t c memo united_states tax_court herold marketing associates inc petitioner v commissioner of internal revenue respondent docket no filed date held compensation paid_by p to its sole shareholder ceo was reasonable daniel j boivin frank r berman and jeffrey a olson for petitioner jack m forsberg for respondent memorandum findings_of_fact and opinion laro judge herold marketing associates inc petitioned the court to redetermine and income_tax deficiencies of dollar_figure and dollar_figure respectively the deficiencies stem from respondent's determination that dollar_figure of the dollar_figure million in compensation that petitioner paid to its sole shareholder chief_executive_officer could not be deducted under sec_162 we must decide whether petitioner may deduct the full compensation of dollar_figure million we hold it may unless otherwise stated section references are to the internal_revenue_code in effect for the years in issue rule references are to the tax_court rules_of_practice and procedure most dollar amounts are rounded to the nearest dollar findings_of_fact some of the facts have been stipulated and are so found the stipulations of fact and the exhibits submitted therewith are incorporated herein by this reference petitioner is an accrual_method calendar_year c_corporation the principal office of which was in eden prairie minnesota when it petitioned the court stephan herold herold has been petitioner's president and chief_executive_officer since it was founded he has been petitioner's sole director since date petitioner's business history petitioner was originally a division of stan clothier co scc which was primarily a manufacturer's representative for industrial components the division that was to become petitioner was a manufacturer's representative for consumer electronics components when it was first spun off in petitioner was named clothier--herold co stan clothier owned percent of petitioner's stock and herold owned the rest in herold became the sole shareholder and he changed the company's name to herold marketing associates petitioner was very successful in its early years herold recognized as early as the mid-1970's that personal computers would become an extremely successful technology later he identified apple computer apple as a company that was destined for success in this fledgling industry by cultivating relationships with key personnel at apple herold overcame that company's initial resistance to marketing through sales representatives in its first year of business petitioner became apple's first sales representative with a territory that covered the dakotas minnesota and western wisconsin petitioner developed its territory for apple from annual sales of dollar_figure million in to dollar_figure million in in apple stopped using sales representatives and terminated its relationship with petitioner just before the relationship ended apple accounted for percent of petitioner's sales volume herold changed the focus of the company by identifying three of apple's four largest accounts and concentrating on selling them other electronics products petitioner ran into difficulties in when all three of these key accounts became insolvent herold then developed a three-pronged strategy focusing on one major product line in each of three categories products that were currently well recognized and in demand products that were just beginning to become available and for which herold foresaw a strong demand and products that were just beginning to be conceptualized that herold felt would gain strong market acceptance by implementing this strategy petitioner which had seen its revenue drop to less than dollar_figure million in achieved sales of over dollar_figure million in and nearly dollar_figure million in around herold changed the company's fundamental mode of doing business by ceasing to operate as a sales representative and concentrating on being a distributor herold recognized that this strategy involved greater risks since petitioner would have to finance customer receivables and carry inventories of the products it was selling he decided these risks would be outweighed by certain benefits in particular herold personally would be able to minimize unproductive time he had been spending at sales meetings for each of the manufacturers whose product lines petitioner had been representing and petitioner would gain greater leeway to develop its own sales and business strategies another significant event in was petitioner's loss of its largest customer gateway computers which had accounted for percent of petitioner's sales this occurred at a time when the computer industry in general was in a minirecession despite this setback and amid adverse conditions petitioner achieved sales growth of more than dollar_figure million in a 50-percent increase over and further growth of nearly dollar_figure million in a 25-percent increase over at the time of trial a potential buyer had offered dollar_figure million for herold's stake in petitioner and was engaged in due diligence at that point herold had not accepted the offer petitioner's owner herold was born and raised in iowa he joined the u s navy upon graduating from high school and received training in various categories of complex electronic communications and navigation equipment after his discharge from the navy herold held a series of jobs with electronics companies such as control data and univac in the course of these jobs he developed computer programming and diagnostic skills in late herold began working at dayton-hudson and evolved a role in which he acted as an internal management consultant interviewing company executives reviewing operations and recommending improvements for various business units of dayton-hudson around the country while working full time for dayton-hudson herold attended the university of minnesota and earned a bachelor's degree in years he later began but did not complete a master's degree in business administration at that point a number of graduates of nationally recognized m b a programs were herold's subordinates at dayton-hudson and observing them herold was not convinced that additional academic studies would be worth the investment of his time and energy herold left dayton-hudson for a position as an account executive at scc in this was his first sales-related position he was hired to help scc diversify into consumer electronics within years scc had established a separate consumer electronics division with herold as vice president this was the division that was eventually spun off with herold first as co-owner and eventually sole owner and that is the petitioner in this action herold is a workaholic sometimes working hours a week at one point his workaholism contributed to a marital breakup he is also a micromanager involved in all aspects of the company's operations for example he personally interviews every new employee and determines and distributes each employee's annual bonus he is responsible for every business plan at the company he personally reviews every major sale does the sales forecasting and sales reporting and has designed petitioner's sales report the success of petitioner's business derives almost entirely from its relationships with manufacturers and customers herold is deeply involved in each of these essential relationships petitioner occupies a unigue niche in the industry in terms of size most of its competitors are either much smaller or much larger in terms of sales volume the smaller firms tend to have annual sales ranging from dollar_figure to dollar_figure million and sales of the industry giants are in the billions of dollars petitioner's sales were dollar_figure to dollar_figure million during the subject years to help petitioner thrive in this environment herold devised a strategy of identifying and aggressively pursuing large customers that would not normally do business with a supplier as small as petitioner as a result petitioner sells to of the top accounts in the nation for its industry during petitioner's early days herold undertook major financial risks to provide funding for petitioner when petitioner hit a slump in herold withdrew funds from a gualified retirement_plan paying income_tax on the withdrawal as well as a 10-percent penalty to obtain funds needed to keep petitioner going as part of the three-pronged strategy described above herold aggressively sought a relationship with houston instruments seeking to market its computer aided design cad product line to cement that relationship and meet houston instrument's concerns as to petitioner's financial stability herold mortgaged his house to secure a dollar_figure letter_of_credit herold has also lent substantial personal funds to petitioner and personally guaranteed credit lines of dollar_figure to dollar_figure million with sony corp and mitsubishi corp these guaranties were still in effect during the subject years by contrast with his willingness to place his personal assets at risk herold maintains a conservative financial strategy with respect to petitioner he insists that petitioner maintain substantial cash reserves refusing his financial adviser's suggestions that petitioner play the float this builds petitioner's credibility with suppliers and customers and enables it to take full advantage of vendors' early payment discounts by following this strategy petitioner has incurred interest costs of dollar_figure to maintain its cash balances in some years while generating savings of as much as dollar_figure through early payment discounts petitioner's operations financial results and dividend history for and petitioner's gross_receipts net of returns and allowances gross_income book net_income before deducting herold's compensation taxable_income before deducting herold's compensation herold's compensation and herold's compensation percentages rounded to the nearest dollar were taxable gross_receipts gross book taxable herold's year net of returns income net_income income compensation dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number herold's compensation percentages herold's compensation divided by gross taxable receipts gross net_income taxable_year net_income per books net_income dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure ‘we use as the base_year for comparison purposes that was the year immediately after herold became petitioner's sole shareholder at that point petitioner had lost its sales representation arrangement with apple was facing the impending insolvency of the three major apple accounts it had been cultivating and was starting over again essentially from scratch petitioner's retained earnings and the percentage by which those retained earnings increased over the previous year's amounts for and were year retained barnings