tax_exempt_and_government_entities_division department of the treasury internal_revenue_service washington d c aug tep 2a t uniform issue list number kikrarekrekrerrerereerereeerereererkreereeer hrekkkkekrrekrereeeeeeaeekeekk hrekeeekekkkeereeerereereeeereee attention rrekekekeekekeeaekekeereeerererekkerkerkee legend church a me hk kakkkkerrerekeraeeeerereeeere co ng reg atio n b haekkekarerekrerertekreekererereeik congregation b-1 hikaru rereeeeeeerereeeeeeeeererere university c me hahahahaha eere corporation d h me hhkkkakkrekkekeeerekekeeerekerereeeer hospital e me kekkkkeakeaearerereeeereererrrerererererererreee hakkar ieee eer eere rear ere are eeeeeeereree herrera rekeeeereekeeeaee organization j me kkikkkkeekeeeereerekeerekrereeeeeelererteree hkahkkraki aker ierie estee eetereeeeeerere organization k ire a ekkrikarakerererr errata state l city m plan x plan y ee akahrarrere rarer ererriaree ae errata iita raha r ei hre rra rrr rii itaa i ierie err t rsh t irr i iiit ia tiaa iiia iasi siar itr kick kiki aee eere ereerrreereee quuz4e7uz2 kekekkkekeraeeeeekrereekeekeeeekes this is in response to a letter dated date as supplemented by additional correspondence dated january august august august and date in which your authorized representative requested a ruling on your behalf under sec_414 of the internal_revenue_code the code’ in support of your ruling_request you have submitted the following statements and information corporation d and hospital e are elements of a health care system established in state l under the auspices of church a congregation b and university c university c is the sole member of corporation d which is the sole member of hospital e hospital e a not-for-profit corporation chartered under the laws of state l operates a teaching hospital and medical clinics by letter dated date the internal_revenue_service service determined that hospital e is a tax-exempt_organization under sec_501 of the code the mission statement of corporation d hospital e’s sole member describes an organization that through the religious heritage of church a is committed to excellence in patient care and the education of health care professionals corporation d’s connections to church a and to congregation b’s traditions of ethical behavior academic distinction and scientific research contribute to new knowledge and advance the organization’s healing mission in the communities that it serves to further this mission corporation d and hospital e foster an environment that encourages innovation embraces diversity respects life and values human dignity congregation b a religious_order was founded under the auspices of church a in furtherance of the teachings and tenets of church a congregation b began providing medical education and health care the head of congregation b is responsible for the governance of congregation b congregation b-1 is a regional subdivision of congregation b with offices and a residence for congregants located in city m of state l the head of congregation b-1 is appointed by and reports directly to the head of congregation b as parts of its mission within church a congregation b-1 lists evangelization of contemporary culture the strengthening of church a heritage and identity contributions to the intellectual life of church a by scholarship research and writing and solidarity with the poor congregation b-1 operates two universities including university c congregation b-1 also is a not-for-profit corporation chartered under the laws of state l as one of four medical schools sponsored by congregation b corporation d values its opportunity to further the teachings and tenets of church a by caring for patients and educating future physicians nurses bio-medical scientists and other medical professionals in the long tradition of church a medical education and health care corporation d and hospital e adhere to the standards of patient care and professional conduct outlined in the services published by the leaders of church a in the united_states for church a health care corporation d’s by-laws provide that university c as the sole member of corpora- tion d retains authority over the election removal appointment and replacement of the members and the chairman of corporation d’s board_of directors university c also has final approval over the election removal appointment and replacement of corporation d’s president and over its annual operating and capital budgets hospital e’s by-laws provide that corporation d as the hospital's sole member retains authority over the election removal appointment and replacement of the hospital's president and the chairman and members of the hospital’s board_of directors corporation d also retains authority to approve and modify the strategic plan and operating and capital budgets of hospital e hospital e adopted plan x a defined benefit pension_plan to effective april provide retirement benefits for its eligible employees and their beneficiaries plan x provides benefit accruals comparable to those provided in plan y adefined benefit plan sponsored by university c participation by hospital e employees in plan y was frozen no employees of for-profit entities or any individuals who are or as of march can be considered employees in connection with any unrelated_trade_or_business within the meaning of sec_513 of the code are eligible to participate in plan x plan x has been adopted by three organizations in addition to hospital e the plan_sponsor congregation b-1 is described above congregation b-1 adopted plan xx and employees ceased accruing benefits under plan y as effective july of june organization k founded in organization j operates facilities for retreats and conferences in cooperation with church a of city m and its surrounding area meetings at organization j are intended to encourage spiritual development among church a adherents and among persons of other religious persuasions organization j adopted plan x effective may benefits under plan y as of april and organization j employees ceased accruing is a not-for-profit publisher of religious literature for congregation b-1 literature published by organization k encourages faith formation in children and spiritual growth in adults organization k adopted plan x effective july employees ceased accruing benefits under plan y as of june and organization k by letter issued by the service dated date plan x was determined to be a qualified multiple_employer_plan under sec_401 and sec_413 of the code a retirement_plan committee that is appointed by hospital e’s board_of directors and which serves at the pleasure of that board administers plan x the principal purpose of the retirement_plan committee is the administration of plan x individual committee members are all employees and executive officers of corporation d or hospital e the retirement_plan committee retains all authority to interpret the plan x document rule on appeals of denied claims and determine the necessary funding levels of plan x a separate retirement_plan investment committee composed of employees and executive officers of corporation d and hospital e oversees the investment of plan x assets congregation b-1 and organizations j and k utilize the administrative committees established and maintained by hospital e to oversee the participation of their employees and their employees’ beneficiaries in pian x congregation b-1 university c_corporation d hospital e and organizations j and k are all organizations listed in the official directory of church a in the united_states the service has determined that all such organizations listed or appearing in the official directory of church a are organizations described in sec_501 of the code and exempt from tax under sec_501 based on the foregoing statements and representations hospital e requests a ruling that plan x is a church_plan within the meaning of sec_414 of the code and has been a church_plan since its april effective date to qualify under sec_401 of the code an employees’ plan generally must among other requirements meet the minimum_participation_standards of sec_410 and the minimum vesting standards of sec_411 qualified_pension plans also must meet the minimum_funding standards of sec_412 each of these sections however contains an exception for a church_plan as defined in sec_414 unless an election has been made in accordance with sec_410 see sec_410 sec_411 and sec_412 further only the employer or administrator of a plan subject_to erisa is required to file form_5500 or form 5500c annual return report of employee_benefit_plan church pension benefit plans and various welfare_benefit plans that are church plans are excused from the filing see announcement 1982_47_irb_53 and sec_1a and sec_2b of the instructions to form_5500 sec_414 of the code generally defines a church_plan as a plan established and maintained for its employees or their beneficiaries by a church or by a convention or association of churches which is exempt from taxation under sec_501 sec_414 of the code provides that a plan will be treated as a church_plan if it is maintained by an organization whether a civil law corporation or otherwise the principal purpose or function of which is the administration or funding of a plan or program for the provision of retirement benefits or welfare benefits or both for the employees of a church or a convention or association of churches if such organization is controlled by or associated with a church or a convention or association of churches sec_414 of the code defines employee to include a duly ordained commissioned or licensed minister of a church in the exercise of his or her ministry regardless of the source of his or her compensation or an employee of an organization whether a civil law corporation or otherwise which is exempt from tax under sec_501 of the code and which is controlled by or associated with a church or a convention or association of churches sec_414 of the code provides that a church or a convention or association of churches which is exempt from tax under sec_501 shall be deemed the employer of any individual included as an employee under subparagraph b sec_414 of the code provides that an organization whether a civil law corporation or otherwise is associated with a church_or_convention_or_association_of_churches if the organization shares common religious bonds and convictions with that church_or_convention_or_association_of_churches sec_1_414_e_-1 of the income_tax regulations regulations provides in pertinent part that the term church_plan does not include a plan which during the plan_year is maintained by two or more employers unless each of the employers is a church that is exempt from tax under sec_501 and less than percent of the employees of such employers are employed in an unrelated_trade_or_business sec_1_414_e_-1 of the regulations provides that for the purpose of this section the term church includes a religious_order or a religious_organization if such order or organization is an integral part of the church and is engaged in carrying out the functions of a church whether as a civil law corporation or otherwise in order for an organization that is not itself a church_or_convention_or_association_of_churches to have a church_plan under sec_414 of the code that organization must establish that its employees are employees or deemed employees of the church_or_convention_or_association_of_churches under sec_414 employees of any organization maintaining a plan are considered to be church employees if that organi- zation is an integral part of the church alternatively employees of any organization maintaining a plan are considered to be church employees if that organization is exempt from tax under sec_501 of the code is controlled by or associated with a church_or_convention_or_association_of_churches and provides for the administration or funding or both of the plan by an organization described in sec_414a of the code 900747u2z2 in this case corporation d and hospital e are elements of a health care system established under the auspices of church a congregation b and university c hospital e a not-for-profit corporation chartered under the laws of state l is part of an organization that through its church a religious heritage and