t c memo united_states tax_court donna j collins petitioner v commissioner of internal revenue respondent shahram manighalam petitioner v commissioner of internal revenue respondent docket no filed date gary r king for petitioner in docket no shahram manighalam pro_se kevin w coy and kelley blaine for respondent memorandum findings_of_fact and opinion colvin judge respondent determined a deficiency in petitioners’ federal_income_tax of dollar_figure and an addition_to_tax under sec_6651 of dollar_figure - - the xircom company extended a job offer to shahram manighalam petitioner petitioner then resigned from a position with his prior employer american telephone telegraph at t however xircom rescinded its job offer before petitioner began his employment at xircom and at t refused petitioner’s request to rescind his resignation as compensation xircom paid dollar_figure to petitioner in the issues for decision are whether petitioners may exclude the xircom payments for from gross_income under sec_104 as damages for a personal injury we hold that they may not whether petitioners are liable for the addition_to_tax for failure to timely file under sec_6651 for we hold that they are whether the statute_of_limitations bars assessment of tax for we hold that it does not section references are to the internal_revenue_code as amended and in effect for the year in issue and rule references are to the tax_court rules_of_practice and procedure ' before trial donna j collins conceded all separate issues raised in her petition and agreed to be bound by the court’s decision on all other issues in shahram manighalam’s case - - findings_of_fact some of the facts have been stipulated and are so found a petitioners petitioners resided in fullerton california when they filed their petitions their cases were later consolidated for trial briefing and opinion petitioner has a bachelor’s and a master’s degree in electrical engineering petitioners were married in donna j collins collins did not work outside the home while she was raising petitioners’ two young sons in petitioner worked as an engineer for at t in huntington beach california in early in a recruiting firm contacted petitioner about working for xircom inc xircom in thousand oaks california james richard soriano iii soriano and several xircom engineers interviewed petitioner on date xircom offered petitioner a job at a monthly salary of dollar_figure beginning date xircom agreed to pay petitioners’ relocation expenses from fullerton where they lived at the time to thousand oaks petitioner accepted the xircom offer petitioner resigned from at t on date xircom withdrew its offer to petitioner on date petitioner unsuccessfully tried to withdraw his resignation from at t he advised xircom of this fact on date - - b petitioner’s negotiations with xircom before xircom had occasionally offered jobs to prospective employees other than petitioner and withdrawn those offers before the employee began to work for xircom in xircom’s practice was to offer to prospective employees from whom it had withdrawn employment offers replacement salary replacement medical insurance payments and out--placement services on date xircom offered petitioner medical insurance out-placement services and payments equal to months of his at t salary xircom intended the payments to replace the compensation that petitioner would have earned in months at at t if xircom had not made a job offer to him petitioner made a counteroffer in which he asked for months of the salary xircom had promised him dollar_figure per month and a positive employment reference on date xircom agreed petitioner and xircom signed a consulting agreement effective as of date which said that petitioner was an independent_contractor of xircom xircom agreed to pay petitioner dollar_figure per month until date and it gave petitioner a positive employment reference out-placement services include assistance in career planning and development of skills in areas such as resume preparation and interviewing - - petitioner performed no services for xircom in xircom paid petitioner dollar_figure in and dollar_figure in under the consulting agreement xircom issued to petitioner forms misc miscellaneous income showing that it had paid him nonemployee compensation in those amounts the consulting agreement was scheduled to expire on date on date petitioner wrote to xircom and asked xircom to extend the period for which he was to be compensated for another months xircom refused petitioner then offered to release xircom from liability for any damages inflicted on me as a result of xircom’s withdrawal of job offer on date xircom offered to extend the original agreement for months until date if petitioner agreed to sign a settlement agreement and mutual release of all claims petitioner refused on date petitioner threatened to sue xircom if it did not agree to pay him a lump-sum payment of dollar_figure months of compensation dollar_figure plus months of cobra coverage dollar_figure petitioner asked xircom to characterize all of its payments to him as a personal injury settlement for tax purposes xkircom refused to do so cc petitioner’s lawsuit on date petitioner sued xircom in the superior court of orange county california petitioner sought dollar_figure million in damages for loss of earnings he alleged three causes of action breach of contract intentional tort for fraudulent inducement to enter into a contract and general negligence the court granted xircom’s motion for judgment on the pleadings as to the intentional tort and negligence claims the court found no breach of contract because the contract could be unilaterally terminated petitioner amended his complaint to add a cause of action for equitable_estoppel the court denied relief to petitioner finding that he had not shown that he suffered damages directly related to his reliance on xircom’s job offer d petitioners’ family petitioners had no source_of_income other than petitioner’s employment they were devastated by xircom’s withdrawal of its job offer to petitioner and at t’s refusal to allow him to rescind his resignation during that time petitioners did not sleep well and they became short tempered with each other and their children petitioners separated in october or date and later divorced eb petitioners’ return extension of time to assess and notice_of_deficiency petitioners filed a joint_return for on date on date petitioner signed a form_872 consent to extend the time to assess tax extending the period to assess tax for until date respondent issued the notice_of_deficiency to petitioners on date opinion a whether petitioners may exclude from gross_income under sec_104 dollar_figure that petitioner received in petitioners contend that the dollar_figure that petitioner received from xircom in is excludable from gross_income as damages for a personal injury under sec_104 a petitioners contend that xircom and at t colluded to prevent petitioner from being employed by either of them petitioners contend that because of petitioner’s job situation they became physically ill lost sleep suffered emotional distress and were divorced and that the payments were on account of those personal injuries ’ sec_104 provides sec_104 in general --except in the case of amounts attributable to and not in excess of deductions allowed under sec_213 relating to medical etc expenses for any prior taxable_year gross_income does not include-- the amount of any damages received whether by suit or agreement and whether as lump sums or as periodic_payments on account of personal injuries or sickness for the year in issue personal injuries included both physical and nonphysical injuries 515_us_323 n --- - respondent contends that petitioners may not exclude the xircom payments from income under sec_104 because xircom paid those amounts to replace wages petitioner would have earned if xircom had not withdrawn its job offer we agree with respondent for reasons discussed next gross_income does not include the amount of any damages received whether by suit or agreement and whether as lump sums or as periodic_payments on account of personal injuries or sickness sec_104 we decide the tax treatment of the xircom payments by considering in lieu of what these amounts were paid 105_tc_396 affd 121_f3d_393 8th cir the date agreement between petitioner and xircom does not state that the payments were on account of personal_injury_or_sickness where a settlement agreement is silent as to whether a payment was made on account of a personal injury the most important factor in determining the application of sec_104 is the intent of the payor 349_f2d_610 10th cir affg tcmemo_1964_33 290_f2d_283 2d cir affg per sec_7491 applies to court proceedings arising in connection with examinations commencing after date petitioners do not contend that respondent bears the burden of proving that sec_104 does not apply and they introduced no evidence establishing that the examination in this case commenced after date accordingly petitioners bear the burden of proving that sec_104 applies rule a curiam tcmemo_1960_21 88_tc_834 affd without published opinion 845_f2d_1013 3d cir to discern the intent of the payor we consider the method used by the payor to determine the amount_paid compare the agreement to other agreements made by the company consider the facts that led to the agreement and weigh other facts that may reveal the payor’s intent 207_f3d_322 6th cir 180_f3d_859 7th cir dennis hamby hamby xircom’s director of human resources in and and randall holliday holliday xircom’s corporate counsel in and testified that xircom did not pay petitioner the dollar_figure on account of a personal injury the parties did not negotiate the payments at issue on account of personal injuries or sickness that petitioner may have suffered xircom paid dollar_figure to petitioner in pursuant