percent increase dollar_figure big_number big_number as of the end of these years petitioner reported the following total assets liabilities and equity year total assets total liabilities bquity dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number petitioner's after-tax_income after deducting herold's compensation equity and return on equity for and were year income bquity return on equity dollar_figure dollar_figure big_number big_number dollar_figure big_number big_number dollar_figure petitioner has never paid any dividends herold's compensation from petitioner herold has no written employment contract with petitioner herold does have a written bonus plan as explained below in through follows year salary dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number bonus dollar_figure big_number big_number big_number big_number big_number big_number petitioner paid herold salary and bonuses as total dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number petitioner also provided herold with a dollar_figure life_insurance_policy health insurance during the subject years and vacation and sick leave neither herold nor any other employee of petitioner received contributions to a qualified_pension or profit-sharing_plan during the subject years herold is the sole member of petitioner's board_of directors his bonus was paid bottom-up and then to determine sales goals and economic conditions into account goals that were attainable with hard work stretch in that capacity he devised formulas under which his practice each year was to prepare a analysis of projected sales revenues and profits taking extraordinary events his aim was to determine he then built a factor into his goals in order to challenge himself the resulting bonus plan was always keyed to specific sales increase percentages petitioner adopted each year's plan through board minutes drafted during the first week of april in establishing his compensation herold focused on some executives he knew personally and on some he knew by reputation measuring himself against his personal competitors other companies with whom he sought to achieve parity executives at he did not find directly comparable companies or make a statistically rigorous analysis he looked at firms in related fields and came up with a figure that he considered an appropriate level to aspire to for himself in and he considered dollar_figure million the salary target compared to the executives he measured himself against in both years he did not contemplate any increase in he set this figure as his maximum compensation compensation between and although he aimed for and achieved substantial sales growth in that period herold's bonus plans for through provided as follows sales bonus amounts increase’ - - - - dollar_figure - - - - dollar_figure - - - - same - - dollar_figure big_number dollar_figure dollar_figure big_number dollar_figure big_number big_number same same same same big_number same same same big_number same same same big_number big_number big_number big_number same same same same same same same same big_number big_number same big_number same same same same same same same same big_number big_number same big_number same same ‘for the years through herold's bonus was based on increases in all of petitioner's revenues from its distribution and sales representative activities beginning in only sales in petitioner's distribution business under the trade_name gti were taken into account herold failed to achieve his maximum bonus percentage during of these years the target was approximately dollar_figure million for a maximum bonus of dollar_figure petitioner paid herold the maximum bonus at a time when it appeared this target was met later that year merchandise_returns reduced sales to dollar_figure at that level of sales herold was entitled to a bonus of dollar_figure rather than dollar_figure herold never reimbursed petitioner for the dollar_figure excess bonus he had received in petitioner's sales volume increase was less than the maximum targeted amount petitioner paid herold a bonus of just dollar_figure rather than the dollar_figure bonus he would have received if sales had increased percent or more petitioner's employees for through petitioners’ five most highly compensated employees their respective positions their respective total bonuses for the year compensation_for the year were as follows and their respective total total employee position bonus compensation stephan herold president ceo dollar_figure dollar_figure greg harris vice president account executive big_number big_number greg appelhoff account executive big_number big_number dana frederickson account executive big_number big_number joe berini account executive big_number big_number total employee position bonus compensation stephan herold president ceo dollar_figure dollar_figure dana frederickson account executive big_number big_number greg harris vice president account executive big_number greg appelhoff account executive - - big_number scott munson account executive - - big_number employee stephan herold dana frederickson greg appelhoff greg harris wayne williams employee stephan herold dana frederickson greg appelhoff jeff fetzer greg harris employee stephan herold greg appelhoff chris schmidt bruce senst curtis ocepak position president ceo account executive account executive vice president account executive account executive position president ceo account executive account executive account executive vice president account executive position president ceo vice president account executive account executive controller account executive total bonus compensation dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number total bonus compensation dollar_figure dollar_figure - - big_number big_number big_number - - big_number - - big_number total bonus compensation dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number the total compensation of petitioner's four most highly compensated employees other than herold for each of the years through as a percentage of herold's compensation was as follows next four most highly compensated employees herold's total as of herold's year compensation compensation compensation dollar_figure dollar_figure dollar_figure big_number big_number dollar_figure big_number big_number dollar_figure big_number big_number dollar_figure big_number big_number dollar_figure during through petitioner's account executives earned both a salary and commissions the bulk of their compensation each year was earned as commissions most account executives were paid a salary of dollar_figure per month although some received a higher salary the account executives earned a commission of percent of the gross margin on sales they generated the commission paid_by petitioner was a quarter to a third higher than generally paid in the industry petitioner employed consultative selling techniques designed by herold to differentiate itself in the marketplace and to justify higher-than-average markups this strategy required that petitioner's account executives provide services beyond those normally provided in the industry petitioner's account executives spent more time with each customer than required of the competitors' account executives herold believed that this justified a more generous commission structure beyond that herold felt it was worthwhile to pay higher compensation to attract and retain the best people opinion we are faced with perhaps one of the most litigated issues in federal income_taxation the deductibility of compensation paid to shareholder employees of a closely_held_corporation in order for employee compensation to be deductible by an accrual_method taxpayer like petitioner the compensation must be incurred in the taxable_year for services rendered to the taxpayer in the conduct of its trade_or_business reasonable in amount and ordinary and necessary in character sec_162 a sec_1_162-7 income_tax regs while each criterion may be at issue from time to time it is the reasonableness standard that presents the most difficult issue as the court has observed inherently there is a natural tension between shareholders employees who feel that they are entitled to be paid from a corporation's profits even to the exhaustion thereof of an amount that reflects their skills and efforts and a provision in the tax law that conditions the deductibility of compensation on the concept of reasonableness what is reasonable to the entrepreneur employee often may not be to the tax collector the term reasonable however must reflect the intrinsic value of employees in the broadest and most comprehenssive sense mad auto wrecking inc v commissioner tcmemo_1995_153 the parties do not dispute that herold's compensation was an ordinary_and_necessary_expense of petitioner or that it was paid for services which he rendered to petitioner thus we assume it was and limit our discussion to the question of reasonableness the reasonableness of compensation is a question of fact that must be answered by comparing each employee's compensation with the value of services that he or she performed in return 877_f2d_647 8th cir affg per curiam tcmemo_1987_98 500_f2d_148 8th cir affg tcmemo_1973_130 95_tc_525 affd 965_f2d_1038 11th cir the commissioner's determination as to the reasonableness of compensation is presumed correct and taxpayers like petitioner -- - must prove it wrong rule a 290_us_111 ris inv corp v commissioner supra pincite factors to consider in passing on the question of reasonableness no one factor of which is controlling in itself include the employee's qualifications the nature extent and scope of the employee's work the size and complexities of the employer's business a comparison of salaries paid with the employer's gross and net_income the prevailing general economic conditions a comparison of salaries with distributions to officers and retained earnings the prevailing rates of compensation_for comparable positions in comparable concerns the salary policy of the employer as to all employees the amount of compensation paid to the particular employee in previous years the employer's financial condition whether the employer and the employee dealt at arm's length whether the employee guaranteed the employer's debt whether the employer offered a pension_plan or profit-sharing_plan to its employees and whether the employee was reimbursed by the employer for business_expenses that the employee paid personally see 853_f2d_1267 5th cir affg tcmemo_1986_407 charles schneider co v commissioner supra pincite estate of wallace v commissioner supra pincite 73_tc_1142 see also mad auto wrecking inc v commissioner supra we carefully scrutinize the facts at hand because petitioner the paying corporation is controlled by herold the employee to whom the