congregation b’s traditions of ethical behavior academic distinction and scientific research is committed to excellence in patient care and the education of health care professionals in addition congregation b-1 corporation d and hospital e and organizations j and k are all organizations listed in the official directory of church a in the united_states organizations listed or appearing in the official directory of church a have been determined by the service to be organizations described in sec_501 of the code and exempt from tax under sec_501 further by virtue of their listings in the church a directory and their commitments to caring for the sick providing quality medical education contributing to the spiritual betterment of church a adherents through ministry publications religious retreats and service to the poor congregation b-1 corporation d hospital e and organizations j and k all share common religious bonds and convictions with church a and congregation b accordingly we conclude that corporation d hospital e and organizations j and k are associated with church a and congregation b for purposes of sec_414 of the church_plan rules moreover under the rule_of code sec_414 if an organization is controlled by or associated with a church_or_convention_or_association_of_churches as provided under sec_414 the employees of that organization are deemed to be employees of that church_or_convention_or_association_of_churches accordingly the employees of corporation d hospital e and organizations j and k in this case also are considered to be church a employees for purposes of the church_plan rules of code sec_414 conversely under the rule_of code sec_414 church a is deemed to be the employer of the employees of corporation d hospital e and organizations j and k with regard to congregation b-1 a religious_order that is an integral part of church a engaged in carrying out the functions of church a within the meaning of sec_1_414_e_-1 of the regulations lay employees of congregation b-1 are therefore church a employees and any member of congregation b or congregation b-1 is a duly ordained commissioned or licensed church a minister in the exercise of his ministry within the meaning of sec_414 of the code having established that congregation b-1 employees are church a employees and that corporation d hospital e and organizations j and k employees are deemed to be church a employees the question remaining is whether or not plan x is administered by an organization the principal purpose or function of which is the administration or funding of a plan or program for the provision of retirement benefits or welfare benefits or both for the employees of a church or a convention or association of churches hospital e adopted plan x a defined benefit pension_plan to effective april provide retirement benefits for eligible employees and their beneficiaries congregation b-1 and organizations j and k subsequently adopted plan x are employed by an organization that is exempt from tax under code sec_501 no plan x participant is employed by an unrelated_trade_or_business all plan x participants a committee that is appointed by hospital e’s board_of directors and serves at the pleasure of that board administers plan x the principal purpose of the committee is the administration of plan x individual committee members are all employees and executive officers of corporation d or hospital e the committee retains all authority to interpret the plan x document and rule on appeals of denied claims a separate retirement_plan investment committee composed of employees and executive officers of corporation d and hospital e oversees the investment of plan x assets we conclude therefore that plan x is maintained by an organization that is controlled by or associated with a church_or_convention_or_association_of_churches the principal purpose or function of which is the administration or funding of a plan or plans within the meaning of sec_414 of the code accordingly it is ruled that plan x is a church_plan within the meaning of sec_414 of the code and has been a church_plan since its april effective date no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter expresses no opinion as to whether plan x continues to satisfy the requirements for qualification under code sec_401 the determination as to whether a plan is qualified under sec_401 is within the jurisdiction of the manager employee_plans determinations programs cincinnati ohio pursuant to sec_1 of plan x hospital e the plan_sponsor is authorized to act on its own behalf and on behalf of each participating employer with respect to any communication with the service on the status of the plan as a qualified_plan or as a church_plan under code sec_414 this ruling therefore is directed only to the taxpayer the plan_sponsor that requested it and those other organizations specifically listed herein as having adopted plan x sec_6110 of the code provides that it may not be used or cited by others as precedent copies of this letter and related documents have been sent to your authorized representative in accordance with a power_of_attorney on file in this office any questions pertaining to the ruling please contact for further information se t ep ra t1 if you have sincerely caton a watbins carlton a watkins manager employee_plans technical group


t c memo united_states tax_court faith j larsen petitioner v commissioner of internal revenue respondent docket no filed date a lavar taylor for petitioner alan h cooper for respondent memorandum findings_of_fact and opinion kroupa judge respondent determined deficiencies in petitioner’s federal_income_tax for and of dollar_figure and dollar_figure respectively and an dollar_figure accuracy-related_penalty under sec_6662 a for after concessions we must decide two issues the first issue is whether petitioner should have included a dollar_figure payment she received from her employer power conversion inc pci in her taxable_income for we hold that petitioner should have included this payment in her taxable_income the second issue is whether petitioner is liable for the accuracy-related_penalty under sec_6662 we hold that she is findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the accompanying exhibits are incorporated by this reference petitioner resided in washington at the time her petition was filed petitioner’s employment the dispute here focuses upon whether the dollar_figure petitioner received from pci was a gift or taxable_income pci employed approximately people and manufactured electronic components magnetic coil and transformers used by other 1all section references are to the internal_revenue_code in effect for the year at issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated 2the parties have resolved all other issues raised in the deficiency_notice and the petition 3we note that the parties stipulated that petitioner would not be liable for self-employment_tax if the court determined that the payment was income electronics manufacturers donald hoiland4 mr hoiland was the owner of pci during petitioner met mr hoiland in mr hoiland hired petitioner as his executive assistant at pci in july of at a dollar_figure per annum salary petitioner reported directly to mr hoiland mr hoiland was so impressed by petitioner’s performance that he promoted her to vice president for operations and increased her salary by dollar_figure after she had worked there a year as vice president petitioner interacted with different departments and provided mr hoiland with suggestions regarding pci’s operations mr hoiland retired and promoted petitioner to president of pci during date the interactions between petitioner and mr hoiland were typically professional petitioner often spoke with mr hoiland by phone as she drove to work the two had lunch together regularly before mr hoiland retired their relationship was never intimate petitioner refused to sign employment contracts of more than year because she was uncertain how long she would stay in seattle mr hoiland offered petitioner a dollar_figure raise a jaguar automobile and a condominium along with her promotion to president and to induce her to stay in seattle but she turned them down 4mr hoiland died in date at age the payment in date approximately month after petitioner was promoted to the pci presidency she received a dollar_figure payment from pci petitioner opened a bank account for bossart an entity she created for her commercial photography business in anticipation of her receipt of the dollar_figure payment dave skone mr skone pci’s accountant helped petitioner with the bossart licensing and other paperwork petitioner deposited the dollar_figure into bossart’s bank account over which she had sole signatory authority petitioner played a limited role in determining how she would receive the dollar_figure payment her lawyer herman pettegrove mr pettegrove contacted mr skone mr hoiland mr skone and mr pettegrove arranged the payment to her petitioner and mr pettegrove allege that mr skone characterized the payment as a gift neither mr pettegrove nor petitioner asked pci for documentation that the payment was a gift pci issued petitioner a form 1099-misc miscellaneous income reporting that it paid petitioner dollar_figure petitioner and mr hoiland discussed bonuses at christmas time a few weeks before pci paid her the dollar_figure it was petitioner’s belief that no other employee of pci received a bonus as large as dollar_figure decline in petitioner’s employment relationship with pci after retiring mr hoiland traveled extensively while traveling mr hoiland called petitioner and threatened to fire her if she did not sleep with him when he returned petitioner feared that mr hoiland a recovering alcoholic was drinking again and she attributed his advances to a relapse petitioner called the personnel manager for pci who encouraged her to prepare and file a summary of her conversation with mr hoiland mr hoiland apologized to petitioner when he returned from his vacation and explained that he had indeed been drinking petitioner’s relationship with mr hoiland and pci deteriorated rapidly after this exchange with mr hoiland mr hoiland fired petitioner in date petitioner informally asserted a claim against pci for damages after pci terminated her employment petitioner and pci engaged in mediation to settle the claim petitioner through her counsel alleged that the dollar_figure payment was a bonus during mediation the mediation resulted in petitioner’s receiving a dollar_figure settlement of which dollar_figure was allocated to back wages and dollar_figure to general damages attorney’s fees and costs petitioner and pci also waived all other claims against one another as part of their mediation agreement the tax treatment of the mediation settlement is not in dispute petitioner’s federal_income_tax return petitioner timely filed a federal_income_tax return for but she did not report the dollar_figure payment mr pettegrove who occasionally assisted petitioner in legal matters and in the preparation of her tax returns prepared her federal_income_tax return mr pettegrove is admitted to practice before the tax_court petitioner provided mr pettegrove with the form 1099-misc that she received from pci and her other tax documents the form 1099-misc was in the total amount of dollar_figure including the dollar_figure payment and dollar_figure for the value of a computer given to petitioner petitioner acknowledged receipt of the computer but she and respondent agree that its value was dollar_figure mr pettegrove asked for no corroboration or substantiation from petitioner or pci to show that the dollar_figure payment was a gift other than his conversations with pci representatives and petitioner mr pettegrove made no independent determination of whether the dollar_figure payment was a gift or a bonus mr skone pci’s accountant helped petitioner prepare her state tax_return petitioner reported the dollar_figure payment in the category of services other activities on the state tax_return petitioner paid the washington state tax due with the return petitioner wrote taxes in the memo line of this check and made her check payable to the washington state department of revenue pci