to the date agreement between petitioner and xircom the amounts chosen were the amounts of salary petitioner would have earned at at t or xircom xircom’s practice of offering payments resembling severance_pay to individuals from whom it had withdrawn an employment offer suggests that xircom made payments to petitioner to replace wages the fact that xircom made monthly payments and that xircom issued petitioner a form -- - misc for showing that it had paid him nonemployee compensation of dollar_figure suggests that xircom thought those amounts were a substitute for wages lost wages are not excluded from income under sec_104 when received as damages pursuant to the settlement of economic rights arising out of a contract 102_tc_116 revd on an issue not relevant herein 70_f3d_34 5th cir in contrast lost wages recovered on behalf of an individual who is unable to work because of a personal injury such as an automobile accident may be excludable see 515_us_323 petitioner points out that hamby testified in an earlier deposition that xircom made the payments to prevent further harm to petitioner petitioner contends that hamby’s use of the term harm shows that the payments were for personal_injury_or_sickness we disagree we believe the harm hamby referred to was the loss of wages hamby and holliday testified that xircom paid petitioner solely to replace wages that he would have earned xircom had no financial interest in the characterization of its payments to petitioner because it could deduct them whether or not petitioner could exclude them from income we find the testimony of hamby and holliday to be credible petitioners testified that they became physically ill lost sleep contracted pneumonia had headaches suffered emotional distress and divorced as a result of xircom’s withdrawal of the employment offer to petitioner however this does not establish that xircom had knowledge of or intended to pay petitioner damages on account of personal injuries or sickness xircom did not pay petitioner for damage to his reputation thus this case is unlike 223_f3d_1261 11th cir revg t cc where the u s court_of_appeals for the eleventh circuit held that because the taxpayers’ business reputation was uniquely linked to their personal reputation damages paid for injury to the taxpayers’ business reputation were received on account of personal injury and thus excludable under sec_104 we conclude that petitioners may not exclude from income xircom’s payments of dollar_figure to petitioner in because they were a substitute for wages and they were not paid on account of personal injuries or sickness see 504_us_229 robinson v commissioner supra b whether petitioners are liable for the addition_to_tax for failure to timely file their income_tax return respondent determined and contends that petitioners are liable for the addition_to_tax under sec_6651 for failure to timely file their income_tax return for a taxpayer is liable for an addition_to_tax of up to percent for failure to -- timely file a federal_income_tax return unless the failure was due to reasonable_cause and not willful neglect sec_6651 a as stated above the record is not clear whether sec_7491 applies here in court proceedings arising in connection with examinations beginning after date sec_7491 c places on the commissioner the burden of producing sufficient evidence that it 1s appropriate to impose the addition_to_tax under sec_665l1 a if sec_7491 applies respondent has met the burden of production relating to petitioners’ liability for the addition_to_tax for failure to timely file their return because respondent has shown that petitioners filed their return on date thus petitioners bear the burden of proving that the failure is due to reasonable_cause and not willful neglect see 469_us_241 petitioners did not address this issue at trial or on brief and we deem petitioners to have conceded that they are liable for the addition_to_tax for failure to timely file their income_tax return we may deem a taxpayer to have conceded an issue that was raised in the petition if he or she made no argument at trial or on brief relating to that issue see 87_tc_698 affd 832_f2d_403 7th cir 67_tc_94 n - - we conclude that petitioners are liable for the addition_to_tax under sec_6651 for failure to timely file their income_tax return c whether the time to assess tax against petitioners for has expired petitioner contends that the time to assess tax against petitioners for expired before respondent issued the notice_of_deficiency we disagree collins concedes that the time to assess tax for petitioners’ tax_year has not expired on date petitioner signed a form_872 in which he agreed to extend the time to assess tax for until date respondent issued the notice_of_deficiency on date petitioner does not contend that the form_872 that he signed is invalid we conclude that the time to assess the tax for petitioners’ tax_year had not expired when respondent issued the notice_of_deficiency to reflect the foregoing decisions will be entered for respondent


tcmemo_2016_74 united_states tax_court angelina alhadi petitioner v commissioner of internal revenue respondent docket no filed date angelina alhadi pro_se jon d feldhammer thomas r thomas patricia donahue and trent d usitalo for respondent memorandum findings_of_fact and opinion holmes judge arthur marsh worked hard and lived simply for decades but when he became old and infirm he met angelina alhadi in the two last years of his life she somehow came to receive more than a million dollars from him she claims that these transfers were nontaxable loans or gifts the commissioner says they were the proceeds of undue influence and elder abuse he wants her to pay tax on it and he wants a fraud_penalty too findings_of_fact arthur marsh art marsh was born in montana a century ago in late date his parents weren’t too far removed from the first homesteaders and he grew up on their farm in plentywood as the fifth of seven children his mother worked all day to do the laundry and prepare meals for her family while his father tended to the land neither had much education and their lives were recorded only in the short and simple annals of the poor many decades later he recalled that there hadn’t been much room for tenderness he never once heard his father tell his mother that he loved her and he never once saw his parents show affection to each other art’s education was cut short by the depression and it seemed he could look forward to the same hardscrabble life then the war came after pearl harbor arthur marsh volunteered and became an enlisted man he served the country honorably in a stateside posting and after he was discharged he used his gi benefits to get a higher education dr arthur marsh moved to california it was the golden state’s golden age the city of gilroy--the small town where he settled after the war--boomed with its state doubling in size and then doubling again and doubling once more dr marsh opened an optometry practice there and as gilroy prospered and its middle class grew he saw to the vision of three generations of families dr marsh also set down deep roots in his town he joined civic associations like the rotary club grew thick connections in his profession and was a faithful member of his local church he loved the outdoors and would often take vacations throughout the west with his brothers and sisters and nieces and nephews but he never married or had children of his own and when he returned home it was always to the same second-floor apartment on carmel street it was only about square feet and dr marsh furnished it modestly--a small table with a single chair on the right when one walked in a living room connected to a kitchenette and a single bedroom and bath dr marsh was by no means a miser but the poverty of his childhood and youth had--as it did to so many of his generation--marked him for life and made him frugal he rented his little apartment for dollar_figure a month and got by largely on social_security but dr marsh had been a good businessman saving over dollar_figure million before he retired in the ‘80s and investing it prudently well into retirement until it reached nearly dollar_figure million his friends sometimes joshed him about his habits but he would just tell them that his wealth was insurance against having to leave his apartment of years to end up in a nursing home but the silent artillery of time began to bracket him--his brothers and sisters died one after the other then at the start of the new century it hit him too in he had a terrible fall and broke his hip which sent him to the hospital and rehab he began to use a walker and could not leave his second-story apartment without help in when he wa sec_91 things grew still worse he couldn’t drive a car he couldn’t go to the doctor and he could no longer even prepare his own food he suffered from incontinence atrial fibrillation congestive heart failure hypertension chronic back pain arthritis hearing loss in both ears and deteriorating vision then he suffered a stroke in the right frontal lobe of his brain his physician dr george green diagnosed him with dementia and cognitive decline these neurological problems showed themselves in dr marsh’s poor short-term memory diminished long-term memory inability to perform simple arithmetic and persistent deficiencies in visuospatial analysis these problems also made him vulnerable--it had become difficult for him to according to dr jonathan mueller the neuropsychiatric specialist who examined dr marsh this is the part of the brain associated with reflective self- awareness and insight remember any information about his assets tests showed that he couldn’t repeat five digits in sequence--let alone manage analyze or protect his seven- figure wealth in date dr marsh was admitted to st louise regional hospital for dehydration his doctor knew