compensation was paid we must be sure that any amount purportedly paid as compensation was actually paid for services rendered by herold rather than a distribution to him of earnings that petitioner could not otherwise deduct rts inv corp v commissioner supra pincite 511_f2d_313 8th cir affg tcmemo_1974_44 charles schneider co v commissioner supra pincite we turn to the applicable factors employee's qualifications an employee's superior qualifications justify high compensation see eg home interiors gifts inc v commissioner supra pincite 59_tc_338 herold is exceptionally qualified for petitioner's business by virtue of his education training experience and dedication he understands and controls every aspect of its operations he is highly motivated and extremely productive he is the primary reason for petitioner's success the ability to conceptualize a vision and to lead an organization to fulfill that vision is the essence of effective business leadership as the record amply demonstrates herold's vision and insight into his industry have enabled him to invent and reinvent petitioner's business in response to a series of crises that might have led others to capitulate in each instance petitioner has survived the crisis by dint of herold's efforts petitioner's profitability which rests upon its sales upon key relationships herold has painstakingly cultivated and upon herold's ambition inventiveness and energy as opposed to petitioner's investment in capital are the primary reasons for petitioner's sales growth and success see home interiors gifts inc v commissioner supra pincite dave fischbein manufacturing co v commissioner supra pincite nature extent and scope of employee's work an employee's position hours worked duties performed and general importance to the success of a business may justify high compensation home interiors gifts inc v commissioner supra pincite herold is a micromanager who oversees all of petitioner's executive and managerial functions he performs or oversees virtually all of its sales activities he supervises its daily operations including supervising and directing its employees and makes every key business decision given the vital role herold plays in petitioner's operations and success and the long hours that he dedicates thereto we view herold as indispensable to petitioner's business petitioner's growth and prosperity are due directly to his skills dedication and creativity see 671_f2d_167 6th cir revg 72_tc_793 home interiors gifts inc v commissioner supra pincite dave fischbein manufacturing co v commissioner supra pincite size and complexities of employer's business courts have considered the size and complexity of a taxpayer’s business in deciding whether compensation is reasonable 528_f2d_176 10th cir affg 61_tc_564 petitioner's is a highly specialized sales operation occupying a unigue niche in its industry there is no comparably sized competitor most firms in the field are much smaller a few are larger herold's aggressive pursuit of large accounts that can be serviced at a lower cost relative to volume and his development of a service-intensive consultative selling style have enabled petitioner to compete successfully with its industry's giants and to develop relationships with of the largest national accounts in its field comparison of salaries paid with net and gross_income a comparison of sales and net_income to amounts of compensation may be important in deciding whether compensation is reasonable mad auto wrecking inc v commissioner tcmemo_1995_153 the instant percentages are reasonable in light of herold's gualifications and the nature extent scope and success of his efforts in his salary was dollar_figure percent of gross_receipts and dollar_figure percent of gross_income in his salary was dollar_figure percent of gross_receipts and percent of gross_income his salary was dollar_figure percent and dollar_figure percent of book net_income before deducting his compensation respectively his - - salary was dollar_figure percent of taxable net_income before deducting his compensation in and dollar_figure percent in general economic conditions this factor helps to determine whether the success of a business is attributable to general economic conditions as opposed to the efforts and business acumen of the employee general economic conditions may affect a business' performance and indicate the extent if any of the employee's effect on the company adverse economic conditions for example may tend to show that an employee's skill was important to a company that grew during the bad years mad auto wrecking inc v commissioner supra petitioner has faced economic ruin and been forced to reinvent itself on at least three separate occasions its sales went from dollar_figure million in its first year to dollar_figure million in sales fell to less than dollar_figure million in and were back up to nearly dollar_figure million by in petitioner lost its sales representation contract with apple this accounts for the precipitous sales decline in while petitioner represented apple it had developed apple's four largest accounts nationwide herold devised a strategy of targeting these four largest accounts and selling other electronics products to them he succeeded with three of these jumbo accounts just as that strategy was beginning to take hold all three of these accounts ran into adverse economic conditions and became insolvent again petitioner saw its continuing viability threatened and again herold devised a new strategy a three-pronged targeted focus on key products in each of three different phases of market penetration combined with the consultative selling technique herold had crafted and his focus on selling to very large customers who would not normally do business with a company the size of petitioner herold succeeded in reinventing and revitalizing petitioner's business each time it was threatened comparison of salaries with distributions to officers and retained earnings the failure to pay more than minimal dividends may suggest that reported compensation actually is in whole or in part a dividend 819_f2d_1315 5th cir affg tcmemo_1985_267 charles schneider co v commissioner f 2d pincite corporations however are not required to pay dividends shareholders may be equally content with the appreciation of their stock caused for example by the retention of earnings owensby kritikos inc v commissioner supra home interiors gifts inc v commissioner t c pincite see also revrul_79_8 1979_1_cb_92 compensation is not unreasonable merely because a corporation pays an insubstantial portion of its earnings as dividends in reviewing the reasonableness of an employee's compensation a hypothetical independent investor standard may be used to determine whether a shareholder has received a fair return on investment after the payment of the compensation in question see qwensby kritikos inc v commissioner supra pincite7 medina v commissioner tcmemo_1983_253 whether to pay a dividend and the amount thereof were business decisions herold made acting as petitioner's sole director herold treated his company in effect as a growth stock reinvesting earnings and aiming to derive a return on his investment in the form of capital_gain at some future time by selling his shares in the company at the time of trial a potential buyer had offered dollar_figure million for herold's stake in petitioner we refuse to second-guess the business judgment of petitioner's director under the facts herein we view its decision not to pay dividends as a reasonable business decision ’ see comtec sys inc v commissioner tcmemo_1995_4 in addition to the fact that the increase in petitioner's retained earnings most likely increased the value of its stock we believe that a hypothetical investor would have considered over dollar_figure growth in retained earnings to have been an acceptable performance for the period from to a growth-oriented investor might be most concerned with the increases in annual as noted above petitioner's strategy is to maintain substantial cash balances to take advantage of early payment discounts and to present a reassuring image of financial stability for the large customers with whom petitioner seeks to do business by building retained earnings to more than a half million dollars petitioner reduces the interest costs it would otherwise incur to maintain these cash balances - - revenue which a potential buyer would focus on in formulating an offering price for petitioner's stock the dollar_figure million offer that has been made would certainly tend to validate such a judgment we conclude that an investment in petitioner's stock was very attractive and that a hypothetical investor would have received a handsome return through appreciation in the value of petitioner's stock prevailing rates of compensation_for comparable positions in comparable concerns petitioner and respondent rely on expert testimony with respect to this factor we have wide discretion when it comes to expert testimony sometimes an expert will help us decide a case see eg 108_tc_524 106_tc_274 see also m i c ltd v commissioner tcmemo_1997_96 other times he or she will not see eg estate of scanlan v commissioner tcmemo_1996_331 affd without published opinion 116_f3d_1476 5th cir mandelbaum v commissioner tcmemo_1995_255 affd without published opinion 91_f3d_124 3d cir we weigh an expert's testimony in light of his or her qualifications and with proper regard to all other credible_evidence in the record we may accept or reject an expert's opinion in toto or we may pick and choose the portions of the opinion which we adopt 304_us_282 86_tc_547 see also pabst brewing co v commissioner tcmemo_1996_506 we are not persuaded by either expert petitioner's expert was edwin s mruk senior partner and owner of mruk partners he candidly stated that the companies he had used for comparison were reasonably comparable not totally comparable he chose these companies not because they were appropriate but because they were cited in an engineering report respondent used in making his determination in this matter respondent's engineering report was not offered in evidence mr mruk also did not make an independent evaluation preparing a rebuttal for a document that is not part of the record respondent's expert was james carey owner of a management consulting firm carey associates inc his conclusions were not based on data from businesses that are akin to the business at hand ie medium-sized wholesalers of electronic components some of the firms in his survey are for example software designers rather than hardware distributors others are large publicly traded corporations with sales far in excess of petitioner's we also question the reliability and validity of mr carey's sample size and data analysis he