department of the treasury internal_revenue_service washington d c daten contact person 1d number telephone number oe e0 employer_identification_number c l abs dollar_figure -oc - mz x dear applicant this letter responds to x's request dated date for a ruling that the tax on net_investment_income under sec_4940 of the internal_revenue_code will not apply to x's proposed foreign investment program as described below facts x is a private non-operating foundation described in sec_50 and a of the code x proposes to conduct a program of invee‘ments the investment progra n in order to promote economic development in m a foreign_country the investment program will provide relief of poverty in m by producing jobs and thus will further charitable purposes x's investment program will consist of two parts a government program and a direct loan or investment progra‘n in a separate letter_ruling plr date the service ruled that loans made under these programs will further exclusively charitable purposes and will be program-related investments under sec_4944 government program the government program will invoive three levels of loans x will make loans of a certain amount in u s dollars to the government of m the goverment of m in turn will make loans to privately owned local banks which will make loans to businesses in m amounts repaid by borrowers may be reloaned by the government of m under the same procedures the loans between x and the government of m will be interest-free the government's loans to the local banks will be at an interest rate well below the going market rate the local banks may charge interest on their loans up to a stated maximum substantlally below the going market rates the government of m and the local banks may also charge a penalty for late payments in order to encourage timely repayment x will not receive any income from the program other han possibie foreign_currency gains direct loan or investment program in x's direct loan or investment program x wil make direct loans including below-market loans to or equity investments in businesses in order to induce those businesses to operate in m x will receive interest payments denominated in the currency of m instead of dollars law sec_483 of the code provides generally that sec_483 does not apply to any debt_instrument for which an issue_price is determined under sec_1273 or sec_1274 sec_985 of the code generally defines a taxpayer's functional_currency as the dollar sec_988 of the code provides that foreign_currency_gain or oss attributable to a sec_988 transaction is generally treated as ordinary_income or loss and that in certain cases such income or loss may be treated as capital_gain or loss or as interest ir come or expense sec_988 of the code defines certain transactions as a sec_988 transaction if the amount that the taxpayer is entitied to receive or is required to pay by reason of such transaction is denominated in terms of a nonfunctional_currency or is determined by reference to the value of one or more nonfunctional currencies sec_988 of the code defines one type of sec_988 transaction as the acquisition of a debt_instrument or becoming the obligor under a debt_instrument sec_1272 of the code generally requires a holder of a debt_instrument with original_issue_discount to include the discount in gross_income sec_1273 of the code defines original_issue_discount oid as the excess if any of a debt instrument's stated_redemption_price_at_maturity over its issue_price sec_1273 of the code defines ‘he issue_price of a debt_instrument to which sec_1273 applies sec_1274 of the code determines the issue_price of certain debt instruments given in consideration for the sale_or_exchange of property sec_4940 of the code imposes an excise_tax on private_foundations based on their net_investment_income consisting of items of gross_investment_income and capital_gain_net_income less certain deductions sec_4940 of the code defines gross_investment_income as the gross amount of income from interest dividends rents payments_with_respect_to_securities_loans as defined in sec_512 and royalties but not including any such income to the extent included in computing the tax imposed by sec_511 sec_7872 of the code recharacterizes certain below-market loans described in sec_7872 of the code as two transactions a loan at the applicable_federal_rate afr and a transfer from the lender to the borrower in an amount sufficient to fund the borrower's payments of interest at the afr oe fe sec_1_988-3 of the income_tax regulations indicates that foreign_currency_gain is not characterized as interest_income sec_53_4940-1 of the foundations and similar excise_taxes regulations provides that interest dividends rents and royalties derived from assets devoted to charitable activities are includible in gross_investment_income therefore for example interest received on a student_loan would be includible in the gross_investment_income of a private_foundation making such loan sec_53_4940-1 of the regulations provides that sales or other dispositions of program- related investments as defined in sec_4944 of the code held by a private_foundation are not taken into account in determining capital_gain_net_income sec_1_7872-5t of the regulations exempts from sec_7872 of the code loans made by a private_foundation or other organization described in sec_170 with the primary purpose to accomplish one or more purposes described in sec_170 unless one of the principal purposes of structuring the transaction as a loan is to avoid federal tax rationale capital_gains capital_gains from the sale of program-related investments are excludible in determining net_investment_income under sec_4940 of the code gross_investment_income interest dividends and other items of gross_investment_income under sec_4940 of the code arising from program-reiated investments are taxable under sec_4940 while x anticipates receiving interest and dividends designated as such from the direct loan or investment program x will receive only a retum of capital from the government program plus possibie foreign_currency gains the question arises whether x will receive any retum not designated as gross_investment_income or any imputed_income that is properly characterized as gross_investment_income x will not receive any foreign_currency gains under the investment program characterized as gross_investment_income under sec_4940 of the code x's interest-free_loan to the government of m is not a sec_988 transaction resulting in currency gain_or_loss because the return of principal that x is entitled to receive is not denominated in terms of or determined by reference to the value of a nonfunctional_currency such as the currency of m rather the loan is denominated in and determined by reference to x’s functional_currency the u s dollar while loans under the direct loan or investment program may be sec_988 transactions any foreign_currency_gain from such loans will not be characterized under sec_988 as interest or another item of gross_investment_income under sec_4940 we aiso find that x will not receive any imputed_income under sec_483 sec_1274 or sec_7872 of the code because the loans made by x pursuant to the investment program will be issued for money sec_483 and sec_1274 do not apply instead the issue_price of each loan is determined under sec_1273 thus there is no interest imputed under sec_1274 on the loans made by x sec_7872 re- characterizes the repayment of certain below-market loans as interest in part since the investment program is a program-related_investment it is exempt under sec_1_7872-5t of the regulations from such re-characterization ruling of accordingly we rute that interest or dividend income that is designated as such and derived from the direct loan or investment program will constitute gross_investment_income under sec_4940 of the code otherwise the tax on net_investment_income under sec_4940 of the code will not apply to x's investment program except as we have ruled above we express no opinion as to the tax consequences of the grant under the cited provisions of the code or under any other provisions of the code this ruling is directed only to x sec_6110 of the code provides that it may not be used or cited as precedent because this letter could help resolve any future tax questions relating to x's activities x should a copy of this ruling in x's permanent records we are providing our ohio tax exempt government entities office a copy of this ruling sincerely yours signed garland a carter garland a carter manager exempt_organizations technical group ot


cca_2015121715545054 id uilc number release date third party communication date of communication month dd yyyy from sent thursday date pm to cc bcc subject re diagreed tao emancipation filing_date timely filing of refund claim thanks for your patience while i reviewed the case here is my understanding of the facts is a friday is emancipation day a saturday for filed by the taxpayer on a monday - because of emancipation day being observed on the is timely filed 1040x for filed by the taxpayer on a thursday i very clearly think the 1040x is a timely claim_for_refund filed within years from the time the return was filed and is very much like situation in revrul_2003_41 for your convenience i am attaching a copy of revrul_2003_41 the only difference between situation and this case is that the refund being claimed is not from taxes withheld from wages - it is based on a larger student_loan_interest_deduction i have consulted with a sec_6511 expert in counsel and she also agrees that the taxpayer's refund claim is not time-barred thus i support the tao please let me know if you have any questions ----------------------- ------------------------------- -------------------------------------------------------------- ---------------------------- ---------------------


t c memo united_states tax_court steven j and terry l namyst petitioners v commissioner of internal revenue respondent docket no filed date jay b kelly for petitioners blaine holiday for respondent memorandum findings_of_fact and opinion goeke judge respondent determined deficiencies of dollar_figure dollar_figure dollar_figure and dollar_figure in petitioners’ and federal income taxes respectively respondent also determined penalties under section of dollar_figure dollar_figure 1unless otherwise indicated all section references are to the internal_revenue_code as amended and all rule references are continued dollar_figure and dollar_figure for and respectively there are four issues for decision first were amounts mr namyst petitioner received from intelligent motion controls inc imc reimbursements under an accountable_plan qualifying under sec_1_62-2 income_tax regs rather than amounts includable in petitioners’ gross_income as compensation we hold the amounts received were includable in petitioners’ gross_income as compensation second were amounts petitioners received for the sale of petitioner’s tools includable in their gross_income we hold that they were third does the 6-year period of limitations under sec_6501 permit respondent’s determination for we hold that it does fourth are petitioners liable for the accuracy-related_penalty under sec_6662 we hold that they are not findings_of_fact some of the facts are stipulated the stipulation of facts and the attached exhibits are incorporated herein by this reference at the time the petition was filed petitioners resided in eagan minnesota continued to the tax_court rules_of_practice and procedure petitioners husband and wife filed joint federal_income_tax returns for and petitioner was employed by imc beginning in and during the years in issue imc made motor controls for blood pumps and later developed digital inspection hardware and software for