he lived alone knew he had no immediate_family and knew that his room was on the second floor even as he recovered a bit in the hospital dr marsh was told he couldn’t go back without first arranging for in-home care ms angelina alhadi enter ms angelina alhadi ms alhadi is a native of the philippines she had immigrated in the ‘80s and told dr marsh that she was born into a poor family and spent many years working in rice paddies she claimed to have a bachelor’s degree in medical technology in her native country she found work here as a nurse’s assistant which is what she did first at st louise hospital in and then at a nursing home called covenant care in when she wasn’t working these two jobs she lived in a house in hollister california that she coowned with her estranged husband and fellow immigrant yahya hassan alhadi they had three children st louise knows the elderly can be vulnerable and it has a written policy that bans its employees from soliciting work from patients but never mind--ms alhadi slipped a note to dr marsh when she heard that he wouldn’t be discharged without some in-home care ready for him dr marsh accepted her offer and she became his primary caregiver at the beginning of as part of her employment ms alhadi was supposed to prepare his meals bathe him make sure he took his drugs provide basic nursing shop for groceries do his banking drive him wherever he needed to go help him to and from the bathroom wash his clothes clean his apartment and provide some companionship for what had become a lonely old age dr marsh hired ms alhadi at an hourly rate and she deposited her first paycheck from him in date she was paid according to their initial hourly arrangement through march but then he agreed to pay her dollar_figure a month for her services--even though the going rate was dollar_figure he also gave her dollar_figure a month for groceries--even though he needed only dollar_figure a month to feed himself and his minifridge could hold only about dollar_figure worth of food ms alhadi began making deposit after deposit of cash into her bank account dr marsh’s payments to ms alhadi became irregular on april he wrote a check to her for dollar_figure two days later he wrote her another for dollar_figure he also bought her expensive electronic equipment ms alhadi’s lifestyle began to improve in date she used money from dr marsh to make a downpayment on a million-dollar home in gilroy after that she began to pressure dr marsh to help her with her mortgage payments by the end of date he had written checks to her that added up to roughly dollar_figure--which she used to pay off her husband’s dollar_figure interest in their old home in hollister and to remodel her new home in gilroy she spent dollar_figure on furniture purchased by dr marsh for her dollar_figure on a new stone facade dollar_figure on landscaping work and dollar_figure on a new pool complete with a spa and a therapeutic turtle mosaic this new pool almost became a problem for her she told dr marsh about her plans for it before work began he said he didn’t see how it made sense for her to build a pool until she had her house paid off she ignored him then one day she presented dr marsh with the dollar_figure invoice for digging the hole for the pool he roused himself to ask her who the hell is going to pay for it she gave him a look as if to say like who the hell do you think i expect you to pay for it dr marsh then relented and later said that he felt he had to pay for the pool because the work was already done and he had to accommodate his caregiver sometime that summer ms alhadi told dr marsh that she had won a cruise and that she wanted him to come with her this was a ploy--she hadn’t won anything and he was afraid he’d be all alone at home without any assistance when she went dr marsh paid dollar_figure for the whole thing but though she took him along ms alhadi left him sitting alone in the sun while she went off with her own children later he couldn’t remember paying for the cruise and was surprised when he was shown the check he had written dr marsh wasn’t yet wholly isolated he’d always been particularly close to one niece sheila person but ms person lived in seattle and had her own life there as her uncle grew old however she made it a habit to call him every sunday night to check in after ms alhadi entered his life her success in reaching him became sporadic by ms person found it even more difficult to get in touch ms alhadi would answer the phone and tell her that her uncle was asleep or eating and sometimes the phone would just ring and ring with no answer by the end of the summer of neither ms person nor dr marsh’s other family members were able to get through ms alhadi to talk to dr marsh at all ms alhadi wed isolation to expressions of affection she told dr marsh four or five times a day that she loved him she suggested getting married and invited him to come live with her she would sit in front of him and cry about how she was financially struggling and worried about how she was going to survive and provide for her children we cannot find these tears genuine for ms alhadi was at the same time hiding her newfound fortune in date as part of her divorce action she signed and filed a property declaration under penalty of perjury in the superior court of california in that declaration she disclosed none of the money dr marsh had paid her even though she had received at least dollar_figure by that point in date as ms alhadi’s divorce action continued she again filed with the court under penalty of perjury an income-and-expense declaration in which she disclosed only the income she earned from st louise and covenant care a month later she went to margarita lopez a tax preparer to complete her return she handed ms lopez a handwritten list of her income and expenses and when asked if she had any additional income ms alhadi said no she never once mentioned dr marsh or the money that she had wheedled from him we don’t think this was forgetfulness the commissioner introduced into evidence the mortgage applications that ms alhadi filled out to get two mortgages on her new million-dollar home on these forms ms alhadi told the bank that she earned dollar_figure a month--dollar_figure from her jobs at st louise and covenant care and dollar_figure from her second job with dr marsh yet even this was only a fraction of what he was actually paying her by the fall of dr marsh had written checks to ms alhadi that totaled nearly dollar_figure then ms alhadi pressed down even harder in october she got dr marsh to write her five checks each for dollar_figure and then she wrote to her mortgage company that she didn’t have enough money to make her mortgage payments and wanted her payments reduced here begins the end of the story one sometimes hears mockery of the modern mantra that your call may be monitored for quality-control purposes but dr marsh had his wealth mostly in mutual funds with the vanguard group vanguard records all of its phone calls the commissioner introduced these recordings and we were able to hear dr marsh in his own voice on one recording that october the vanguard representative identified herself and expressed concern that a fund owner had written five dollar_figure checks in such a short time she began to ask dr marsh how he had come to write them we heard ms alhadi’s voice in the background and we heard her tell dr marsh to repeat his social_security_number and we heard her read to the vanguard representative the account balances in his money-market fund in one call we heard her explain to vanguard on what days and exactly how many shares dr marsh had sold from his accounts in another call only thirty minutes later we heard her in the background as she told dr marsh that he needed to tell vanguard that he wants to sell stock ms alhadi however testified that she knew nothing about dr marsh’s finances we don’t believe her the next day vanguard’s fraud team called dr marsh to verify that he had authorized the five dollar_figure checks to ms alhadi during this call we heard ms alhadi yell in the background at dr marsh reminding him that he had written her five checks for dollar_figure and dr marsh replied i didn’t think they were all a hundred thousand dollars throughout the rest of the phone call dr marsh got confused and stated i wrote one check ten grand at various points we heard ms alhadi threaten that he was going to get her in trouble if he didn’t confirm that he had written her the checks vanguard didn’t honor the checks it suspended his access to his accounts and sent him a letter to explain the steps he needed to take to regain control remember though that dr marsh was homebound he depended on ms alhadi to get his mail and she made sure he didn’t on one occasion she told the fedex deliveryman that dr marsh no longer lived there on another she said that he wasn’t home lies all lies--dr marsh couldn’t leave his apartment without her help the people at vanguard now knew something was seriously wrong and they sent a report of suspected elder abuse to the california department of health and human services in date the department assigned susan fowle to investigate vanguard’s report she is part of the financial abuse specialist team that investigates elder-abuse referrals for the santa clara county public guardian’s office investigator fowle--whom we find to be an entirely credible witness--went to visit dr marsh with two other members of her team and interviewed him for two hours when she asked him about the money he was paying to ms alhadi he was so adamant that he hadn’t written five dollar_figure checks that investigator fowle had to call vanguard again after the interview to make sure it was true that was when she learned he had written a lot more than just five ms alhadi made a last lunge for dr marsh’s money she took him to see an estate