internal_revenue_service number release date index number ------------------------------ ------------------ ----------------------------- re ---------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number -------------------- refer reply to cc psi plr-123153-14 date december legend -------------------- testator ----------------------------------------------------------------------- trust --------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- ---------------------------------------------------------------------- ------------------------------------------------------------------------ corporate trustee a ----------------------------------------------------------- corporate trustee b ----------------------------- corporate trustee c --------------------------------------------- corporate trustee d ---------------------- child a ---------------------- child b --------------------------------- child c ------------------------------------------------------------------------ grandchild c -------------------------- grandchild a-1 --------------------- grandchild a-2 ----------------------- individual trust a ----------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------- trust b ---------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------- plr-123153-14 ------------------------------------------------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------- share ----------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------- ----- ------------------------------------------------------------------------------------ --------------------------------------------------------------- ------------------ ------------------- ------------------ ------- ------- ------- ------- -------- --------------------------------------------------------- ----------------------------------------------------------------------- share --------------------------------------------------------------------------------------------------- date date date year year year year state court state act --------- ------------------------------------------------------ --------------------------------------------------------------------------------------------------------------- ---------------------------------------------------- cite ------------------------------------------------------------------------ cite ------------------------------------------------- cite cite ------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------- dear --------------- this responds to your authorized representatives’ letter dated date and subsequent correspondence requesting rulings concerning the income gift estate and generation-skipping gst tax consequences of a settlement agreement facts testator died testate on date prior to date a resident of state he was survived by two children child a and child b a third child child c predeceased testator child c was survived by her child grandchild c testator’s last will and testament will established a_trust trust for the benefit of his lineal_descendants article first paragraph a of trust provides that the trustees are to plr-123153-14 pay the net_income quarterly in equal shares to child a child b and grandchild c if any of them is not living on an income payment_date the trustees are to pay over his or her share of the income by right of representation to his or her issue then living article first paragraph b provides that trust is to end upon the death of the survivor of child a child b and grandchild c at which time the trustees are to distribute the trust principal by right of representation to testator’s then living issue article second provides in relevant part that corporate trustee a child a child b and grandchild c are to be the trustees child a died in year survived by two children grandchild a-1 and grandchild a-2 child b is living grandchild c is living_trust will terminate when the survivor of child b and grandchild c has died corporate trustee a and its successor_corporation served as a co-trustee until year at present one-third of the trust income is paid to grandchild a-1 and grandchild a-2 as successors to child a’s income_interest another third of the income is paid to child b the last third of the income is paid to grandchild c the current presumptive remainder beneficiaries are i grandchild a-1 and grandchild a-2 ii child b’s three children and iii grandchild c’s four children the trust assets consist primarily of investment_assets it is represented that no actual or constructive additions have been made to trust since its inception in year child b and grandchild c as co-trustees petitioned the court to appoint an institutional co-trustee to restore the trustee structure as originally constituted under the will by court order of date corporate trustee b was appointed co-trustee of trust corporate trustee b was subsequently acquired by corporate trustee c accordingly the current co-trustees are child b and grandchild c and corporate trustee c following the year court proceedings the trustees modified the written investment policy of trust to invest and manage the trust assets in accordance with the state act under the modification in part an independent fiduciary as a trustee may equitably adjust between principal and income by allocating an amount of income to principal or an amount of principal to income to the extent the independent fiduciary considers appropriate if the terms of the trust describe the amount that may or must be distributed to a beneficiary by referring to the trust’s income in deciding whether and to what extent to exercise this power the independent fiduciary is to consider certain factors such as the assets held in the trust the extent to which they consist of financial_assets interests in closely held enterprises tangible and intangible personal_property or real_property the extent to which an asset is used by a beneficiary and whether an asset was purchased by the trustee or received from the settlor plr-123153-14 pursuant to the modification corporate trustee c exercised its authority to equitably adjust trust receipts between income and principal thereafter child b expressed concern and objected to corporate trustee c’s actions in exercising its adjustment powers the disagreements over these actions have resulted in a rift in the family and a desire by some family members to have different trustees and separate trusts for some of the beneficiaries in year child b filed a petition with the court to divide trust and administer the divided trusts as separate trusts child b’s stated reasons for the division were that it would facilitate investment management and administrative decisions regarding the share for child b and his family that would be consistent with their investment philosophy child b’s petition was met with opposition from the other beneficiaries and corporate trustee c they were concerned that among other things the division of trust violated the testamentary intent of testator and violated a material purpose of trust they were also concerned that the division of trust into new smaller trusts would result in the loss of economic efficiencies enjoyed by the existing trust child b’s petition was answered by the other beneficiaries who raised a counterclaim they requested that the court construe the words by right of representation in the context of testator’s will they asserted that construction of the term could affect future distributions from trust whether or not trust was divided that is depending on the order of deaths and whether or not there were future births in the family there were three possible constructions that could produce substantially different distributions of income and principal of trust see cite cite and cite see also cite after an adversarial process before the court and extensive settlement negotiations the trustees and beneficiaries of trust agreed to a settlement settlement agreement under which trust will terminate and its assets will be divided into two trusts trust a and trust b_trust a equal in value to one-third of the value of trust will be held as a separate trust for child b and his descendants trust b equal in value to two-thirds of the value of trust will be held as a separate trust for grandchild c and her descendants and child a’s descendants to the extent it is administratively feasible the division of assets will be pro_rata in addition the parties agreed that the term by right of representation will be construed to require a per stirpes distribution of trust assets among the descendants of testator with the first division to be made at the child level ie at the level of child a child b and child c even if that generation has no living descendants on date the court issued an order approving and adopting the terms of the settlement agreement the order provides in part that beginning on the date of division and continuing until termination trust a and trust b i shall be treated as completely separate and distinct trusts for all purposes and ii shall be governed by the plr-123153-14 existing provisions of trust except to the extent modified by certain provisions as described below trust a child b will receive the trust a income quarterly for his life after child b’s death his children will receive the income in equal shares if any child should die that child’s children will receive the child’s share of the income in equal shares if child b and all of his issue die before the termination of trust a the assets of trust a will be added to trust b on the death of the survivor of child b and grandchild c trust a will terminate and the trust a assets will be distributed to the then-living descendants of child b by right of representation child b and his three children will be the individual co-trustees of trust a corporate trustee d will be appointed as a co-trustee by a document signed prior to the effective date of the trust division and effective upon the creation of trust a a corporate trustee will remain in service until trust a terminates the corporate trustee will have all the powers under state law to exercise the trustee’s powers to adjust between income and principal pursuant to the provisions of the state act trust b grandchild a-1 grandchild a-2 grandchild c and individual will be the co-trustees of trust b corporate trustee c will serve as the corporate trustee trust b will consist of two shares share and share the income of share will be