received replies from only out of nearly big_number persons to whom he directed his mailing and he pointed to no methodological guidelines that would indicate this small number was statistically reliable in fact on many occasions persons failed to answer guestions and mr carey interpreted these omissions as negative responses nothing in the record gives us comfort that treating blank responses as negative responses is a reasonable approach under the circumstances once again 'we are not satisfied that a reasonable level of compensation_for an executive like herold can be accurately determined by reference to the industries mr carey surveyed because of the absence of significant information on other businesses similar to petitioner's ' pulsar components intl inc v commissioner tcmemo_1996_129 quoting thomas a curtis m d inc v commissioner t c memo see also mad auto wrecking inc v commissioner tcmemo_1995_153 indeed comparing compensation paid to officers of companies that differ markedly provides guidance of dubious value see diverse indus inc v commissioner tcmemo_1986_84 niagara falls coach lines inc v commissioner tcmemo_1977_269 employer's salary policy as to all employees courts have considered salaries paid to other employees of a business in deciding whether compensation is reasonable home interiors gifts inc v commissioner t c pincite we look to this factor to determine whether herold was compensated differently than petitioner's other employees merely because of herold's status as a shareholder qwensby kritikos inc v commissioner f 2d pincite3 a reasonable longstanding and consistently applied compensation plan is evidence that compensation is reasonable petitioner's approach to compensation leaned heavily on commissions as a motivational tool for all of its employees its commission structure for all of its employees was considerably more generous than the industry standard herold's approach to determining his own compensation structure was consistent with that overall approach we think it is significant that herold consistently designed his compensation structure by the end of the first quarter each year and memorialized the bonus structure in board minutes this was done well before herold could know what the actual outcome for the year would be with one minor deviation that we do not consider significant petitioner lived by this structure when he failed to make his numbers he did not get his maximum bonus he was never paid any additional bonus beyond the maximum he had committed petitioner to earlier in the year compensation paid in previous years an employer may deduct compensation paid to an employee ina year although the employee performed the services in a prior year 281_us_115 see also r j nicoll co v commissione59_tc_37 in year after-the-fact developments caused the maximum sales target to be missed by a relatively small amount by then herold had been paid the maximum bonus which was appropriate according to the information available when the payment was made as it later turned out he was overpaid by dollar_figure looking at herold's overall track record and the vital role he played in petitioner's continuing success we do not believe independent investors would have pressed herold to repay this overage we note for example that herold was not paid a bonus during petitioner's lean years and the cases cited therein in order to do so the employer must show that the employer intended to compensate the employee for past undercompensation and the amount of the undercompensation 399_f2d_603 9th cir affg tcmemo_1967_7 estate of wallace v commissioner t c pincite the record does not indicate that herold's compensation during the subject years was attributable to services which he performed for petitioner in earlier years in fact herold even testified that none of his and compensation was redress for earlier years employer's past and present financial condition petitioner grew and became very profitable under herold's leadership its equity grew from dollar_figure at the end of to dollar_figure at the end of an increase of percent whether employer and employee dealt at arm's length where an employer and an employee are not dealing at arm's length the amount of compensation paid may be unreasonable owensby kritikos inc v commissioner supra pincite see 284_f2d_697 2d cir affg tcmemo_1960_13 as petitioner's sole shareholder and its only board member herold controlled every detail of the process by which his compensation was determined nevertheless we are impressed by the lengths herold went to in order to develop objective underpinnings for his bonus formula each year whether employee guaranteed employer's debt courts have considered whether an employee personally guaranteed his or her employer's debt in determining whether the employee's compensation is reasonable in certain situations an employee's personal guaranty of his or her employer's debt may entitle the employer to pay a greater salary to the employee than the employer would otherwise have paid see oqwensby kritikos inc v commissioner supra pincite n r j nicoll co v commissioner supra pincite see also acme constr co v commissioner tcmemo_1995_6 boca constr inc v commissioner tcmemo_1995_5 at a key point when petitioner's economic outlook was grim herold pledged his personal_residence to secure a letter_of_credit that was required by a potential supplier houston instruments securing houston instruments as a supplier was a linchpin of herold's three-pronged strategy in addition to the fact that herold was willing to put his residence at risk to ensure this strategy's success herold also personally guaranteed other credit lines of dollar_figure to dollar_figure million which were still in effect during the subject years absence of pension_plan profit--sharing plan courts have considered the absence of a pension_plan or a profit-sharing_plan in determining reasonable_compensation 853_f2d_1267 5th cir affg tcmemo_1986_407 kennedy v commissioner f 2d pincite such an absence may allow the employer to pay the employee more compensation than the employer would have paid had the employer offered the employee a pension_plan or a profit-- sharing plan rutter v commissioner supra pincite petitioner did not have a pension or profit-sharing_plan thus herold did not receive the benefit of any qualified_retirement_plan contributions reimbursement of business_expenses courts have considered the reimbursement of business_expenses in determining reasonable_compensation an employer may pay greater compensation to an employee to reflect the fact that the employee is not being reimbursed for expenses that he or she paid on behalf of the employer id there is no evidence that herold incurred unreimbursed expenses on behalf of petitioner conclusion our analysis of the factors favors the deductibility of all the compensation paid to herold by petitioner we sustain petitioner's deductions in and in as for reasonable_compensation to reflect the foregoing decision will be entered for petitioner


t c summary opinion united_states tax_court laurie calder-green petitioner v commissioner of internal revenue respondent docket no 1705-06s filed date laurie calder-green pro_se steven m webster for respondent armen special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless otherwise indicated all subsequent section references are to the internal_revenue_code_of_1986 as amended the primary issue for decision in this collection review case is whether it was an abuse of respondent’s discretion to deny effective tax_administration relief to petitioner from her self-reported tax_liability for the taxable_year we hold that it was not we must also decide whether it was an abuse of respondent’s discretion not to abate interest on petitioner’s underpayment_of_tax we hold that it was not background some of the facts have been stipulated and they are so found we incorporate by reference the parties’ extremely confusing stipulation of facts and morass of accompanying exhibits at the time the petition was filed petitioner resided in north carolina petitioner and her ex-husband married in and separated in they divorced in it was not an amicable divorce petitioner’s mother arranged for an attorney a golfing buddy of petitioner’s brother-in-law to represent petitioner during the divorce proceedings at the urging of her attorney petitioner agreed to purchase her ex-husband’s half of the marital estate in south carolina petitioner testified that even though petitioner and her ex-husband were not yet divorced they were separated and apparently negotiations on the divorce settlement had begun for clarity we refer to petitioner’s ex-husband as her ex-husband throughout this continued her attorney arranged for a bank loan to enable her to refinance the mortgage and purchase her ex-husband’s interest in the house when petitioner refused to pay the attorney’s bill the attorney refused to continue the representation and the loan offer he had arranged was rescinded petitioner’s mother gave her approximately dollar_figure to replace the lost loan and help petitioner keep the house instead petitioner used the money to move to an apartment in north carolina so her son could attend college there she also paid off some debt and fixed up the house in south carolina in the fall of petitioner refinanced the marital estate and received dollar_figure petitioner did not use the proceeds or any portion thereof to buy out her ex-husband instead the proceeds were disbursed as follows approximately dollar_figure went to closing costs dollar_figure went to pay off credit card debt and dollar_figure went directly to petitioner she repaid her mother and was left about dollar_figure to play with petitioner’s divorce was finalized in the fall of despite her best efforts at negotiating a favorable divorce settlement petitioner was unhappy with the result a south carolina court ordered petitioner to pay her ex-husband continued opinion regardless of the time period involved dollar_figure within days in compensation_for his interest in both the house and a camper finding herself in ever-increasing debt and having used all of her available_resources on other things petitioner liquidated the entire dollar_figure balance of her individual_retirement_account ira in order to pay her ex-husband the now-court-ordered amount of dollar_figure petitioner spent the rest of the money making payments on her van remodeling buying appliances and paying expenses for her children such as braces and graduation college application fees petitioner timely filed her federal_income_tax return for she properly reported the ira distribution as taxable_income along with the sec_72 additional 10-percent tax due on a portion of the distribution see eg sec_72 exempting from the 10-percent additional