did not deduct the dollar_figure payment on its federal_income_tax return for pci issued petitioner a form misc for the dollar_figure payment rather than a form_w-2 wage and tax statement pci did not withhold tax on the dollar_figure payment respondent mailed a deficiency_notice to petitioner treating the dollar_figure payment as a bonus not a gift as petitioner asserts petitioner filed a timely petition opinion petitioner did not report the dollar_figure payment and contends that it was a gift respondent determined that the dollar_figure payment was includable in petitioner’ sec_2001 income and that petitioner is liable for an accuracy-related_penalty petitioner contends that she is not liable for the accuracy-related_penalty because she acted with reasonable_cause and in good_faith in reliance upon the advice of her lawyer and tax preparer we address each issue in turn inclusion of the dollar_figure payment in petitioner’s income5 we first consider whether petitioner should have included the dollar_figure payment in income petitioner failed to include this amount in income on her return even though pci issued her a 5petitioner conceded that she bears the burden_of_proof on this issue see rule a form 1099-misc showing the payment as income respondent contends that this payment was not a gift and petitioner should have included it in income petitioner claims this payment was a gift from pci’s owner mr hoiland whom petitioner identified as a close acquaintance petitioner alleges that mr hoiland’s generosity stemmed from a romantic interest in her rather than her performance for pci gross_income is income from whatever source derived unless otherwise excluded sec_61 gross_income includes compensation from services sec_61 gross_income does not include the value of property acquired by gift sec_102 generally amounts transferred by or for an employer to or for the benefit of an employee are includable in gross_income sec_102 the legislative_history underlying sec_102 indicates that a payment from an employer to an employee solely for personal reasons can still be a gift if the payment is completely unrelated to the employment relationship and reflects no expectation of a business benefit williams v commissioner tcmemo_2003_97 citing s rept pincite 1986_3_cb_1 affd 120_fedappx_289 10th cir h rept pincite n 1986_3_cb_1 a gift must proceed from a detached and disinterested generosity motivated by affection respect admiration charity or the like for income_tax purposes duberstein v 363_us_278 williams v commissioner supra the transferor’s intention is the most critical consideration for this inquiry duberstein v commissioner supra pincite the transferor’s own characterization of the payment however is not determinative id pincite there must be an objective inquiry as to whether the payment is really a gift id payments from an employer to an employee may still be income to the employee even when the two share a close friendship williams v commissioner supra also payments between an employer and an employee may be income when the employer provides neither a form_w-2 nor a form 1099-misc and fails to withhold tax on those payments leschke v commissioner tcmemo_2001_18 nevertheless a payment between an employer and an employee may be a gift when the relationship between the employer and the employee is personal and unrelated to work caglia v commissioner tcmemo_1989_143 harrington v commissioner tcmemo_1958_194 the personal relationship may be indicated by after-work social interactions or activities such as gambling trips see caglia v commissioner supra harrington v commissioner supra mr hoiland rewarded petitioner’s performance as an officer and employee of pci with promotions and raises mr hoiland arranged to give petitioner the dollar_figure payment after she turned down a dollar_figure raise and an offer of a home and an automobile the offers that preceded the dollar_figure payment related to petitioner’s role as an employee those offers were either to reward petitioner’s performance or to induce her to remain in the seattle area although petitioner and mr hoiland worked together and were close acquaintances there was no romantic relationship between them petitioner did not travel with mr hoiland and their social relationship did not transcend their work relationship although mr hoiland made one sexual advance petitioner flatly rejected it these facts suggest that the dollar_figure payment was motivated by business exigencies and not by detached or disinterested generosity see duberstein v commissioner supra pincite considering the record as a whole we find that petitioner’s uncorroborated testimony that mr hoiland had an unrequited romantic interest in her or that she was the only employee to receive a substantial payment at the end of the year is insufficient to support her contention that the payment was a gift we are not required to accept the self-serving testimony of interested parties without persuasive evidence or corroboration see 87_tc_74 yang v commissioner tcmemo_2000_263 pci’s issuance of a form 1099-misc reporting the dollar_figure payment indicates that pci did not intend this payment to be a gift petitioner reported the dollar_figure payment as income under the category services other activities on her state tax_return and paid the state tax on the additional income mr skone the same accountant who purportedly advised mr pettegrove that the payment was a gift prepared that return petitioner has failed to establish that the dollar_figure payment was a gift accordingly we hold that respondent’s 6while petitioner and respondent had approximately years from the time that the petition was filed to the start of trial both failed to produce relevant information about pci’s tax returns that would have been helpful to the court although the parties stipulated that pci did not deduct the payment in the parties did not present evidence regarding which accounting_method pci used a donor’s characterization of his action however is not determinative of its tax treatment in the hands of the recipient duberstein v 363_us_278 7petitioner also inaptly argued that the duty_of_consistency doctrine precludes respondent from asserting that the dollar_figure payment is income to petitioner petitioner’s argument is premised upon respondent’s stipulation that the income to petitioner is either wage income or a gift and that it was not self-employment_income petitioner’s counsel suggests that this is inconsistent with pci’s treatment of the payment because pci did not pay employment_taxes on that payment the duty_of_consistency doctrine estops a taxpayer from adopting a position in an open_year that is inconsistent with a position that the taxpayer took during a different year after the period of limitations has expired for the earlier year 231_f3d_541 9th cir affg tcmemo_1998_145 estoppel and the duty_of_consistency are to be applied against the commissioner with the utmost caution and restraint if at all and only in compelling situations where the result otherwise would be unwarrantable or unconscionable 67_tc_612 petitioner’s argument must fail as there is no inconsistent treatment or position asserted or taken by respondent determination that the dollar_figure payment to petitioner was includable in income was not in error whether petitioner is liable for the accuracy-related_penalty we next consider whether petitioner is liable for the accuracy-related_penalty under sec_6662 respondent determined that petitioner was liable for the accuracy-related_penalty for for dollar_figure of unreported income including the dollar_figure payment and dollar_figure for a computer pci provided her petitioner argues that even if she is liable for income_tax on the dollar_figure payment she is not liable for the penalty because she acted in good_faith and with reasonable_cause respondent bears the burden of production under sec_7491 and must come forward with sufficient evidence that it was appropriate to impose the penalty see 116_tc_438 respondent determined that petitioner is liable for the accuracy-related_penalty for negligence or disregard of rules or regulations and or a substantial_understatement_of_income_tax under sec_6662 for a taxpayer may be liable for a 20-percent penalty on any underpayment_of_tax attributable to negligence or disregard of rules or regulations or a substantial_understatement of tax sec_6662 and b negligence is any failure to make a reasonable attempt to comply with the provisions of the internal_revenue_code and disregard means any careless reckless or intentional disregard sec_6662 an underpayment is not subject_to the penalty for negligence or for disregard of rules and regulations to the extent that the taxpayer shows that the underpayment is due to reasonable_cause or good_faith 115_tc_43 affd 299_f3d_221 3d cir see also sec_1 a a income_tax regs a substantial_understatement of tax is an understatement that exceeds the greater of percent of the tax required to be shown on the tax_return or dollar_figure sec_6662 without including the dollar_figure in income petitioner reported a tax due of dollar_figure whereas respondent determined a tax due of dollar_figure and a federal_income_tax deficiency of dollar_figure petitioner understated her income_tax for in an amount greater than dollar_figure or percent of the tax required to be shown on the return respondent has therefore met his burden of production with respect to petitioner’s substantial_understatement_of_income_tax the accuracy-related_penalty under sec_6662 does not apply to any portion of an underpayment if it is shown that there was reasonable_cause for the taxpayer’s position and that the taxpayer acted in good_faith with respect to that portion sec_6664 sec_1_6664-4 income_tax regs accordingly we next consider whether the taxpayer acted with reasonable_cause and in good_faith our consideration of this aspect is based on pertinent facts and circumstances including the taxpayer’s efforts to assess his or her proper tax_liability the knowledge and experience of the taxpayer and the reliance on the advice of a professional sec_1_6664-4 income_tax regs when a taxpayer relies on the professional judgment of a competent tax adviser and provides him or her with all relevant information the taxpayer’s behavior is consistent with ordinary business care and prudence 469_us_241 to establish reasonable_cause through reliance on the advice of a tax adviser the taxpayer must meet a three-prong test laid out by neonatology associates p a v commissioner supra pincite the adviser was a competent professional who had sufficient expertise to justify reliance the taxpayer provided necessary and accurate information to the adviser and the taxpayer relied in good_faith on the adviser’s judgment petitioner bears the burden_of_proof with respect to the defenses to the accuracy-related_penalty see higbee v commissioner supra pincite petitioner has not established that she had reasonable_cause and acted in good_faith petitioner claims that she relied on mr hoiland and mr skone’s characterization of the payment petitioner presents no credible_evidence corroborating her testimony that this was indeed their characterization of the payment she also presents no credible_evidence that mr hoiland or mr skone was competent to advise her on the taxable nature of the payment she received petitioner’s claims that mr skone told her the payment was a gift are even harder to believe because mr skone prepared her state tax_return reporting the payment as income petitioner also claims to have relied upon the advice of mr pettegrove this is dubious as he offered none he relied on her characterization of the payment as a gift and made no further inquiry particularly troubling is the fact that he completely disregarded the form 1099-misc from pci that petitioner provided to him after considering all of the facts and circumstances we find that petitioner failed to establish that she had reasonable_cause and acted in good_faith with respect to the underpayment accordingly we sustain respondent’s determination that petitioner is liable for the accuracy-related_penalty we have considered all the remaining arguments that the parties made and to the extent not addressed we find them to be irrelevant moot or meritless to reflect the foregoing and the concessions of the parties decision will be entered under rule


