1986 in particular the selection of individual grant recipients will be made by a selection committee the members of which are totally independent and separate from the private_foundation the foundation's creator and the relevant employer the grants will not be used as a means of inducement to recruit employees nor will a grant be terminated if the employee leaves the employer the recipient will not be restricted in a course of study that would be of particular benefit to the relevant employer or to the foundation section dollar_figure of rev_proc provides a percentage_test guideline it states in the case of a program that awards grants to children of employees of a particular employee the program meets the percentage_test if either of the following tests are met the number of grants awarded under that program in any year to such children do not exceed percent of the number of employees’ children who were eligible were applicants for such grants and were considered by the selection committee in selecting the recipients of grants in that year or the number of grants awarded under the program in any year to such children does not exceed percent of the number of employees’ children who can be shown to be eligible for grants whether or not they submitted an application in that year you have agreed that your program will meet the requirements of either the percent or percent percentage_test of section dollar_figure applicable to a program that awards grants to children of employees of a particular employer records should be maintained to show that you meet the applicable_percentage test of section dollar_figure this determination is issued with the understanding that in applying the percent test applicable to employees’ children set forth in revproc_76_47 you will include as eligible only those children who meet the eligibility standards described in revproc_85_51 1985_2_cb_717 this determination will remain in effect as long as the procedures in awarding grants under your program remain in compliance with sections dollar_figure through dollar_figure of rev_proc without regard to the amendments to sec_117 made by the tax_reform_act_of_1986 if you enter into any other program covering the same individuals the percentage_test of revproc_76_47 must be met in the aggregate based on the information submitted and assuming your award programs will be conducted as proposed your procedures for granting the awards comply with the requirements contained in sec_4945 of the code and that awards granted in accordance with such procedures will not constitute taxable_expenditures within the meaning of sec_4945 in addition we have determined that awards made under your procedures are excludable from the gross_income of the recipients subject_to the limitations provided by sec_117 of the code this determination is conditioned on the understanding that there will be no material_change in the facts upon which it is based it is further conditioned on the premise that no grants will be awarded to foundation managers or members of the selection committee or for a purpose that is inconsistent with the purpose described in sec_170 of the code the approval of your employer-related grant-making program is a one-time approval this determination only covers the grant programs described above thus approval shall apply to subsequent grant programs only as long as the standards and procedures under which they are conducted do not differ materially from those described in your request any funds you distribute to individuals must be made on a true charitable basis in furtherance of the purposes for which you are organized therefore you should maintain adequate_records and histories so that any or all grant distributions can be substantiated upon request by the internal_revenue_service this determination is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited as a precedent you must report any future changes in your grant making procedures please keep a copy of this letter in your permanent records we have sent a copy of this letter to your representative as indicated in your power_of_attorney if you have any questions please contact the person whose name and telephone number are shown above sincerely yours lois g lerner director exempt_organizations _ enclosure