the jewelry industry imc’s products included a patented device to analyze and appraise diamonds petitioner was employed to design and manufacture imc’s products for each of and petitioner received forms w-2 wage and tax statement from imc reporting his wages petitioner’s form_w-2 for reported dollar_figure in gross wages petitioner’s form_w-2 for reported dollar_figure in gross wages the amount reported on petitioner’s form_w-2 represented wages paid to him between january and date john kerkinni was the sole shareholder ceo and president of imc he never took a salary from imc mr kerkinni met petitioner in when they worked together for another corporation in mr kerkinni called petitioner and asked him to come work for imc to develop the equipment to analyze diamonds petitioner did not have an ownership_interest in imc in designing and manufacturing imc’s products petitioner and other imc employees used tools and equipment that petitioner had personally owned for many years petitioner’s old tools in date mr kerkinni approached petitioner and informed him that imc could no longer afford to pay him a salary petitioner claims that at that time he agreed to continue working for imc without a salary petitioner and mr kerkinni agreed that imc would reimburse petitioner for any expenses he paid in performing his duties as an employee the reimbursement payments were to be made whenever and in whatever amounts imc could afford to make them mr kerkinni also agreed that imc would purchase any of petitioner’s old tools that were being used by employees of imc at mr kerkinni’s request petitioner kept an inventory list of the tools and equipment owned by him and used by imc employees and added to the list annually during and petitioner paid expenses related to his work at imc petitioner’s expenses included travel and purchases of new equipment imc issued checks to petitioner between march and date and in and the amounts of these checks were not reported to petitioner on a form_w-2 and petitioners did not report the amounts of the checks on their or federal_income_tax returns the checks from imc were issued almost every month although on different days each month the amounts of the checks varied from dollar_figure date to dollar_figure date and were generally in round numbers petitioner did not receive a statement allocating the amounts of the checks between expense reimbursements and payments for imc’s purchase of petitioner’s old tools respondent determined deficiencies for each of petitioners’ taxable years and in a notice_of_deficiency dated date respondent adjusted petitioners’ income for each year to include the amounts of the checks from imc as a result of respondent’s adjustments to petitioners’ gross_income petitioners were no longer entitled to the earned_income credits claimed on their returns for and the parties stipulated that petitioners are entitled to the child_tax_credit for and respondent also conceded that petitioners were entitled to miscellaneous_itemized_deductions limited under sec_67 to the extent the expenses exceeded percent of petitioners’ adjusted_gross_income for the expenses petitioner paid on behalf of imc in each year on brief respondent conceded an additional dollar_figure of petitioners’ expenses for the only expenses listed by petitioner that were not allowed as miscellaneous_itemized_deductions by respondent in either the notice_of_deficiency or on brief were those made by petitioner before date respondent treated the amounts petitioners received from imc in exchange for petitioner’s old tools as wage income respondent also determined that petitioners were liable for an accuracy-related_penalty under sec_6662 for each year in issue opinion petitioners argue that the checks issued to petitioner by imc between date and date were not wages but were in part reimbursements for the expenses petitioner paid in and and in part proceeds from the sale of petitioner’s tools to imc with respect to the expenses petitioner paid petitioners claim that the reimbursement arrangement between petitioner and mr kerkinni qualifies as an accountable_plan under sec_1_62-2 income_tax regs and that petitioners were not required to include the amounts of the expense reimbursements in their gross_income petitioners also argue that petitioner sold his old tools to imc at reasonable used values set by petitioner totaling dollar_figure and that the amounts that represented the proceeds from these sales were returns of petitioner’s capital and not includable in gross_income respondent argues that it is unreasonable to believe that petitioner agreed to work for imc without a salary or an ownership_interest in the corporation although the arrangement was unusual we reject respondent’s contention petitioner is dedicated to his work and loyal to his friend mr kerkinni the parties do not address the application of sec_7491 or c in the instant case respondent issued the notice_of_deficiency on date and it is possible that respondent's examination of petitioners’ returns for and began after date however petitioners do not argue that the burden_of_proof shifts to respondent under sec_7491 and have not shown that the threshold requirements of sec_7491 were met we decide the issues involving petitioners’ unreported income on a preponderance_of_the_evidence and the burden_of_proof does not affect the outcome we shall first address petitioners’ contention that they were not required to report as gross_income the amounts imc reimbursed petitioner for his expenses which included travel and the purchases of new equipment on behalf of imc we shall then address petitioner’s contention that the remainder of the payments made by imc were returns of petitioner’s capital with respect to the sale of his old tools to imc i accountable_plan sec_61 includes in gross_income all income from whatever source derived sec_62 defines adjusted_gross_income as gross_income minus certain deductions sec_62 allows taxpayers to deduct from gross_income amounts paid_by the taxpayer in connection with the performance by him of services as an employee under a reimbursement or other expense allowance arrangement with his employer expense reimbursements under an accountable_plan are not reported as wages on the employee’s form_w-2 and are exempt from withholding and payment of employment_taxes sec_1_62-2 income_tax regs in order to qualify as an accountable_plan under sec_62 an arrangement must satisfy the business connection substantiation and return of excess requirements sec_1 c income_tax regs the business connection substantiation and return of excess requirements under sec_1_62-2 e and f income_tax regs are applied on an employee-by-employee basis therefore the failure of one employee to substantiate his expenses would not cause reimbursements to other employees to be treated as made under a nonaccountable_plan sec_1_62-2 income_tax regs a business connection requirement the business connection requirement is satisfied if an arrangement provides advances allowances or reimbursements only for business_expenses that are allowed as deductions under sec_161 through and that are paid_by the employee in_connection_with_the_performance_of_services as an employee of the employer sec_1_62-2 income_tax regs see also 118_tc_467 affd 351_f3d_982 9th cir respondent admits that petitioner was an employee of imc during all of the years in issue in the notice_of_deficiency and on brief respondent allowed deductions under sec_162 for the expenses petitioner paid in_connection_with_the_performance_of_services as an employee of imc a deduction under sec_162 requires that the reported expenses be directly connected with or pertaining to the taxpayer’s trade_or_business sec_1_162-1 income_tax regs petitioner kept track of the expenses he made carefully even deducting sales_tax from his expense reports when his own personal purchases were on receipts with purchases he made for imc petitioner was dedicated to imc’s business and the work he was doing to develop imc’s products we believe that the expenses he made and listed on the expense reports were directly connected to imc’s business of developing its products therefore we conclude that the business connection requirement was met here b substantiation requirement an arrangement meets the substantiation requirement if it requires that each business_expense be substantiated to the payor within a reasonable period of time sec_1_62-2 income_tax regs a reasonable period of time depends on the facts and circumstances of each arrangement sec_1_62-2 income_tax regs for travel entertainment and other expenses governed by sec_274 the substantiation requirement is fulfilled if the employee provides information sufficient to satisfy the substantiation requirements of sec_274 and the regulations thereunder to the employer sec_1_62-2 income_tax regs sec_274 allows a deduction for expenses of traveling away from home only if an employee substantiates the amount date time place and business_purpose for the travel sec_1 5t b temporary income_tax regs fed reg date for business_expenses not governed by sec_274 the employee must submit information to the employer sufficient to enable the employer to identify the specific nature of each expense and conclude that the expense is attributable to the employer’s business activities for these non sec_274 expenses each of the elements of an expenditure or use must be substantiated to the payor sec_1_62-2 income_tax regs petitioner and mr kerkinni testified that petitioner submitted a list of expenses and receipts to mr kerkinni annually in addition before making expenditures on behalf of imc petitioner would inform mr kerkinni that his work required a certain piece of equipment and with mr kerkinni’s permission he would purchase what was needed petitioner would then show mr kerkinni the receipts mr kerkinni asked petitioner to keep track of and save the receipts petitioner’s lists and receipts were submitted at trial the lists provided by petitioner stated the date vendor description invoice number amount and mileage where relevant for each expenditure each annual list was attached to an envelope containing receipts for the expenses some of petitioner’s expenses were for travel away from home for trade shows and the rest were for expenses not covered by sec_274 ie equipment for imc’s business as described above respondent allowed petitioners deductions from adjusted_gross_income under sec_162 for the and expenses listed in the exhibits submitted at trial these lists of expenses were the lists petitioner created for substantiation of his expenses to mr kerkinni the substantiation rules for business_expense deductions under sec_162 and sec_274 are incorporated by sec_1_62-2 through income_tax regs for the purpose of determining whether a reimbursement arrangement constitutes an accountable_plan in the notice_of_deficiency and on brief respondent accepted petitioner’s lists as proper substantiation under sec_162 and we agree that petitioner has met the substantiation requirements of sec_162 we believe that petitioner’s lists of expenses were also sufficiently detailed to qualify as proper substantiation under the requirements of sec_274 where applicable in order to meet the substantiation requirement of sec_1_62-2 income_tax regs petitioner must have actually submitted his substantiation to imc in order to be reimbursed we have found above that petitioner submitted expense reports to mr kerkinni annually and he showed mr kerkinni the receipts after each expenditure was made petitioner’s records were kept carefully and at the end of each year he submitted an accurate list of his expenditures that petitioner kept mr kerkinni informed of his expenditures when they were made helps to convince us that it