fa irs department of the treasury internal_revenue_service p o box cincinnati oh number release date date date employer id number contact person number contact telephone number form you must file tax years uil dear this letter is our final_determination that you don't qualify for tax-exempt status under sec_501 of the internal_revenue_code the code recently we sent you a proposed adverse determination in response to your application the proposed adverse determination explained the facts law and basis for our conclusion and it gave you days to file a protest because we didn't receive a protest within the required days the proposed determination is now final because you don't qualify as a tax-exempt_organization under sec_501 of the code donors can't deduct contributions to you under sec_170 of the code you must file federal_income_tax returns for the tax years listed at the top of this letter using the required form also listed at the top of this letter within days of this letter unless you request an extension of time to file we'll make this final adverse determination_letter and the proposed adverse determination_letter available for public inspection as required under sec_6110 of the code after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions follow the instructions in the notice on how to notify us if you agree with our deletions you don't need to take any further action we'll also notify the appropriate state officials of our determination by sending them a copy of this final letter and the proposed determination_letter under sec_6104 ofthe code you should contact your state officials if you have questions about how this determination will affect your state responsibilities and requirements letter4038 rev catalog number if you have questions about this letter you can contact the person listed at the top of this letter if you have questions about your federal_income_tax status and responsibilities call our customer service number pincite-829-1040 tty for deaf or hard of hearing or customer service for businesses pincite-829-4933 sincerely jeffrey i cooper director exempt_organizations rulings and agreements enclosures notice redacted letter proposed adverse determination under sec_501 c redacted letter final adverse determination under sec_501 - no protest letter4038 rev catalog number fij irs department of the treasury internal_revenue_service p o box cincinnati oh legend b date c state d name f organization g organization dear date date employer id number contact person number contact telephone number contact fax number uil we considered your application_for recognition of exemption from federal_income_tax under sec_501 of the internal_revenue_code the code based on the information provided we determined that you don't qualify for exemption under sec_501 of the code this letter explains the basis for our conclusion please keep it for your records issues do you qualify for exemption under sec_50l c of the code no for the reasons stated below facts you formed on b in the state of c pursuant to its general statutes your stated purposes in your articles of incorporation are as follows said organization is organized exclusively for charitable religious educational and scientific purposes including for such purposes the making of distributions to organizations that qualify as exempt_organizations under sec_50l c of the internal_revenue_code or corresponding section of any future federal tax code the business activity for said organization is as follows provide ministry to a group by teaching various topics to strengthen their relationships and spiritual walk with god you are governed by a board_of four persons led by your president d the other board members consist of d's spouse d's aunt and d's friend d and one other board member are compensated letter rev catalog number 47630w initially in your application you stated that your activities consist of teaching biblical principles for everyday life to this end you stated you would teach classes to youth regarding communicating in society sexual purity marriage and forgiveness additionally you stated you provide ministry opportunities to churches to participate in disaster relief efforts and you travel to historical places and compare the places to the biblical foundations set by america's forefathers you further stated that you will contact organizations daily and visit churches to seek an opportunity to work with their ministries through your outreach ministry and you would seek to provide an opportunity for underprivileged children to participate in your programs and seek financial support for them to cover any expenses you included a travel brochure with your application and stated that your activities will be conducted at various locations while traveling on the road upon case development you explained that your sole activity consists of providing mobile retreats on a specially converted bus to accommodate a group of thirty-eight retreaters your services include providing transportation sleeping accommodations on the bus and meals for church or ministry groups participating in your retreats the teachings you described in your application are provided to participants during your trips mainly incorporating bible lessons all materials used are directly from the bible you primarily provide these services for a children's choir and you provided a copy of your contract with them showing they pay you to transport them to their various singing venues for twenty-nine weeks of the year when you are not providing your services for the children's choir you stated that you provide your services to other ministry groups four to eight times during the year for purposes of conducting vacation bible schools singing in nursing homes or serving on disaster relief teams the ministry teams you transport provide the ministry or service projects your role is to provide transportation accommodations food and bible classes for team participants part of each trip may include stops at amusement parks beaches and other recreational destinations you submitted a brochure outlining your services and inviting people to call today and plan your mobile retreat the following are excerpts from your brochure join d and his spouse for an exciting trip as each day will bring the excitement of the day the lord hath made psalm sec_118 call today lock in your dates and let us start planning now the planning of your trip where do you want to go we will drive each night to get your group there throughout each day of your retreat the purpose of your trip what do you want to do missions trip disaster relief service fun and education marriage enrichment you decide and we'll put it together for you letter rev catalog number 47630w what can we do we will drive we can cook meals mainly breakfast and lunches yes hot ones and not just cereal or bologna sandwiches although they are good too we can work out the details of where you want to visit and get tickets and reservations we will teach preach play music pop popcorn and even tum down the blankets for you what do you need to do most trips average days and nights however we can do more the cost depends on what we are doing and where we are going we will work with your group and customize your mobile retreat to fit into your budget fund raisers and sponsorship are a good way to help keep the individual costs down start one now and build up your fund quickly so we can get on the road sooner the bottom line will be the lives that will be changed and transformed into the likeness and mind of christ we all need to grow and mature in the lord often there are times when things hinder our growth and walls go up breaking down those walls and allowing god's word to heal the hearts and then rebuild our lives makes all of our efforts of working together with you worth it all this is not your usual check into a hotel and stay three days retreat it's not like going to church camp for a week and sleeping in a cabin with no a c it's a new adventure everyday sic arise your first morning out on top of a mountain and hear your voice echo throughout the hills enjoy day two at an exciting amusement park with rides shows or water activities then finish up day three relaxing on a beautiful beach feeling the oceans breeze each day we will incorporate bible lessons since formation you have taken approximately twenty trips the purposes listed for your trips include a men's retreat exchange student ministry ministry to nursing homes and a youth retreat among others you stated in the course of your trips you have visited several amusement parks national parks and national monuments we requested an hourly itinerary for your last four trips which included time for all your activities including bible classes your last four trips were conducted for a f group a college class a church choir and g the itinerary for the f group included visits to niagara falls new york city and washington dc as well as a whitewater rafting trip j ach destination had a full schedule of sightseeing the itinerary indicates that you conducted group devotions every evening the trip for the college included destinations to various campgrounds at national parks such as yellowstone and the grand canyon the itinerary for the college class did not make any reference to bible classes or devotions the itinerary for the church choir included three days with multiple stops for singing according to the itinerary you planned a visit to an amusement park for the final day of the letter rev catalog number 47630w trip your itinerary labeled g included visits to niagara falls new york city and washington dc each destination included a full_day of sightseeing your trip information sheet shows that you held devotions each morning and evening you determine the cost of your trips based on an amount for the driver's salary fuel bus maintenance meals and activities you explained that you use a cost share program for each trip wherein you divide the total costs of the trip by the number of participants generally each participant pays his or her share ofthe cost however if someone is unable to pay another person may pay their share or you stated that you may cover their expenses from general donations you are supported by fees as well as donations the children's choir raises its own funds for its trips you submitted a copy of your retreat agreement with the children's choir which shows the choir pays you for the driver's salary mileage and bus idle time the agreement shows that you calculated a ten percent discount on the bus idle fee and mileage and a five percent discount on the driver's salary the agreement provides provisions for overage charges if the duration of the trip and or mileage exceeds the duration and mileage to which you agreed fees for entertainment fuel and tolls are not included in the agreement total your website encourages donations so that you keep prices low we asked you how many program participants' costs were covered from general donations you stated that out of participants around paid nothing and the remaining participants paid a small amount of their share after their organization contributed funds and after you used any available funds to assist you stated that if funds are designated for an individual's share it goes directly to their share for large groups the organizations raise funds on behalf of their participants and the amount raised is shared among the individuals attending the attendees then pay the amount remaining to their organization historically you provided one donation to a church but you do not have plans to make similar donations in the future your expenses are for compensation_for your directors at least one ofwhom also serves as a driver rent to store the motorhome supplies maintenance of the motorhome gas lodging and miscellaneous expenses law sec_501 of the code provides in part for the exemption from federal_income_tax to organizations organized and operated exclusively for charitable religious or educational_purposes where no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_1 