distributed quarterly to grandchild c the income of share will be distributed quarterly in equal shares to grandchild a-1 and grandchild a-2 if any of those persons should die during the term of the trust his or her income share will be paid to his or her descendants by right of representation on the death of the survivor of child b and grandchild c trust b will terminate share will be distributed to the then-living descendants of grandchild c by right of representation and share will be distributed to the then-living descendants of child a by right of representation you have asked for the following rulings the terms of the settlement agreement including the trust division and the construction of the phrase by right of representation will not cause a distribution from or the termination of any interest in trust trust a or trust b to be subject_to the generation-skipping_transfer_tax plr-123153-14 the terms of the settlement agreement including the trust division and the construction of the phrase by right of representation will not cause any person to make a gift to any beneficiary of trust trust a or trust b the terms of the settlement agreement including the trust division and the construction of the phrase by right of representation will not cause the assets held in trust trust a or trust b to be included in the gross_estate of a beneficiary who dies prior to the termination of such trust following the termination of trust and the resulting division of trust pursuant to the settlement agreement trust a and trust b will be treated as separate trusts the terms of the settlement agreement including the trust division and the construction of the phrase by right of representation will not cause any party to the settlement agreement to realize income from the sale_or_exchange of any trust assets or interests law and analysis ruling sec_2601 of the internal_revenue_code imposes a tax on every generation-skipping_transfer which is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip under of the tax_reform_act_of_1986 the act gst tax is generally applicable to generation-skipping transfers made after date however under b a of the act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations the tax does not apply to a transfer under a_trust that was irrevocable on date except to the extent the transfer is made out of corpus added to the trust by an actual or constructive_addition after date sec_26_2601-1 provides rules for determining when a modification judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the generation-skipping_transfer_tax under sec_26_2601-1 will not cause the trust to lose its exempt status these rules are applicable only for purposes of determining whether an exempt trust retains exempt status for generation-skipping_transfer_tax purposes the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of capital_gain for purposes of sec_1001 sec_26_2601-1 provides that a court-approved settlement of a bona_fide issue regarding the administration of the trust or the construction of terms of the plr-123153-14 governing instrument will not cause an exempt trust to be subject_to the provisions of chapter if the settlement is the product of arm's length negotiations and the settlement is within the range of reasonable outcomes under the governing instrument and applicable state law addressing the issues resolved by the settlement a settlement that results in a compromise between the positions of the litigating parties and reflects the parties' assessments of the relative strengths of their positions is a settlement that is within the range of reasonable outcomes sec_26_2601-1 provides that a judicial construction of a governing instrument to resolve an ambiguity in the terms of the instrument or to correct a scrivener's error will not cause an exempt trust to be subject_to the provisions of chapter if the judicial action involves a bona_fide issue and the construction is consistent with applicable state law that would be applied by the highest court of the state sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy sec_26_2601-1 b or c by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust sec_26_2601-1 example describes a situation where in grantor established an irrevocable_trust for the benefit of his two children a and b and their issue under the terms of the trust the trustee has the discretion to distribute income and principal to a b and their issue in such amounts as the trustee deems appropriate on the death of the last to die of a and b the trust principal is to be distributed to the living issue of a and b per stirpes in the appropriate local court approved the division of the trust into two equal trusts one for the benefit of a and a's issue and one for the benefit of b and b's issue the trust for a and a's issue provides that the trustee has the discretion to distribute trust income and principal to a and a's issue in such amounts as the trustee deems appropriate on a's death the trust principal is to be distributed equally to a's issue per stirpes if a dies with no living descendants the principal will be added to the trust for b and b's issue the trust for b and b's issue is identical except for the beneficiaries and terminates at b's death at which time the trust principal is to be distributed equally to b's issue per stirpes if b dies with no living descendants principal will be added to the trust for a and a's issue the example concludes that the division of the trust into two trusts does not shift any beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the division in addition the division does not extend the time for vesting of any beneficial_interest in plr-123153-14 the trust beyond the period provided for in the original trust therefore the two partitioned trusts resulting from the division will not be subject_to the provisions of chapter in this case trust was irrevocable on date it is represented that there have been no actual or constructive additions to the trust after date the settlement agreement and court order resolve bona_fide issues ie the construction of the words by right of representation as intended by testator and the administration of trust under the state act the settlement agreement is the product of arm's length negotiations and is within the range of reasonable outcomes under trust and state law finally the settlement agreement and court order construing the term by right of representation and dividing trust will not shift a beneficial_interest in trust to a lower generation beneficiary and will not extend the time for vesting of any beneficial_interest in trust accordingly based on the facts submitted and representations made we conclude that the terms of the settlement agreement including the trust division and construction of the phrase by right of representation will not cause distributions from or the termination of any interest in trust trust a or trust b to be subject_to the gst tax imposed by sec_2601 ruling sec_2501 provides that a tax is imposed for each calendar_year on the transfer of property by gift during such calendar_year by any individual resident or nonresident sec_2511 provides that the tax imposed by sec_2501 will apply whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_25_2511-1 of the gift_tax regulations provides that any transaction in which an interest in property is gratuitously passed or conferred upon another regardless of the means or device employed constitutes a gift subject_to tax whether an agreement settling a dispute is effective for gift_tax purposes depends on whether the settlement is based on a valid enforceable claim asserted by the parties and to the extent feasible produces an economically fair result see 674_f2d_761 9th cir citing 387_us_456 thus state law must be examined to ascertain the legitimacy of each party's claim if it is determined that each party has a valid claim the service must determine that the settlement reflects the result that would apply under state law if there is a difference it is necessary to consider whether the difference may be justified because of the uncertainty of the result if the question were litigated plr-123153-14 as discussed above the issues resolved by the settlement agreement and court order concerning the construction of trust and its administration are bona_fide issues based upon valid enforceable claims by the interested parties the settlement agreement resolves conflicts concerning distributions of income and principal and is reflective of the rights of the parties under applicable state law that would be applied by the highest court of state accordingly based on the facts submitted and representations made we conclude that the terms of the settlement agreement will not cause any person to make a gift to any beneficiary of trust trust a or trust b ruling sec_2001 provides that a tax is imposed on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2033 provides that the value of the gross_estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death sec_2036 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for adequate_and_full_consideration in money_or_money's_worth by trust or otherwise under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death the possession or enjoyment of or the right to the income from the property or the right either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income therefrom sec_2037 provides that the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time after date made a transfer except in case of a bona_fide sale for an adequate_and_full_consideration in money_or_money's_worth by trust or otherwise if possession or enjoyment of the property can through ownership of such interest be obtained only by surviving the decedent and the decedent has retained a reversionary_interest in the property but in the case of a transfer made before date only if such reversionary_interest arose by the express terms of the instrument of transfer and the value of such reversionary_interest immediately before the death of the decedent exceeds five percent of the value of such property sec_2038 provides that the value of the decedent's gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for adequate_and_full_consideration in money_or_money's_worth by trust or otherwise where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power in whatever capacity exercisable by the decedent alone