was reasonable for petitioner to submit a detailed list only annually c returning amounts in excess of expenses sec_1_62-2 income_tax regs provides that an arrangement meets the third requirement of an accountable_plan if the employee is required to return to the payor within a reasonable period of time any amount_paid under the arrangement in excess of the expenses substantiated when an employer advances money to an employee for anticipated expenses paragraph f of sec_1_62-2 income_tax regs is satisfied only if the amount of money advanced is reasonably calculated not to exceed the amount of anticipated expenditures the advance is made within a reasonable period of when the expenditures are made and any excess of the advance over the substantiated expenses is required to be repaid within a reasonable period after the advance is received the facts and circumstances of each arrangement determine whether an employee is required to return amounts in excess of substantiated expenses id under the arrangement here petitioner was required to get mr kerkinni’s permission before making expenditures_for imc he was also required to submit his receipts to mr kerkinni for reimbursement imc agreed to pay petitioner whatever amounts it could afford to pay as reimbursements there is no evidence that petitioner was required to return any amounts he received that exceeded his expenses although petitioner was required to substantiate expenses the annual reimbursement amounts exceeded petitioner’s expenses if the excess amounts were meant to be advances for anticipated expenses petitioner would make there is no evidence that the advances were calculated to approximate the amounts of the anticipated expenditures the record does not show whether petitioner did in fact return any of the excess amounts to imc based on all the facts available to us we do not believe that the arrangement between petitioner and mr kerkinni required petitioner to return excess amounts to imc therefore the arrangement did not satisfy the returning amounts in excess of expenses requirement of sec_1_62-2 income_tax regs we believe that petitioner and mr kerkinni did come to an agreement about how imc would reimburse petitioner for his expenses however because petitioners have not shown that the reimbursement arrangement satisfied all three of the requirements of sec_1_62-2 it did not qualify as an accountable_plan under sec_62 and sec_1_62-2 income_tax regs therefore the amounts petitioner received from imc in the last months of and in and in excess of the amounts imc paid for petitioner’s tools as described below should be included in petitioners’ gross_income in those years as compensation ii expenses paid in and petitioners argue that expenditures of dollar_figure petitioner made in and were properly excludable from their gross_income in the years covered by the accountable_plan because the amounts were repaid as part of an accountable_plan imc paid petitioner a salary in and but did not reimburse him for expenses during those years because we have found that the arrangement between petitioner and mr kerkinni did not qualify as an accountable_plan in or petitioner’s expenses in and were not part of an accountable_plan in any year 2the record does not show whether petitioners claimed these expenses as miscellaneous_itemized_deductions from their adjusted_gross_income in and iii sale of petitioner’s tools to imc petitioner claims that as a part of his arrangement with mr kerkinni in he agreed to sell his old tools to imc petitioner used his old tools in his work for imc and other employees of imc also used the tools in petitioner brought the tools to imc and allowed it to take ownership and possession of them at that time petitioner agreed with mr kerkinni that he would keep an inventory of the tools that he transferred to imc petitioner updated the inventory list annually as more of his tools were used by imc employees he also agreed to assign a reasonable used value to each tool which values imc accepted as sale prices the record does not show how petitioner arrived at the values he placed on his tools respondent does not dispute that petitioner sold his tools to imc for the amounts petitioner listed in the inventory and that imc took possession of the tools we are convinced that petitioner did sell his old tools to imc petitioners argue that the entire amount imc paid for the tools should be treated as a return_of_capital respondent argues that because petitioners did not establish basis in any of the purchased tools the amount_paid for the tools should be treated as compensation_for services to imc because we have concluded that petitioner did sell his tools to imc we disagree with respondent’s characterization of the proceeds from the sale of the old tools as compensation it is likely that some of petitioner’s old tools qualified as capital assets under sec_1221 and some of the old tools were property used in petitioner’s trade_or_business of being an employee of imc of a character subject_to the allowance for depreciation under sec_167 see 97_tc_670 it is unnecessary for us to distinguish among petitioner’s old tools the result is the same gain from the sale of a capital_asset held longer than year is long-term_capital_gain under sec_1222 and net gain from the sale of property used in a taxpayer’s trade_or_business is treated as long-term_capital_gain under sec_1231 petitioner has shown that he owned all of the old tools for more than year before he first began selling them to imc ie date we believe based on petitioner’s testimony and the photographs the parties submitted of petitioner’s old tools that these were tools petitioner owned for both everyday use and use in his work for many years 3we do not believe that any of the tools petitioner sold to imc during should be characterized as supplies of a type regularly used or consumed by petitioner in the ordinary_course_of_his_trade_or_business within the meaning of sec_1221 any such supplies held or acquired by a taxpayer on or after date are excluded from characterization as capital assets by sec_1221 4we make the distinction between long- and short-term_capital_gain with respect to petitioner’s old tools only imc reimbursed petitioner for the new equipment he purchased for imc during and as part of the continued a taxpayer must establish his cost or adjusted_basis for the purpose of determining gain_or_loss that he must recognize on a sale of property 271_f2d_44 9th cir affg tcmemo_1957_193 brodsky v commissioner tcmemo_2001_240 schaeffer v commissioner tcmemo_1994_ proof of the cost or adjusted_basis is necessary because recovery_of an amount in excess of cost constitutes income 24_tc_322 in certain circumstances we may use the cohan_rule to estimate a taxpayer’s basis in an asset at the time of transfer 39_f2d_540 2d cir group admin premium servs inc v commissioner tcmemo_1996_451 in order for the court to estimate basis the taxpayer must provide some reasonable evidentiary basis for the estimation group admin premium servs inc supra citing 94_tc_337 and 85_tc_731 saykally v commissioner tcmemo_2003_152 here petitioners have not provided any facts or details that permit a reasonable estimate of their basis in the purchased tools petitioner testified that the tools were his older equipment and that he had owned some of them since he was or pictures of each tool were submitted at trial with continued arrangement between petitioner and mr kerkinni petitioner’s list of the tools’ reasonable used values the pictures however were taken on date in preparation for trial and they do not provide evidence of petitioner’s cost when the tools were new the cohan_rule should not be used as a substitute for petitioners’ burden_of_proof reinke v commissioner 46_f3d_760 8th cir citing 540_f2d_427 9th cir affg t c memo affg tcmemo_1993_197 because petitioners have not provided any information that would help us estimate their basis in the tools the cohan_rule is inapplicable consequently the amount_paid by imc for petitioner’s tools should be treated as long-term_capital_gain by petitioners and it is includable in petitioners’ gross_income for the years in which the amounts were received based on the inventory list and petitioner’s credible testimony it appears that petitioner transferred ownership of most of his tools in as a result we shall allocate dollar_figure the total amount imc paid petitioner in to for the sale of the tools the inventory list that petitioner created at the beginning of indicates that he sold dollar_figure worth of old tools to imc in however petitioner was paid only dollar_figure in we believe imc purchased dollar_figure the difference between dollar_figure and dollar_figure worth of tools in the inventory list petitioner created in early indicates that petitioner also sold dollar_figure worth of tools in therefore in total we allocate dollar_figure for the sale of tools to petitioners’ tax_year petitioner’s inventory list indicates that petitioner transferred dollar_figure worth of tools in therefore dollar_figure attributable to the sale of the tools will be allocated to petitioners’ gross_income petitioner sold dollar_figure worth of tools in therefore dollar_figure attributable to the sale of the tools will be allocated to petitioners’ gross_income iv summary of unreported income in summary petitioners improperly failed to report the following amounts in their income year sale of tools compensation dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure v period of limitations for generally the commissioner must assess an income_tax deficiency for a specified year within years from the date the taxpayer's return for that year was filed sec_6501 however in cases where a filed return omits_from_gross_income an amount exceeding percent of the amount stated as gross_income on the return sec_6501 provides that the tax may be assessed at any time within years of the filing of the return petitioners argue that the 3-year period of limitations on assessment under sec_6501 applies for their tax_year and that the period expired before respondent issued the notice_of_deficiency on date respondent admits that petitioners filed their return on date however respondent argues that because petitioners underreported their income by more than percent of the amount of gross_income stated on their return the appropriate period of limitations is years pursuant to sec_6501 because we concluded above that petitioners are not entitled to exclude their income from imc in any year as paid under an accountable_plan petitioners underreported their gross_income for by dollar_figure petitioners reported gross_income of dollar_figure on their return twenty-five percent of dollar_figure is dollar_figure therefore the appropriate period of limitations is years under sec_6501 the period of limitations for assessment of petitioners’ taxes did not expire before respondent issued the notice_of_deficiency vi accuracy-related_penalty respondent asserted an accuracy-related_penalty under sec_6662 for each of petitioners’ taxable years and sec_6662 provides that if sec_6662 applies to any portion of an underpayment_of_tax required 5petitioners signed form_872 consent to extend the time to assess tax for their taxable years and to be shown on a return there shall be added to the tax an amount equal to percent of the portion of the underpayment to which sec_6662 applies as relevant here sec_6662 applies to the portion of any underpayment that is attributable to negligence or disregard of the rules or regulations sec_6662 the term negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws or to exercise ordinary and reasonable care in the preparation of a tax_return sec_6662 gowni v commissioner tcmemo_2004_154 the