attorney james simoni in date to have dr marsh grant her a power_of_attorney mr simoni whom we also find a credible witness testified that he learned about the blocked vanguard accounts and supposed promise by dr marsh to ms alhadi to pay her approximately dollar_figure in exchange for taking care of him for the rest of his life we find that this trip to his office was a ploy by ms alhadi to get those accounts unblocked and to get her hands on the last few dollar_figure checks that dr marsh had written dr marsh later told mr simoni that ms alhadi was pressuring him to get named in his will and that he needed to create a separate trust for her so that his family members wouldn’t be able to interfere mr simoni refused to be part of this and even tried to convince ms alhadi to return the money she had already received she told him why should i he gave it to me ms alhadi’s scheme soon unraveled the santa clara public guardian filed a petition in state court to put dr marsh under a temporary conservatorship the court granted the petition in date on two grounds the first was that dr marsh’s assets were at risk--he had written ms alhadi nearly dollar_figure million in checks and then wrote her another five dollar_figure checks in date the second and even more devastating ground was that ms alhadi wasn’t providing even a bare minimum of care ms fowle--and we note again that we found her testimony entirely credible--looked in dr marsh’s kitchen the appliances were old the sink was old the cabinets were old but on top of being old they were not clean he had two little like dorm- size refrigerators and one was on the floor and it was a freezer and the other--i assume it was a freezer because there was ice it was overfrosted and there was ice coming out of the door and it couldn’t shut and there was a trail of ants and the food that was in this freezer that was on the floor was rotten she saw greasy pots and pans broken utensils and nothing but stale food and just sparse things she looked into his bedroom and whatever was in the drawers everything that was close to the front was stained with urine that he had spilled down it because he would either maybe try to get to the bathroom and not make it and then use the urinal that he had resting on his dresser and nobody had ever bothered to clean this she looked in the bathroom and found it really filthy we pulled up the bath mat because it was older and i wanted to get a new one i thought you know just to get the bathroom cleaned up underneath it there was gelled mold all under this bath mat which told me that nobody was also cleaning the bathroom investigator fowle also came across some papers ms alhadi had handwritten a document for dr marsh to sign the document is in broken english written entirely in ms alhadi’s handwriting and purports to make any amount of money given to her as a gift or loan will be void and cancelled after his death the document goes on to say that i arthur marsh made this decision in we are convinced that this awkward phrasing wasn’t an effort to undo any of the gifts dr marsh had given her but instead an attempt to insulate her from any effort to recoup the money she had received repayment for angelina alhadi her excellent care for me for take good care of him every day on date dr marsh died at the age of his niece ms person described the scene at his funeral mass ms alhadi dressed in full hijab and carrying a single red rose tried to crawl in the coffin or get inside there and she was screaming this was the last contact ms alhadi had with dr marsh in date the arthur j marsh trust marsh trust which dr marsh had created years before as a substitute for a will settled a suit it brought against ms alhadi the trust recovered assets and dollar_figure in cash ms alhadi’s million-dollar home with its pool that dr marsh had paid for was lost to foreclosure ms alhadi spent almost all the rest of the money or gave it away or rendered it untraceable on behalf of the marsh trust santa clara county filed forms for ms alhadi covering and ms alhadi didn’t bring them to her annual meeting with ms lopez and the preparer didn’t include the income that they reported on her returns the irs noticed and wrote ms alhadi to point out her failure ms alhadi took this letter back to ms lopez who warned ms alhadi that she should file an amended_return to include this unreported income ms alhadi refused revenue_agent dan sutherland later sent a letter to ms alhadi to try to schedule an appointment but she called back and said she’d hired an attorney she refused at that time however to provide any information about this lawyer--not even his name she never did provide agent sutherland with anything and she failed to cooperate with the examination the commissioner mailed ms alhadi a notice_of_deficiency in which he asserted deficiencies and penalties on what he determined was a total unreported income of more than dollar_figure million we tried the case in san francisco and ms alhadi was a california resident when she filed her petition remember that this is just the unreported income and not the total ms alhadi got from dr marsh the commissioner humanely decided before trial not to include in these totals the dollar_figure that was in ms alhadi’s account and thus probably subject_to her dominion and control see 348_us_426 the effect is that this remaining money from dr marsh’s lifetime of hard work and thrift will pass to his beneficiaries and not be taken by the irs to pay ms alhadi’s substantial tax bill see barbara k morgan should the sovereign be paid first a comparative international analysis of the priority for tax claims in bankruptcy am bankr l j opinion what are the tax consequences of this behavior a failure to report income we generally presume that the commissioner’s determinations in a notice_of_deficiency are correct and the taxpayer bears the burden of proving otherwise see rule a 290_us_111 for cases appealable to the ninth circuit there is an additional quirk in unreported-income cases the presumption of correctness doesn’t attach unless the commissioner first establishes an evidentiary foundation that links the taxpayer to the alleged income-producing activity see 596_f2d_358 9th cir rev’g 67_tc_672 we don’t need much evidence and what evidence we have needn’t be direct see grandy v commissioner tcmemo_2012_196 banister v commissioner tcmemo_2008_201 aff’d 418_fedappx_637 9th cir but this special rule is a low hurdle here the commissioner introduced bank and credit-card records that show ms alhadi received at least dollar_figure during the years and that she failed to report on her tax returns ms alhadi doesn’t deny receiving this money from dr marsh instead she argues we should exclude it from her gross_income because it was a loan or gift from dr marsh we find that the commissioner has met his burden here and the burden_of_proof is on ms alhadi to show she didn’t have to include these transfers in her taxable_income for her and tax years b character of the income a loan in tax law a loan is an agreement either express or implied whereby one person advances money to the other and the other agrees to repay it upon such terms as to time and rate of interest or without interest as the parties may agree 204_f3d_1228 9th cir quoting 305_f2d_610 9th cir aff’g tcmemo_1998_121 a bona_fide loan is created when both parties intend to establish a debtor-creditor relationship at the time the funds are advanced 54_tc_905 and we decide whether a debtor- creditor relationship exists based on all the facts and circumstances in the case id pincite we focus on the time that the funds were transferred and ask whether there was unconditional obligation on the part of the transferee to repay the money and an unconditional intention on the part of the transferor to secure repayment 88_tc_604 aff’d 855_f2d_855 8th cir we consider several factors 691_f3d_1119 9th cir in re 742_f2d_1311 11th cir see 135_tc_26 aff’d 691_f2d_1315 11th cir aff’g tcmemo_2011_78 we needn’t run through all of them to find that dr marsh lent no money to ms alhadi he never once referred to the money as anything other than compensation_for taking care of him he received no certificates evidencing indebtedness or schedules for repayment and ms alhadi shows no proof of any maturity dates or interest rates set or interest_paid the document that she prepared for him to sign and that ms fowle found purports to forgive all loans after his death--further demonstrating that she never intended to give the money back and while some checks had loan written in the memo they are the names given to the certificates evidencing the indebtedness the presence or absence of a fixed maturity_date the source of payments the right to enforce payment of principal and interest participation in management flowing as a result the status of the contribution in relation to regular corporate creditors the intent of the parties ‘thin’ or adequate capitalization identity of interest between creditor and stockholder source of interest payments the ability of the corporation to obtain loans from outside lending institutions the extent to which the advance was used to acquire capital assets and the failure of the debtor to repay on the due_date or to seek a postponement line some checks had memo lines that read gift while others read personal we therefore find that dr marsh and ms alhadi weren’t in a debtor- creditor relationship we also specifically find that the dollar_figure that the marsh trust managed to recover from ms alhadi wasn’t a repayment a gift ms alhadi argues in the alternative that the money she received from dr marsh was a gift and so not income under sec_102 to be a gift the transfer must proceed from a detached and disinterested generosity out of affection respect admiration charity or like impulses 363_us_278 internal quotations omitted where