c -1 c l states that an organization will be regarded as 'operated exclusively' for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 c an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose revrul_77_366 1977_2_cb_192 describes a nonprofit organization that was formed to provide a continuing educational program in an atmosphere conducive to spiritual renewal the organization's only activities consisted of the regular arrangement and conduct of fourteen-day wintertime cruises on chartered ships in addition to the usual cruise activities the programs conducted on each cruise included a schedule of lectures discussion groups and special interest workshops on religious topics at which attendance was not required for approximately four hours on each of the nine days the ship was at sea the organization conducted lectures discussions and workshops the remainder of the time was available for meals recreation activities and social functions many of the social and recreational function were arranged as part of the cruise and recreational letter rev catalog number 47630w facilities were readily at hand for participants use a day was spent at each of five different ports of call where arrangements were made for general sightseeing tours and shopping opportunities at three of the ports of call the cruise sponsored programs also enabled the participants to spend minor portions of their time ashore meeting with local church leaders attending worship services and or visiting mission projects the ruling held that the lectures discussions workshops and some of the activities on shore further religious and educational_purposes however the extensive amount of time energy and other resources which are regularly devoted to the conduct of social and recreational activities together with the manner in which such activities are scheduled in relation to other cruise programs and all the other attendant facts and circumstances here present demonstrate that the organization's conduct of such social and recreational activities serve substantial independent purposes of a non-charitable nature revrul_77_430 1977_2_cb_194 describes an organization which conducted religious weekend retreats at a rural lakeshore site where participants enjoyed recreational facilities during their limited free time and qualified for exemption under sec_501 c the organization was formed for the purpose of conducting weekend religious retreats open to individuals of diverse christian denominations the retreats are conducted by ministers and priests of the various denominations the activities engaged in at the retreats are group and individual prayer lectures reading and meditation such activities are generally scheduled on an hourly basis throughout the day although no recreational activities are scheduled there is a limited amount of free time in which the participants may relax and enjoy the facilities in better business bureau of washington d c inc v united_states 326_us_179 the supreme court held that the presence of a single non-exempt purpose if substantial in nature will destroy a claim for exemption regardless of the number or importance of truly exempt purposes in 70_tc_352 the organization provided consulting services for a fee to various tax-exempt and non-profit organizations the organizations fees were set at or close to cost the court concluded that those activities are not inherently charitable because they are of the type typically conducted by for-profit organizations even though the organization argued that its fees may in fact be lower than those charged by other firms the court concluded that it was not enough to prove that organization's purposes are primarily exempt the court concluded that the petitioner is not an organization described in sec_501 because its primary purpose is neither educational scientific nor charitable but rather commercial in the schoeger foundation v commissioner 76_tc_380 the applicant organization which was characterized as a religious retreat facility owned and operated a mountain lodge numerous religious recreational and social activities were available to the lodge's guests none of which were regularly scheduled or required the religious activities revolve around individual prayer and contemplation with optional daily devotions and occasional sunday services available to the guests the court held that the organization did not qualify for exemption because the lodge's recreational and social activities were those of a vacation resort in retreat in motion inc v c i r 48_tcm_334 t c memo a religious_organization was formed to provide fun experiences through bus trips to florida disneyworld and washington dc to accomplish its purposes the organization acquired an over-the-road bus which it rebuilt inside in order to provide in-bus sleeping facilities the organization's program consisted of taking church-related groups on three-to five-day trips and providing an environment which was more conducive to the sharing of the christian faith the bus trips constituted the entire program of the organization with the only other activities ancillary such as fund letter rev catalog number 47630w raising administration and bus maintenance the organization failed to qualify as a tax-exempt_organization the recreational aspects of the trips involving secular sightseeing beach-going mountain climbing etc were not shown by the taxpayer to be insubstantial in nature and were not merely incidental to religious activities application of law you are not described in sec_501 c of the code you do not meet the operational_test as described in sec_1 c -1 c because you have failed to establish that you exclusively further charitable religious or educational_purposes or any other purposes described in sec_501 of the code and because you have failed to establish that no more than an insubstantial part of your purposes are social recreational and commercial you stated that your purpose is to restore relationships through the teachings you share during travel we asked you to provide itineraries which showed an hourly schedule of your activities including bible classes the only reference to bible classes on some of your itineraries was morning and evening devotions the itineraries include multiple stops for sightseeing and amusement parks your devotional times are only a small part of your overall activities which are providing transportation services for a fee according to better business bureau of washington d c inc v united_states you fail to qualify for exemption from federal_income_tax due to the presence of a substantial non-exempt purpose your transportation services this is true regardless of the number of truly exempt purposes you are similar to the organizations described in retreat in motion inc v c i r and revrul_77_366 in that you arrange and conduct travel opportunities which include an opportunity for spiritual renewal your sole activity is your mobile retreats and similar to those organizations your retreats include extensive opportunities for sightseeing recreational and social activities indeed the itineraries submitted with your application showed that your participants engaged in activities such as sightseeing whitewater rafting and attending amusement parks although you have a devotional time each evening during your trip it is clear that a substantial purpose of your organization is to transport persons to participate in social and recreational activities in fact based on the itineraries you provided the devotional times are only an incidental part of your overall purposes we note that some groups you transport may conduct activities that further religious or charitable purposes however it is they not you who conduct those activities your role is to provide transportation and to coordinate their sightseeing adventures we also note that although you state your purpose is to transport groups to ministry opportunities only one of your four most recent itineraries pertained to a group participating in ministry the itineraries and brochures show your activities further substantial social and recreational purposes by transporting persons to sites where they may engage in recreational activities you are distinguished from the organization in revrul_77_430 above which provided a full schedule of group and individual prayer lectures reading and meditation conducted each hour throughout the day participants attending their retreats had access to recreational facilities in their limited spare time instead of you providing structured religious activities your brochures make it clear that your participants choose the destinations and activities of the trips the brochures also advertise that each day participants may awaken on a mountain a beach or may attend an amusement park we also note that some of the organizations you serve provide activities for persons in a charitable_class such as for youth f trip or for persons who may be distressed g however you do not have an established program to provide charitable programs for a charitable_class nor do you appear to limit the availability of your retreats in any way instead the organizations which utilize your services to plan the trip determine the destinations your role is to provide travel services and to organize the logistics of the trips you are more like the organization described in the schoeger letter rev catalog number 47630w foundation v commissioner which provided opportunities for several unstructured activities most of which furthered social and recreational purposes you stated your primary activity is providing transportations services to the children's choir for a fee according to your contract you provide these services to them twenty-nine weeks of the year they pay you a fee for the driver's salary bus mileage and bus idle time the services you provide are not distinguished from those provided by a for-profit bus charter company like the organization in b s w group inc v commissioner your activities are not inherently charitable rather your primary purpose is providing services for a fee which is commercial also like the organization in b s w group inc v commissioner you state that you set your fees at cost however that is insufficient to establish you are formed for purposes described in sec_501 ofthe code you are similar to the organization described in revrul_72_369 you provide services at cost to primarily non-profit groups you did not specify whether all the organization you serve have been recognized as exempt from federal_income_tax under sec_501 of the code however as held in revrul_72_369 above that factor alone is insufficient to establish you are operated for charitable purposes like the organization described in revrul_72_369 your services are those generally carried on by for-profit companies you are not supported significantly by grants or donations although your financial data shows you will receive donations and your website also shows you will solicit for donations your travel brochure clearly states that the cost of the trip depends on where participants go and the activities conducted you stated that you covered the cost of participants but the other facts of the case do not support this assertion when we asked you how you determined who you would assist you stated that funds designated for an individual's share is paid for their share and large groups raise funds on behalf of their participants additionally your brochure encourages your trip participants to start their own fundraiser to keep costs down thus we must conclude that the organizations participating with you typically raise their own funds rather than you subsidizing costs from general donations setting your fees at cost lacks the donative element necessary to establish you are operated exclusively for exempt purposes under sec_501 of the code even if you did provide your services at substantially below cost your services do not exclusively further 50l c purposes as described above your services work to substantially further social and recreational purposes your position you state that you are not a motor coach transportation business you do not seek commercial business and are not involved in one day bus trips your purpose is to work