term disregard includes any careless reckless or intentional disregard sec_6662 under sec_6664 an exception is provided to the imposition of a sec_6662 accuracy-related_penalty where a taxpayer establishes that there was reasonable_cause for the understatement and that the taxpayer acted in good_faith sec_6664 the determination of whether a taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all pertinent facts and circumstances generally the most important factor is the extent of the taxpayer's effort to assess the proper tax_liability sec_1_6664-4 income_tax regs we have concluded that petitioners were required to report as gross_income the amounts received as reimbursements of petitioner’s substantiated expenses and in exchange for petitioner’s tools our resolution of the issues in this case required careful examination of the relevant laws trial exhibits and testimony petitioners’ omission of the reimbursement income from imc was made in good_faith and with the belief that the reimbursement arrangement would qualify as an accountable_plan it was not unreasonable that petitioners did not report any of the income since the arrangement between petitioner and mr kerkinni provided that petitioner would not receive any reportable wages from imc and petitioner did not receive a form_w-2 for any of the years in issue in addition petitioners’ failure to report the proceeds they received for petitioner’s tools was a result of their belief that the payments did not exceed petitioner’s basis in the tools based on the information they had petitioners made an effort to comply with the tax laws in preparing their returns therefore we conclude that the accuracy-related_penalty is not appropriate and petitioners are not liable for the penalty pursuant to sec_6662 to reflect the foregoing and concessions by respondent decision will be entered under rule


internal_revenue_service number release date index number - ----------------------------------------------- --------------------------------------------- ------------------------------------------ --------------------------------- department of the treasury washington dc person to contact ---------------------- -------- ------------- telephone number --------------------- refer reply to cc psi - plr-130678-05 date date --------------------------------------------- ----------------------------------------- --------------------------------------------------------------------- ----------------------------------------- ----------------------- legend x --------------------------------------------------- a ----------------------------------------------------- b_trust -------------------------------------------------- trust --------------------------------------------------- date date date date date date - ---------------------- ------------------ ----------------- ----------------- ----------------- ---------------- this letter responds to a letter dated date and subsequent the information submitted states that x was incorporated on date and elected plr-130678-05 dear ------------------------ correspondence submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code to be an s_corporation effective date in date the shareholders of x consisted of individuals and trust a voting_trust with two individual beneficiaries a and b_trust is a permissible s_corporation shareholder under sec_1361 however under sec_1361 the beneficiaries of trust a and b are treated as the shareholders of x on date b contributed his beneficial_interest in trust to trust a grantor_trust that was treated under subpart e of part of subchapter_j of chapter as entirely owned by b_trust was eligible to be an s_corporation shareholder under sec_1361 however under sec_1361 the deemed owner of trust b is treated as the shareholder of x the trust agreement for trust provides that upon b’s death the beneficial interests in trust are to be allocated by the trustee to eleven subtrusts each a separate and independent share of trust these eleven subtrusts are to be established for the benefit of eleven separate individuals the trust agreement for trust also provides that each subtrust must satisfy all of the requirements of a qualified_subchapter_s_trust set forth in sec_1361 and that the consent of the beneficiary of each subtrust to the continuation of x’s s election is a condition_precedent to the formation and funding of each subtrust when b died on date trust ceased to be a grantor_trust under sec_1361 trust remained a permissible s_corporation shareholder until date two years after b’s death however under sec_1_1361-1 the estate of b was treated as the shareholder of x from date to date on date each subtrust by the terms set forth in the trust agreement for trust satisfied all of the requirements of a qualified_subchapter_s_trust qsst within the meaning of sec_1361 however the income beneficiaries of the subtrusts failed to timely file an election under sec_1361 accordingly the s election of x terminated on date in date the tax_return_preparers of trust discovered the beneficiaries’ failure_to_file the qsst elections and notified x of these omissions x represents that the trustee of trust inadvertently failed to require that the qsst elections be filed as a condition to the funding of the subtrusts x also represents that x was unaware of the beneficiaries’ failure_to_file the qsst elections and that these omissions took place outside the knowledge and reasonable control of x and were not a part of any plan or intention of x to terminate its s election x represents that for all taxable years during the termination period x and x’s shareholders have filed tax returns consistent with x being an s_corporation plr-130678-05 sec_1361 provides that the term as corporation means with respect to any taxable_year a small_business_corporation for which an election under ' a is in effect for such year sec_1361 provides that a asmall business corporation means a domestic_corporation that is not an ineligible_corporation and that does not have as a shareholder a person other than an estate a_trust described in ' c or an organization described in ' c who is not an individual sec_1361 provides that for purposes of sec_1361 a_trust may be a shareholder if all of it is treated under subpart e of part i of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states sec_1361 provides that for purposes of sec_1361 in the case of a_trust described in sec_1361 the deemed owner shall be treated as the shareholder sec_1361 and sec_1_1361-1 provide that for purposes of sec_1361 a_trust which was described in sec_1361 immediately before the death of the deemed owner and which continues in existence after such death is a permitted shareholder but only for the 2-year period beginning on the day of the deemed owner’s death sec_1_1361-1 provides that if stock is held by a_trust described in sec_1_1361-1 the estate of the deemed owner is generally treated as the shareholder as of the day of the deemed owner’s death sec_1361 provides that a_trust created primarily to exercise the sec_1361 provides that in the case of a qualified_subchapter_s_trust voting power of stock transferred to it may be a shareholder sec_1361 provides that in the case of a_trust described in sec_1361 each beneficiary of the trust shall be treated as a shareholder qsst with respect to which a beneficiary makes an election under sec_1361 such trust shall be treated as a_trust described in sec_1361 and for purposes of sec_678 the beneficiary of such trust shall be treated as the owner of that portion of the trust which consists of stock in an s_corporation with respect to which the election under sec_1361 is made sec_1362 provides that a beneficiary of a qsst or his legal_representative may elect to have sec_1361 apply sec_1361 provides that an election under sec_1362 shall be effective up to days and months before the date of the election trust- a the terms of which require that- i during the life of the current income_beneficiary there shall be only income_beneficiary of the trust ii any corpus sec_1361 provides that the term qualified_subchapter_s_trust means a plr-130678-05 distributed during the life of the current income_beneficiary may be distributed only to such beneficiary iii the income_interest of the current income_beneficiary in the trust shall terminate on the earlier of such beneficiary’s death or the termination of the trust and iv upon termination of the trust during the life of the current income_beneficiary the trust shall distribute all of its assets to such beneficiary and b all of the income within the meaning of sec_643 of which is distributed or required to be distributed currently to individual who is a citizen or resident_of_the_united_states sec_1_1361-1 provides that for purposes of sec_1361 and sec_1361 a substantially separate and independent share of a_trust within the meaning of sec_663 and the regulations thereunder is treated as a separate trust for a separate share which holds s_corporation stock to qualify as a qsst the terms of the trust applicable to that separate share must meet the qsst requirements stated in sec_1_1361-1 and ii sec_1_1361-1 provides that if a_trust ceases to be a qualified_subpart_e_trust satisfies the requirements of a qsst and intends to become a qsst the qsst election must be filed within the 16-day-and-2-month period beginning on the date on which the trust ceases to be a qualified_subpart_e_trust if the estate of the deemed owner of the trust is treated as the shareholder under sec_1_1361-1 the qsst election may be filed at any time but no later than the end of the 16-day-and- 2-month period beginning on the date on which the estate of the deemed owner ceases to be treated as a shareholder sec_1362 provides that except as provided in ' g a small_business_corporation may elect in accordance with the provisions of ' to be an s_corporation sec_1362 provides that an election under ' a shall be terminated whenever at any time on or after the first day of the first taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation a termination of an s_corporation_election under ' d is effective on and after the date of cessation sec_1362 provides that if an election under ' a by any corporation was terminated under ' d or the secretary determines that the circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the termination steps were taken so that the corporation is a small_business_corporation and the corporation and each person who was a shareholder of the corporation at any time during the period specified under ' f agrees to make the adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary for that period then notwithstanding the circumstances plr-130678-05 resulting in such termination the corporation shall be treated as an s_corporation during the period specified by the secretary based solely on the facts submitted and the representations made we hold that x’s election to be an s_corporation terminated on date as a result of the failure of the beneficiaries of the eleven subtrusts to make the election required under sec_1361 we also hold that the termination was inadvertent within the meaning of sec_1362 we further hold that pursuant to the provisions of sec_1362 x will be treated as except as specifically set forth above no opinion is expressed concerning the an s_corporation from date and thereafter provided that the required qsst elections with an effective date of date are filed with the appropriate service_center within days from the date of this letter the eleven subtrusts otherwise qualify as qssts and x’s election to be an s_corporation was otherwise valid and was not terminated under sec_1362 accordingly the shareholders of x must include in income their pro_rata share of the separately_stated