payment is for past services or an inducement for services in the future it’s not a gift id pincite and it doesn’t matter that the donor derived no economic benefit from it robertson u s pincite a payment stemming from any obligation whether moral or legal is also not a gift 302_us_34 the most critical consideration is the transferor’s intention or motive with which payment however voluntary has been made duberstein u s pincite we can glean insight into a transferor’s intent by looking at the facts surrounding the transfer all section references are to the internal_revenue_code in effect for the years in issue and all rule reference are to the tax_court rules_of_practice and procedure unless otherwise indicated and the form of assistance 363_us_299 the donor’s characterization of the payment isn’t dispositive however-- there must be an objective inquiry as to whether what is called a gift amounts to it in reality duberstein u s pincite there is a strong presumption that payments made beyond an employee’s salary are compensation_for services and not gifts see 166_f2d_647 9th cir aff’g 8_tc_388 81_f2d_914 9th cir aff’g 29_bta_656 25_tc_1106 25_tc_832 12_tc_86 ms alhadi already admitted that she earned dollar_figure and dollar_figure for services she performed for dr marsh in and we can therefore presume that the rest of the payments she received from dr marsh weren’t gifts but rather compensation_for services nonfamily taxpayers in generous-elder cases who rely solely on their own testimony can succeed in proving that a transfer was a gift and not a misappropriation see eg lebaron v commissioner tcmemo_1990_592 holding that although the taxpayer failed to meet her burden it was possible for a taxpayer to prove the issue is one of fact however and the burden_of_proof rests on ms alhadi see rule a we must decide whether what ms alhadi calls a gift was intended as a gift by dr marsh see duberstein u s pincite ms alhadi’s entire case rests on her own uncorroborated testimony and the word gift written on the memo lines of some of the checks we look at things objectively and the first thing we see is that dr marsh couldn’t even keep track of how much money he had given to ms alhadi he told the neuropsychiatrist who examined him dr mueller in the first place i didn’t realize i gave her that much money mr simoni dr marsh’s estate attorney speculated that the arrangement between dr marsh and ms alhadi was perhaps a sort of viatical contract--that dollar_figure was given to ms alhadi as prepaid medical payments for caregiver services for the remainder of his life we do note that we believe mr simoni’s testimony that dr marsh never once told him that he was giving his money to ms alhadi as a gift and while dr marsh referred to the payments as compensation he also said he was taken advantage of we have no difficulty then in finding that the transfers to ms alhadi weren’t gifts but they also weren’t embezzlement so what were they on this question we agree with dr mueller’s expert testimony he concluded that there was a real if sad emotional bond between dr marsh and ms alhadi he testified that dr marsh wanted to rescue her wanted to be a good person and wanted to feel loved for the rest of his days on earth he observed that there is no way that one could put a price tag on the depth of the pleasure and sense of security that he felt with this woman as though he was the luckiest man in the world is this the affection respect admiration charity or like impulses that duberstein u s pincite tells us to look for the commissioner argues that it isn’t--that any donative_intent there may have been was negated by the presence of undue influence there is very little federal tax law about whether and how undue influence on a donor affects the validity of a gift_for purposes of sec_102 the only caselaw on point is readily distinguishable in johnson v commissioner tcmemo_1972_180 31_tcm_884 the taxpayer was the in- home nurse practitioner charged with taking care of an elderly woman who was recovering from an operation she quit her day job to work full time for the woman eventually brought her to live with her own family and was a devoted friend and companion after a few years and in the twilight of her own life the elderly woman decided to give the nurse dollar_figure the elderly woman’s nephew then began a series of protracted competency proceedings to restrain his aunt from giving anything to the loving nurse the elderly woman fought back hard-- she proved she was in control and knew what she was doing and we found that she was mentally competent and capable of managing her property we found that the nephew was out to get his aunt’s money and that there was no question that the transfer to the nurse stemmed from a desire to express her love gratitude admiration and respect for the one person who cared for her the most we upheld the gift but were careful to point out that there was no evidence of undue influence if we squint hard enough maybe we can make out some similarities--dr marsh had a niece rather than a nephew looking in on him but ms person is the opposite of the greedy character in johnson out to get his aunt’s money and didn’t even know how much money her uncle had she didn’t seek to place him under a conservatorship the santa clara public guardian’s office did after it independently determined that ms alhadi was abusing him that office succeeded because unlike the elderly woman in johnson dr marsh could not demonstrate that he was competent his physician diagnosed him with dementia and an independent neuropsychiatrist--the same dr mueller whose testimony we heard at trial and found credible--determined that dr marsh wasn’t competent to handle his finances and was the victim of financial abuse and ms alhadi wasn’t the gentle and considerate caregiver that we saw in johnson we heard her on the recordings from vanguard yelling at dr marsh cajoling him and directing him to do as she said with his money she was also not as candid and as truthful a witness as the caregiver in johnson ms alhadi testified she knew nothing of dr marsh’s finances and had never seen his brokerage statements but the vanguard audiotape proved she knew about specific trades which she read from his brokerage statement and ms person’s and mr simoni’s credible testimony back up this physical record of ms alhadi’s true behavior we believe them and not her that means that we now have to figure out the questions we left unanswered in johnson just what is undue influence as a matter of federal tax law and how does it affect donative_intent there are plenty of cases where we made common- sense findings that there can be no detached and disinterested generosity in the presence of coercion or undue influence 475_f2d_876 2d cir no gift if transfer induced by threats aff’g tcmemo_1972_26 see 51_tc_226 money obtained by impersonating cancer patient not gift thrower v commissioner tcmemo_1962_291 aff’d 330_f2d_614 5th cir subtle coercion on donor but we think there is also a role for state law in these cases state law creates property rights and interests and federal_law merely determines their tax treatment 309_us_78 133_tc_24 whether ms alhadi obtained money from dr marsh through undue influence affects her right to that money and is thus a question of state law see estate of sharp v commissioner tcmemo_1994_636 state law determines whether deed procured by undue influence california has codified its definition of undue influence as the use of a confidence or real or apparent authority for the purpose of obtaining an unfair advantage over someone taking an unfair advantage of another’s weakness of mind or taking a grossly oppressive and unfair advantage of another’s necessities or distress cal civ code sec west for the specific purpose of elder abuse california law defines undue influence as the excessive persuasion that causes another person to act or refrain from acting by overcoming that person’s free will and results in inequity cal welf inst code sec dollar_figure west the statute considers the vulnerability of the victim the influencer’s apparent authority the actions or tactics used by the influencer for example the use of affection the equity of the result id california takes elder abuse seriously and provides statutory remedies to its victims see eg id sec west id sec dollar_figure west id sec west id sec we find that ms alhadi exerted undue influence over dr marsh she was in a confidential relationship with dr marsh as his sole caregiver he relied on her just to get downstairs to go to the doctor to be fed and even to bathe dr marsh was also in extremely poor health he suffered from heart problems hearing and vision loss a broken hip and dementia among other handicaps ms alhadi knew all this she used her relationship with dr marsh to isolate him from his family and financial advisers and to wring money out of him she repeatedly prevented vanguard from contacting him by mail and would interfere when ms person tried to talk with him on the phone the resulting isolation and dependence made him even more vulnerable to ms alhadi’s influence his in the last few months of his life dr marsh told dr mueller the neuropsychiatrist that it was impossible to imagine how it feels being years- old and feeling loved for the first time dr mueller however tested dr marsh for depression and found it significant that dr marsh agreed with statements such as i feel sad much of the time i feel more discouraged about my future than i continued multiple cognitive deficits also affected his ability to withstand this influence he wasn’t able to do simple computations he had poor short-term and diminished long-term memory and he could no longer understand let alone analyze his million-dollar portfolio ms alhadi was a trained caregiver dr marsh’s problems were obvious to anyone but their consequences