or by the decedent in plr-123153-14 conjunction with any other person without regard to when or from what source the decedent acquired such power to alter amend revoke or terminate or where any such power is relinquished during the three-year period on the date of the decedent's death sec_2041 provides that the value of the gross_estate shall include the value of all property to the extent of any property with respect to which the decedent has at the time of his death a general_power_of_appointment created after date or with respect to which the decedent has at any time exercised or released a power_of_appointment by a disposition that is of such nature that if it were a transfer of property owned by the decedent the property would be includible in the decedent's gross_estate under sec_2035 to sec_2041 provides that a general_power_of_appointment is a power that is exercisable in favor of the decedent the decedent's_estate the decedent's creditors or the creditors of the decedent's_estate however a power to consume invade or appropriate property for the benefit of the decedent that is limited by an ascertainable_standard relating to the health education support or maintenance of the decedent shall not be deemed a general_power_of_appointment in this case no person made a transfer to trust other than testator at his death on date the income and terminating distributions from the divided trusts will follow the same pattern as they would have had trust not been divided the income beneficiaries will be entitled to distributions quarterly and the remaindermen will be entitled to receive the trust property only upon surviving termination of the respective trust the terms of the settlement agreement do not cause any transfers or create any general powers of appointment that would cause any of the trust property to be included in the estate of a beneficiary under sec_2036 sec_2038 or sec_2041 consequently the terms of the settlement agreement will not cause any beneficiary of trust trust a or trust b who dies prior to the termination of such trust to include trust assets in his or her taxable_estate other than i trust assets that have been distributed to him or her prior to death or ii such quarterly distributions of income that were past due and not paid in accordance with the trust terms during a beneficiary’s life and to which he or she has a legally enforceable claim at death ruling sec_643 provides that for purposes of subchapter_j of chapter of subtitle a under regulations prescribed by the secretary two or more trusts shall be treated as one trust if such trusts have substantially the same grantor or grantors and substantially the same primary beneficiary or beneficiaries and a principal purpose of such trusts is the avoidance of the tax_imposed_by_chapter_1 plr-123153-14 section b of the tax_reform_act_of_1986 provides that sec_643 shall apply to taxable years beginning after date except that in the case of a_trust that was irrevocable on date it shall apply only to that portion of the trust that is attributable to contributions of corpus after date the taxpayers represent that in this case trust a and trust b will have different beneficiaries the taxpayers also represent that no actual or constructive additions have been made to trust since its inception prior to date based on the facts submitted and the representations made we conclude that as long as trust a and trust b are separately managed and administered they will be treated as separate trusts for federal tax purposes ruling sec_61 and provides that gross_income includes gains derived from dealings in property and income from an interest in a_trust sec_1001 provides that the gain from the sale_or_other_disposition of property is the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss is the excess of the adjusted_basis provided in sec_1011 for determining loss over the amount_realized under sec_1001 the amount_realized from the sale_or_other_disposition of property is the sum of any money received plus the fair_market_value of the property other than money received under sec_1001 except as otherwise provided in subtitle a of the code the entire amount of gain_or_loss determined under sec_1001 on the sale_or_exchange of property must be recognized sec_1_1001-1 of the income_tax regulations provides that the gain_or_loss realized from the conversion of property into cash or from the exchange of property for other_property differing materially either in_kind or in extent is treated as income or loss sustained a partition of jointly owned property is not a sale_or_other_disposition of property if the co-owners of the joint property sever their joint_interests but do not acquire a new or additional interest as a result thereof thus neither gain nor loss is realized on a partition see revrul_56_437 1956_2_cb_507 conversion of a joint_tenancy in stock to a tenancy_in_common in order to eliminate the survivorship feature and the partition of a joint_tenancy in stock are not sales or exchanges similarly divisions of trusts are also not sales or exchanges of trust interests if each asset is divided pro_rata among the new trusts see revrul_69_486 1969_2_cb_159 pro_rata distribution of trust assets not a sale_or_exchange here the division of trust into trust a and trust b will not result in any shift in beneficial_interest in the assets of trust accordingly the division of trust as described will not result in the realization of gain_or_loss under sec_61 and sec_1001 in addition the plr-123153-14 agreement regarding construction of the term by right of representation will not result in the realization of gain_or_loss under sec_61 and sec_1001 except as expressly provided herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code these rulings are directed only to the taxpayers requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely leslie h finlow senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosure copy of letter for sec_6110 purposes


internal_revenue_service number release date index number ------------------------------------------------------------ ------- ------------------------------------------------------------ ------- ----------------------------------------------- -------------------------------------- ---------------------------------------------------------- department of the treasury washington dc person to contact ------------------- id no ------------ telephone number -------------------- refer reply to cc psi plr-134352-07 date date company f legend ------------------------------- ---------------------------------- --------------------------------------- ----------------------- company g ----------------------------------- company h ------------------------------------- ---------------------- year x year y year z ------ --------- ------ plr-134352-07 dear -------------- this is in reply to a letter dated date and subsequent correspondence submitted by company h and its authorized representatives requesting permission to revoke company f’s election to use the alternative_incremental_research_credit airc under sec_41 of the internal_revenue_code for the year x taxable_year in year x company f was a calendar_year taxpayer that used the accrual_method of accounting for tax years prior to year x company f had calculated the sec_41 research_credit using the regular_method under sec_41 and the sec_41 rules for start-up companies to determine the fixed-base percentage during year x company f acquired company g for purposes of filing the combined company f and company g return for year x company f determined taking into account company f’s acquisition of company g that the airc method under sec_41 would be more beneficial to company f than the method used in years prior to year x to claim the sec_41 research_credit accordingly company f attached a form_6765 credit for increasing research expenses to its year x return electing to use the airc method to claim sec_41 research credits in year y following a successful hostile takeover bid company h acquired a controlling_interest in company f in year z company f merged with and into company h with company h continuing as the surviving company sometime after year y an officer for company h determined that had company f calculated the sec_41 research_credit for year x using the regular fixed-based percentage rules under sec_41 and company g’s base-period qualified_research expenditures and gross_receipts rather than the sec_41 rules for start-up companies more research_credit would have been available to include on company f’s return for year x than the amount calculated using the airc method company f through its successor_in_interest company h has requested permission to revoke its election to use the sec_41 airc method for the year x taxable_year for taxable years beginning after date taxpayers may elect to determine their research_credit under the airc rules of sec_41 sec_41 provides that an election under sec_41 applies to the taxable_year for which it is made and all succeeding taxable years unless revoked with the consent of the secretary based solely on the facts submitted and representations made we decline to grant permission to company f to revoke its election to determine its research_credit under the airc rules of sec_41 for qualified_research_expenses paid_or_incurred during company f’s year x taxable_year plr-134352-07 except as expressly provided herein we express or imply no opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file a copy of this letter is being sent to your authorized representatives enclosures copy of this letter copy for sec_6110 purposes sincerely s christopher j wilson senior counsel branch office of associate chief_counsel passthroughs and special industries