and nonseparately computed items of x as provided in sec_1366 make any adjustments to basis as provided in sec_1367 and take into account any distributions made by x as provided in sec_1368 if x or its shareholders fail to treat x as described above this letter_ruling will be null and void federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 or whether each of the eleven subtrusts are qssts within the meaning of sec_1361 of the code provides that it may not be used or cited as precedent being sent to x's authorized representative enclosures sincerely yours beverly katz senior technician reviewer branch office of the associate chief_counsel passthroughs and special industries this ruling is directed only to the taxpayer who requested it sec_6110 pursuant to a power_of_attorney on file with this office a copy of this letter is copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number ------------------------------------------ ------------------------------------------------------------ ---------------------- ----------------------------- legend x ------------------------------------------ ----------------------- 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-117452-06 date date ------ -------------------------- country d dear ---------------- correspondence written on behalf of x requesting an extension of time under ' and ' of the procedure and administration regulations to file an entity classification election this letter responds to the letter dated date and related facts the information submitted states that x is an entity formed under the laws of country on d x represents x is a foreign eligible_entity for entity classification purposes x intended to elect to be treated as a disregarded_entity for federal tax purposes the election however was not timely filed law and analysis sec_301_7701-3 provides that a business_entity that is not classified as a corporation under ' b or an eligible_entity can elect its classification for federal tax purposes elections are necessary only when an eligible_entity does not want to be classified under the default classification or when an eligible_entity chooses to change its classification plr-117452-06 sec_301_7701-3 provides that except for certain existing entities described in sec_301_7701-3 unless a foreign eligible_entity elects otherwise the entity is a a partnership if it has two or more members and at least one member does not have limited_liability b an association if all members have limited_liability or c disregarded as an entity separate from its owner if it has a single member that does not have limited_liability sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under ' b by filing form_8832 with the appropriate service_center under ' c iii this election will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified the date specified on form_8832 cannot be more than days prior to the date on which the election is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose deadline is prescribed by a regulation published in the federal_register commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-1 through provide the standards the conclusion based solely on the facts submitted and representations made we conclude that x has satisfied the requirements of and and therefore it is granted an extension of time of sixty days from the date of this letter to file a form_8832 to elect to be treated as a disregarded_entity for federal tax purposes effective d a copy of this letter should be attached to the election a copy is enclosed for that purpose except as specifically set forth above we express no opinion concerning the federal tax consequences of the facts described above under any other provision of the internal_revenue_code plr-117452-06 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 copies of this letter are being mailed to your authorized representatives sincerely heather c maloy associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for ' purposes


t c memo united_states tax_court peter y atkinson petitioner v commissioner of internal revenue respondent docket no filed date mitchell bryan and michael j tuchman for petitioner lawrence c letkowicz for respondent memorandum opinion kroupa judge this matter is before the court on respondent’s motion for partial summary_judgment under rule respondent determined 1all rule references are to the tax_court rules_of_practice and procedure and all section references are to the internal_revenue_code as amended and in continued deficiencies of dollar_figure and dollar_figure in petitioner’s federal_income_tax for and years at issue respectively petitioner a canadian citizen and resident received payments purportedly in exchange for entering into covenants not to compete noncompete_agreements with united_states companies petitioner asserts that the payments are not u s -source income subject_to federal_income_tax respondent contends that the payments resulted from fraud and are therefore subject_to federal_income_tax under the convention and protocols with respect to taxes on income and capital u s -can date t i a s no convention we are asked to decide two issues first we consider whether a prior pecuniary fraud conviction precludes petitioner from disputing that one of the payments resulted from fraud we hold that the collateral_estoppel doctrine precludes petitioner from disputing that the payment resulted from fraud next we decide whether a different pecuniary fraud conviction that was vacated bars petitioner from disputing that another payment resulted from fraud we hold that collateral_estoppel does not apply in that circumstance continued effect for the years at issue unless otherwise indicated background the facts have been assumed solely for resolving the pending motion petitioner is a canadian citizen and resided in canada at the time he filed the petition petitioner did not file a federal_income_tax return for these years at issue i ravelston and hollinger ravelston corporation limited ravelston was a privately held foreign_corporation with its principal office in toronto canada ravelston indirectly held a controlling_interest in hollinger international inc hollinger hollinger was a publicly traded domestic_corporation that owned the chicago sun-times the daily telegraph in the united kingdom the national post in toronto the jerusalem post in israel and numerous community newspapers in the united_states and canada conrad black was ravelston’s chief_executive_officer and chairman of the board_of directors mr black controlled approximately of ravelston john arthur boultbee was ravelston’s chief financial officer and indirectly owned approximately of ravelston f david radler was ravelston’s president and indirectly maintained a ownership_interest petitioner owned nearly of ravelston petitioner and messrs black radler and boultbee collectively hollinger’s management provided management services to hollinger under a written_agreement between hollinger and ravelston mr black served as hollinger’s chief_executive_officer and chairman mr radler served as president chief operating officer and deputy chairman for hollinger petitioner and mr boultbee each served as an executive vice president ii sale of community newspapers and purported noncompete_agreements in the late 1990s hollinger’s management anticipated that the rise of the internet would negatively influence the print newspaper industry’s profitability they created a plan to sell hollinger’s community newspapers from through hollinger’s management effected that plan the transactions were structured so that each member of hollinger’s management received a share of the proceeds purportedly in exchange for entering into a noncompete agreement with the purchasers the payments were 2mr radler and mr boultbee each filed petitions with this court for redetermination of separate deficiency notices see radler v commissioner docket no boultbee v commissioner docket no respondent has filed a similar motion for partial summary_judgment in mr boultbee’s case a memorandum opinion in which is also being filed today not disclosed to the audit committee of hollinger’s board_of directors those transactions included sales of newspapers to forum communications inc forum pmg acquisition corporation pmg and community newspaper holdings inc cnhi petitioner was paid dollar_figure of the proceeds from the forum and pmg transactions forum payment and dollar_figure of the proceeds from the cnhi transaction cnhi payment purportedly for noncompete_agreements petitioner never entered into a written noncompete agreement with forum or pmg each member of hollinger’s management also entered into a purported noncompete agreement with a hollinger subsidiary american publishing company apc petitioner was paid dollar_figure from apc purportedly in consideration for his noncompete agreement with apc apc payment 3respondent determined in the deficiency_notice that the tax_liabilities stem from five payments for purported noncompete_agreements respondent contended that petitioner received dollar_figure from canwest global communications corp in and dollar_figure from osprey media group in the parties stipulated that petitioner did not receive theft and or other income as a result of either payment 4respondent identifies the cnhi payment as income in the deficiency_notice respondent does not address the cnhi payment in his motion for partial summary_judgment iii indictment and prosecution the united_states indicted petitioner and messrs black and boultbee on numerous charges of fraud united_states v black no 05-cr-727 n d ill filed date the united_states alleged in the superseding information as pertinent here that the forum payment and the apc payment were unauthorized bonuses that violated hollinger’s management’s fiduciary duty to hollinger’s shareholders the united_states argued that hollinger’s management characterized the payments as compensation_for noncompete_agreements because the income would not be taxed by canadian authorities the united_states alleged that the forum payment and the apc payment each were obtained through fraud under distinct legal theories first the united_states alleged each payment was obtained through pecuniary fraud which was a scheme of fraudulent appropriation of money to which hollinger was legally entitled see u s c sec_1341 black v 625_f3d_386 5a fourth hollinger executive mark s kipnis was identified as a defendant in the superseding information mr kipnis has not filed a petition before this court 6the government indicted petitioner and messrs black boultbee and kipnis in a single charging document for convenience we will limit our discussion of the superseding information prosecution and appellate review to petitioner unless otherwise relevant to the petition 7th cir the united_states alleged that each payment was also obtained through honest services fraud which was a scheme to deprive hollinger of its intangible right of honest services see u s c sec_1346 black f 3d pincite the jury found petitioner guilty of fraud with respect to the forum payment and the apc payment the general verdict however did not distinguish between the distinct theories of fraud alleged in the superseding information it was therefore unclear whether the jury found petitioner guilty of pecuniary fraud honest services fraud or both iv appellate review of convictions on appeal the supreme court of the united_states held in a related opinion issued on the same day that honest services fraud requires proof that an individual solicited or received a bribe or a kickback see 130_sct_2896 n the supreme court remanded petitioner’s case to the united_states court_of_appeals for the seventh circuit for further consideration black v united_states ___ u s ___ 