for his ability to make rational decisions would have been even more obvious to her dr marsh’s spending on ms alhadi was uncharacteristic of a man who had spent most of his life fearing the poverty in which he was born inspector fowle concluded that this wild spending was so abnormal for dr marsh that it was strong evidence that ms alhadi had unduly influenced him and ms alhadi’s unending demands on dr marsh--that he pay for a swimming pool cover her mortgage name her in his will create a separate trust for her benefit and treat her and her family to a cruise--all support this finding we also can’t close our eyes to dr marsh’s emotional life ms alhadi preyed on his loneliness she would sit and cry in his apartment and lament how she had no money and didn’t know how she was going to survive she exploited continued used to i don’t consider myself as worthwhile and useful as i used to and i have lost most of my interest in other people or things his forgetfulness sometimes dr marsh thought he was behind on paying her and she didn’t correct him even though he had actually never fallen behind like dr mueller we too were struck at the lack of any anger in dr marsh as he flitted in and out of realizing what ms alhadi had done we agree with him as well however that dr marsh’s lack of animus and his failure to experience any deep outrage or disgust at her behavior do not exculpate her they merely indicate that she chose her victim well we don’t hold that all gifts to caregivers are made from undue influence johnson shows they aren’t but this case is different it was ms alhadi’s job to keep dr marsh’s apartment clean to supply him with fresh food and to help maintain his dignity she did not we return to the testimony of inspector fowle q d id you make a final_determination as to whether dr marsh was a victim of financial elder abuse a yes q and what was that determination a that there was financial elder abuse q and who was the perpetrator of the financial abuse a angelina alhadi we find that ms alhadi exercised undue influence on dr marsh and that all the money she received from him is taxable to her c self-employment_tax the commissioner also determined that ms alhadi owes self-employment_tax on the money she obtained through this undue influence self-employment_income is income arising from the performance of personal services where an employer-employee relationship does not exist between the payor and the payee sec_1401 and sec_1402 sec_1401 imposes a percentage tax on self-employment_income of every individual self-employment_income is defined as the net_earnings_from_self-employment derived by an individual during any taxable_year sec_1402 net_earnings_from_self-employment is defined as the gross_income derived from any trade_or_business carried on by such individual less deductions sec_1402 the obligation to pay self-employment taxes is mandatory so long as the requirements of sec_1401 are met 455_us_252 the agreement between dr marsh and ms alhadi included monthly wages of dollar_figure totaling annual income of dollar_figure at trial ms alhadi admitted to making only dollar_figure related to her services during there is no reason to believe that ms alhadi received less than dollar_figure of income related to her services in dr marsh wrote her checks totaling dollar_figure between january and date alone dr marsh consistently referred to all the money he gave ms alhadi as payment in exchange for her services even if we find that the money dr marsh paid ms alhadi was misappropriated by ms alhadi when she influenced him to make those payments see infra the funds would still be taxable_income see 366_us_213 therefore we hold that she is liable for self-employment_tax d fraudulent return the commissioner also argues that ms alhadi’s and returns-- returns on which she failed to report the money she got from dr marsh--were fraudulent which would make her liable for a sec_6663 penalty the burden of showing fraud is on the commissioner and the burden is one that he must meet with clear_and_convincing evidence the commissioner must establish that ms alhadi intentionally evaded a tax that she believed was due see 61_tc_249 aff’d 519_f2d_1121 5th cir he can meet this burden if he shows that there is an underpayment and that some part of the underpayment was due to fraud sec_6663 sec_7454 rule b the first part of the test is easily met and we’ve already discussed it ms alhadi failed to report any income from dr marsh this income was substantial and caused a large underpayment of the tax that ms alhadi owed but was this underpayment due to fraud fraud is the intentional wrongdoing on the part of the taxpayer with the specific purpose of evading tax believed to be owing 92_tc_661 direct evidence of fraud is seldom available 56_tc_213 but we may infer it from conduct calculated to mislead or conceal 55_tc_85 our caselaw describes a number of factors that might indicate fraudulent intent understating income concealing income or assets filing false documents failing to cooperate with tax authorities giving implausible or inconsistent explanations of behavior illegal activity and living a lavish lifestyle 317_us_492 796_f2d_303 9th cir aff’g tcmemo_1984_601 relying on these factors the commissioner easily showed that ms alhadi’s and returns were fraudulent understatement ms alhadi knew that the income she earned for her caregiving services was taxable despite this she reported none of the money dr marsh paid her on her income_tax return for either year she had undisclosed caretaker income of more than dollar_figure million for her and tax years combined concealment ms alhadi actively worked to conceal the income she failed to tell her tax preparer that she worked for dr marsh and that she received money from him after santa clara county sent forms to her covering and her tax preparer advised her to amend her returns to reflect the additional income which she refused to do filing false documents when she applied for home mortgages to buy her new million-dollar home ms alhadi disclosed all of her regular monthly income from dr marsh but ms alhadi filed false reports of her assets and income with the superior court of california as part of the divorce proceedings against her she signed these documents under penalty of perjury failure to cooperate ms alhadi actively concealed the income through the audit she didn’t turn over any documents the examiner requested and she refused to provide any information to the examiner she even refused at first to tell the auditor the name of her attorney inconsistent explanations ms alhadi’s testimony teemed with perjury she testified that she received payments from dr marsh only by check after being confronted with the evidence of cash deposits at trial and being unable to come up with any explanation for it she changed her story and acknowledged that the cash came from dr marsh she testified that she didn’t know anything about his finances but then the commissioner’s lawyer played the vanguard audio files she testified that dr marsh offered to build her a pool but dr marsh in his videotaped interview from conservatorship proceedings told how ms alhadi demanded he pay the bill for the pool after he had specifically counseled her against having it built finally while ms alhadi didn’t tell her tax preparer that she worked for dr marsh at the time she prepared her returns she did tell her that she had incurred car-and-truck expenses traveling between st louise hospital and carmel street in gilroy california--dr marsh’s apartment ms alhadi deducted these expenses as schedule a unreimbursed-employee business_expenses on her and returns illegal activity ms alhadi’s inducing dr marsh to pay her large sums of money through the use of undue influence amounted to abuse of an elder which includes both financial abuse and isolation of an elder in violation of the california welfare and institutions code section dollar_figure west financial abuse is defined under the california welfare and institutions code section dollar_figure as occurring when a person t akes secretes appropriates obtains or retains real or personal_property of an elder or dependent adult by undue influence we’ve already found that ms alhadi did this isolation of an elder includes acts intentionally committed for the purpose of preventing and that do serve to prevent an elder or dependent adult from receiving his or her mail or telephone calls id sec a isolation also includes telling a caller or prospective visitor that an elder or dependent adult is not present or does not wish to talk with the caller where the statement is false is contrary to the express wishes of the elder and is made for the purpose of preventing the elder or dependent adult from having contact with family friends or concerned persons id para ms alhadi blocked phone calls to dr marsh from his niece told a fedex delivery man that he no longer lived at his address and blocked vanguard’s mail to him lavish lifestyle ms alhadi bought a second home for dollar_figure million in putting up a dollar_figure downpayment she spent another dollar_figure on remodeling bought her husband’s interest in their hollister home for dollar_figure went on a fancy cruise and had her home equipped with expensive furniture and electronics we find that ms alhadi’s and returns were fraudulent conclusion it is unusual for so lopsided a case to go to trial ms alhadi called no witnesses and introduced no exhibits in the face of credible testimony against her documents in her own hand showing fraud and even dr marsh’s recorded statement and calls in which we heard direct evidence of her abuse of this old man she denied everything m y heart is clean and i don’t expect anyone in this court to believe me you know i don’t have nobody to help me protect me in my case i know the people in this court is very strong but i feel myself that i’m clean in the face of god i’m clean we are a court of mercifully limited jurisdiction and must make no particular judgment about what is in her heart but we will enter a final_decision against her in our court that holds that undue influence can be found by applying the law of the state where it was exercised finds that through undue influence as defined in california law she obtained dollar_figure in and dollar_figure in that she should have reported as income on her returns finds that her income from dr marsh was self-employment_income and finds that her returns for those two years were fraudulent under rule decision will be entered