internal_revenue_service number release date index number ------------------------------ --------- -------------------------------------- ---------------------- ------------------------------ department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------- telephone number ------------------- refer reply to cc ita b03 plr-135173-08 date date ty ------- ty ------- legend taxpayer date corporation date -------------------------------------- -------------------------- -------- --------------------- dear ------------------- this letter responds to a letter_ruling request dated ---------------------- submitted on behalf of taxpayer taxpayer requests an extension of time under sec_301_9100-1 and -3 to of the income_tax regulations to complete the documentation of success- based fees required under sec_1_263_a_-5 thereby excluding these fees from amounts that are required to be capitalized under sec_263 of the internal_revenue_code taxpayer uses the accrual_method of accounting on date corporation acquired taxpayer in a taxable stock acquisition the due_date for taxpayer’s return without regard to extension was date taxpayer incurred success-based fees in connection with the taxable stock acquisition on date shortly after the acquisition corporation engaged an outside accounting firm to identify and compile documentation for the success-based fees associated with the corporation’s acquisition of taxpayer as a general_rule sec_263 and sec_1_263_a_-5 require capitalization of amounts paid to facilitate certain acquisition transactions the amounts required to be capitalized generally include amounts paid in the process of investigating or otherwise pursuing the transaction sec_1_263_a_-5 however there is an exception to plr-135173-08 this requirement for certain success-based fees sec_1_263_a_-5 this exception provides an amount_paid that is contingent on the successful closing of a transaction described in paragraph a of this section is an amount_paid to facilitate the transaction except to the extent the taxpayer maintains sufficient documentation to establish that a portion of the fee is allocable to activities that do not facilitate the transaction this documentation must be completed on or before the due_date of the taxpayer’s timely filed original federal_income_tax return including extensions for the taxable_year during which the transaction closes id corporation mailed an application_for an automatic_extension of time for taxpayer to file its return before date after date the application was returned for lack of postage because it was returned for lack of postage the application was not considered timely filed thus the documentation could not be completed before the due_date for its return including extensions taxpayer filed this request for relief before the date it would have had to file its return if the extension of time had been properly filed under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election under all subtitles of the code except subtitles e g h and i provided that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government sec_301_9100-3 provides extensions of time to make a regulatory election under code sections other than those for which sec_301_9100-2 expressly permits automatic extensions requests for extensions of time for regulatory elections will be granted when the taxpayer provides evidence including affidavits described in the regulations to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government in the present situation the documentation required by sec_1_263_a_-5 is a regulatory election as defined in sec_301_9100-1 therefore the commissioner has discretionary authority to grant taxpayer a reasonable extension of time provided that the taxpayer satisfy the requirements set forth in sec_301_9100-3 based on the facts and information submitted we conclude that taxpayer satisfies the requirements of sec_301_9100-3 the taxpayer reasonably relied upon corporation to timely file its application_for extension to file its return the application was mailed before date and the failure to attach proper postage was not known until after date soon after the notice of the failure taxpayer requested this extension plr-135173-08 ruling accordingly the consent of the commissioner is hereby granted for an extension of time under sec_301_9100-1 and -3 to complete the documentation of success-based fees required under sec_1_263_a_-5 the taxpayer has an extension of days from date of this ruling in which to make this election the granting of an extension is not a determination that taxpayer is otherwise eligible to make the election sec_301_9100-1 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed concerning the correct due_date of taxpayer’s return or the deductibility of success-based fees including whether taxpayer’s documentation is adequate for purposes of sec_1_263_a_-5 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative a copy of this letter must be attached to any income_tax return to which it is relevant alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination sincerely robert m casey senior technical reviewer branch income_tax accounting


internal_revenue_service number release date index number ---------------------------------------- ----------------------------------- ---------------------------------------- ------------------------------------------ legend department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------- id no ----------------- telephone number -------------------- refer reply to cc psi b01 plr-133712-12 date october x ----------------------------------------- ------------------------------------- d ----------------------- state -------------- dear ---------------- this responds to a letter dated date submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts according to the information submitted x was incorporated on d under the laws of state x intended to be treated as an s_corporation for federal tax purposes effective d but the form_2553 election by a small_business_corporation was not timely filed law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective sec_1362 provides that if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made if the election is made after the first two and one-half months of a corporation's taxable_year then the corporation will plr-133712-12 not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if no election is made pursuant to sec_1362 or if made the election is made after the date prescribed for making such an election and the secretary determines there was reasonable_cause for the failure to timely make the election then the secretary may treat such election as timely made for such taxable_year and effective as of the first day of that year x did not file a timely election to be treated as an s_corporation under sec_1362 effective d x has however established reasonable_cause for not making a timely election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and representations made and provided that x otherwise qualifies as a subchapter_s_corporation we conclude that x will be recognized as an s_corporation effective d if within days from the date of this letter x submits a properly completed form_2553 with a copy of this letter attached to the appropriate service_center except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed or implied concerning whether x otherwise qualifies as an s_corporation for federal tax purposes this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely laura c fields laura c fields senior technician reviewer branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes cc


t c memo united_states tax_court james f drakes and barbara e taylor petitioners v commissioner of internal revenue respondent docket no 19209-09l filed date james f drakes and barbara e taylor pro sese robert w mopsick for respondent memorandum findings_of_fact and opinion laro judge petitioners james f drakes and barbara e taylor invoked the court’s jurisdiction pursuant to sec_6330 to review the determination of respondent’s office of appeals appeals sustaining a proposed levy upon their property respondent sought the levy to collect from petitioners approximately dollar_figure of unpaid tax_liability relating to their federal_income_tax return return after our remand of this case to appeals to conduct a new hearing under sec_6330 as well as a short trial on the issues we decide the following two questions whether petitioners may challenge their underlying tax_liability we hold they may not and whether appeals abused its discretion in rejecting petitioners’ offer to compromise an unpaid federal tax_liability of dollar_figure for dollar_figure we hold it did not findings_of_fact the parties have filed with the court a stipulation of facts as well as certain related exhibits and they have agreed that all stipulated facts are conclusive we incorporate herein by reference the stipulation of facts and accompanying exhibits and we find the stipulated facts accordingly petitioners resided in new jersey at the time they petitioned the court petitioners husband and wife each have three children born of prior marriages three children were older than years of age at the time of trial and the record does not specify the ages of the other three children ms taylor is an 1unless otherwise indicated section references are to the internal_revenue_code and rule references are to the tax_court rules_of_practice and procedure dollar amounts are rounded auditor with ubs financial services ubs and mr drakes works for vonage network llc ms taylor was previously married to lamont taylor who died in at the age of lamont taylor bequeathed to ms taylor his sec_401 retirement account retirement account with a balance of more than dollar_figure in ms taylor rolled over the retirement account balance at the time dollar_figure into an individual_retirement_account ira she received distributions from the ira beginning in and continuing throughout when each distribution was made to ms taylor she was younger than years old during ms taylor received taxable_distributions from the ira totaling dollar_figure the return was not made a part of this record but the parties stipulated an internal_revenue_service irs computer transcript rtvue listing the line items summarized on that return according to the transcript petitioners reported on the return wages of dollar_figure state and local_tax refunds of dollar_figure taxable ira_distributions of dollar_figure total income of dollar_figure and itemized_deductions of dollar_figure petitioners also reported additional tax on qualified_plans of dollar_figure a 2we note that the additional tax computed under sec_72 should be dollar_figure dollar_figure taxable ira distribution times additional tax and not dollar_figure as reported on the return respondent does not contend and we do not decide whether petitioners are liable for the shortfall assuming one exists total_tax liability of dollar_figure including a dollar_figure estimated_tax penalty and federal_income_tax