130_sct_2963 on remand the court_of_appeals determined that the bribe or kickback element had not been proven black f 3d pincite petitioner’s convictions under the honest services fraud theory were therefore vacated id because the verdict was general the court_of_appeals considered whether the record demonstrated that the forum payment and the apc payment each were obtained through pecuniary fraud id the court_of_appeals determined that the record conclusively established beyond a reasonable doubt that the forum payment was obtained through pecuniary fraud id the court_of_appeals therefore affirmed the pecuniary fraud conviction for the forum payment forum pecuniary fraud conviction id pincite the court_of_appeals concluded differently with respect to the apc payment it reasoned that it was possible although unlikely that the jury had convicted petitioner only under the honest services theory id pincite consequently the court_of_appeals reversed the fraud conviction predicated on the apc payment and remanded the matter for a new trial on that issue id pincite the government chose not to retry petitioner on the counts that were based on the apc payments those counts were dismissed v petition and answer respondent issued a deficiency_notice in for the years at issue petitioner filed a petition for redetermination the amendment to the answer affirmatively pleaded collateral_estoppel as previously noted respondent moved for partial summary_judgment i introduction discussion the instant motion ultimately relates to the characterization of the forum payment and apc payment under the convention the convention is designed to prevent double_taxation and to avoid fiscal evasion n w life assur co of can v commissioner 107_tc_363 because petitioner was a canadian citizen residing in canada the united_states may tax petitioner’s income arising in the united_states only to the extent permitted by the convention the parties agree that under the convention the united_states may not tax the payments if they were compensation_for noncompete_agreements respondent argues that income derived from a fraudulent scheme fraud income however is taxable under the convention as other income all income not specifically identified by the convention is characterized as other income convention art xxii other income is taxable by the signatory country wherein the taxpayer resides unless the income arises in the other signatory country id if the income arises in the other signatory country both 7it is well settled that funds derived through embezzlement or other fraudulent schemes are income see 366_us_213 51_tc_226 davis v commissioner tcmemo_1991_333 signatory countries may tax the income id petitioner’s fraud income would therefore be taxable if it arose in the united_states respondent asks us to hold that the criminal conviction precludes petitioner from disputing that both the forum payment and the apc payment resulted from fraud and ultimately that each is other income within the meaning of the convention in contrast petitioner argues that the payments are not subject_to united_states tax because the payments were compensation_for_personal_services performed without the united_states petitioner avers that he worked and resided in canada when he received the payments respondent does not dispute this rather respondent contends that it has been conclusively determined that each payment was obtained through fraud and was not compensation_for_personal_services with that in mind we turn to the instant motion 8petitioner argues that compensation_for noncompete_agreements do not constitute u s -source income see sec_861 sec_862 this argument relies on the assumption that the income was compensation_for bona_fide noncompete_agreements respondent’s motion for partial summary_judgment seeks to preclude petitioner from disputing the income’s characterization as other income as opposed to personal_service_income we therefore need not reach petitioner’s argument that compensation_for noncompete_agreements is non-u s -source income not subject_to united_states tax ii standard of review we now consider whether it is appropriate to grant summary_judgment and the applicable standard of review summary_judgment is intended to expedite litigation and avoid unnecessary and expensive trials see eg 116_tc_73 either party may move for summary_judgment upon all or any part of the legal issues in controversy rule a a motion for summary_judgment or partial summary_judgment will be granted if the pleadings and other acceptable materials together with the affidavits if any show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law see rule b 118_tc_226 the moving party has the burden of proving that no genuine issue of material fact exists and that it is entitled to judgment as a matter of law see eg 119_tc_157 the party opposing summary_judgment must set forth specific facts showing that there is a genuine issue for trial and may not rely merely on allegations or denials in the pleadings rule d see also 477_us_317 because summary_judgment decides against a party before trial we grant such a remedy cautiously and sparingly and only after carefully ascertaining that the requirements for summary_judgment have been met 106_tc_441 aff’d without published opinion 139_f3d_907 9th cir 106_tc_343 iii collateral_estoppel we now consider whether petitioner is barred under the collateral_estoppel doctrine from disputing that the forum payment and the apc payment were obtained through fraud collateral_estoppel has been applied in federal tax cases to preclude a party from relitigating previously decided issues of fact or law necessary to a court’s prior judgment 333_us_591 91_tc_273 citing 439_us_322 and 440_us_147 see also koprowski v commissioner t c ___ ___ slip op pincite date citing 449_us_90 collateral_estoppel operates with respect to issues of fact issues of law and mixed issues of fact and law 94_tc_491 its application conserves judicial resources and fosters reliance on judicial action by minimizing the possibility of inconsistent decisions montana u s pincite meier v commissioner t c pincite six conditions must be met for collateral_estoppel to apply see generally 90_tc_162 aff’d 904_f2d_525 9th cir first there must be a final judgment rendered by a court of competent jurisdiction id second the issue in the second suit must be identical with the one decided in the first suit id third collateral_estoppel may be asserted only against parties or their privies to the prior judgment id fourth the parties must actually have litigated the issues and the resolution of these issues must have been essential to the prior decision id fifth the controlling facts and applicable legal rules must remain unchanged from those in the prior litigation id sixth there must not be any special circumstances that warrant an exception to its application meier v commissioner t c pincite a final judgment we first consider whether there was a final judgment in the earlier matter by a court of competent jurisdiction see 447_fedappx_186 fed cir peck v commissioner t c pincite 62_tc_607 a judgment that has been vacated reversed or set_aside on appeal is deprived of all conclusive effect both as res_judicata and as collateral_estoppel 541_f3d_671 6th cir aff’g tcmemo_2007_173 where a portion of the judgment is reversed or vacated on appeal there is no final judgment as to issues not actually resolved by the appellate court berman fed appx pincite therefore a new judgment must be entered regarding the matters reversed or vacated id citing in re microsoft corp antitrust litig 355_f3d_322 4th cir on remand from the supreme court the court_of_appeals affirmed the forum pecuniary fraud conviction but vacated the conviction related to the apc payment the forum pecuniary fraud conviction then became final when the supreme court denied petitioner’s petition for writ of certiorari the conviction related to the apc payment was vacated and the matter was remanded to the district_court for a new trial the government did not retry petitioner on the counts that were based on the apc payments thus there was no final judgment respondent acknowledges that the conviction related to the apc payment was vacated yet argues that the court_of_appeals found that the government had proven pecuniary fraud by a preponderance_of_the_evidence the court_of_appeals viewed the record to be certainly sufficient to prove a pecuniary fraud and 9the court takes judicial_notice that the trial_court granted the government’s oral motion to dismiss the apc counts see united_states v black no 05-cr-727 n d ill filed date observed that the sentencing court may consider any conduct proven by a preponderance_of_the_evidence black f 3d pincite neither observation however negates the final judgment requirement nor is a finding during criminal sentencing entitled to preclusive effect see kosinski v commissioner f 3d pincite consequently there was no final judgment with respect to the conviction related to the apc payment and collateral_estoppel cannot be applied because of our holding we will not consider the remaining elements with respect to the apc payment we still must analyze whether collateral_estoppel applies regarding the forum payment b identical issues we next consider whether the issue in this case regarding the forum payment is identical in all respects to the issue decided in the criminal matter commissioner v sunnen u s pincite peck v commissioner t c pincite we are mindful that a prior conviction precludes a party in a later civil suit from contesting facts necessarily established in the criminal proceeding see 732_f2d_1429 9th cir abrogated on other grounds by 483_us_143 in the case of a criminal conviction based on a guilty verdict issues essential to that verdict are regarded as having been determined by the judgment blanton v commissioner t c pincite what issues were adjudicated in the prior proceeding is a question of law id respondent contends that the forum pecuniary fraud conviction required a finding that the payment was obtained through fraud and not in exchange for a bona_fide noncompete agreement we agree the conviction required a finding that petitioner fraudulently appropriated hollinger’s money the court_of_appeals found that it was decisively unbelievable that the payment was bona_fide compensation and concluded that the only rational explanation was that the forum payment constituted proceeds of a plain-vanilla pecuniary fraud black f 3d pincite here the issue is whether the payment was compensation_for a noncompete agreement or the result of unlawful conduct the finding of fraud in the criminal matter is the same issuedollar_figure this element is satisfied 10we note that it can be difficult to ascertain from a jury’s general verdict exactly what facts were found as a predicate to that verdict see 94_tc_491 here the parties agree on most of the underlying facts and the appellate opinion summarizes the findings_of_fact necessary to the forum pecuniary fraud conviction thus an examination of the record in the criminal proceeding is not necessary in this circumstance c identical parties we next consider whether petitioner was the same party as in the criminal matter the parties agree and the record supports that petitioner was the defendant in the criminal matter this element is satisfied d issue actually litigated and essential to the prior decision we now decide whether the issue was actually litigated and essential to the prior criminal conviction an issue is decided if the issue’s determination was necessary to support the judgment entered in the prior proceeding see blanton v commissioner t c pincite the pecuniary fraud conviction required a finding that the payment to petitioner resulted from a fraudulent