tax certain qualified medical educational and home-buying expenses when she filed her return petitioner did not pay the tax shown as due under separate cover petitioner mailed a letter to the irs offering to pay dollar_figure in satisfaction of her petitioner argues that she should not have had to pay her ex-husband so much for his share of the house she testified that he allegedly sold some of the fixtures and otherwise destroyed the house we can appreciate petitioner’s frustration with the divorce proceedings but any perceived inequities resulting from those proceedings have no bearing on the tax consequences of the issues before us approximately dollar_figure reported tax_liability respondent has no record of having received petitioner’s offer letter on date respondent assessed the tax reported interest and an addition_to_tax under sec_6651 for failure to pay the amount shown on the return upon receiving petitioner’s form_656 offer_in_compromise oic in date respondent requested more information petitioner responded on date petitioner was not contacted again by respondent until date when respondent requested more information to properly evaluate the oic discussions between the parties continued over the course of the year and forms and supporting documents were sent back and forth having determined that she could pay the liability in full respondent rejected petitioner’s oic on date and further determined that petitioner did not meet the criteria for an oic on the basis of the effective tax_administration eta provisions of sec_7122 and its accompanying regulations petitioner did not like the response she received from the irs she interpreted the rejection of her oic as a lack of understanding as to how difficult things had been since her divorce and she spent time researching tax laws and offers-in- petitioner remarried in and is gainfully_employed as a teacher and athletic coach respondent determined that she had both equity in her residence and future income potential exceeding her total liability compromise in date petitioner appealed the rejection of her oic after more discussions and lengthy negotiations between the parties the rejection was sustained by respondent’s office of appeals on date petitioner’s requests for interest abatement were also rejected respondent issued a final notice_of_intent_to_levy and your right to a hearing in date after offsets from other taxable years petitioner’s federal_income_tax liability for was approximately dollar_figure petitioner felt that no one at the irs understood her plight or her arguments and she began contacting her legislators and the irs taxpayer_advocate_service in the spring of she also filed a form request for a collection_due_process_hearing cdp hearing at the cdp hearing petitioner submitted a second oic also based on eta of dollar_figure the record is unclear as to whether the amount offered was inclusive of amounts already paid to or collected by the irs further adding to the confusion respondent decided that petitioner’s changes to the form_656 rendered the offer void regardless the oic was evaluated and rejected and no offer of an installment_agreement or other type although petitioner submitted two different offers-in- compromise we refer to them later in this opinion as a single oic because our reasoning applies with equal force to both of her offers-in-compromise of collection alternative was agreed upon having determined again that petitioner did not qualify for an oic on eta grounds and having explained again the reasoning behind the rejection respondent issued petitioner a notice_of_determination concerning collection action s under sec_6320 and or on date the case came before this court in and was remanded to respondent’s office of appeals for further consideration petitioner’s oic was once again rejected and the reasons for the rejection and refusal to abate interest were explained on date respondent issued the supplemental notice_of_determination concerning collection action s under sec_6320 and or from which petitioner now appeals a collection actions discussion sec_6330 generally provides that the commissioner cannot proceed with collection by levy on a taxpayer’s property until the taxpayer has been given notice of and the opportunity for an administrative review of the matter in the form of an appeals_office hearing and if dissatisfied with judicial review of the administrative determination see davis v commissioner petitioner claims she did not propose any other type of collection alternative because no information had been provided to her about her options however the record is clear that petitioner rejected respondent’s offer of an installment_agreement on at least one occasion t c 114_tc_176 sec_6330 imposes on the appeals_office an obligation to verify that the requirements of any applicable law or administrative procedure have been met sec_6330 prescribes the matters that a person may raise at an appeals_office hearing in sum sec_6330 provides that a person may raise collection issues such as spousal defenses the appropriateness of the commissioner’s intended collection action and possible alternative means of collection sec_6330 further provides that the existence and amount of the underlying tax_liability can be contested at an appeals_office hearing if the person did not receive a notice_of_deficiency for the tax in question or did not otherwise have an earlier opportunity to dispute the tax_liability see 114_tc_604 goza v commissioner supra pincite see also 118_tc_488 wooten v commissioner tcmemo_2003_113 it is well settled that where the validity of the underlying tax_liability is properly at issue in a collection review proceeding the court will review the matter de novo goza v sec_6330 was amended date see pension_protection_act of pub_l_no sec_855 120_stat_1019 therefore any determinations made at a cdp hearing after date are the exclusive jurisdiction of this court id sec_855 120_stat_1019 commissioner supra pincite where the validity of the underlying tax_liability is not at issue the court will review the commissioner’s administrative determination for an abuse_of_discretion see eg id pincite an abuse_of_discretion occurs when the commissioner takes action that is arbitrary capricious without sound basis in fact or law or is not justifiable in light of the circumstances see eg 112_tc_19 91_tc_1079 petitioner agrees that she owes the tax and never contested her liability for the tax due thus we review the case for an abuse_of_discretion petitioner however insists that it would be unfair to make her pay the amount due given her circumstances and she argues that the eta provision of sec_7122 mandates that she not be required to pay the liability the addition_to_tax or any interest on her federal_income_tax obligation b effective tax_administration sec_7122 and its accompanying regulations authorize the secretary to compromise any civil case arising under the internal revenue laws compromises may be made on three grounds doubt as to liability doubt as to collectibility and promotion of effective tax_administration sec_301_7122-1 proced admin regs eta is further divided into hardship and nonhardship eta id respondent determined that petitioner does not meet the criteria for acceptance of an oic on eta grounds because petitioner makes both hardship and nonhardship eta arguments at various points in the proceedings we discuss both sec_301_7122-1 proced admin regs sets forth factors that would support but are not conclusive of a finding of economic hardship a long-term illness medical_condition or disability which is expected to exhaust the taxpayer’s financial resources the total depletion of a taxpayer’s income resulting from the provision of dependent care or the inability to exploit existing asset wealth in order to finance basic living_expenses and satisfy the outstanding tax_liability none of those factors are present here petitioner also argues that her case is so important and so essential to public policy that it was an abuse_of_discretion not to accept her oic on public policy grounds however this argument is not sound compromises are permitted on public policy and fairness grounds where there is no doubt as to liability and the liability could be collected in full without causing economic hardship it is up to the taxpayer to demonstrate that his or her circumstances are compelling enough to justify the compromise notwithstanding the inherent inequity to other taxpayers see sec_301_7122-1 c iv proced admin regs see also irm pt date petitioner has not satisfied that burden tax jurisprudence is replete with cases more extreme than the one at bar where taxpayers have found themselves in difficult financial positions because of the application of a tax provision that as applied to them had adverse consequences these taxpayers were denied relief under eta provisions see eg 124_tc_165 affd 454_f3d_782 8th cir wai v commissioner tcmemo_2006_179 thus we conclude that respondent did not abuse his discretion in the instant case many people encounter financial difficulties as a result of the economic changes that typically accompany divorce although we understand petitioner’s desire to help pay for her children’s college educations the fact that her children play division i sports and find it difficult to work during the school year does not entitle petitioner to a compromised tax_liability on the basis of financial hardship or public policy more to the point petitioner has not satisfactorily demonstrated that her situation is so unique or warrants disparate treatment from the myriad other taxpayers who pay their taxes in full and on time when they and their families too have opportunities which may be made more difficult as a result of their tax obligations thus it is clear that in this case petitioner must satisfy her tax_liability in full the underlying tax liability8 the south carolina court ordered petitioner to pay her ex- husband a sum of money like many taxpayers petitioner was forced to use a portion of her retirement savings to meet her financial obligations the fact that she had no alternative but to withdraw money from her ira does not necessarily bring petitioner’s situation within the purview of economic hardship or compelling public policy as envisioned by the provisions of the eta rules and regulations the 10-percent additional tax petitioner liquidated her ira and received a dollar_figure taxable_distribution in generally a distribution from a qualified_plan such as petitioner’s ira is includable in the distributee’s gross_income in the year of distribution see sec_61 sec_72 sec_401 sec_402 sec_408 sec_4974 sec_72 imposes an additional tax on a distribution from a qualified_retirement_plan made prior to a taxpayer’s attaining the age of 59½ unless an enumerated exception applies the additional tax is intended to discourage premature distributions from retirement plans 106_tc_337 see also s although not at issue here we discuss petitioner’s underlying liability to make clear the nature of petitioner’s arguments see supra p rept pincite c b supp the additional tax equals percent of the portion of such distribution that is includable in gross_income it appears from the record that the taxable_portion of petitioner’s ira distribution has already been reduced by the application of exceptions for medical educational and first- time home buyer expenses the remaining dollar_figure does not appear to be subject_to any exception and petitioner does not contest her liability for the 10-percent additional tax on that amount rather petitioner’s argument is that if she had been properly represented by counsel throughout her divorce her counsel would have known she had no source of funds other than her ira with which she could satisfy the court order her counsel would have suggested obtaining a qualified_domestic_relations_order qdro see sec_72 to satisfy the obligation instead of permitting petitioner to be forced into a situation where liquidating her ira was her only option accordingly petitioner’s argument continues her taxes would have been far less under the other scenario and fairness demands that she should not have to pay the full amount she admits she owes however the qdro provision does not apply to distributions made the fact that the record indicates petitioner received an exception for a first-time_homebuyer when she was not in fact a first-time_homebuyer is beyond the scope of our review in the instant case from iras the qdro provision exempts from tax only distributions made from other types of qualified_retirement_plans see sec_72 further it is well settled that a transaction must be given its effect in accord with what actually occurred and not in accord with what might have occurred 435_us_561 it was not an abuse_of_discretion for respondent to reject petitioner’s oic c interest abatement regardless of respondent’s position at trial the record clearly supports our finding that petitioner requested an abatement of interest during the prior administrative proceedings and as part of her oic we therefore have jurisdiction to consider her request see 116_tc_60 115_tc_329 generally interest on a federal_income_tax liability begins to accrue from the last date prescribed for payment of that tax and continues to accrue compounding daily until payment is made see sec_6601 sec_6622 interest abatements are permitted if a delay is attributable to unreasonable errors or delays by an official or employee of the internal_revenue_service in performing a ministerial or managerial act sec_6404 see also sec_301_6404-2 proced admin regs prior to sec_6404 provided for the abatement of interest attributable to any error or delay by an continued any abatement of interest applies only to the period of time attributable to the failure to perform the ministerial or managerial act see eg pettyjohn v commissioner tcmemo_2001_227 see also h rept pincite 1986_3_cb_1 s rept pincite 1986_3_cb_1 further sec_6404 requires that a taxpayer not only identify an error or delay caused by a ministerial or managerial act on the commissioner’s part but also identify a specific period of time over which interest should be abated as a result of such error or delay see eg spurgin v commissioner tcmemo_2001_290 we apply an abuse_of_discretion standard in reviewing the commissioner’s failure to abate interest see 112_tc_230 woodral v commissioner t c pincite petitioner mailed her first offer in date respondent has no record of having received this letter she resubmitted the offer as an official oic in date requests for continued employee of the internal_revenue_service in performing a ministerial_act congress amended sec_6404 to permit the abatement of interest for unreasonable error and delay in performing a ministerial or managerial act taxpayer bill of right sec_2 publaw_104_168 110_stat_1457 the amendment applies to interest accruing with respect to deficiencies or payments for taxable years beginning after date id sec_301 110_stat_1457 despite the change the reasoning of cases decided under the old version of the statute is still generally applicable more information and responses went back and forth between the parties according to petitioner’s own timeline discussions concerning petitioner’s financial situation continued for a long time until the oic was rejected in date after that there was an administrative appeal process there was a cdp hearing and a new oic the numbers were revised as the discussions continued there was a tax_court proceeding and the case was remanded to respondent’s office of appeals for further consideration a supplemental notice_of_determination was issued in date and the case is now before us for consideration petitioner argues that the entire process took too long and with every delay interest accrued she claims it was an abuse_of_discretion by respondent not to abate the interest we acknowledge that the process from petitioner’s first mailing of an offer to compromise her liability in date to our receipt of the case for final disposition was lengthy yet there is no specific time period that we can identify that reveals respondent was responsible for an unreasonable error or delay there is also no specific period of time petitioner has identified where there is an error or delay attributable to a ministerial or managerial act on respondent’s part rather petitioner essentially requests that the interest with respect to her taxable_year be abated either in whole or in part as we have previously held such a request is in effect a request for an exemption from interest rather than a request for an abatement of interest the scope of such a request is beyond that contemplated by the statute see eg spurgin v commissioner supra donovan v commissioner tcmemo_2000_220 the biggest stretch of time between petitioner’s submission of information and a reply from respondent was the period between date and date that 171-day period encompassed the veterans’ day thanksgiving christmas and new year’s holidays among others petitioner has not demonstrated that days is an unreasonably long time given respondent’s workload and the time of year particularly given respondent’s need to review the voluminous documentation petitioner submitted and the number of revisions she made to respondent’s own documents further we have previously held that the mere passage of time does not by itself suggest an unreasonable delay or error caused by a ministerial or managerial act on the commissioner’s part such that an abatement of interest is warranted see eg spurgin v commissioner supra in 118_tc_22 the taxpayers filed a return on which they correctly reported their dollar_figure tax_liability yet they included only dollar_figure and an oic with the return instead of full payment the irs misplaced the taxpayers’ oic for a year yet we held that the commissioner’s refusal to abate the interest that accrued during that time was not an abuse_of_discretion if a taxpayer files a return but does not pay the taxes due sec_6404 does not permit abatement of the interest regardless of how long the irs took to contact the taxpayer and request payment id pincite citing h conf rept vol ii at ii-811 1986_3_cb_1 although we can identify mistakes on respondent’s part we are not convinced of unreasonable delay by respondent under the circumstances accordingly we are not convinced that an interest abatement is warranted here and therefore we hold that it was not an abuse_of_discretion by respondent to deny the abatement request petitioner argues that having to pay interest is unwarranted unfair and undeserved but the purpose of interest is to compensate the government for delay in payment of a tax goettee v commissioner tcmemo_2003_43 citing 588_f2d_342 2d cir affd 192_fedappx_212 4th cir interest is warranted because petitioner did not timely pay the tax due we also note that respondent advised petitioner repeatedly that she did not meet the criteria for an oic on eta grounds to the extent petitioner persisted in challenging respondent’s determination the extra time spent was by her own choice d conclusion we have considered all of petitioner’s arguments and to the extent we did not specifically address them we find that they are without merit to reflect our disposition of the disputed issues decision will be entered for respondent


internal_revenue_service p o box cincinnati oh number release date department of the treasury employer_identification_number contact person - id number date date contact telephone number legend uil x name of internship program y name of city z dollars total award dear you asked for advance approval of your educational grant procedures under internal_revenue_code sec_4945 this approval is required because you are a private_foundation that is exempt from federal_income_tax our determination we approved your procedures for awarding educational grants based on the information you submitted and assuming you will conduct your program as proposed we determined that your procedures for awarding educational grants meet the requirements of code sec_4945 as a result expenditures you make under these procedures won't be taxable description of your request your letter indicates that you will operate an educational grant program your purpose is to promote education your grant program seeks to provide students with the education necessary to transition from school to the workplace your program is part of a broader internship initiative called x which is a citywide collaborative effort that includes the city of y schools businesses and civic organizations x exposes prepares and connects students to careers in regional high-paying industries x provides students with life experience in the workplace and with soft skills and business etiquette training they cannot obtain through high school classroom learning the grants are inducements for participants to complete the program payable upon each phase of completion students who complete x’s program will receive a total award amount of z dollars you will pay the award in three equal installments the first one after the student completes the first set of training hours any student who does not complete this training is ineligible for an award the second installment will be distributed at midway point and the last one upon completion of x’s internship program students must participate in the entire program to earn the full award if a student does not show up for work or leaves the program due to behavioral issues the remainder of the internship will not be paid there is no stipulation that the