with ministries that serve others through ministry you state that during evening travel you will have a time to share with each other so that relationship healing may begin you stated that like a church camp which provides recreational activities like swimming volleyball and arts and crafts your main focus is to help each individual grow spiritually from teaching the bible you desire to be able to accept tax deductible contributions to minimize your operational costs our response to your position as described above you did not establish that you are formed exclusively for the purposes described in sec_501 ofthe code you did not distinguish yourself from a commercial business providing transportation services merely adding a devotional time to your itinerary does not make your operations exclusively religious the commercial and recreational aspects of your operations are substantial although it is possible that a recreational activity may further a c purpose you did not establish how your operations do so even if you did establish that your recreational activities further 50l c purposes the substantial commercial aspects of your operations would preclude exemption although given an opportunity to revise your activities and brochures you made no changes and thus provided no additional information for us to consider we note letter rev catalog number 47630w additionally that the factual assertions in your position statement were not signed under penalties of perjury as required by rev procs and however the information in your position statement provided no new information conclusion you do not qualify for exemption from federal_income_tax under sec_501 ofthe code because you do not meet the operational_test you failed to establish that you are operated exclusively for religious charitable educational or other c purposes additionally the administrative record indicates that you are formed to further substantial social recreational and commercial purposes if you don't agree you have a right to file a protest if you don't agree with our proposed adverse determination to do so you must send a statement to us within days of the date of this letter the statement must include your name address employer_identification_number ein and a daytime phone number a copy of this letter highlighting the findings you disagree with an explanation of why you disagree including any supporting documents the law or authority if any you are relying on the signature of an officer director trustee or other official who is authorized to sign for the organization or your authorized representative one of the following declarations for an officer director trustee or other official who is authorized to sign for the organization under penalties of perjury i declare that i examined this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete for authorized representatives under penalties of perjury i declare that i prepared this protest statement including accompanying documents and to the best of my knowledge and belief the statement contains all relevant facts and such facts are true correct and complete your representative attorney certified_public_accountant or other individual enrolled to practice_before_the_irs must file a form_2848 power_of_attorney and declaration of representative with us if he or she hasn't already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney we'll review your protest statement and decide if you provided a basis for us to reconsider our determination if so we'll continue to process your case considering the information you provided if you haven't provided a basis for reconsideration we'll forward your case to the office of appeals and notify you you can find more letter rev catalog number 47630w information about the role of the appeals_office in publication how to appeal an irs decision on tax exempt status if you don't file a protest within days you can't seek a declaratory_judgment in court at a later date because the law requires that you use the irs administrative process first sec_7428 of the code where to send your protest please send your protest statement form_2848 if needed and any supporting documents to the applicable address u s mail street address for delivery service internal_revenue_service eo determinations quality assurance room p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street room cincinnati oh you can also fax your statement and supporting documents to the fax number listed at the top ofthis letter if you fax your statement please contact the person listed at the top of this letter to confirm that he or she received it lfyou agree if you agree with our proposed adverse determination you don't need to do anything if we don't hear from you within days we'll issue a final adverse determination_letter that letter will provide information on your income_tax filing_requirements you can find all forms and publications mentioned in this letter on our website at www irs gov formspubs if you have questions you can contact the person listed at the top of this letter sincerely jeffrey i cooper director exempt_organizations rulings and agreements enclosure publication letter rev catalog number 47630w


t c memo united_states tax_court richard be elizabeth s nilsen petitioners v commissioner of internal revenue respondent docket nos filed date jerome l blut for petitioners timothy s sinnott for respondent memorandum opinion couvillion special_trial_judge in these consolidated cases respondent determined that petitioners were liable for the following additions to tax for the years and unless otherwise indicated all section references are to the internal_revenue_code in effect for the years at issue and all rule references are to the tax_court rules_of_practice and procedure additions to tax_year sec_6653 sec_6653 sec_6661 sec_443 dollar_figure --- fifty percent of the interest due on dollar_figure fifty percent of the interest due on dollar_figure the issues for decision are whether for and petitioners are liable for the additions to tax under sec_6653 and for negligence and whether for petitioners are liable for the addition_to_tax under sec_6661 for a substantial_understatement of tax the issues in these cases relate to the participation of richard e nilsen petitioner as a limited_partner in a partnership known as blythe jojoba ii research ltd blythe ii or the partnership some of the facts were stipulated and those facts with the annexed exhibits are so found and are incorporated herein by reference at the time the petitions were filed petitioners’ legal residence was henderson nevada petitioner is a medical doctor specializing in family practice medicine petitioner has been practicing family medicine in las vegas nevada since during or when petitioner was a medical intern he became acquainted with a financial adviser named gary sheets mr sheets at that time mr sheets began advising petitioner on various financial matters and introduced petitioner to numerous investment opportunities between the years and petitioner invested money with mr sheets approximately two or three times per year petitioner experienced a favorable rate of financial success with mr sheets' investment suggestions which consisted primarily of real_estate investments such as land development during mr sheets approached petitioner about investing in blythe ii which was being promoted as an agricultural research_and_development partnership blythe ii was the first agricultural type investment opportunity that had been proposed by mr sheets for consideration by petitioner mr sheets provided petitioner with a fairly voluminous private_placement memorandum’ the offering which described the proposed investment in and the activities to be conducted through blythe ii petitioner admittedly only scanned the document and did not carefully read each page instead petitioner passed along the offering to his certified_public_accountant gary mathis mr mathis who routinely reviewed petitioner's other investment opportunities after perusing the offering mr mathis advised petitioner that blythe ii appeared to be a reasonable investment opportunity and that petitioner should be entitled to deductions for research_and_development costs as well as other partnership expenses the private_placement memorandum consisted of some pages plus exhibits and a table of contents petitioner also contacted jack huntington mr huntington who operated huntington jewelers in las vegas to inguire about the use of jojoba bean oil in the jewelry and watch industry according to the offering one of the potential uses for oil extracted from jojoba beans was a substitute for sperm whale oil which had been banned from importation into the united_states in the early 1970's mr huntington advised petitioner that there was some concern among those in the watch industry about the availability of sperm whale oil as a lubricant and the prospects for any viable substitute petitioner did not consult an attorney or any independent expert in the area of agriculture or jojoba plants regarding whether jojoba oil could be a viable or competitive substitute for sperm whale oil petitioners nevertheless invested in blythe ii on their joint federal_income_tax return petitioners reported wages of dollar_figure from petitioner's medical practice and a loss of dollar_figure from blythe ii including the loss reported from blythe ii petitioners reported total net losses from various partnerships of dollar_figure for thus petitioners reported an adjusted_gross_income of dollar_figure and a total_tax liability of dollar_figure during date petitioners filed an amended_return for reporting an increase in adjusted_gross_income of dollar_figure due to the disallowance of another partnership loss continued on their joint federal_income_tax return petitioners reported wages of dollar_figure from petitioner's medical practice and a loss of dollar_figure from blythe ii including the loss reported from blythe ii petitioners reported total net losses from various partnerships of dollar_figure for thus petitioners reported an adjusted_gross_income of dollar_figure and a total_tax liability of dollar_figure ’ blythe ii was audited by the internal_revenue_service anda notice of final_partnership_administrative_adjustment was issued to the partnership the partnership initiated a tefra proceeding in this court and a decision was entered in utah jojoba i research v commissioner tcmemo_1998_6 which involved a similar jojoba investment program ’ in the decided case this court held that the partnerships did not directly or indirectly continued claimed on their original return on the amended_return petitioners reported a total_tax liability of dollar_figure during date petitioners filed an amended_return for reporting an increase in adjusted_gross_income of dollar_figure due to respondent's disqualification of a pension and profit-sharing_plan to which petitioner made contributions during on the amended_return petitioners reported a total_tax liability of dollar_figure the tax_matters_partner of blythe ii signed a stipulation to be bound by the outcome of utah jojoba i research v commissioner tcmemo_1998_6 bighteen docketed cases were bound by stipulation by the outcome of utah jojoba i research v commissioner supra engage in research or experimentation and that the partnerships lacked a realistic prospect of entering into a trade_or_business in upholding respondent's disallowance of research_and_experimental_expenditures the court found that the agreements between the partnerships and the proposed research_and_development contractor u s agri research development corp u s agri had been designed and entered into solely to provide a mechanism to disguise the capital contributions of limited partners as currently deductible expenditures the court stated that the activities of the partnerships were another example of efforts by promoters and investors in the early 1980's to reduce the cost of commencing and engaging in the farming of jojoba by claiming inaccurately that capital expenditures in jojoba plantations might be treated as research or experimental expenditures_for purposes of claiming deductions under sec_174 id as a result of blythe ii's tefra proceeding petitioners