number release date internal_revenue_service index number -------------------- --------------------------------- -------------------------------------------------- ------------------------------ - department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 plr-113106-06 date date legend x ---------------------------------- ----------------------- ------------------- ------------- date state dear -------------- this letter responds to the letter dated date submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code facts the information submitted states that x was incorporated on date1 under the laws of state the shareholder of x intended that x be treated as an s_corporation effective date1 but the election to be treated as an s_corporation was not timely filed law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election plr-113106-06 is made if the election is made after the first two and one-half months of a corporation's taxable_year then the corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if no election is made pursuant to sec_1362 or if made the election is made after the date prescribed for making such an election and the secretary determines there was reasonable_cause for the failure to timely make the election then the secretary may treat such an election as timely made for such taxable_year and effective as of the first day of that tax_year x did not file a timely election to be treated as an s_corporation under sec_1362 effective date x has however established reasonable_cause for not making a timely election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and representations made and provided that x otherwise qualifies as a subchapter_s_corporation we conclude that x will be recognized as an s_corporation effective date1 within days from the date of this letter x should submit a properly completed form_2553 with a copy of this letter attached to the relevant service_center except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being mailed to your authorized representative sincerely dianna k miosi dianna k miosi chief branch passthroughs special industries enclosures copy of this letter copy for sec_6110 purpose


t c memo united_states tax_court milward corporation petitioner v commissioner of internal revenue respondent docket no filed date meryl silver for respondent memorandum opinion dawson judge this case was assigned to special_trial_judge robert n armen jr pursuant to the provisions of sec_7443a and rule sec_180 sec_181 and sec_183 the court agrees with all section references are to the internal_revenue_code in effect for the taxable years in issue and all rule references are to the tax_court rules_of_practice and procedure and adopts the opinion of the special_trial_judge which is set forth below opinion of the special_trial_judge armen special_trial_judge this matter is before the court on respondent's motion for summary_judgment respondent moves for summary_judgment that she did not abuse her discretion in requiring petitioner to remain on the accrual_method of accounting in computing its income taxes as explained in greater detail below we will grant respondent's motion background2 milward corp is an electrical contracting firm organized as a corporation under the laws of the state of connecticut with its principal_place_of_business in hartford connecticut petitioner's business consists primarily of commercial and industrial work for new_construction george o milward milward is petitioner's president and sole shareholder respondent issued a statutory_notice_of_deficiency to petitioner determining deficiencies in its federal corporate income taxes for the taxable years ending date through as follows taxable_year ending deficiency date dollar_figure date big_number the following is a summary of the relevant facts that do not appear to be in dispute they are stated for purposes of deciding the pending motion date big_number the notice_of_deficiency includes an explanation of the adjustments that states in pertinent part the cash_receipts_and_disbursements_method of accounting you used to keep your books_and_records for the date and date taxable years does not clearly reflect income however the accrual_method of accounting does clearly reflect your income therefore your taxable_income is increased by dollar_figure and dollar_figure respectively due to the increase in your taxable_income for the taxable_year date you did not incur a net_operating_loss in that year since you carried net operating losses of dollar_figure and dollar_figure back to the date and date tax returns respectively your taxable_income for the years date and date is increased dollar_figure and dollar_figure respectively petitioner invoked this court's jurisdiction by filing a timely petition for redetermination respondent filed a timely answer to the petition following the filing of respondent's answer counsel for petitioner moved for and the court granted a stay of proceedings to permit petitioner to submit an offer-in-compromise to respondent one year later however counsel for petitioner filed a motion to withdraw from the case asserting that both petitioner and milward had failed to respond to his communications we subsequently granted counsel's motion to withdraw and restored the case to the general docket for trial or other_disposition after the case was restored to the general docket respondent served petitioner with a request for admissions with attached exhibits pursuant to rule a interrogatories and a request for production of documents at the same time respondent filed her request for admissions with the court pursuant to rule b petitioner failed to respond to respondent's discovery requests further as a consequence of petitioner's failure to respond to respondent's request for admissions each matter set forth therein was deemed admitted pursuant to rule c 85_tc_267 81_tc_644 the following is a summary of the matters that petitioner is deemed to have admitted pursuant to rule c for the fiscal_year ending date petitioner used the accrual_method of accounting for financial statement purposes and income_tax purposes for the fiscal years ending date and petitioner utilized the accrual_method of accounting and percentage_of_completion_method for financial statement purposes and used the cash_method_of_accounting for income_tax purposes petitioner did not file a form_3115 application_for change in accounting_method or otherwise seek respondent's approval to change its method_of_accounting for either the fiscal_year ending date or the fiscal_year ending date petitioner reported taxable_income in the amount of dollar_figure without regard to any nol deduction on its income_tax return form_1120 for the fiscal_year ending date petitioner reported a loss in the amount of dollar_figure on its income_tax return form_1120 for the fiscal_year ending date materials that petitioner ordered for specific jobs were either delivered to petitioner's premises or drop-shipped to the job site where the materials were stored in petitioner's containers most of petitioner's materials were ordered fob-pos ie free on board--point of shipment petitioner retained title to materials purchased for a job until the main contractor or owner of the property approved petitioner's work in some instances petitioner was able to purchase materials only in lot sizes larger than those needed for a particular job materials that petitioner purchased for a particular job that were not used in the project were retained for future jobs any excess materials remaining at the end of a job either were collected and sold as scrap by petitioner's employees who retained the proceeds or were removed to petitioner's warehouse petitioner accounted for the direct and indirect_costs associated with work in progress as costs in excess of billings petitioner received progress payments for work completed petitioner computed its taxable_income by deducting the cost of materials_and_supplies in the year when they were purchased petitioner had inventory in the amounts of dollar_figure and dollar_figure for the fiscal years ending date and respectively petitioner had no inventory on the first day of the fiscal_year ending date petitioner's gross_receipts cost of materials accounts_receivable and accounts_payable for the fiscal years in issue are summarized as follows fy fy fy gross_receipts dollar_figure dollar_figure dollar_figure cost of materials big_number big_number big_number accounts_receivable big_number big_number big_number accounts_payable big_number big_number big_number cost of materials as a percent of gross_receipts deemed admissions aside respondent filed motions to compel requesting that the court direct petitioner to respond to respondent's interrogatories and request for production of documents we granted respondent's motions to compel and directed petitioner to respond to respondent's discovery requests petitioner failed to comply with the court's order as indicated respondent filed a motion for summary_judgment seeking judgment in her favor on all issues respondent contends that the matters deemed admitted in this case pursuant to rule c establish that petitioner is liable for the deficiencies as determined