awards be utilized for any specified purpose you will publicize your program through participating high schools school leaders will be provided recruitment fliers to place around campus you will conduct in-school recruitment sessions which include a power point presentation a video and q a sessions you will also advertise your program through your website to be eligible students must be high school seniors attending public high schools participating in x they must complete an application process and have interest in pursuing a career in healthcare technology or skilled crafts candidates are evaluated on a variety of factors including leadership experience demonstrated commitment to the program oral and verbal communications skills gpa extracurricular involvement and feedback from teachers the selection committee endeavors to select a diverse cohort that includes students across a range of preparedness using a scoring format it will not discriminate based on race creed color ethnicity national origin religion sex sexual orientation gender expression age height weight or physical and mental ability the selection committee is comprised of two members of your staff and two staff members from the provider of the soft skills training you will hire teachers as coaches case workers for the students these coaches will help with the soft skills and business etiquette training and then once the hour internship begins they will act as case managers staying in touch with both the student and employer to help resolve any problems that might occur you will obtain reports from each employer on the student's performance you represent that you will maintain the following all records relating to individual grants including information obtained to evaluate grantees identify a grantee is a disqualified_person establish the amount and purpose of each grant and establish that you undertook the supervision and investigation of grants described above basis for our determination the law imposes certain excise_taxes on the taxable_expenditures of private_foundations code sec_4945 a taxable_expenditure is any amount a private_foundation pays as a grant to an individual for travel study or other similar purposes however a grant that letter catalog number 58222y meets all of the following requirements of code sec_4945 is not a taxable_expenditure the foundation awards the grant on an objective and nondiscriminatory basis the irs approves in advance the procedure for awarding the grant the grant is - - - ascholarship or fellowship subject_to sec_117 and is to be used for study at an educational_organization described in sec_170 or aprize or award subject_to the provisions of sec_74 if the recipient of the prize or award is selected from the general_public or to achieve a specific objective produce a report or similar product or improve or enhance a literary artistic musical scientific teaching or other similar skill or talent of the recipient to receive approval of its educational grant procedures sec_53_4945-4 requires that a private_foundation show the grant procedure includes an objective and nondiscriminatory selection process the grant procedure results in the recipients performing the activities the grants were intended to finance the foundation plans to obtain reports to determine whether the recipients have performed the activities that the grants were intended to finance other conditions that apply to this determination this determination covers only the grant program described above this approval will apply to succeeding grant programs only if their standards and procedures don't differ significantly from those described in your original request this determination applies only to you it may not be cited as precedent you cannot rely on the conclusions in this letter if the facts you provided have changed substantially you must report any significant changes in your program to the cincinnati office of exempt_organizations at internal_revenue_service exempt_organizations determinations p o box cincinnati oh you cannot make grants to your creators officers directors trustees foundation managers or members of selection committees or their relatives letter catalog number 58222y e e all funds distributed to individuals must be made on a charitable basis and must further the purposes of your organization you cannot award grants for a purpose that is inconsistent with code sec_170 you should keep adequate_records and case histories so that you can substantiate your grant distributions with the irs if necessary please keep a copy of this letter in your records if you have any questions please contact the person listed at the top of this letter sincerely stephen a martin director exempt_organizations rulings and agreements letter catalog number 58222y


internal_revenue_service number release date index number ---------------------------------- ---------------------------------------- ------------------------ ---------------------------------------- ---------------------------------- ty ------- ty ------- 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 b03 plr-135905-08 date date legend corp a ----------------------- ------------------------ ----------------------------------------------- ------------------------------------------ -------------------------------- ------------ --------------------------- --------------------------- corp b corp c corp d country l date o date p tax_year x ------- tax_year y ------- dear ---------------- this is in response to your letter dated date in which you request consent for corp a to revoke effective for tax_year y and for all subsequent taxable years its election effective beginning for tax_year x to use the safe_harbor method described in sec_1_901-2a in determining the amount of foreign_income_tax paid_or_accrued or deemed paid_or_accrued to country l the information submitted for consideration is substantially as set forth below the ruling contained in this letter is based upon information and representations you submitted and accompanied by your penalty of perjury statement executed 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 corp a is a domestic_corporation that is the common parent of an affiliated_group_of_corporations corp a group that has filed a u s consolidated federal_income_tax return for tax_year x and for all subsequent tax years the due_date including plr-135905-08 extensions for corp a’s u s consolidated federal_income_tax return for tax_year y is date o which is more than days after date corp a group owns directly and indirectly percent of corp b a controlled_foreign_corporation cfc for u s tax purposes corp b owns percent of corp c another cfc prior to date p corp b owned percent of corp d which conducts operations in country l on date p corp b transferred the stock of corp d to corp c in exchange for additional stock of corp c following the transfer corp d filed a check-the-box election to be treated as disregarded as an entity separate from corp c for u s tax purposes corp d is and has been a dual_capacity_taxpayer as defined in sec_1_901-2 with respect to its operations in country l sec_1_901-2a permits dual capacity taxpayers in computing foreign tax_credits for qualifying levies of each country to use either a facts and circumstances method or a safe_harbor method to determine the amount of a levy that is not paid in exchange for a specific_economic_benefit corp a filed a safe_harbor method election under sec_1_901-2a with respect to country l levies paid_or_accrued or deemed paid_or_accrued by members of corp a group effective for tax_year x and for subsequent years that safe_harbor method election has not been revoked under sec_1_901-2a sec_1_901-2a describes the manner in which taxpayers may elect and revoke the safe_harbor method sec_1_901-2a provides that the safe_harbor method election may not be revoked without the consent of the commissioner consent is normally given provided the conditions set forth in the regulation are satisfied the regulation provides that an application_for consent to revoke the election must be made not later than days before the due_date including extensions for the filing of the income_tax return for the first taxable_year for which the revocation is sought to be effective with certain exceptions not applicable to this situation the commissioner may make his consent to any revocation conditioned upon adjustments being made in one or more taxable years so as to prevent the revocation from resulting in a distortion of the amount of any item relating to tax_liability in any taxable_year the commissioner will normally consent to a revocation under the circumstances described in sec_1_901-2a through vi sec_1_901-2a provides that the commissioner will normally consent to a revocation of a safe_harbor method election if the election has been in effect with respect to at least three taxable years prior to the taxable_year for which the revocation is to be effective based solely on the information and representations submitted corp a’s application_for consent to revoke the safe_harbor method election with respect to qualifying levies of country l was made not later than days before date o the due_date including plr-135905-08 extensions for corp a’s u s consolidated federal_income_tax return for tax_year y and the applicable safe_harbor method election has been in effect with respect to at least corp a’s last three taxable years prior to tax_year y accordingly consent is granted to corp a to revoke the safe_harbor method election with respect to qualifying levies of country l effective for tax_year y and for all subsequent taxable years no opinion was requested and no opinion is expressed as to whether based upon all of the relevant facts and circumstances the amount if any paid pursuant to a levy or levies imposed by country l is not an amount_paid in exchange for a specific_economic_benefit except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling sincerely richard l chewning senior counsel branch international enclosure copy for purposes