withheld of dollar_figure respondent assessed the tax of dollar_figure reported as due on the return and credited petitioners for amounts withheld of dollar_figure the balance had not been paid when the trial was held respondent issued to each petitioner a separate final notice_of_intent_to_levy and notice of your right to a hearing final levy notices advising petitioners that respondent intended to levy upon their property to collect a dollar_figure federal_income_tax liability relating to the return in response to the final levy notices ms taylor requested a hearing by submitting to appeals form request for a collection_due_process or equivalent_hearing that form advanced an installment_agreement as a collection alternative to the proposed levy because according to ms taylor levying on petitioners’ property would have created financial hardship and other collection alternatives were available although the form indicated that the hearing was also requested in response to the filing of a notice_of_federal_tax_lien nftl appeals’ case activity record indicated that no nftl relating to petitioners’ property was filed as of date after requesting the referenced hearing ms taylor submitted to appeals a form_656 offer_in_compromise in respect of petitioners’ and federal_income_tax liabilities and based on doubt as to collectibility under the terms of the offer-in-compromise ms taylor proposed to compromise the and federal_income_tax liabilities for dollar_figure structured as short-term periodic_payments of dollar_figure for months appeals assigned settlement officer deborah e douglas so douglas to review petitioners’ offer-in-compromise so douglas rejected petitioners’ offer-in-compromise because according to a letter dated date petitioners were delinquent in paying their federal_income_tax and they had not included tax owing for that year in their offer-in-compromise the letter also stated that petitioners had failed to verify they would not owe tax for even though they were required to do so so douglas held a telephone hearing with ms taylor on date first hearing during the first hearing ms taylor stated that a levy would cause her undue financial hardship and she expressed her desire to submit an offer-in- compromise as a collection alternative to the proposed levy the parties have stipulated ms taylor did not contest petitioners’ underlying tax_liability for at any point during the first hearing in separate notices of determination dated july 3although petitioners’ and federal_income_tax liabilities are not at issue here we note that petitioners owed more than dollar_figure for the and taxable years and more than dollar_figure for the and taxable years the record does not specify the amount of the liability owed for each year appeals sustained the proposed levy because petitioners did not prove that they had made required withholding and or estimated_tax payments with respect to their federal_income_tax liabilities petitioners petitioned the court to review the notices of determination on date the parties stipulated and we agree petitioners did not challenge their underlying tax_liability for in the petition respondent moved the court for summary_judgment on date relying on 133_tc_392 the court denied that motion because a triable issue of fact might have been implicated by allegations in the petition surrounding petitioners’ claimed financial hardship respondent later moved the court to remand this case to appeals and we granted respondent’s motion for remand insofar as we remanded this case to appeals to conduct a new hearing under sec_6330 appeals assigned petitioners’ case on remand to settlement officer lisa wold so wold who held a face-to-face hearing with ms taylor and petitioners’ attorney on date second hearing we note that petitioners’ attorney has since withdrawn from the case the parties stipulated that ms taylor did not contest the validity of petitioners’ underlying tax_liability during the second hearing after the second hearing petitioners entered into an installment_agreement with the irs whereby they agreed to pay dollar_figure per month towards their and federal_income_tax liabilities the record does not specify the extent to which if at all petitioners have abided by the terms of the installment_agreement also at the second hearing petitioners submitted a completed form 433-a collection information statement for wage earners and self-employed individuals along with supporting documentation the form 433-a reported petitioners’ assets as dollar_figure cash a sec_401 retirement account with ubs and a balance of dollar_figure life_insurance policies with combined cash surrender values of dollar_figure two automobiles with equity of dollar_figure and miscellaneous personal_property valued at dollar_figure petitioners also reported owning a single family home valued at dollar_figure subject_to one or more mortgages totaling dollar_figure zero equity and a monthly mortgage payment of dollar_figure according to the form 433-a petitioners’ home was the subject of a foreclosure proceeding petitioners further reported on the form 433-a disposable income of dollar_figure per month so wold verified and accepted petitioners’ monthly income figure though she determined that petitioners were able to pay dollar_figure per month towards their unpaid tax_liability without suffering financial hardship the competing monthly income and expense determinations are summarized as follows income wages ms taylor wages mr drakes total income amount claimed amount determined dollar_figure big_number big_number dollar_figure big_number big_number expenses amount claimed determined amount food clothing and miscellaneous housing and utilities vehicle operating costs public transportation health insurance out-of-pocket health costs court-ordered payments life_insurance taxes total living_expenses dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number with respect to the favorable adjustments to petitioners’ expenses for food clothing public transportation and miscellaneous expenses so wold relied upon national and local standards to determine the additional_amounts which petitioners were entitled to claim as to the unfavorable adjustment to petitioners’ housing and utilities allowance so wold reasoned that petitioners should be allowed only the local standard because petitioners were not making mortgage payments finally so wold determined that ms taylor’s sec_401 retirement account with ubs was fully available to satisfy petitioners’ unpaid tax_liabilities because those funds were not needed to pay living_expenses respondent issued to petitioners a supplemental notice_of_determination on date the supplemental notice_of_determination reflected appeals’ decision to sustain the proposed levy because as so wold concluded paying dollar_figure monthly rather than the dollar_figure offered would not create a hardship for petitioners the supplemental notice_of_determination detailed so wold’s analysis stating that appeals had obtained verification from the irs office collecting the tax that legal and procedural requirements had been met the supplemental notice also concluded that the proposed collection action levy was not more intrusive than necessary because as appeals concluded a levy of dollar_figure per month would not impose hardship on petitioners opinion i overview the commissioner is authorized to levy upon all property or property rights of taxpayers liable for any_tax who neglect or refuse to pay that liability within days after notice_and_demand for payment was made sec_6331 before the commissioner may pursue collection by levy however he must notify the affected taxpayers in writing of their right to a hearing before an impartial appeals officer sec_6330 and b taxpayers who request a hearing under sec_6330 may raise at the hearing any issue relevant to the unpaid tax or the proposed levy including but not limited to appropriate spousal defenses challenges to the appropriateness of the collection action and offers of collection alternatives such as an installment_agreement or an offer-in-compromise sec_6330 this court generally lacks jurisdiction to consider taxpayers’ underlying tax_liability where that issue was not properly raised at the sec_6330 hearing or considered in the notice_of_determination see 129_tc_107 at the conclusion of the hearing appeals issues a notice_of_determination setting forth its findings and decisions see sec_6330 sec_301_6330-1 q e-8 proced admin regs the determination must be based on consideration of a the commissioner’s verification that the requirements of applicable law and administrative procedure have been met b any relevant issues relating to the unpaid tax or the proposed levy and c whether the proposed levy balances the need for efficient collection of tax with the taxpayers’ legitimate concern that the collection action be no more intrusive than necessary sec_6330 where taxpayers desire judicial review of appeals’ determination they may file a petition with this court as petitioners have done see sec_6330 in cases where the underlying tax_liability is not at issue this court reviews appeals’ administrative determination for abuse_of_discretion 114_tc_176 abuse_of_discretion exists where appeals rendered its determination arbitrarily capriciously or without sound basis in fact or law see 112_tc_19 ii challenge to underlying liability not allowed petitioners claimed for the first time at trial they are not liable for the additional tax under sec_72 even though they self-reported the tax as owing on the return respondent countered at trial that petitioners are precluded from challenging that liability because they did not raise the issue at either of two administrative hearings we agree with respondent taxpayers appealing a notice_of_determination under sec_6330 generally may challenge the existence or amount of an underlying tax_liability only if they did not receive a statutory_notice_of_deficiency for the liability or otherwise receive an opportunity to dispute the liability sec_6330 114_tc_604 for purposes of a collection review proceeding such as this the phrase underlying tax_liability includes the deficiency additions to tax including the additional tax provided by sec_72 penalties and statutory interest see 115_tc_329 the record does not establish that petitioners received a notice_of_deficiency for and consequently