scheme to deprive hollinger the jury had to find that petitioner stole the company’s rightful property and reject petitioner’s contention that the payment was consideration for a valid noncompete agreement black f 3d pincite this element is satisfied e controlling facts and applicable principles remain unchanged we next consider any changes to the controlling facts or legal principles since the criminal matter the parties do not contend that there have been nor are we aware of any changes to the controlling facts or the legal principles underlying the forum pecuniary fraud conviction this element is satisfied f special circumstances exception our final consideration is whether any special circumstances warrant an exception to applying collateral_estoppel petitioner has not argued that any apply nor do we perceive any reason that collateral_estoppel is inapplicable in this situation petitioner had a great incentive to fully litigate this issue in the criminal matter the appellate review confirms that the issue was established and the jury so found this element is satisfied iv conclusion in toto we hold that the collateral_estoppel doctrine applies to the forum pecuniary fraud conviction we shall grant respondent’s partial summary_judgment motion only as to the forum payment accordingly petitioner is barred from disputing that the forum payment was the result of fraud we decline however to apply issue preclusion to the apc payment because there was no final judgment establishing that the payment was the result of fraud we make no further determination at this stage on the convention’s application to each payment a trial will be scheduled in due course to resolve the outstanding issues in reaching these holdings we have considered all of the parties’ arguments and to the extent not addressed we conclude that they are moot irrelevant or without merit to reflect the foregoing an appropriate order will be issued


id office uilc cca_2009051808344137 -------------- number release date from ------------------- sent monday date am to ---------------------- cc ------------------------------------------------------ subject re mitigation in tefra mitigation applies to tefra specifically it applies to the partners since the partnership is not a party to a tefra proceeding see 95_tc_388 the correction need not necessarily apply in the tefra proceeding itself if the correction needs to apply to a year not subject_to the tefra proceeding we would simply abate and refund the double included income if we failed to do so the partner could file a refund claim for the double included income under sec_1314 within one year of the relevant determination the refund is made in this manner notwithstanding any law or rule_of law that would otherwise prevent it ie notwithstanding the tefra provisions that otherwise might prevent the refund


t c memo united_states tax_court esmat a and sylvia g zaklama petitioners v commissioner of internal revenue respondent docket nos filed date esmat a and sylvia g zaklama pro_se peter reilly for respondent memorandum opinion powell special_trial_judge these cases are before the court on the court's orders dated date directing petitioners to show cause why the stay of these proceedings should not be lifted the question is whether the so-called automatic_stay imposed pursuant to u s c sec_362 was terminated by virtue of the bankruptcy court's dismissal of petitioners' bankruptcy case that was contingent upon several conditions background on date respondent issued a notice_of_deficiency to esmat a and sylvia g zaklama petitioners determining a deficiency in and additions to their federal_income_tax for petitioners filed an imperfect petition with the court on date followed by a proper amended petition on date that was assigned docket no on date respondent issued a notice_of_deficiency to petitioners determining a deficiency in and additions to their federal_income_tax for petitioners filed a petition with the court on date that was assigned docket no on date petitioners filed a voluntary petition for relief under chapter of the bankruptcy code with the u s bankruptcy court for the district of new jersey as a result this court issued orders staying all proceedings in these cases consistent with u s c sec_362 on date the bankruptcy court issued an order stating that upon consideration of its own motion to dismiss or all section references are to title of the united_states_code unless otherwise indicated at the time that the petitions were filed petitioners resided at jersey city new jersey convert the case to a chapter proceeding petitioners' case would be dismissed subject_to certain terms and conditions see u s c sec b in particular the bankruptcy court's order of dismissal is conditioned on petitioners depositing dollar_figure with the bankruptcy trustee and remitting such additional sums as might be necessary to cover administrative claims to be awarded by the court the dismissal with prejudice of petitioners' motion for the turnover from the trustee and disgorgement of fees previously paid staying relief as to all secured creditors in the event petitioners should seek protection under any chapter of the bankruptcy code during a 1-year period following the date of entry of the order of dismissal and petitioners' filing a certification indicating that all unsecured creditors have been paid in full within days of the date of entry of the order of dismissal the bankruptcy court's order of dismissal further provides that the court shall retain jurisdiction over all claims by petitioners against certain professionals involved in the bankruptcy proceedings and that the order would be rescinded in the event of a breach of any term or condition of the order an amended notice of conditional dismissal of case was entered by the bankruptcy court on date stating notice is given u s c sec b provides that the bankruptcy court may convert a case under chapter to a case under chapter or dismiss the case whichever is in the best interests of the creditors and the estate for cause that on the 21st day of march subject_to the terms and conditions stated in the order of dismissal filed date the above captioned matter be and hereby is dismissed neither the bankruptcy court's order of dismissal nor the amended notice contains any reference to the automatic_stay imposed under u s c sec_362 on or about date petitioners filed an appeal in respect of the bankruptcy court's order of dismissal the record does not reflect the disposition of petitioners' appeal on date this court issued an order in each case directing petitioners to show cause why the stay of proceedings herein should not be lifted and these cases restored to the general docket on date petitioners filed a response in each case stating that the conditions for dismissal set forth in the bankruptcy court's order have not been met and that their bankruptcy case has not been closed it appears to be petitioners' position that the proceedings in this court should be stayed until such time as their bankruptcy case is closed a hearing was conducted in these cases in washington d c on date counsel for respondent appeared at the hearing and presented argument in respect of the court's orders to show cause although petitioners were not represented at the hearing they did file a brief written_statement in each case with the court pursuant to rule c discussion title of the united_states_code provides uniform procedures designed to promote the effective rehabilitation of the bankrupt debtor and the equitable distribution of his assets among his creditors see h rept pincite one of the key elements to achieving these aims is the automatic_stay that generally operates to temporarily bar actions against or concerning the debtor or property of the debtor or the bankruptcy_estate see 96_tc_895 when operative the automatic_stay serves to preclude the commencement or continuation of proceedings in this court relevant here u s c sec_362 provides in pertinent part a except as provided in subsection b of this section a petition filed under sec_301 sec_302 or sec_303 of this title operates as a stay applicable to all entities of -- the commencement or continuation of a proceeding before the united_states tax_court concerning the debtor in short the filing of a bankruptcy petition invokes the automatic_stay which normally precludes the commencement or continuation of proceedings in this court 97_tc_544 the period that the automatic_stay remains in effect is prescribed in u s c sec_362 as follows c except as provided in subsections d e and f of this section-- the stay of an act against property of the estate under subsection a of this section continues until such property is no longer property of the estate and the stay of any other act under subsection a of this section continues until the earliest of-- a the time the case is closed b the time the case is dismissed or c if the case is a case under chapter of this title concerning an individual or a case under chapter or of this title the time a discharge is granted or denied thus unless relief from the automatic_stay is granted by order of a bankruptcy court see u s c sec_362 the automatic_stay generally remains in effect until the earliest of the closing of the case dismissal of the case or the grant or denial of a discharge u s c sec_362 see also allison v commissioner supra pincite 96_tc_10 94_tc_1 there is no dispute in these cases that the automatic_stay became operative on date--the date that petitioners filed their chapter bankruptcy petition the question is whether the automatic_stay was terminated in these cases as a consequence of the bankruptcy court's order of dismissal issued date petitioners contend without citing any authority that the bankruptcy court's order providing for the conditional dismissal of their case is not sufficient to terminate the automatic_stay relying on cases such as allison v commissioner supra and smith v commissioner supra respondent maintains that despite the conditions set forth therein the bankruptcy court's order of dismissal terminated the automatic_stay we agree with respondent as previously discussed the automatic_stay imposed under u s c sec_362 generally remains in effect until the earliest of the closing of the case dismissal of the case or the grant or denial of a discharge u s c sec_362 smith v commissioner supra pincite though not expressly cited in the order of dismissal it is evident that the bankruptcy court dismissed petitioners' case pursuant to u s c section b which provides that the bankruptcy court may for cause convert a case under chapter to a case under chapter or dismiss the case whichever is in the best interests of the creditors and the bankruptcy_estate the dismissal of a chapter bankruptcy case pursuant to u s c section b generally terminates the automatic_stay see in re washington associates bankr bankr e d n y in re 968_f2d_647 8th cir in re lindbergh plaza associates l p bankr bankr e d mo in 86_tc_1314 we concluded that dismissal of a bankruptcy case pursuant to u s c section b supp iii served to terminate the automatic_stay under u s c sec_362 supp iii unlike the order of dismissal at issue in olson v commissioner supra the bankruptcy court's order of dismissal in these cases imposes certain terms and conditions on petitioners and provides that the bankruptcy court would retain jurisdiction in the case for certain issues although we are not aware of any case involving an order of dismissal with these specific characteristics we nonetheless conclude that the automatic_stay imposed under u s c sec_362 terminated with the issuance of the bankruptcy court's order of dismissal viewing the order of dismissal as a whole that order reflects the bankruptcy court's