by respondent in the notice_of_deficiency on date the court issued an order calendaring respondent's motion for hearing and directing petitioner to file a response to respondent's motion by date the order also included a reminder to the parties of the applicability of rule c petitioner failed to file a response to respondent's motion respondent's motion was called for hearing at the motions session of the court held in washington d c on date counsel for respondent appeared at the hearing and presented argument in support of the motion petitioner was not represented at the hearing nor did it file a statement with the court pursuant to rule c discussion summary_judgment is intended to expedite litigation and avoid unnecessary and expensive trials 90_tc_678 summary_judgment is appropriate if the pleadings answers to interrogatories depositions admissions and any 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 rule b 98_tc_518 affd 17_f3d_965 7th cir 90_tc_753 85_tc_527 rule d provides when a motion for summary_judgment is made and supported as provided in this rule an adverse_party may not rest upon the mere allegations or denials of such party's pleading but such party's response by affidavits or as otherwise provided in this rule must set forth specific facts showing that there is a genuine issue for trial if the adverse_party does not so respond then a decision if appropriate may be entered against such party see 87_tc_1213 based upon our review of the record we are satisfied that there is no genuine issue of material fact and that respondent is entitled to judgment as a matter of law the issue for decision is whether respondent abused her discretion in requiring petitioner to remain on the accrual_method of accounting in computing its income taxes we consider sec_446 in deciding this issue sec_446 provides in pertinent part a general_rule --taxable income shall be computed under the method_of_accounting on the basis of which the taxpayer regularly computes his income in keeping his books b exceptions --if no method_of_accounting has been regularly used by the taxpayer or if the method used does not clearly reflect income the computation of taxable_income shall be made under such method as in the opinion of the secretary does clearly reflect income c permissible methods --subject to the provisions of subsections a and b a taxpayer may compute taxable_income under any of the following methods of accounting-- the cash_receipts_and_disbursements_method an accrual_method any other method permitted by this chapter or any combination of the foregoing methods permitted under regulations prescribed by the secretary in construing sec_446 the commissioner has broad powers to determine whether accounting methods used by a taxpayer clearly reflect income 360_us_446 courts do not interfere with the commissioner's determination unless it is an abuse_of_discretion 439_us_522 280_us_445 102_tc_87 affd 71_f3d_209 6th cir petitioner changed its method_of_accounting during the period in question without obtaining prior approval from respondent in particular for the fiscal_year ending date petitioner used the accrual_method of accounting for financial statement purposes and income_tax purposes however for the fiscal years ending date and petitioner used the accrual_method of accounting and the percentage_of_completion_method for financial statement purposes and used the cash_method_of_accounting for income_tax purposes petitioner did not file a form_3115 application_for change in accounting_method or otherwise seek respondent's approval to change its method_of_accounting see sec_1_446-1 income_tax regs sec_446 provides that a taxpayer generally is required to secure the commissioner's consent before changing its method_of_accounting see sec_1_446-1 income_tax regs further sec_1_446-1 income_tax regs provides that a change from the accrual_method to the cash_method_of_accounting is a change in a taxpayer's method_of_accounting in view of petitioner's failure to obtain consent from respondent before changing its method_of_accounting we sustain as a matter of law respondent's determination that petitioner must use the accrual_method of accounting for its taxable years ending date and in order to reflect the foregoing an order granting respondent's motion for summary_judgment and decision for respondent will be entered


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 intl br1 plr-109511-05 date date legend taxpayer ------------------------------------------------------------------------------------------------ ------------------------ -------------- -------------------------- ------------- ---------------------- --------------------------- --------------------------- ------- ------- ------- ------- country x cpa firm ------------------- date a date b date c date d date e year year year year dear -------------- this is in response to a letter dated date requesting that taxpayer be granted an extension of time under sec_301_9100-3 to file form_8848 consent to extend the time to assess the branch_profits_tax under regulations sec_1_884-2 and c for the tax_year ended date e the information submitted for consideration is substantially as set forth below the ruling contained in this letter is based upon facts and representations submitted by taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of plr-109511-05 the request for a ruling verification of the factual information representations and other data may be required as a part of the audit process taxpayer is a company incorporated under the laws of country x on date a taxpayer conducted no business in year in the first six months of year taxpayer conducted business in country x and the united_states as of date b taxpayer ceased all activity beginning on date c taxpayer resumed its activities solely in country x taxpayer continues to operate solely in country x in year taxpayer’s activities in the united_states resulted in its having a u s trade_or_business taxable under code sec_882 taxpayer did not have experience with federal or branch_profits_tax matters and believed that because it held cash in a u s bank account at the end of year it owned u_s_assets and as a result had a u s trade_or_business taxpayer believed that it terminated such business in year taxpayer retained cpa firm in year to assist it with the preparation of its return for year in the course of its preparation cpa firm determined that taxpayer had terminated its business in year under sec_1_884-2t a foreign_corporation is treated as having completely terminated its u s trade_or_business for any taxable_year only if it meets certain conditions which include attaching to its income_tax return for the year of complete termination a waiver of the period of limitations sec_1 a ii provides that such waiver must be executed on form_8848 or substitute form and must extend the period for assessment of the branch_profits_tax for the year of complete termination to a date not earlier than the close of the sixth taxable_year following that taxable_year the waiver must be filed on or before the date including extensions prescribed for filing the foreign corporation’s income_tax return for the year of complete termination thus because taxpayer completely terminated its u s branch in year it was required to file form_8848 with its form 1120f by date d the extended due_date for its year return treas reg sec_301_9100-1 through provide the standards the commissioner uses to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 provides that the commissioner has discretion to grant a taxpayer a reasonable extension of time under the standards set forth in sec_301_9100-3 to make a regulatory election under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 provides that an election includes an application_for relief in respect of tax and defines a regulatory election as one whose due_date is prescribed by regulation revenue_ruling revenue_procedure notice or announcement under sec_301_9100-3 requests for extensions of time for regulatory elections will be granted when the taxpayer provides evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the plr-109511-05 commissioner that the taxpayer acted reasonably and in good_faith within the meaning of sec_301_9100-3 subject_to the conditions set forth in sec_301_9100-3 and that the grant of relief will not prejudice the interests of the government within the meaning of sec_301_9100-3 in the present situation sec_1_884-2 fixes the time to file form_8848 therefore the commissioner has discretionary authority under sec_301 c to grant taxpayer an extension of time provided that taxpayer satisfies the standards set forth in sec_301_9100-3 based on the facts and circumstances of this case we conclude that taxpayer satisfies the standards of sec_301_9100-3 accordingly taxpayer is granted an extension of time until days from the date of this ruling letter to file form_8848 for the tax_year ended on date e as provided in sec_301_9100-1 the granting of an extension of time is not a determination that taxpayer is otherwise eligible to file form_8848 no ruling is requested and none is expressed as to the application of any other section of the code or regulations to the facts presented specifically no opinion is expressed as to whether taxpayer terminated its u s trade_or_business in year the tax consequences of filing form_8848 late under the provisions of any other section of the code and regulations or the tax treatment of any conditions existing at the time of or resulting from filing form_8848 late that are not specifically set forth in the above ruling a copy of this ruling letter should be attached to the form_8848 that taxpayer files for the tax_year ended on date e this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely elizabeth u karzon chief branch associate chief_counsel international