a challenge to petitioners’ tax_liability is allowed in this judicial proceeding only if petitioners did not have a prior opportunity to contest the existence or amount of the tax administratively the propriety of a challenge to petitioners’ tax_liability in this collection review proceeding is undermined by three stipulations stating that petitioners did not challenge the tax during the first or second hearing or in the petition petitioners do not ask the court to relieve them of the stipulations and we decline to do so sua sponte a stipulation is generally treated to the extent of its terms as a binding and conclusive admission by the parties rule e the court may allow a party to a stipulation to qualify change or contradict the stipulation upon a showing that the stipulation is contrary to the record see 66_tc_312 or where justice so requires see rule e we are unpersuaded that either circumstance is present in this case petitioners had occasion at either of two collection_due_process hearings to challenge their tax_liability but as we find failed to do so the stipulation of facts signed by both parties included factual paragraphs pages inclusive of exhibits and a clear and unambiguous statement that all stipulated facts shall be conclusive three stipulated paragraphs specify that petitioners’ underlying tax_liability was not challenged at the first hearing at the second hearing or in the petition the disputed stipulations are consistent with the evidentiary record and we conclude that those stipulations are binding upon the parties unless justice requires that petitioners be relieved of them see mathia v commissioner tcmemo_2007_4 93_tcm_653 unilateral mistake was not grounds for relieving commissioner of disputed stipulations justice does not favor relieving petitioners of the stipulations because even if petitioners were permitted to challenge their liability for the additional tax under sec_72 which they are not they would not prevail in 127_tc_1 the court decided whether a taxpayer-beneficiary was liable for the sec_72 additional tax on distributions which she received from an ira that had been partially funded with a rollover from her deceased husband’s retirement account the court stated that when the taxpayer-beneficiary chose to roll over the funds from the retirement account into her own ira she became ineligible for the exception from the additional tax on early distributions id pincite justice does not require a party be relieved of a stipulation where as here the party will not prevail on the merits of the argument cf estate of lee v commissioner tcmemo_2009_303 98_tcm_657 justice does not favor granting a motion for leave to amend the pleadings where doing so would be futile consequently we hold petitioners may not challenge the existence or amount of the liability iii no abuse_of_discretion in rejecting offer-in-compromise the second issue for decision is whether appeals abused its discretion in rejecting petitioners’ offer of dollar_figure to compromise federal_income_tax liabilities of dollar_figure we hold it did not the commissioner is allowed to compromise any civil tax_liability arising under the internal revenue laws sec_7122 see also sec_6330 pursuant to his statutory charge under sec_7122 the commissioner has prescribed guidelines for evaluating whether an offer-in-compromise is adequate and should be accepted to resolve a dispute see sec_301_7122-1 proced admin regs discussing compromises generally under that guidance grounds for compromise include doubt as to liability doubt as to collectibility and promotion of effective tax_administration sec_301_7122-1 proced admin regs petitioners essentially argue that appeals was required to accept their offer-in- compromise on the basis of doubt as to collectibility and effective tax_administration we consider each contention in turn the commissioner may compromise a tax_liability on the basis of doubt as to collectibility where the taxpayer’s assets and income are less than the full amount of the liability sec_301_7122-1 proced admin regs an offer-in- compromise based on doubt as to collectibility generally will be considered acceptable where it is unlikely that the full unpaid liability can be collected and the offer reflects the taxpayer’s reasonable collection potential revproc_2003_71 sec_4 2003_2_cb_517 a taxpayer’s reasonable collection potential is determined in part using published guidelines that establish national and local allowances for necessary living_expenses see internal_revenue_manual irm pt date at the second hearing petitioners submitted form 433-a reporting assets liabilities and monthly disposable income so wold reviewed the form 433-a and adjusted petitioners’ expenses in accordance with the irm determining that petitioners could pay dollar_figure per month without suffering a hardship the variance between petitioners’ and appeals’ monthly disposable income calculations arose from two adjustments first a reduction of dollar_figure to their housing and utilities allowance dollar_figure reported by petitioners less dollar_figure determined by so wold and second a reduction of dollar_figure to their public transportation allotment dollar_figure reported by petitioners less dollar_figure determined by so wold we conclude that so wold did not abuse her discretion in making either adjustment with regard to petitioners’ housing and utilities allocation irs employees are instructed to allow the standard amount for housing and utilities or the amount actually spent whichever is less irm pt a they are also instructed that where the expenses claimed for housing and utilities are more than those allowed by local standards the taxpayers must provide documentation to substantiate that the expenses are necessary see id so wold in an exercise of discretion concluded that the allowable expenses for housing and utilities should be reduced to the standard amount by virtue of petitioners’ nonpayment of their mortgages as to petitioners’ public transportation expense irs employees are advised to allow that expense in an amount fixed by reference to whether the taxpayers own a vehicle see irm pt b where the taxpayers use public transportation and own a vehicle as petitioners did when they submitted to appeals the form 433-a the allowable public transportation expense is the amount actually incurred id as explained in the supplemental notice_of_determination petitioners failed to provide to appeals proof establishing that they paid dollar_figure per month for public transportation and so wold allocated dollar_figure under local standards neither adjustment was arbitrary capricious or without sound basis in fact or law in view of irm pt a and b and we will uphold those determinations so wold also determined consistent with the irm that ms taylor’s sec_401 account balance of dollar_figure was reachable by levy because petitioners did not need that income to provide for necessary living_expenses see irm pt dollar_figure date funds held in a retirement account are reachable by levy when the taxpayer is neither retired nor close to retirement thus while appeals did not explicitly state so in the supplemental notice_of_determination respondent could reasonably expect to collect from petitioners at least dollar_figure dollar_figure of monthly disposable income time sec_120 months in the statutory collection_period plus dollar_figure see sec_6502 irm pt date taxpayers’ offer- in-compromise based on doubt as to collectibility must usually be equal to or exceed taxpayers’ reasonable collection potential we note that petitioners’ reasonable collection potential was actually higher than determined by so wold by virtue of their cash the cash_surrender_value of their life_insurance policies and available equity in their vehicles see eg irm pt date including cash and bank accounts in reasonable collection potential id pt including cash_surrender_value of life_insurance policies in reasonable collection potential id pt dollar_figure date including equity in motor vehicles in reasonable collection potential but see id pt dollar_figure date excluding furniture and personal effects from reasonable collection potential of individual taxpayers because petitioners’ reasonable collection potential of at least dollar_figure exceeded their offer amount of dollar_figure we hold that appeals did not abuse its discretion in rejecting their offer-in-compromise the commissioner may also compromise a tax_liability to promote effective tax_administration where full collection could be achieved but would result in economic hardship or compelling public policy or equity considerations provide a basis for compromising the liability see 124_tc_165 aff’d 454_f3d_782 8th cir sec_301_7122-1 proced admin regs petitioners assert in the petition that respondent’s proposed levy would leave their family without food petitioners have failed to persuade us that such is the case with respect to economic hardship sec_301_6343-1 proced admin regs as made applicable by sec_301_7122-1 proced admin regs states that economic hardship occurs where a taxpayer is unable to pay his or her reasonable basic living_expenses sec_301_7122-1 proced admin regs lists certain factors to consider in evaluating whether collection of a liability involves economic hardship and offers some illustrative examples these examples include a taxpayer who provides dependent care to a child with a serious long-term illness a retired taxpayer who would lack adequate means to pay basic living_expenses if his retirement account was liquidated and a disabled taxpayer with a fixed income and a modest home specially equipped to accommodate his disability sec_301_7122-1 proced admin regs petitioners’ situation is distinguishable from each of the examples in the regulations in they earned annual wages of more than dollar_figure and according to so wold’s credible analysis easily met their basic living_expenses as evidenced by petitioners’ installment_agreement whereby they agreed to pay dollar_figure per month to satisfy their and other tax_liabilities petitioners were able to pay more than they asserted in the petition accordingly we conclude that appeals was justified in rejecting petitioners’ claims of economic hardship we similarly find no equitable considerations requiring appeals to accept petitioners’ offer-in-compromise to the contrary if appeals accepted petitioners’ offer to pay less than their full tax_liability even though their reasonable collection potential reflected the ability to pay other taxpayers might lose confidence in a system that charges some but exempts others when they fail to comply sullivan v commissioner tcmemo_2009_4 t c m cch we are not persuaded that effective tax_administration required appeals to accept petitioners’ offer-in-compromise finally we note that appeals did not abuse its discretion with respect to the installment_agreement of date while the commissioner may generally not levy on a taxpayer’s property during the period that an installment_agreement is in effect see sec_6331 it is not necessarily an abuse_of_discretion to sustain a proposed levy where an installment_agreement is not pending see sec_6331 k so wold’s case activity record establishes that the installment_agreement was not pending until at least date well after the supplemental notice_of_determination was issued thus it would have been impossible for so wold to consider at the second hearing the question of whether the levy should not be made because of the installment_agreement appeals is of course empowered to enter into such an installment_agreement by virtue of its continuing jurisdiction under sec_6330 and respondent is generally precluded from levying on petitioners’ property during the period in which that installment_agreement is in effect under sec_6331 appeals has satisfied its obligations to petitioners under sec_6330 as detailed in the supplemental notice_of_determination appeals obtained verification from the irs office collecting the liability that all requirements of applicable law regulation and administrative procedure had been met so wold considered petitioners’ offer-in-compromise but concluded the offer should not be accepted because petitioners were able to pay dollar_figure per month without suffering hardship finally appeals concluded that the proposed levy was not more intrusive than necessary because petitioners would be able to pay their necessary monthly living_expenses on the basis of the foregoing appeals’ determination to proceed by levy is sustained the court has considered all of petitioners’ arguments for a contrary result and to the extent not discussed herein we conclude those arguments are irrelevant moot or without merit to reflect the foregoing decision will be entered for respondent


t c memo united_states tax_court neil t nordbrock petitioner v commissioner of internal revenue respondent evelyn r nordbrock petitioner v commissioner of internal revenue respondent docket nos filed date neil t nordbrock and evelyn r nordbrock pro sese vicki l miller and robert m fowler for respondent memorandum findings_of_fact and opinion cohen judge respondent determined deficiencies and additions to tax as follows -- - docket no 12755-00--neil t nordbrock additions to tax penalties i r c year deficiency sec_6651 a sec_6654 dollar_figure dollar_figure dollar_figure big_number big_number big_number docket no 12756-00--evelyn r nordbrock additions to tax penalties i r c year deficiency sec_6651 a sec_6654 dollar_figure dollar_figure dollar_figure big_number big_number big_number the issues for decision are whether petitioners failed to report taxable_income whether they are entitled to joint filing_status and whether they are entitled to deduct business_expenses in excess of those conceded by respondent unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure findings_of_fact some of the facts have been deemed stipulated pursuant to rule f petitioners resided in arizona during the years in issue and at the time that they filed their petitions in these cases petitioners were married to each other during the years in issue during and for part of evelyn r nordbrock ms nordbrock was employed by alpha tax service as a tax_return_preparer in she started a tax preparation business in which she prepared tax returns for third parties during and during the years in issue neil t nordbrock mr nordbrock was a self-employed accountant during the years in issue petitioners received the following items of income source wages alpha tax service dollar_figure s dollar_figure --- interest_income dollar_figure dollar_figure dollar_figure dividend income dollar_figure - dollar_figure capital_gain dollar_figure - -- rental income dollar_figure dollar_figure -- cancellation of -- dollar_figure -- indebtedness pension distribution -- -- dollar_figure nonemployee compensation dollar_figure dollar_figure dollar_figure be nordbrock tax dollar_figure dollar_figure -- preparation n nordbrock accounting dollar_figure dollar_figure dollar_figure swan business receipts dollar_figure -- --- danmarkin investments --- dollar_figure --- charles schwab dividend income olde discount-dividend -- dollar_figure -- income under arizona community_property_laws one-half of each of the foregoing items is allocable to each petitioner q4e- beginning long before the years in issue petitioners were involved in continuing disputes with the internal_revenue_service irs petitioners were associated with an organization known as the american law association which conducted seminars promoting the creation of foreign trusts for the purpose of decreasing or avoiding taxes in petitioners established three foreign business trusts in the turks and caicos islands mr nordbrock was convicted of violating sec_7206 for filing false income_tax returns for and mr and ms nordbrock were convicted of violating sec_7206 for filing a false amended income_tax return for these convictions were affirmed on appeal by the court_of_appeals for the ninth circuit in united_states v nordbrock 952_f2d_408 9th cir unpublished opinion in the district_court for the district of arizona imposed a lifetime injunction prohibiting mr nordbrock from preparing tax returns for others the lifetime injunction was affirmed on appeal by the court_of_appeals for the ninth circuit in 38_f3d_440 9th cir in date respondent seized property located on swan road in tucson arizona the irs sent a notice of seizure to swan business organization as nominee of mr nordbrock on date - - in mr nordbrock commenced a proceeding in bankruptcy in that proceeding his attorney was john j standifer jr standifer during checks totaling dollar_figure were written to standifer other checks were written to standifer and to the bankruptcy trustee in multiples of dollar_figure per month as payments to be applied to mr nordbrock’s chapter plan on date the irs sold the swan property in order to enforce a judgment against mr nordbrock for preparer penalties petitioners commenced litigation challenging the sale and seeking to set it aside that litigation was still pending at the time of trial in these cases for each of the years in issue petitioners submitted to the irs a joint form_1040 u s individual_income_tax_return next to their signatures on the form however was a reference to note note to each return was a statement as follows note this return is not voluntarily submitted nor is it signed under penalties of perjury it is signed and submitted under duress coercion and the threat of criminal prosecution see us west virginia state board_of education et al v barnette et al in the notices of deficiency respondent determined that petitioners were taxable on the items of income set forth above less certain of the deductions claimed on the form sec_1040 submitted by them respondent disallowed deductions for legal - - expenses travel_expenses education expenses meals and entertainment and similar unsubstantiated items respondent also determined that petitioners had other items of income that respondent has since conceded respondent determined that petitioners’ form sec_1040 were not valid income_tax returns thus respondent determined the additions to tax in issue and calculated the deficiencies using rates for married persons filing separate returns in each of the petitions in these cases filed date petitioners attached approximately pages of exhibits purportedly supporting their claims that the notices of deficiency were a continuation of harassment lies and criminal_fraud committed by various federal employees summarizing their allegations they claim in excess of criminal violations perpetrated against them by more than different federal co-conspirators during the past years opinion respondent moved to strike from the petition and to dismiss for lack of jurisdiction the allegations constituting accusations of criminal conduct a hearing on respondent’s motion was held in phoenix arizona on date respondent’s motion was granted at that time mr nordbrock requested that any trial be postponed for at least days petitioners were advised that the hearing was only for the purposes of the motion and the trial had not been set by notice served date the case was set for trial in phoenix on date attached to the notice setting case for trial was a standing pre-trial order including among other things the following paragraphs continuances will be granted only in exceptional circumstances see rule formerly rule tax_court rules_of_practice and procedure even joint motions for continuance will not routinely be granted ordered that all facts shall be stipulated to the maximum extent possible all documentary and written evidence shall be marked and stipulated in accordance with rule b unless the evidence is to be used to impeach the credibility of a witness objections may be preserved in the stipulation if a complete stipulation of facts is not ready for submission at trial and if the court determines that this is the result of either party’s failure to fully cooperate in the preparation thereof the court may order sanctions against the uncooperative party any documents or materials which a party expects to utilize in the event of trial except for impeachment but which are not stipulated shall be identified in writing and exchanged by the parties at least days before the first day of the trial session the court may refuse to receive in evidence any document or material not so stipulated or exchanged unless otherwise agreed by the parties or allowed by the court for good cause shown xk kek on date respondent filed a motion to show cause why proposed facts in evidence should not be accepted as established recounting petitioners’ failure to address respondent’s proposed stipulation or to respond to respondent’s --- - informal and formal discovery the motion