were assessed tax deficiencies of dollar_figure for and dollar_figure for plus interest subsequently respondent issued notices of deficiency to petitioners for and for affected items determining that petitioners are liable for the additions to tax for negligence under sec_6653 and and a substantial_understatement of tax under sec_6661 for these additions to tax are the subject of the instant cases the first issue is whether petitioners are liable for the additions to tax for negligence under sec_6653 and for both years at issue sec_6653 imposes an addition_to_tax in an amount equal to percent of an underpayment_of_tax if any part of the underpayment is due to negligence or intentional disregard of rules or regulations sec_6653 imposes another addition_to_tax in an amount equal to percent of the interest due on the portion of the underpayment attributable to negligence or intentional disregard of rules or regulations respondent’s determinations in a notice_of_deficiency are presumed correct and petitioners must establish otherwise see rule a 290_us_111 cf sec_7491 ’ respondent determined that petitioners’ underpayments were due to negligence petitioners therefore have the burden of proving they were not negligent in deducting their share of the partnership’s losses see 64_tc_651 affd 566_f2d_2 6th cir 58_tc_757 the internal_revenue_service restructuring reform act of publaw_105_206 sec 112_stat_685 added sec_7491 which shifts the burden_of_proof to the secretary with respect to a taxpayer’s liability for penalties and additions to tax in court proceedings arising in connection with examinations commencing after date petitioners do not contend that their examination commenced after date or that sec_7491 is applicable in these cases anderson v commissioner tcmemo_1993_607 affd 62_f3d_1266 10th cir negligence is defined as the failure to exercise the due care that a reasonable and ordinarily prudent person would exercise under like circumstances see 62_f3d_1266 10th cir affg tcmemo_1993_607 85_tc_934 glassley v commissioner tcmemo_1996_206 the focus of inquiry is on the reasonableness of the taxpayer’s actions in light of his experience and the nature of the investment see 60_tc_728 greene v commissioner tcmemo_1998_101 affd without published opinion 187_f3d_629 4th cir glassley v commissioner supra turner v commissioner tcmemo_1995_363 whether a taxpayer is negligent in claiming a tax deduction depends upon both the legitimacy of the underlying investment and due care in the claiming of the deduction sacks v commissioner f 3d 9th cir affg tcmemo_1994_217 see greene v commissioner supra a taxpayer may avoid liability for negligence penalties under some circumstances if the taxpayer reasonably relied on competent professional advice see 89_tc_849 affd 904_f2d_1011 5th cir affd on other issue 501_us_868 such reliance however is not an absolute defense to negligence but rather a factor to be considered id for reliance on professional advice to relieve a taxpayer from the negligence addition_to_tax the taxpayer must show that the professional adviser had the expertise and knowledge of the pertinent facts to provide informed advice on the subject matter see id the facts pertinent to the instant cases relating to the structure formation and operation of blythe ii are as discussed in utah jojoba i research v commissioner tcmemo_1998_6 with the exception of a few specific dates and dollar amounts blythe ii was organized in date as a limited_partnership for the described purpose of conducting research_and_development r d involving the jojoba plant the offering dated date provided for a maximum capitalization of dollar_figure consisting of limited_partnership units at dollar_figure per unit each unit required a cash downpayment of dollar_figure anda noninterest-bearing promissory note in the principal_amount of dollar_figure payable in annual installments with an acceleration provision in the event of default the offering was limited to investors with a net_worth exclusive of home furnishings and automobiles of dollar_figure or investors whose net_worth was dollar_figure exclusive of home furnishings and automobiles and who anticipated that for the taxable_year of the investment they would have gross_income equal to dollar_figure or taxable_income a -- - portion of which but for tax-advantaged investments would be subject_to a federal_income_tax rate of percent petitioners' investment was for four limited_partnership units which required an initial downpayment of dollar_figure and execution of a promissory note for dollar_figure petitioners paid dollar_figure each year from through and dollar_figure per year from through on the promissory note in petitioners made a final payment of dollar_figure the offering identified william kellen mr kellen as the general_partner and u s agri as the contractor for the r d program under an r d agreement additionally a license agreement between blythe ii and u s agri granted u s agri the exclusive right to utilize technology developed for blythe ii for years in exchange for a royalty of percent of all products produced the offering included copies of both the r d agreement and the license agreement the r d agreement was executed concurrently with the license agreement in the instant cases the blythe ii offering is included in evidence as a stipulated exhibit however the stipulated exhibit contains an incomplete copy of the r d agreement that was attached to the original offering to the extent that relevant facts are omitted due to the incomplete copy of the r d agreement or other incomplete pieces of evidence in the instant cases the court must rely on findings_of_fact in utah jojoba i research v commissioner tcmemo_1998_6 to which the partners of blythe ii agreed to be bound it is petitioners' burden to establish the context in which their deductions were taken see rule a 290_us_111 58_tc_757 according to its terms the r d agreement expired upon the partnership's execution of the license agreement since the two were executed concurrently amounts paid to u s agri by the partnership were not paid pursuant to a valid r d agreement but were passive investments in a farming venture under which the investors' return if any was to be in the form of a royalty pursuant to the licensing agreement thus as this court held in utah jojoba i research v commissioner supra the partnership was never engaged in research or experimentation either directly or indirectly moreover this court found in utah jojoba i research v commissioner supra that u s agri's attempts to farm jojoba commercially did not constitute research_and_development thereby concluding that the r d agreement was designed and entered into solely to decrease the cost of participation in the jojoba farming venture for the limited partners through large up-front deductions for expenditures that were actually capital contributions the court concluded further that the partnership was not involved in a trade_or_business and had no realistic prospect of entering into a trade_or_business with respect to any technology that was to be developed by u s agri petitioners here contend that their investment in blythe ii was motivated solely by the potential to earn a profit petitioners contend further that their reliance on the advice of their certified_public_accountant mr mathis should absolve them of liability for the negligence_penalty in these cases petitioners also argue that taking into account their experience and the nature of the investment in blythe ii they exercised the due care that a reasonable and ordinarily prudent person would have exercised under like circumstances for the reasons set forth below the court does not agree with petitioners' contentions first the principal flaw in the structure of blythe ii was evident from the face of the very documents included in the offering a reading of the r d agreement and licensing agreement both of which were included as part of the offering plainly shows that the licensing agreement canceled or rendered ineffective the r d agreement because of the concurrent execution of the two documents thus the partnership was never engaged either directly or indirectly in the conduct of any research or experimentation rather the partnership was merely a passive investor seeking royalty returns pursuant to the licensing agreement any experienced attorney capable of reading and understanding the subject documents should have understood the legal ramifications of the licensing agreement canceling out the r d agreement however petitioners never consulted an attorney in connection with this investment nor did they thoroughly read the offering themselves secondly in making their investment in blythe ii petitioners relied on the advice of their certified_public_accountant mr mathis mr sheets who was a promoter for the partnership and petitioner's brief conversation with a local jeweler about the prospects for_the_use_of jojoba bean oil in the watch and jewelry industry mr mathis admittedly made only a cursory review of the offering and advised petitioners that based on what he had read in the offering there was some basis for the investment there would be some tax advantages and the investment had at least some potential mr mathis testified that the subject tax deductions appeared reasonable to him because they were one for one deductions rather than the multiple write-off kind of investments that were floating around at that time mr mathis did not give petitioners a written opinion about the investment nor did he conduct any independent research or consult any type of agricultural or jojoba plant expert about the investment instead he relied solely on the representations made in the offering moreover when guestioned by this court mr mathis admitted that at the time he advised petitioners about blythe ii he had rarely been presented with a question concerning research_and_development expenses and he realized that such expenses would have allowed petitioners certain tax benefits above and beyond what would have been provided by an ordinary business deduction despite his relative inexperience with the deductibility of research_and_development expenses however mr mathis failed to conduct any independent investigation to determine whether the specific research_and_development proposed to be conducted by or on behalf of the partnership would have qualified for deductions under sec_174 it is also notable that mr mathis had no educational background or experience in the area of agricultural pursuits there is no evidence in the record to suggest that petitioners ever questioned mr mathis about the facts and or legal analysis upon which he based his recommendations further the record is devoid of any evidence that petitioners asked mr mathis to explain the blythe ii investment to them particularly those portions of the offering that they had opted not to read or apparently were unable to understand the facts in these cases are similar to those in glassley v commissioner tcmemo_1996_206 in which this court found that the taxpayers acted on their fascination with the idea of participating in a jojoba farming venture and their satisfaction with tax benefits of expensing their investments which were clear to them from the promoter’s presentation they passed the offering circular by their accountants for a glance -- - similarly petitioners in these cases acted on their enthusiasm for the potential uses of jojoba and acted with knowledge of the tax benefits of making the investment the evidence in this record suggests that the nature of the advice given by mr mathis was highly generalized and based primarily on a mere cursory review of the offering rather than on independent knowledge research or analysis petitioners failed to show that mr mathis had the expertise and knowledge of the pertinent facts to provide informed advice on the investment in blythe ii see freytag v commissioner t c pincite accordingly petitioners failed to establish that their reliance on the advice of mr mathis was reasonable or in good_faith see glassley v commissioner supra the court next examines petitioners' reliance on the advice of mr sheets mr sheets had no background or expertise in the areas of agriculture