department of the treasury internal_revenue_service washington d c q q government entities division may uniform issue list - se t ep rast i rakkrekkkakkkkkk rekkkkkkkkrr kkk rkkkkkkkkkk keke legend taxpayer a tedncdbeinik taxpayer b jodo debit ira x stvesunnwnnnses company c jobb gioia salalaelaloaiatettttetata fa ecick jed ebiek ieee rrkkkkkak kare amount e dear state m percent h county l amount g this is in response to a letter dated anxeekeheiaee os sudodlemented by communication dated submitted on your behaif by your authorized representative in which you ask whether a distribution from your individual_retirement_arrangement to your former spouse is considered a modification to a series of substantially_equal_periodic_payments within the meaning of sec_72 of the internal_revenue_code the code the following facts and representations have been submitted on your behalf taxpayer a began taking a series of periodic_payments from an individual_retirement_arrangement ira x she maintains with company c taxpayer a will attain age on euanewexeee taxpayer a elected to have distributions from ira x commence in a series of substantially_equal_periodic_payments as described in sec_2 of revrul_2002_62 2002_42_irb_710 specifically taxpayer a used the fixed annuitization method to determine the annual distributions from ira x the distributions from ira x began on aaeeeeanaeeeee ond were intended to comply with the requirements of sec_72 of the code the annual distribution from ira x is amount e taxpayer a's series of substantially_equal_periodic_payments are made ona monthly basis in the amount of amount g taxpayer a received distributions from ira x on a monthly basis in the amount of amount g from through taxpayer a will continue to receive the same distribution of amount g until the division of ira x on tee judgment of divorce was granted to taxpayer a and taxpayer b by final decree of the family court of state m in and for county l final decree a property settlement agreement was entered into by taxpayer a and taxpayer b the terms of which are contained in a marital stipulation agreement and order in county l state m dated stipulation agreement’ the stipulation agreement included a division of taxpayer a and taxpayer b's property including ira x the stipulation agreement requires that taxpayer b is granted a portion of the value of ira x and also provides taxpayer a the right to request a private_letter_ruling from the internal_revenue_service in order to avoid a penalty taxpayer a shall keep the first dollar_figurexxx xxx of the value of ira x plus percent h of the value in excess of dollar_figurexxx xxx however any gross distributions made to taxpayer a between e and the actual division of ira x will be attributed to taxpayer a pursuant to the stipulation agreement a portion of the value of ira x is awarded to taxpayer a pursuant to the following formula percent h balance at date of division of ira x - dollar_figurexxxx xxx - amount g number of months between through the month containing the date of the actual division of ira x dollar_figurexxx xxx the balance of ira x will be transferred to taxpayer b it is represented that the stipulation agreement and order is a divorce_or_separation_instrument within the meaning of code sec_408 and as described in code sec_71 as a result of the proposed transfer of a portion of the value of ira x to taxpayer b the account balance of ira x will be reduced accordingly using this reduced account balance on which to calculate her series of substantially_equal_periodic_payments would result in a distribution of an amount less than the amount determined when taxpayer a commenced receiving her periodic_payments from ira x taxpayer a intends to use the same fixed annuitization methodology to calculate her future payments from jra x based on the foregoing taxpayer a requests the following rulings the proposed division of ira x and the proposed transfer of a certain portion from ira x to taxpayer b pursuant to the stipulation agreement will be considered a nontaxable transfer under code sec_408 d the reduction in the monthly distribution from ira x to taxpayer a beginning in the month following the month of division of ira x prior to taxpayer a attaining age will not constitute a modification to a series of substantially_equal_periodic_payments from ira x under code sec_72 that will result in the imposition of the percent additional tax under code sec_72 for ira x sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_72 of the code provides rules for determining how amounts received as annuities endowments or life_insurance contracts and distributions from qualified_plans are to be taxed sec_72 of the code provides for the imposition of an additional percent tax on early distributions from qualified_plans including iras the additional tax is imposed on that portion of the distribution that is includible in gross_income sec_72 of the code provides that sec_72 shall not apply to distributions that are part of a series of substantially_equal_periodic_payments not less frequently than annually made for the life or life expectancy of the employee or joint lives or joint life expectancies of such employee and his designated_beneficiary sec_72 of the code imposes the additional limitation on distributions excepted from the percent tax by sec_72 that if the series of payments is subsequently modified other than by reason of death or disability before the later of the employee's attainment of age or the close of the five-year period beginning with the date of the first payment and after the employee attains age then the taxpayer's tax for the first taxable_year in which such modification occurs shall be increased by an amount determined under regulations equal to the tax that would have been imposed except for the sec_72 exception plus interest for the deferral_period sec_408 of the code provides that an individual's ira interest transferred to a spouse or former spouse pursuant to a decree of divorce_or_separation_instrument described in subparagraph a of sec_71 is not treated as a taxable transfer made by such individual notwithstanding any other provision of this subtitle and is treated as an ira of such spouse and not of the original ira owner thereafter such transferred interest is to be treated as maintained for the benefit of such spouse notice_89_25 was published on date and provided guidance in the form of questions and answers on certain provisions of the tax_reform_act_of_1986 tra_'86 in the absence of regulations under sec_72 of the code this notice provides guidance with respect to the exception to the tax on premature distributions provided under sec_72 question and answer-12 of notice_89_25 provides three methods of determining substantially_equal_periodic_payments for purposes of sec_72 of the code revrul_2002_62 r b which was published on date modified q a-12 of notice_89_25 revrul_2002_62 provides among other things that payments are considered to be substantially_equal_periodic_payments within the meaning of sec_72 iv if they are made in accordance with the required_minimum_distribution method the fixed amortization_method or the fixed annuitization method the fixed annuitization method provides that the annual payment for each year is determined by dividing the account balance by an annuity factor that is the present_value of an annuity of one dollar_figure dollar per year beginning at the taxpayer's age and continuing for the life of the taxpayer or the joint lives of the individual and beneficiary the annuity factor is derived using the mortality_table in appendix b of revrul_2002_62 and using the chosen interest rate under this method the account balance the annuity factor the chosen interest rate and the resulting annual payment are determined once for the first distribution year and the annual payment is the same amount in each succeeding year in this case taxpayer a commenced receiving a series of substantially_equal_periodic_payments from ira x in in satisfaction of the terms of the stipulation agreement which was finalized on a4 portion of the value of ira x is awarded to taxpayer b and will be transferred to an individual_retirement_account in his own name pursuant to sec_408 of the code the proposed transfer from ira x to taxpayer b pursuant to the stipulation agreement is considered to be a nontaxable transfer from ira x by taxpayer a and the portion of the ira x account balance that will be transferred ceases to be the property of taxpayer a's ira x at the time of the proposed transfer and can no longer be used to calculate taxpayer a's subsequent payments from ira x the proposed transfer will reduce the ira x account balance which means that the ira x account balance on which taxpayer a will use to calculate her subsequent payments using the same methodology for the series of payments beginning in in the month following the month of division of ira x will produce an annual distribution that is less than the amount calculated when she commenced to receive the series of substantially_equal_periodic_payments from ira x in view of the foregoing we conclude that the proposed division of ira x and the transfer of a certain portion from ira x to taxpayer b pursuant to the stipulation agreement will be considered a nontaxable transfer under code sec_408 we also conclude that the reduction in the monthly distribution from ira x to taxpayer a beginning in the month following the month of division of ira x prior to taxpayer a attaining age will not constitute a modification to a series of substantially_equal_periodic_payments from ira x under code sec_72 that will result in the imposition of the percent additional tax under code sec_72 for ira x this ruling does not express an opinion as to whether but assumes that the series of substantially_equal_periodic_payments received from ira x satisfy code sec_72 and revrul_2002_62 this ruling also assumes that ira x satisfies the requirements of code sec_408 at all times relevant to this transaction 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 addressed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this letter_ruling has been sent to your authorized representative pursuant to a power_of_attorney on file in this office if you have any questions about this ruling please contact identification_number tannic at please address all correspondence to sincerely yours carblor j latkins carlton a watkins manager employee_plans technical group enclosures deleted copy of letter_ruling notice of intention to disclose


internal_revenue_service number info 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 b01 genin-108678-04 date august legend taxpayer dear ----------------------- ------------------------------------------ we are responding to a letter dated date submitted on behalf of the taxpayer requesting a correction of the taxpayer’s name and employer_identification_number ein although we are unable to respond to the request as submitted this letter provides useful information relating to the request according to the information provided the cincinnati service_center issued a notice dated date titled acceptance of form_8869 the notice shows an incorrect name and ein we forwarded your letter to the cincinnati service_center on your behalf the service_center has informed us that the taxpayer’s name and ein concerns have been resolved we hope you find this information helpful sincerely s dianna k miosi dianna k miosi chief branch associate chief_counsel passthroughs and special industries