to show cause also referred to petitioners’ attempt to secure by formal discovery the oaths of office of respondent’s counsel and of the chief_judge and of the judicial officers to whom these cases had been assigned for hearing on respondent’s motion to dismiss and for the trial scheduled for date on date respondent’s motion to compel responses to respondent’s interrogatories and motion to compel production of documents were filed on date an order to show cause was issued on date respondent’s discovery motions were granted on date respondent’s status report was filed respondent’s status report attached a copy of a request fora 90-day continuance served by petitioners but not as of then received by the court respondent objected to continuance recounting the history of the cases and pointing out that petitioners’ grounds for continuance were not well taken respondent also referred to petitioners’ continuing failure to respond to the outstanding discovery on date the court instituted a conference telephone call among the parties and the court to advise petitioners that their request for a continuance would not be granted the parties also discussed the outstanding discovery orders and response to the order to show cause the court --- - advised petitioners of the necessity of presenting documentation that would substantiate the deductions to which they might be entitled for the years in issue thereafter the court received from petitioners documents demanding production of copies of subscribed oaths of office their demands were untimely were not relevant to the subject matter involved in the pending cases and were not likely to lead to the discovery of admissible evidence on date petitioners filed a motion to dismiss claiming that neither respondent nor the court had proven jurisdiction in these cases that motion was denied the court has jurisdiction in these cases as a result of timely filed petitions from valid notices of deficiency sec_6212 sec_6213 and sec_6214 after invoking our jurisdiction ina deficiency case petitioners may not just change their minds and decide they do not want to be here 709_f2d_12 5th cir affg tcmemo_1982_352 57_tc_720 affd per curium 507_f2d_406 2d cir see also sec_7459 62_tc_519 a deficiency case commenced by a taxpayer cannot be voluntarily dismissed without entry of a decision on the merits on date respondent’s motion in limine to exclude untimely identified witnesses and untimely exchanged documents was filed that motion recounted petitioners’ -- - continuing failure to provide documents concerning their claimed deductions other than a few documents that related to expenses for the motion also pointed out petitioners’ failure to submit a trial memorandum identifying witnesses as required by the court’s standing pre-trial order respondent’s motion was set for hearing on date when the cases were called for trial on january petitioners filed a renewal of motion to dismiss repeating and expanding on scurrilous accusations against respondent’s counsel and the court and claiming that the court lacked jurisdiction because neither respondent’s counsel nor the court would provide copies of their oaths of office to petitioners petitioners’ motion was denied respondent’s motion in limine was granted the cases proceeded to trial on january petitioners presented neither evidence nor argument that respondent’s determination of specific items of income was erroneous the facts that were deemed stipulated connected petitioners to items of income either by specific receipts or by bank_deposits into accounts under the control of petitioners see 743_f2d_670 9th cir affg tcmemo_1982_666 87_tc_74 the testimony of mr nordbrock and the documents presented for related to legal and other expenses of filing his personal bankruptcy repairs or improvements to petitioners’ home_travel_expenses and expenses of attending seminars petitioners bear the burden of proving that they are entitled to deductions see eg 512_f2d_882 9th cir affg tcmemo_1972_133 it is apparent from the record in this case that petitioners are not entitled to the benefits of the burden_of_proof provisions of sec_7491 they have failed to respond to reasonable requests for information documents meetings and interviews and they have failed to comply with court orders that they produce documents and answer questions they have not presented any substantiation with respect to deductions for and they have not produced credible_evidence on disputed issues of fact in view of their history as tax_return_preparers they should have been familiar with the types of records required and the legal requirements for deductions instead of substantiating their deductions they have made unwarranted accusations against those charged with determining their tax_liability mr nordbrock testified only after the court told him that he would have to explain the documents that had been produced for before any deductions could be allowed his testimony was vague and conclusory and marked by failure to remember specific details on cross-examination ms nordbrock declined to testify petitioners contend that the bankruptcy proceedings were -- commenced in an attempt by petitioners to save business property from seizure by the irs mr nordbrock testified that the only creditor in the bankruptcy was the irs and the debt to the irs resulted from dollar_figure in preparer penalties see 38_f3d_440 9th cir respondent argues that these expenses are personal expenses and not deductible business_expenses petitioners have not persuaded us that the bankruptcy-related expenses were ordinary and necessary business_expenses and have not provided us with a basis for allocating the fees between personal services and business services petitioners presented copies of checks that were payable to the attorney who filed the bankruptcy proceeding they did not however present any invoices that explained the services provided by the attorney see in re collins 26_f3d_116 11th cir 68_tc_294 some of the payments claimed as deductible were made to the trustee in bankruptcy those payments relate to the preparer penalties inasmuch as petitioner testified that the only creditor in the bankruptcy was the irs and that the seizure of property that he was trying to defeat was for dollar_figure in unpaid preparer penalties that were assessed against him the nature of the payments is not clear if the payments were for monthly fees as petitioner testified they suffer from the same infirmity as the legal fees if they were payments on account of the penalties and any interest related thereto they are not deductible see 104_tc_518 in any event petitioners have failed to prove that the payments are deductible mr nordbrock testified that some of the seminar expenses and travel_expenses were for an investment seminar related to ms nordbrock’s investments respondent’s theory is that the seminars attended by petitioners including travel to those seminars related to petitioners’ tax protest activities some of the exhibits support respondent’s argument a payment of dollar_figure claimed as legal and professional fees was according to mr nordbrock’s testimony for authoring a letter to the irs that challenged the true identity and legal affiliation of the entity known as the internal_revenue_service in any event mr nordbrock was enjoined during the years in issue from preparing tax returns on behalf of clients ms nordbrock did not testify although most of the checks received in evidence were signed by her we are not persuaded that the checks represent payments for deductible business_expenses those expenses relating to investments to personal taxes or to ms nordbrock’s expenses as an employee of alpha tax services would be deductible if at all under sec_212 and only to the extent that the total exceeded percent of petitioners’ adjusted_gross_income see sec_67 the amounts identified by petitioners for seminars totaled less than dollar_figure and do not meet that threshold the travel_expenses claimed by petitioners were not substantiated as required by sec_274 no contemporaneous documents or other reliable evidence corroborated the alleged business_purpose of the travel petitioners contend that the repairs and maintenance expense related to an office in their home the only evidence on this issue is mr nordbrock’s uncorroborated and conclusory testimony the documentation that was presented consisted of checks without invoices and credit card charges and the documentation showed no allocation between an alleged office in the home and the personal residential quarters of petitioners petitioners failed to present reliable or persuasive evidence that would satisfy the conditions of sec_280a after examination of the documents submitted by petitioners and petitioners’ testimony we conclude that any additional expenses beyond those conceded by respondent are not adequately substantiated there is no excuse for petitioners’ failure to present substantiating materials during the administrative stages and for more than a year while these cases were pending they disregarded the court’s order that they produce documents for and they are familiar with the consequences of failing to produce documents when required_by_law or court order -- - to do so see united_states v nordbrock supra they refused to answer interrogatories asking for identification of items of disputed income and claimed deductions notwithstanding a court order that they answer the interrogatories when their efforts to delay trial failed they sought dismissal of the cases on the entire record in these cases we infer that evidence that petitioners refused to produce would have been unfavorable to their claims of error in respondent’s determinations see 6_tc_1158 affd 162_f2d_513 10th cir the form sec_1040 submitted by petitioners for the years in issue were not valid tax returns see 114_tc_136 as a result petitioners are not entitled to joint_return rates see sec_6013 78_tc_558 based on the form sec_1040 they submitted the additions under sec_6651 are appropriate williams v commissioner supra the sec_6654 addition_to_tax applies absent exceptions not shown to exist in these cases 75_tc_1 the tax returns and the transcripts of petitioners’ accounts received in evidence satisfy respondent’s burden of production with respect to the additions to tax -- - to take account of respondent’s concessions decisions will be entered under rule