or jojoba plants in fact nearly all of the previous investments recommended to petitioners by mr sheets had been real_estate investments and blythe ii was the first investment of an agricultural nature advocated by him also because mr sheets was a salesperson for this investment he had a personal profit_motive and thus a conflict of interest in advising petitioners to purchase the limited_partnership interests the advice petitioners allegedly received from mr sheets fails as a defense to negligence due to his lack of -- - competence to give such advice and the clear presence of a conflict of interest see 91_tc_524 petitioners' reliance on the advice of mr sheets was unreasonable under the circumstances outside of mr mathis and mr sheets petitioner's sole inguiry into the viability of this partnership's operations was his contact with a jeweler mr huntington who advised petitioner that there were concerns in the watch industry about the lack of availability of sperm whale oil as a lubricant and the prospects for any viable substitute for this oil the court finds it notable that the offering listed at least fifteen potential uses of jojoba nuts only one of which was a lubricant substitute for sperm whale oil yet petitioners chose to explore only one of those potential uses by contacting a local jeweler some other potential uses listed in the offering were cosmetics shampoos and soaps sunscreens pharmaceuticals cooking oils disinfectants polishing waxes corrosion inhibitors candles animal feed supplements and fertilizer being a physician it seems logical that petitioner would have had some access to information about the use of jojoba in the pharmaceutical arena however petitioner failed to pursue this possibility petitioners' failure to investigate any of the other enumerated potential uses of jojoba plants was unreasonable under the circumstances petitioners had no legal or agricultural background or training yet they consulted no source of such information prior to investing more than dollar_figure in blythe ii petitioners contend that based on the amount of money they were investing in blythe ii they couldn't justify spending additional funds to research the partnership and its proposed activities petitioners argue further that they didn't know where or how to find an appropriate expert to examine the investment on the contrary the court believes that at a minimum petitioners could have contacted an attorney to review the offering provide legal advice surrounding the partnership and explain the legal ramifications of the licensing agreement canceling out the r d agreement a reasonable and ordinarily prudent investor under the circumstances would have consulted an attorney additionally the court does not believe that petitioners would have experienced a great degree of difficulty or incurred a great deal of expense in contacting the agricultural department of a nearby college or university or going to another reliable source to inguire about the research_and_development of jojoba plants and their potential commercial usage if any again a reasonable and ordinarily prudent investor would have at least attempted to make this type of inquiry under the circumstances ’ in utah jojoba i research v commissioner t c memo continued -- - petitioners were not naive investors and should have recognized the need for independent professional advice see 94_tc_637 affd without published opinion 956_f2d_274 9th cir affd in part without published opinion sub nom cowles v commissioner 949_f2d_401 10th cir glassley v commissioner t c memo in fact the offering cautioned that prospective investors should not construe this memorandum or any prior or subsequent communications as constituting legal or tax_advice and urged investors to consult their own counsel as to all matters concerning this investment the offering was replete with statements including the cover page statement that this offering involves a high degree of risk warning of tax risks involved with the investment and the highly speculative nature of the commercial viability of the jojoba plant the offering contained inconsistent information such as the statement on page that the general_partner has limited experience in dealing in jojoba beans and is mainly relying on the r d contractor to develop technology and plant cultivars over the term of the r d agreement contrasted with the statement on page that the continued the court noted that there were experimental jojoba plantations located at the university of california at riverside california of which the general_partner of blythe ii mr kellen was aware general_partner pioneered the development of the blythe airport as an alfalfa ranch and jojoba farming in desert center and was familiar with the development of jojoba citrus vineyards alfalfa and asparagus such inconsistencies should have raised a healthy suspicion in the mind of a reasonable and ordinarily prudent investor even one lacking any legal tax or agricultural background however petitioner testified that prior to investing some dollar_figure in blythe ii he did not even bother to read the entire offering nor did he make an effort to obtain a reasonable understanding of those portions that he did read moreover petitioners failed to monitor the progress of their investment after purchasing the limited_partnership interests the court is mindful that the court_of_appeals for the ninth circuit ninth circuit the court to which appeals in these cases would lie has held that experience and involvement of the general_partner and the lack of warning signs could reasonably lead investors to believe they were entitled to deductions in light of the undeveloped state of the law regarding sec_174 see 998_f2d_1514 9th cir affg in part and revg in part tcmemo_1990_380 in its holding the ninth circuit explained that the supreme court's decision in 416_us_500 left unclear the extent to which research must be in connection with a trade or - - business for purposes of qualifying for an immediate deduction under sec_174 however in the instant cases the partnership was neither engaged in a trade_or_business nor conducting research_and_development either directly or indirectly additionally the experience in jojoba research_and_development of the general_partner of blythe ii mr kellen was guestionable at best as evidenced by conflicting statements in the offering also it is apparent from the evidence presented in these cases that mr kellen had minimal involvement in the partnership petitioners are precluded from relying upon a lack of warning as a defense to negligence when there is no evidence that a reasonable investigation was ever made and the offering materials contained many warnings of the tax risks associated with the investment on this record the court finds that petitioners did not exercise the due care of reasonable and ordinarily prudent persons under the circumstances consequently the court holds that petitioners are liable for the negligence additions to tax under sec_6653 and for each of the years at issue respondent is sustained on this issue the second issue is whether petitioners are liable for the addition_to_tax under sec_6661 for a substantial_understatement of tax for sec_6661 as amended by the omnibus budget reconciliation act of publaw_99_509 --- - sec_8002 100_stat_1951 provides for an addition_to_tax of percent of the amount of any underpayment attributable toa substantial_understatement_of_income_tax for the taxable_year a substantial_understatement_of_income_tax exists if the amount of the understatement exceeds the greater of percent of the tax reguired to be shown on the return or dollar_figure see sec_6661 b a generally the amount of an understatement is reduced by the portion of the understatement that the taxpayer shows is attributable to either the tax treatment of any item for which there was substantial_authority or the tax treatment of any item with respect to which the relevant facts were adequately disclosed on the return see sec_6661 b if an understatement is attributable to a tax_shelter_item however different standards apply first in addition to showing the existence of substantial_authority a taxpayer must show that he reasonably believed that the tax treatment claimed was more_likely_than_not proper see sec_6661 c ii second disclosure whether or not adequate will not reduce the amount of the understatement see sec_6661 b c substantial_authority exists when the weight of the authorities supporting the treatment is substantial in relation to the weight of authorities supporting contrary positions sec_1 b income_tax regs petitioners appear to argue that no authority other than sec_174 itself existed -- - at the time they claimed the relevant loss however their reliance on sec_174 standing alone does not provide the substantial_authority required under sec_6661 and accompanying regulations petitioners have failed to show that substantial_authority existed for the tax treatment of the blythe ii loss on their return adequate_disclosure of the tax treatment of a particular item may be made either in a statement attached to the return or on the return itself if it 1s in accordance with the requirements of revproc_83_21 1983_1_cb_680 see sec_1 b and c income_tax regs the record indicates that petitioners did not attach a statement to their return disclosing the specific facts surrounding their blythe ii loss deduction revproc_83_21 supra applicable to tax returns filed in lists information that would be deemed sufficient disclosure if listed on the return itself without the necessity of attaching an additional statement to the return however none of the specific tax items referenced in revproc_83_21 are relevant to the instant cases if disclosure is not made in compliance with the regulations or the revenue_procedure adequate_disclosure on the return may still be satisfied if sufficient information is provided to enable respondent to identify the potential controversy involved see schirmer v commissioner 89_tc_277 petitioners appear to - - argue that the blythe ii deduction was clearly indicated on their return however a mere claiming of the loss without further explanation is not sufficient to alert respondent to the controversial sec_174 deduction of which the partnership loss consisted petitioners have failed to show that the relevant facts pertaining to their blythe ii loss deduction were adequately disclosed on their return ’ finally sec_6661 provides the secretary with the discretion to waive the sec_6661 addition_to_tax if the taxpayer shows he acted with reasonable_cause and in good_faith this court reviews for abuse_of_discretion the secretary’s failure to waive the addition_to_tax see 110_tc_189 petitioners argue that they acted in good_faith and reasonably relied upon the advice of mr mathis in claiming the relevant loss however nothing in the record indicates that petitioners requested a waiver for good_faith and reasonable_cause under sec_6661 in the absence of such a reguest this court cannot review respondent’s determination for an abuse_of_discretion see id in any event petitioners have not shown that they met the tests of reasonable_cause and good_faith as noted earlier even if an adequate_disclosure had been made on the return such disclosure would not reduce the amount of the understatement attributable to a tax_shelter_item -- - petitioners have failed to prove that they had substantial_authority for their treatment of the partnership loss and that they adequately disclosed the relevant facts of that treatment the understatement upon which the addition_to_tax was imposed was dollar_figure the understatement is substantial because it exceeds the greater of dollar_figure or percent of the amount required to be shown on the return on this record the court holds that petitioners are liable for the addition_to_tax under sec_6661 for a substantial_understatement of tax for respondent is sustained on this issue finally to the extent the court has failed to address an argument of petitioners herein the court concludes such argument 1s without merit decisions will be entered for respondent it the amount required to be shown on the return was dollar_figure percent of which equals dollar_figure