intention to dismiss petitioners' case while retaining jurisdiction over the matter for the purpose of resolving any collateral disputes that might arise as a consequence of enforcement of the conditions set forth therein there is no link between the conditions imposed by the bankruptcy court in its order of dismissal and the policies to be furthered by the automatic_stay similarly the bankruptcy court's decision to dismiss the case while retaining jurisdiction does not provide a basis for concluding that the automatic_stay remains in effect see 95_tc_655 see also allison v commissioner supra pincite roth v commissioner tcmemo_1993_229 further petitioners' appeal of the bankruptcy court's order of dismissal standing alone does not provide a basis for concluding that the automatic_stay remains in effect see olson v commissioner supra pincite absent an order staying dismissal the automatic_stay is terminated upon dismissal in concluding that the bankruptcy court's order of dismissal terminated the automatic_stay in these cases we find it particularly significant that the order makes no mention of the status of the automatic_stay consistent with the approach taken by this court in allison v commissioner supra pincite and kieu v commissioner t c ___ we proceed on the premise that the automatic_stay is terminated upon dismissal of a bankruptcy case whether conditional or otherwise absent a clear indication from the bankruptcy court to the contrary see 105_tc_220 mindful that the automatic_stay respecting the commencement or continuation of proceedings in this court was adopted in part to avert duplicative and inconsistent litigation over tax issues see halpern v commissioner t c pincite we note that a bankruptcy court has the means to bring about a stay of the proceedings in this court in the event it intends to rule with respect to petitioners' tax_liabilities see allison v commissioner t c pincite referring to u s c sec_105 which permits the bankruptcy court to issue any order necessary to carry out title consequently we will proceed in these cases consistent with the view that the automatic_stay was terminated on date in this regard the court's orders dated date directing petitioners to show cause why the stay of these proceedings should not be lifted will be made absolute and these cases will be restored to the general docket for trial on the merits or other_disposition in due course to reflect the foregoing appropriate orders will be issued


internal_revenue_service number release date index number ------------------------------------- ------------------------------- ----------------------- --------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc psi b03 plr-117315-06 date date ----------------------------------------------------------------------- ------------------------------- --------------------------------------------------------- legend x -------------------------------------------------------------------- trust agreement ------------------------------------------------------------ trust1 -------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- -------------------------------------------------------------------- trust2 ------------------------------------------------------------------------ -------------------------------------------------------------------- trust3 ------------------------------------------------------------------------ -------------------------------------------------------------------- trust4 ------------------------------------------------------------------------- -------------------------------------------------------------------- trust5 ------ ----------------------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- -------------------------- ----------------------------- plr-117315-06 ---------------------------------------------------------------------- -------------------------------------------------------------------- trust6 ------------------------------------------------------------------------------ --------------------------------------------------------------------- a ---------------------------------------------------------------------- b ---------------------------------------------------------------------- state1 state2 date1 date2 date3 date4 date5 dear -------------------- -------------------------- -------------------------- -------------------------- ---------------------- ---------------------- ------------------ ------------------ this letter responds to your letter dated date and subsequent correspondence requesting a ruling on behalf of x that pursuant to sec_1362 of the internal_revenue_code certain trusts qualify as shareholders of an s_corporation facts the information submitted states that x was incorporated in state1 on date1 x made a timely s_corporation_election effective date3 on date2 a and b united_states citizens and husband and wife executed trust agreement under state2 law the trust agreement created sub-trusts trust1 trust2 trust3 trust4 trust5 and trust6 the sub-trusts under the terms of section iii of the trust agreement shares of the trust assets were apportioned as separate and plr-117315-06 distinct trusts but physical separation of the assets was not required a and b the grantors of the trust authorized the trustee to mingle and commingle investments but wishes it understood that grantor is creating independent trusts for all purposes on date2 x corporation stock was transferred to each of the sub-trusts section xiv of the trust agreement provides that the trust is irrevocable section iv of the trust agreement provides that a and b retain the right and power to acquire or reacquire any trust property and substitute other_property of equivalent value without incurring liability to a_trust beneficiary or other party the trust agreement states that the substitution power granted to the power holder is exercisable in a non- fiduciary capacity section vii of the trust agreement provides each beneficiary of the respective sub-trusts the right to appoint to himself a proportionate share of additions made to the sub-trust each year the amount appointed cannot exceed the amount excludable for gift_tax purposes in any calendar_year a and b were treated on their joint federal_income_tax returns as owners of the x corporation stock transferred to the sub-trusts from the time of the stock transfers through date4 effective one day later on date5 a and b irrevocably relinquished their power to substitute trust assets with respect to the sub-trusts elections were made to treat each of the sub-trusts as electing small_business trusts under sec_1361 effective date5 the beneficiaries of the sub-trusts received timely notification of their withdrawal rights and no beneficiary has exercised those rights law and analysis sec_1361 provides that the term s_corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 provides that a small_business_corporation may not have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 provides that for purpose of sec_1361 a husband and wife shall be treated as one shareholder sec_1361 provides that for purposes of sec_1361 a_trust all of which is treated under subpart e of part i of subchapter_j of chapter i as owned by an individual who is a citizen or resident_of_the_united_states may be a shareholder in plr-117315-06 an s_corporation the deemed owner of the trust shall be treated as the shareholder under sec_1361 sec_1_1361-1 of the income_tax regulations provides that for purposes of sec_1_1361-1 stock owned by a husband and wife is treated as if owned by one shareholder regardless of the form in which they own the stock for example if husband and wife are owners of a subpart e trust they will be treated as one individual both husband and wife must be u s citizens or residents sec_675 provides that the grantor shall be treated as the owner of any portion of a_trust in respect of which a power_of_administration is exercisable in a nonfiduciary capacity by any person without the approval or consent of any person in a fiduciary capacity sec_675 provides that power_of_administration means among other things a power to reacquire the trust corpus by substituting other_property of an equivalent value sec_1_675-1 iii flush language provides in part that if a power is not exercisable by a person as trustee the determination of whether the power is exercisable in a fiduciary or nonfiduciary capacity depends on all of the terms of the trust and the circumstances surrounding its creation and administration sec_678 provides that a person other than the grantor shall be treated as the owner of any portion of a_trust with respect to which such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself or the person has previously partially released or otherwise modified such a power and after the release or modifications retains such control as would cause a grantor to be treated as the owner of such portion of the trust within the principles of sec_671 to inclusive sec_678 provides that sec_678 shall not apply with respect to a power over income as originally granted or thereafter modified if the grantor of the trust is otherwise treated as the owner under the provisions of subpart e other than sec_678 conclusion based solely on the facts and representations submitted we conclude that the circumstances surrounding the administration of the sub-trusts will determine whether the power_of_administration is exercisable in a fiduciary or nonfiduciary capacity this is a question of fact the determination of which must be deferred until the federal_income_tax returns of the parties involved have been examined by the internal_revenue_service office where the returns are filed therefore we cannot determine at this time whether a and b will be treated as the owners of the sub-trusts under sec_675 provided that the circumstances indicate that the power_of_administration is exercisable in a plr-117315-06 nonfiduciary capacity a and b will be treated as the owners of the sub-trusts under sec_675 and sec_678 accordingly the sub-trusts were permitted shareholders in x an s_corporation under sec_1361 if otherwise eligible from date3 through date4 except as expressly provided herein we express or imply no opinion concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion concerning whether x is otherwise eligible to be an s_corporation for federal tax purposes is being sent to x’s authorized representative in accordance with a power_of_attorney on file with this office a copy of this letter this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely s james a quinn senior technician reviewer acting branch office of associate chief_counsel passthroughs and special industries enclosures a copy of this letter a copy for sec_6110 purposes


number release date id office uilc cca_2009033113033064 ------------- from ------------------ sent tuesday date pm to ------------------------ cc subject re dats shelter project --------- how about the below note that except where the gross_valuation_misstatement penalty applies sec_6662a should be the primary penalty and sec_6662 the secondary position i have not tried to integrate the language for the two penalties to accomplish that as i think you can readily do so it is determined that you are liable for a penalty under sec_6662a for a reportable_transaction_understatement generally the penalty is percent of the reportable_transaction_understatement however the penalty i sec_30 percent of the portion of any reportable_transaction_understatement with respect to which the disclosure requirement in sec_6664 was not met you have not shown there was reasonable_cause and that you acted in good_faith with respect to the reportable_transaction_understatement or that any other exception to the penalty applies